##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO

SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934    
|          
|           |  | For the fiscal year ended December 31,
    2003                                                 
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-15327

CytRx Corporation


(Exact name of Registrant as specified in its
charter)


|                                                                                                               |  |                                         
|-------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                                                       |  | 58-1642740                              
|(State or other jurisdiction of
    incorporation or organization)                                             |  | (I.R.S. Employer
    Identification No.)
|                                                                                                              
|11726 San Vicente Blvd,
    Suite 650,
    Los Angeles, California(Address of principal executive
    offices) |  | 90049(Zip Code)                         

Registrants telephone number, including
area code:

(310) 826-5648




---

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

Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, $.001 par value per
share


Indicate by check mark whether the Registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been
subject to such filing requirements for the past
90 days.     Yes o          No þ

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K     o

Indicate by check mark with the Registrant is an
accelerated filer (as defined in Exchange Act
Rule 12b-2).     Yes o          No þ

The aggregate market value of the
Registrants common stock held by non-affiliates on
June 30, 2003 was approximately $42,682,165. On May 7,
2004, there were 34,589,081 shares of the Registrants
common stock outstanding, exclusive of treasury shares.



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TABLE OF CONTENTS



|              |                                                                                                                      |  |  |  |  |  |  | 
|------------- | -------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I       
|              | Item 1. Business                                                                                                    
|              | Item 2. Properties                                                                                                  
|              | Item 3. Legal Proceedings                                                                                           
|              | Item 4. Submission of Matters to a Vote of Security Holders                                                         
|PART II      
|              | Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|              | Item 6. Selected Financial Data                                                                                     
|              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations                       
|              | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                                 
|              | Item 8. Financial Statements and Supplementary Data                                                                 
|              | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                        
|              | Item 9A. Controls and Procedures                                                                                    
|PART III     
|              | Item 10. Directors and Executive Officers of the Registrant                                                         
|PART IV      
|              | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                                           
|SIGNATURES   
|Exhibit 3.5  
|Exhibit 4.8  
|Exhibit 10.14
|Exhibit 10.15
|Exhibit 10.57
|Exhibit 10.58
|Exhibit 10.59
|Exhibit 10.60
|Exhibit 10.61
|Exhibit 10.62
|Exhibit 10.63
|Exhibit 10.64
|Exhibit 10.65
|Exhibit 10.66
|Exhibit 10.67
|Exhibit 14.1 
|Exhibit 21.1 
|Exhibit 23.1 
|Exhibit 23.2 
|Exhibit 23.3 
|Exhibit 23.4 
|Exhibit 23.5 
|Exhibit 31   
|Exhibit 32   



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CYTRX CORPORATION

2003 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

|         |  |                                                                                                                     |  |      |    | 
|-------- |  | ------------------------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                                                     |  | Page
|         |  |                                                                                                                     |  |     
|PART I  
|Item 1.  |  | Business                                                                                                            |  |      | 1  | 
|Item 2.  |  | Properties                                                                                                          |  |      | 10 | 
|Item 3.  |  | Legal Proceedings                                                                                                   |  |      | 10 | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                                             |  |      | 10 | 
|PART II 
|Item 5.  |  | Market for Registrants Common Equity
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities |  |      | 11 | 
|Item 6.  |  | Selected Financial Data                                                                                             |  |      | 13 | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                           |  |      | 15 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                      |  |      | 34 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                                                         |  |      | 34 | 
|Item 9.  |  | Changes and Disagreements with Accountants on
    Accounting and Financial Disclosure                               |  |      | 34 | 
|Item 9A. |  | Controls and Procedures                                                                                             |  |      | 37 | 
|PART III
|Item 10. |  | Directors and Executive Officers of the Registrant                                                                  |  |      | 37 | 
|Item 11. |  | Executive Compensation                                                                                              |  |      | 40 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters                  |  |      | 42 | 
|Item 13. |  | Certain Relationships and Related Transactions                                                                      |  |      | 44 | 
|Item 14. |  | Principal Accountant Fees and Services                                                                              |  |      | 45 | 
|PART IV 
|Item 15. |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                                                |  |      | 46 | 
|         |  | Signatures                                                                                                          |  |      | 51 | 

Exhibit Index located on page 47 of
this report.

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SAFE HARBOR STATEMENT UNDER
THE

PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995


From time to time, we make oral and written
statements that may constitute forward-looking
statements (rather than historical facts) as defined in
the Private Securities Litigation Reform Act of 1995 or by the
Securities and Exchange Commission (the SEC) in its
rules, regulations and releases, including Section 27A of
the Securities Act of 1933, as amended (the Securities Act) and
Section 21E of the Securities Exchange Act of 1934, as
amended (the Securities and Exchange Act). We desire
to take advantage of the safe harbor provisions in
the Private Securities Litigation Reform Act of 1995 for
forward-looking statements made from time to time, including,
but not limited to, the forward-looking statements made in this
Annual Report on Form 10-K (the Annual Report),
as well as those made in other filings with the SEC.

All statements in this Annual Report, including
in Managements Discussion and Analysis of Financial
Condition and Results of Operations, other than statements
of historical fact are forward-looking statements for purposes
of these provisions, including any projections of financial
items, any statements of the plans and objectives of management
for future operations, any statements concerning proposed new
products or services, any statements regarding future economic
conditions or performance, and any statement of assumptions
underlying any of the foregoing. In some cases, forward-looking
statements can be identified by the use of terminology such as
may, will, expects,
plans, anticipates,
estimates, potential, or
could or the negative thereof or other comparable
terminology. Although we believe that the expectations reflected
in the forward-looking statements contained herein and in
documents incorporated by this Annual Report are reasonable,
there can be no assurance that such expectations or any of the
forward-looking statements will prove to be correct, and actual
results could differ materially from those projected or assumed
in the forward-looking statements. Our future financial
condition and results of operations, as well as any
forward-looking statements, are subject to inherent risks and
uncertainties, including but not limited to the risk factors set
forth in the Risk Factors and for the reasons
described elsewhere in this Annual Report. All forward-looking
statements and reasons why results may differ included in this
Annual Report are made as of the date hereof, and we assume no
obligation to update any such forward-looking statement or
reason why actual results might differ.




PART I






|        |         
|------- | --------
|Item 1. | Business

General

CytRx Corporation is a biopharmaceutical research
and development company, based in Los Angeles, California, with
a subsidiary in Worcester, Massachusetts. We are in the process
of developing products, primarily in the areas of ribonucleic
acid interference (RNAi) and small molecule therapeutics, for
the human health care market. RNAi is a new technology for
silencing genes in living cells and organisms. In addition to
our work in RNAi, we are involved in the development of a
DNA-based HIV vaccine and have entered into strategic alliances
with respect to the development of several other products using
our other technologies.

Since our incorporation, in 1985, we have been
engaged in the development of pharmaceutical products. July
2002, when we merged with Global Genomics Capital, Inc.
(Global Genomics), marked a change in the focus of our company.
Subsequent to the Global Genomics merger, we modified our
corporate business strategy by discontinuing any further
research and development efforts for our pre-merger
pharmaceutical technologies and began to seek strategic
relationships with other pharmaceutical companies to complete
the development of those technologies. Instead of continuing
research and development for those technologies, we focused our
efforts on acquiring new technologies and products to serve as
the foundation for the future of the company.

In April 2003, we acquired our first new
technologies by entering into exclusive license agreements with
the University of Massachusetts Medical School (UMMS) covering
potential applications for the medical

1



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schools proprietary RNAi technology in the
treatment of specified diseases, including those within the
areas of obesity and type 2 diabetes; amyotrophic lateral
sclerosis (ALS), commonly referred to as Lou Gehrigs
disease, which is a progressive neurodegenerative disease that
results in motor neuron degeneration of the brain and spinal
cord and eventual paralysis; and human cytomegalovirus (CMV),
which is a herpes virus that often affects HIV patients. At that
time, we also acquired an exclusive license from UMMS covering
the medical schools proprietary technology with potential
gene therapy applications within the area of cancer. In May
2003, we broadened our strategic alliance with UMMS by acquiring
an exclusive license from that institution covering a
proprietary DNA-based HIV vaccine technology.


As part of our strategic alliance with UMMS, we
agreed to fund certain discovery and pre-clinical research at
the medical school relating to the use of our technologies,
licensed from UMMS, for the development of therapeutic products
within certain fields. To date, we have entered into agreements
with UMMS to sponsor research in the areas of obesity and
type 2 diabetes, ALS and CMV retinitis. In addition, we
have entered into an agreement with Massachusetts General
Hospital to sponsor research at that institution that will
utilize our proprietary gene silencing technology in the area of
ALS.

Although we intend to internally fund the early
stage development work for certain of these product applications
(including obesity, type 2 diabetes and ALS) and may seek
to fund the completion of the development of certain of these
product applications (such as ALS), we may also seek to secure
strategic alliances or license agreements with larger
pharmaceutical companies to fund the early stage development
work for other gene silencing product applications and for
subsequent development of those potential products where we fund
the early stage development work.

In conjunction with our work with UMMS, in
September 2003, we formed a subsidiary to develop RNAi-based and
small molecule therapeutics for the prevention, treatment and
cure of obesity and type 2 diabetes. This subsidiary will
focus on using genomic and proteomic based drug discovery
technologies combined with our proprietary gene silencing
technology to accelerate the process of screening and
identifying potential drug targets and pathways for these
diseases. Through this subsidiary, we will seek to develop
orally active drugs against promising targets and pathways
relevant to obesity and type 2 diabetes.

Prior to 2003, our primary products were
FLOCORTM, an intravenous agent for treatment of
sickle cell disease and other acute vaso-occlusive disorders,
and TranzFectTM, a delivery technology for DNA and
conventional-based vaccines. In October 2003, we entered into a
strategic relationship with another entity, which was recently
formed, to complete the development of FLOCOR. Our TranzFect
technology has been licensed to two companies. We have granted a
third party an option to license our TranzFect technology for
development as a potential DNA-based prostate cancer adjuvant
and may also seek to license this technology as a potential
conventional adjuvant for hepatitis C, human pappiloma
virus, herpes simplex virus and other viral diseases. Adjuvants
are agents added to a vaccine to increase its effectiveness. In
addition, we may seek to license TranzFect for use as a
non-clinical research reagent to increase transfection
in vitroor in laboratory animals. FLOCOR and
TranzFect are further described under Pre-Global Genomics
Merger Technologies.

In addition, through our merger with Global
Genomics, we acquired minority interests in two development
stage genomics companies, Blizzard Genomics, Inc. and Psynomics,
Inc. In 2003, we recorded a write-off of our investments in
those companies. Our decision to record the write-off was based
upon several factors. Those investments, and the write-off of
those investments, are further described under Genomics
Investments.

RNAi Technology

RNAi technology is a recently discovered
technology that uses short double-stranded RNA (dsRNA) molecules
to silence targeted genes and, as a result, is commonly referred
to as gene silencing. RNAi has been shown to
effectively silence targeted genes within living cells with
great specificity and potency. As a result, RNAi technology is
able to effectively silence targeted genes without impacting
other, non-targeted, genes.

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RNA is a polymeric constituent of all living
cells and many viruses, consisting of a long, usually
single-stranded chain of alternating phosphate and ribose units
with the bases adenine, guanine, cytosine, and uracil bonded to
the ribose. The structure and base sequence of RNA are
determinants of protein synthesis and the transmission of
genetic information. RNAi is a technique of using short pieces
of double-stranded RNA to precisely target the messenger RNA
(mRNA) of a specific gene. The end result is the destruction of
the specific mRNA, thus silencing that gene.

RNAi is regarded as a significant advancement in
gene silencing and was featured in Sciencemagazine as
the Breakthrough of the Year in 2002. Delivery of
RNAi can be in vitroand in vivoto target
specific mRNAs, thus reducing the levels of the specific protein
product coded for by that gene in the targeted cells. This
allows the use of RNAi either as a therapeutic product itself or
as a drug discovery tool. We intend to develop RNAi technology
as both a drug discovery tool and for therapeutic applications.
As a therapeutic, we will seek to demonstrate its efficacy in
human clinical trials using RNAi to silence specific genes that
cause diseases. As a drug discovery tool, we intend to use RNAi
to identify and validate novel targets, which will then be used
to develop small molecules or RNAi-based therapeutics to treat
and prevent specific diseases, including those in the areas of
obesity, type 2 diabetes, ALS and CMV. In March 2004,
Dr. Craig Mello, the co-discoverer of RNAi, joined our
Scientific Advisory Board and will act in an advisory capacity
to help us develop therapeutics for specific diseases.

In mammals and human cells, RNAi can be triggered
by delivering dsRNA molecules directly into the cells
cytoplasm (the region inside the cell membrane but outside the
cell nucleus). Specific enzymes (proteins) in the cell called
dicer enzymes cut the dsRNA to form small interfering RNA
(siRNA). These siRNA are approximately 21 to 25 nucleotide
long pieces of RNA. The siRNA then interact with other cellular
enzymes called the RNA-induced silencing complex (RISC), which
causes the unwinding of the bound siRNA. This unwound strand of
the siRNA can then bind with the complementary target mRNA,
which carries the coding, or instructions, from the cell nucleus
DNA. These instructions determine which proteins the cell will
produce. When the siRNA binds with the mRNA, that
message is degraded and the cell does not produce
the specific protein. Since the siRNA can be designed to
specifically interact with a single gene through its mRNA, it
can prevent the creation of a specific protein without affecting
other genes.

One reason for the potential of RNAi to be
effective, where previous nucleic acid-based technologies have,
to date, been unsuccessful, is that the cell already has in
place all of the enzymes and proteins to effectively silence
genes once the dsRNA is introduced into the cell. This is in
direct contrast to the older technology of antisense RNA, where
there were no enzymes present in the cells to facilitate the
effectiveness of the antisense RNA molecule. In fact, one major
problem with the successful development of antisense has been
the poor stability of the antisense products in vivo.
Because antisense RNA is single-stranded, it is very unstable
and tends to break down rapidly in vivo. This is one of
the reasons for the poor success rate, to date, for antisense
RNA products.

Another reason for the interest in RNAi is its
potential to completely suppress or eliminate the viral
replicon. A replicon is a DNA or RNA element that can act as a
template to replicate itself. Once a virus is established in a
cell, there are very few drugs that are effective in eliminating
the virus. The RNAi process, however, has the potential of
eliminating viral nucleic acids and, therefore, to cure certain
viral diseases. Development work on RNAi is still at an early
stage, and we are not aware of any clinical testing of medical
applications using RNAi that have yet been initiated by any
party.

Product Development



| |                                               
| | ----------------------------------------------
| | University of Massachusetts Medical
    School

Through our strategic alliance with UMMS, we have
acquired the rights to a portfolio of technologies, including
the rights to use UMMSs proprietary RNAi technology with
potential therapeutic applications in certain defined areas that
include obesity, type 2 diabetes, ALS and CMV, as well as a
DNA-based HIV vaccine technology and a cancer therapeutic
technology.

3



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##### Table of Contents



Our agreements with UMMS may require us to make
significant expenditures to fund research at the institution
relating to developing therapeutic products based on UMMSs
proprietary technologies that have been licensed to us. We
estimate that the aggregate amount of these sponsored research
expenditures under our current commitments will be approximately
$1,400,000 for 2004, approximately $1,500,000 for 2005 and
approximately $800,000 for 2006. Our license agreements with
UMMS require us to make payments of an aggregate of up to
$85,000 per year to maintain all of our licenses, with such
aggregate annual payments increasing to as much as $125,000 if
we are not then conducting certain sponsored research at the
institution. Our UMMS license agreements also provide, in
certain cases, for milestone payments, from us to UMMS, based on
the progress we make in the clinical development and marketing
of products utilizing the technologies licensed from UMMS. In
the event that we were to successfully develop a product in each
of the categories of obesity/ type 2 diabetes, ALS, CMV,
cancer and an HIV vaccine, under our licenses, those milestone
payments could aggregate up to $16,055,000. Those milestone
payments, however, could vary significantly based upon the
milestones we achieve and the number of products we ultimately
undertake to develop.

The HIV vaccine technology that we have licensed
from UMMS is based upon a unique mixture of human HIV-1 primary
isolates from several genetic subtypes of HIV. This polyvalent
naked DNA (isolated, purified DNA) vaccine approach has the
potential advantages of maintaining efficacy despite the high
mutation rate of HIV, a broader immune response against
divergent HIV-1 glycoproteins and the possible ability to
neutralize a wide spectrum of HIV-1 viruses. UMMS has conducted
animal studies of this vaccine, and UMMS and Advanced BioScience
Laboratories (ABL), which provides an adjuvant for use with the
vaccine, have received a $16 million grant from the NIH.
This grant will fund a Phase I clinical trial of a vaccine
candidate using our licensed technology. The investigational new
drug application (IND) for that trial was filed in January 2004
and allowed, by the FDA, to go into effect in March 2004.
Enrollment of volunteers for this trial began in April 2004. We
have a commercial relationship with ABL which gives us the
ownership of, and responsibility for, the further development of
the vaccine and subsequent FDA registration following the
completion of the Phase I trial, which is being conducted
by UMMS and ABL. We do not have a commercial relationship with a
company that is providing another adjuvant for the HIV vaccine
candidate in the currently planned Phase I clinical trial.
We may also elect to use a different adjuvant in conjunction
with our HIV vaccine technology, in which case we may not be
able to utilize some or all of the results of the currently
planned trial as part of our clinical data for obtaining FDA
approval of a vaccine.

Finally, we have also licensed a cancer treatment
technology from UMMS that is based on a naked DNA approach in
which the DNA material will be delivered by direct injection
into the tumor or other localized administration.



| |                            
| | ---------------------------
| | Obesity and Type 2 Diabetes

Obesity and type 2 diabetes are significant
health problems. The World Health Organization estimates that,
on a worldwide basis, there are more than 250 million cases
of obesity and 176 million cases of type 2 diabetes.
According to the American Obesity Association, there are
currently more than 55 million cases of obesity in the
United States, and the American Diabetes Association reports
that there are more than 16 million cases of type 2
diabetes in the United States. Scientists at UMMS, as part of
our strategic alliance, are researching, with funding that we
have provided, the specific genetic relationship of type 2
diabetes to obesity. The research is focused on using cultured
adipocytes (fat cells) as a model system for studying the
regulation of gene expression involved in adipocyte
differentiation and function. This research may lead to the
identification of specific drug targets which regulate insulin
signaling as well as other metabolic pathways regulating glucose
and fatty acids. With this understanding, the program will focus
on drug discovery of RNAi-based and small molecule therapeutics
for type 2 diabetes (e.g., drugs that act as insulin
sensitizers and compounds that alleviate obesity). We believe
that RNAi could potentially be a reliable method to selectively
inhibit certain genes or their protein expression in adipocytes.

4



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| |                                        
| | ---------------------------------------
| | Research and Development
    Subsidiary

In addition to the obesity and diabetes work
being done under our sponsored research agreement with UMMS, in
September 2003, we purchased 95% of CytRx Laboratories, Inc.
(formerly known as Araios, Inc.), our research and development
subsidiary, which had been recently formed by Dr. Michael
P. Czech to develop orally active small molecule and RNAi-based
drugs for the prevention, treatment and cure of obesity and
type 2 diabetes. Our business strategy is to use our
portfolio of state of the art drug discovery technologies and
our relationships with leading diabetes and obesity researchers
to discover and develop first in class medicines to prevent,
treat and cure obesity and type 2 diabetes. Utilizing the
RNAi technology that we have licensed from UMMS, in combination
with state of the art target identification methods, our
research and development subsidiary will focus on using a
structure based drug discovery approach to accelerate the
process of screening and identifying potential drug targets and
pathways for these diseases. Through our subsidiary, we will
seek to develop orally administered drugs that are based on
promising targets and pathways that we may be able to identify.

Dr. Czech is a prominent scientist in the
fields of obesity and type 2 diabetes at UMMS, is a member
of our Scientific Advisory Board, heads our subsidiarys
Scientific Advisory Board and holds a 5% equity interest in the
subsidiary. We have provided the subsidiary with initial capital
of approximately $7,000,000 to fund the staffing of its
operations with managerial and scientific personnel and its
initial drug development activities.

Through our license and sponsored research
agreement with UMMS, we have secured rights to novel drug
targets believed to be involved in obesity and type 2
diabetes. We will seek to validate these targets using the
proprietary high throughput RNAi technology that we have
licensed from UMMS and by applying structure-based medicinal
chemistry. We will then work to develop small molecules and
RNAi-based therapeutic products.



| |    
| | ---
| | ALS

The development of therapeutics for the treatment
of various forms of ALS is an area of significant interest for
us. ALS is a debilitating disease. According the ALS Survival
Guide, 50% of ALS patients die within 18 months of
diagnosis and 80% of ALS patients die within five years of
diagnosis. According to the ALS Association, in the United
States, alone, approximately 30,000 people are living with ALS
and nearly 6,000 new cases are diagnosed each year.

In October 2003, we entered into sponsored
research agreements with UMMS and Massachusetts General
Hospital, pursuant to which we will sponsor certain ALS research
at those institutions utilizing our proprietary gene silencing
technology targeted at the mutant SOD1 gene, which is the
subject of the ALS technology we have licensed from UMMS. The
mutant SOD1 gene is responsible for causing ALS in a subset of
the 10% of all ALS patients who suffer from the familial, or
genetic, form of the disease.

Dr. Zuoshang Xu, an Associate Professor of
Biochemistry and Molecular Pharmacology at UMMS, is the
principal investigator under our sponsored research agreement
with UMMS. We have committed to fund approximately $302,000 of
research under that agreement during the first year,
approximately $280,000 of research under that agreement during
the second year and approximately $288,000 of research under
that agreement during the third year of the program.

Dr. Robert B. Brown, Jr., a Professor of
Neurology at Harvard Medical School, Founder and Director of the
Cecil B. Day Laboratory for Neuromuscular Research and a
co-discoverer of the mutant SOD1 gene as a cause for certain ALS
cases, is the principal investigator under our sponsored
research agreement with Massachusetts General Hospital. We have
committed to fund approximately $279,000 of research under that
agreement during the first year and approximately $278,000 under
that agreement during the second year of the program. In
addition, in March 2004, Dr. Brown joined our Scientific
Advisory Board and entered into a consulting agreement with us.

5



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Pre-Global Genomics Merger
Technologies



| |                              
| | -----------------------------
| | Therapeutic Copolymer Program

Prior to the merger with Global Genomics, our
primary focus was on CRL-5861 (purified poloxamer 188),
which we also call FLOCOR. FLOCOR is an intravenous agent for
the treatment of sickle cell disease and other acute
vaso-occlusive disorders. Sickle cell disease is an inherited
disease caused by a genetic mutation of hemoglobin in the blood,
and acute vaso-occlusive disorders are a blockage of blood flow
caused by deformed, or sickled, red blood cells
which can cause intense pain in sickle cell disease patients. In
October 2003, we entered into an agreement to license our
copolymer technologies, including FLOCOR, on an exclusive basis,
to SynthRx, Inc., a Houston, Texas-based biopharmaceutical
company that was recently formed by Dr. Robert Hunter. As a
result of the SynthRx license, we will receive a 19.9% ownership
interest in SynthRx and a cash payment from SynthRx of
approximately $228,000, in return for our rights to the licensed
technologies, with this license arrangement expected to be
completed in the second quarter of 2004. In addition, upon
commercialization of any products developed under our alliance
with SynthRx, we may also receive significant milestone payments
and royalties. Prior to the change in our business strategy that
led us to seek licensees for our FLOCOR technology, we had
internally developed FLOCOR. In December 1999, we reported
results from a Phase III clinical study of FLOCOR for
treatment of acute sickle cell crisis. Although the study did
not demonstrate statistical significance in the primary
endpoint, or objective, of the study, statistically significant
and clinically important benefits associated with FLOCOR were
observed in certain subgroups.



| |                                     
| | ------------------------------------
| | Vaccine Enhancement and Gene Therapy

Gene therapy and/or gene based vaccines are
mediated through the delivery of DNA containing selected genes
into cells by a process known as transfection. We refer to our
gene delivery technology as TranzFect. A large majority of the
revenues we have generated over the past three years has been
due to license fees paid to us with respect to our TranzFect
technology, representing 81%, 94% and 94% of our total revenues
for 2003, 2002 and 2001, respectively.



| |              
| | -------------
| | Merck License

In November 2000, we entered into an exclusive,
worldwide license agreement with Merck & Co., Inc.
whereby we granted Merck the right to use our TranzFect
technology in DNA-based vaccines for HIV and three other
targets. To date, Merck has focused its efforts on the HIV
application, which is still at an early stage of clinical
development, and, in July 2003, Merck notified us that it was
returning to us the rights to the three other targets covered by
its license, which we are now able to license to other third
parties. In November 2000, Merck paid us a signature payment of
$2 million. In February 2002, we received an additional
$1 million milestone fee related to the commencement of
Mercks first FDA Phase I study for a product
incorporating TranzFect designed for the prevention and
treatment of HIV. Merck completed a multi-center, blinded,
placebo controlled Phase I trial of an HIV vaccine
utilizing TranzFect as a component. Although the formulation of
this tested vaccine was generally safe, well-tolerated and
generated an immune response, the addition of TranzFect to the
vaccine did not increase this immune response. Moreover, the DNA
single-modality vaccine regimen with TranzFect, when tested in
humans, yielded immune responses that were inferior to those
obtained with the DNA vaccines in macaque monkeys. All amounts
paid to us by Merck are non-refundable upon termination of the
agreement and require no additional effort on our part.



| |              
| | -------------
| | Vical License

In December 2001, we entered into a license
agreement with Vical Incorporated granting Vical exclusive,
worldwide rights to use or sublicense our TranzFect poloxamer
technology to enhance viral or non-viral delivery of
polynucleotides, such as DNA and RNA, in all preventive and
therapeutic human and animal health applications, except for
(1) the four targets previously licensed by us to Merck,
(2) DNA vaccines or therapeutics based on prostate-specific
membrane antigen (PSMA) and (3) sale of a non-regulated
product for use as a non-clinical research reagent to increase
transfection in vitro or in laboratory animals. In
addition,

6



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the Vical license permits Vical to use TranzFect
poloxamer technology to enhance the delivery of proteins in
prime-boost vaccine applications that involve the use of
polynucleotides (short segments of DNA or RNA). Under the Vical
license, we received a non-refundable up-front payment of
$3,750,000, and we have the potential to receive milestone and
royalty payments in the future based on criteria described in
the agreement. In April 2004, we received an additional $100,000
milestone fee related to the commencement of Vicals first
FDA Phase I clinical trial for a product incorporating our
TranzFect technology. All amounts paid to us by Vical are
non-refundable upon termination of the agreement and require no
additional effort on our part.




| |                                              
| | ---------------------------------------------
| | PSMA Development Company Option
    Agreement

In December 2002, we granted an option to PSMA
Development Company (PDC) to license TranzFect for use as
an adjuvant in a prostate cancer vaccine. Under the terms of the
option agreement, PDC has a 24-month right of first refusal to
enter into a strategic alliance with us, through a license
agreement for TranzFect, under pre-negotiated terms.

2002 Merger with Global Genomics

On July 19, 2002, we completed the
acquisition of Global Genomics. The acquisition of Global
Genomics was accomplished through a merger of our wholly-owned
subsidiary, GGC Merger Corporation, with and into Global
Genomics. Global Genomics was the surviving corporation in the
merger with GGC Merger Corporation and is now our wholly-owned
subsidiary. We have changed Global Genomics name to GGC
Pharmaceuticals, Inc., but for purposes of this Annual
Report, we will continue to refer to the company as Global
Genomics. For accounting purposes, we were deemed the acquiror
of Global Genomics.

In the Global Genomics merger, each outstanding
share of common stock of Global Genomics was converted into
0.765967 shares of our common stock. Accordingly, a total
of 8,948,204 shares of our common stock, or approximately
41.7% of our common stock outstanding immediately after the
merger, were issued to the common stockholders of Global
Genomics, and an additional 1,014,677 shares of our common
stock were reserved for issuance upon the exercise of the
outstanding Global Genomics warrants that we assumed in the
merger. Other than the foregoing stock, we paid no other
consideration to the Global Genomics shareholders.

At the time of the Global Genomics merger, there
were no material relationships between Global Genomics or any of
its shareholders or affiliates and us, except that on
July 16, 2002, Global Genomics three designees to our
Board of Directors, Steven A. Kriegsman, Louis J.
Ignarro, Ph.D. and Joseph Rubinfeld, Ph.D., were
elected directors and Mr. Kriegsman became our Chief
Executive Officer. Mr. Kriegsman was Global Genomics
Chairman and Dr. Ignarro was a director of Global Genomics
at that time. On the date of the merger, the controlling
shareholder of Global Genomics was Mr. Kriegsman, who
beneficially owned, on a fully diluted basis, approximately
40.4% of Global Genomics equity interests.

Genomics Investments

In connection with our merger with Global
Genomics, we acquired equity interests in two development-stage
genomics companies, a 40% equity interest in Blizzard and a 5%
equity interest in Psynomics. In the fourth quarter of 2003, we
decided that we would cease funding our investments in those
genomics companies to focus on our core strategy of developing
human therapeutics for large market indications. In May 2004, we
determined that a write-off of those investments in the third
quarter of 2003 should have been made. Our decision to record
the write-off was based upon several factors, including
Blizzards lack of success in raising a significant amount
of the financing necessary for it to pursue the
commercialization strategy for its products, current financial
projections prepared by Blizzard, application of a discounted
cash flow valuation model of Blizzards projected cash
flows and the consideration of other qualitative factors. Based
upon the quantitative and qualitative factors described above,
in addition to others, we determined that the investment in
Blizzard had no remaining value as of September 30, 2003 and
that a write-off of this investment should have been made in the
third quarter of 2003. We have filed with the SEC an amended
Form 10-Q for the quarter ended September 30, 2003 to
reflect this write-off.

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Research and Development
Expenditures

Expenditures for research and development
activities related to continuing operations were $4,388,000,
$767,000 and $1,844,000 during the years ended December 31,
2003, 2002 and 2001, respectively.

Manufacturing

We do not have the facilities or expertise to
manufacture any of the clinical or commercial supplies of any of
our products. To be successful, our products and the products of
our partners must be manufactured in commercial quantities in
compliance with regulatory requirements and at an acceptable
cost. To date, we have not commercialized any products, nor have
we demonstrated that we can manufacture commercial quantities of
our product candidates in accordance with regulatory
requirements. If we cannot manufacture products in suitable
quantities and in accordance with regulatory standards, either
on our own or through contracts with third parties, it may delay
clinical trials, regulatory approvals and marketing efforts for
such products. Such delays could adversely affect our
competitive position and our chances of achieving profitability.
We cannot be sure that we can manufacture, either on our own or
through contracts with third parties, such products at a cost or
in quantities, which are commercially viable. We currently rely
and intend to continue to rely on third-party contract
manufacturers to produce materials needed for research, clinical
trials and, ultimately, for product commercialization.

Patents and Proprietary Technology

Patents are important to our company and we
actively seek patent protection for our technologies, processes,
uses, and ongoing improvements and consider our patents and
other intellectual property to be critical to our business. We
have filed applications for a number of patents and have been
granted patents related to technologies, primarily TranzFect and
FLOCOR, we were developing prior to our 2002 merger with Global
Genomics. Subsequent to the merger, we have licensed a number of
technologies covered by patents or patent applications, most of
which have been in the RNAi field.

As part of our development process, we evaluate
the patentability of new inventions and improvements developed
by us or our collaborators. Whenever appropriate, we will
endeavor to file United States and international patent
applications to protect these new inventions and improvements.
However, we cannot be certain that any of the current pending
patent applications we have filed or licensed, or any new patent
applications we may file or license, will ever be issued in the
United States or any other country. Even if issued, there can be
no assurance that those patents will be sufficiently broad to
prevent others from using our products or processes.
Furthermore, our patents, as well as those we have licensed or
may license in the future, may be held invalid or unenforceable
by a court, or may be infringed or circumvented by third
parties, or third parties could obtain patents that we would
need to either license or circumvent. Current and future
competitors may have licensed or filed patent applications or
received patents, and may acquire additional patents and
proprietary rights relating to RNAi technology, small molecule
technology, DNA-based vaccines or other compounds, products or
processes competitive with ours.

In addition to patent protection, we also attempt
to protect our proprietary products, processes and other
information by relying on trade secrets and non-disclosure
agreements with our employees, consultants and certain other
persons who have access to such products, processes and
information. Under the agreements, all inventions conceived by
employees are our exclusive property. Nevertheless, there can be
no assurance that these agreements will afford significant
protection against misappropriation or unauthorized disclosure
of our trade secrets and confidential information.

Competition

The RNAi field, though at an early stage of
development, is already a competitive one and the competition is
expected to increase. We face competition on many
fronts  ranging from large and small pharmaceutical,
chemical and biotechnology companies to universities, government
agencies and other public and private research organizations.
Examples of companies that are focusing their commercial efforts
in the RNAi field are Sirna Therapeutics, Alnylam
Pharmaceuticals and Benitec Ltd. A number of the multinational

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pharmaceutical companies also either have their
own gene silencing product development programs or are working
with smaller biopharmaceutical companies in this area. In
addition to our RNAi competitors, companies in other fields may
be using other technologies to target the same diseases that we
are targeting. The competition from other firms and institutions
will manifest itself not only in our potential product markets
but also, and importantly at this stage in development of RNAi
technology, in recruiting and retaining key scientific and
management personnel.


Companies developing HIV vaccines that could
compete with our HIV vaccine technology include Merck,
VaxGen, Inc., Epimmune, Inc., AlphaVax, Inc. and
Immunitor Corporation, and ABL may also seek to develop
competing HIV vaccines that could utilize a portion of the
technology that we have licensed from UMMS and ABL.

With respect to both our RNAi and non-RNAi
products, many companies, including large pharmaceutical,
chemical and biotechnology firms with financial resources,
research and development staffs, and facilities that may, in
certain cases, be substantially greater than those of ours or
our strategic partners or licensees, are engaged in the research
and development of pharmaceutical products that could compete
with our potential products. To the extent that we seek to
acquire, through license or otherwise, existing or potential new
products, we will be competing with numerous other companies,
many of which will have substantially greater financial
resources, large acquisition and research and development staffs
that may give those companies a competitive advantage over us in
identifying and evaluating these drug acquisition opportunities.
Any products that we acquire will be competing with products
marketed by companies that in many cases will have substantially
greater marketing resources than we have. The industry is
characterized by rapid technological advances and competitors
may develop their products more rapidly and such products may be
more effective than those currently under development or that
may be developed in the future by our strategic partners or
licensees. Competitive products for a number of the disease
indications that we have targeted are currently being marketed
by other parties, and additional competitive products are under
development and may also include products currently under
development that we are not aware of or products that may be
developed in the future.

Government Regulation

The marketing of pharmaceutical products requires
the approval of the FDA and comparable regulatory authorities in
foreign countries. The FDA has established guidelines and safety
standards which apply to the pre-clinical evaluation, clinical
testing, manufacture and marketing of pharmaceutical products.
The process of obtaining FDA approval for a new drug product
generally takes a number of years and involves the expenditure
of substantial resources. The steps required before such a
product can be produced and marketed for human use in the United
States include preclinical studies in animal models, the filing
of an Investigational New Drug (IND) application, human clinical
trials and the submission and approval of a New Drug Application
(NDA) or a Biologics License Application (BLA). The NDA or BLA
involves considerable data collection, verification and
analysis, as well as the preparation of summaries of the
manufacturing and testing processes, preclinical studies, and
clinical trials. The FDA must approve the NDA or BLA before the
drug may be marketed. There can be no assurance that we or our
strategic alliance partners or licensees will be able to obtain
the required FDA approvals for any of our products.

The manufacturing facilities and processes for
our products, which we anticipate will be manufactured by our
strategic partners or licensees or other third parties, will be
subject to rigorous regulation, including the need to comply
with Federal Good Manufacturing Practice regulations. Our
manufacturers also will be subject to regulation under the
Occupational Safety and Health Act, the Environmental Protection
Act, the Nuclear Energy and Radiation Control Act, the Toxic
Substance Control Act and the Resource Conservation and Recovery
Act.

Employees

As of December 31, 2003, we had
13 full-time employees, four of whom were engaged in
research and development activities and nine of whom were
involved in management and administrative operations. Of the

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employees engaged in research and development
activities, all four held Ph.D. degrees and one also held an
M.D. degree.







|        |           
|------- | ----------
|Item 2. | Properties

Our operations are based in Los Angeles,
California and Worcester, Massachusetts. The lease for our
headquarters facility, in Los Angeles, consists of approximately
3,300 square feet of office space and expires in June 2005.
The lease for our subsidiary, in Worcester, consists of
approximately 6,900 square feet of office and laboratory
space and expires in December 2005 and is suitable and adequate
for our current operations. We have the right to extend the
Worcester lease until December 2007.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

We are occasionally involved in claims arising
out of our operations in the normal course of business, none of
which are expected, individually or in the aggregate, to have a
material adverse effect on us.

We have recently been notified by the
Massachusetts State Ethics Commission (Massachusetts Commission)
that it has initiated a Preliminary Inquiry into whether our
previous retention of a consultant who introduced us to UMMS
constituted an improper conflict of interest under
Massachusetts ethics laws. Since the inquiry is at a very
preliminary stage, it is inherently difficult to predict whether
the Massachusetts Commission will decide to initiate any formal
proceedings, whether these proceedings will be directed at us or
whether we will be found in any such proceedings to have
violated any Massachusetts ethics laws. We also cannot estimate
what our legal costs will be in connection with this matter,
although these expenses could be substantial if a formal
proceeding is initiated. Moreover, if the Massachusetts
Commission were to determine that our conduct was unlawful, the
Commission could impose a number of different penalties or
sanctions upon us which, under certain circumstances, would have
a material adverse effect on our business and financial
condition.

On April 5, 2004, we were served with a
complaint for breach of contract, filed by Madison & Wall
Worldwide, Inc. (M&W), in the Superior Court of
California, County of Orange on April 1, 2004. M&W, a
former independent contractor to us, engaged to provide investor
relations services, was seeking damages in excess of $700,000 in
that lawsuit. On May 11, 2004, we reached an agreement in
principle with M&W to settle this lawsuit by issuing the
200,000 shares of our common stock that were to have been
earned and received by M&W upon our entering into the
investor relations services contract with them and by our making
an additional payment of $50,000 to M&W. We are in the
process, with M&W, of preparing the documentation for this
settlement.






|        |                                                        
|------- | -------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
    Holders

Our annual meeting of stockholders was held on
October 10, 2003, for the following purposes:



| |                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. To elect four directors, two to serve
    until our 2005 annual meeting of stockholders, and two to serve
    until our 2006 annual meeting of stockholders;                                                                                                                                       
|
| | 2. To approve an amendment to our 2000
    Long-Term Incentive Plan (the Plan) to increase the
    number of shares of common stock available under the Plan from
    3,000,000 to 10,000,000;                                                                                                      
|
| | 3. To approve an amendment to the Plan to
    increase from 500,000 shares to 1,000,000 shares the
    maximum number of stock options or stock appreciation rights
    that may be granted to any one participant in any calendar year;                                                              
|
| | 4. To approve an amendment to our Restated
    Certificate of Incorporation (the Certificate) to
    increase the authorized number of shares of common stock from
    50,000,000 to 100,000,000 and to increase the authorized number
    of shares of preferred stock from 1,000 to 5,000,000; and
|
| | 5. To ratify the selection of
    Ernst & Young LLP as independent auditors for the
    fiscal year ending December 31, 2003.                                                                                                                                                                         

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The number of outstanding shares of our common
stock as of the record date for the annual meeting was
28,347,499, out of which in excess of 25,889,384 shares
were represented at the annual meeting.

Alexander L. Cappello and Max Link were reelected
as our Class III directors to serve until the 2006 annual
meeting of stockholders. Richard L. Wennekamp and
Marvin R. Selter were elected as our Class II
directors to serve until the 2005 annual meeting of
stockholders, to fill the vacancies created by the retirement of
Raymond C. Carnahan, Jr. and Herbert H. McDade, Jr.
Louis Ignarro, Joseph Rubinfeld and Steven A. Kriegsman, our
Class I directors, continued to serve as directors after
the annual meeting.

The following table sets forth the number of
votes cast for, against, or withheld for each director nominee,
as well as the number of abstentions and broker non-votes as to
each such director nominee:

|                      |  |                |            |                    |  |             |         |           |  |  |         |  |  |  |   | 
|--------------------- |  | -------------- | ---------- | ------------------ |  | ----------- | ------- | --------- |  |  | ------- |  |  |  | - | 
|                      |  |                |            | Votes Cast Against |  |             |         | Broker   
|Director Nominee      |  | Votes Cast For |            | or Withheld        |  | Abstentions |         | Non-Votes
|                      |  |                |            |                    |  |             |         |          
|Alexander L. Cappello |  |                | 24,835,744 |                    |  |             | 686,570 |           |  |  | 367,070 |  |  |  |  | 
|Max Link              |  |                | 25,333,963 |                    |  |             | 188,351 |           |  |  | 367,070 |  |  |  |  | 
|Richard L. Wennekamp  |  |                | 25,198,102 |                    |  |             | 342,212 |           |  |  | 367,070 |  |  |  |  | 
|Marvin R. Selter      |  |                | 25,197,552 |                    |  |             | 324,762 |           |  |  | 367,070 |  |  |  |  | 

With respect to the proposal to approve an
amendment to the Plan to increase the number of shares of common
stock available under the Plan from 3,000,000 to 10,000,000:
(i) 14,638,959 votes were cast for, (ii) 1,119,418
votes were cast against, (iii) 278,729 shares
abstained and (iv) there were 10,103,278 broker non-votes
with respect to the proposal. Accordingly, the proposal was
approved by our stockholders.

With respect to the proposal to approve an
amendment to the Plan to increase from 500,000 shares to
1,000,000 the maximum number of stock options or stock
appreciation rights that may be granted to any one participant
in any calendar year: (i) 14,439,008 votes were cast for,
(ii) 1,068,369 votes were cast against,
(iii) 278,729 shares abstained and (iv) there
were 10,103,278 broker non-votes with respect to the proposal.
Accordingly, the proposal was approved by our stockholders.

With respect to the proposal to approve an
amendment to the Certificate to increase the authorized number
of shares of common stock from 50,000,000 to 100,000,000 and to
increase the authorized number of shares of preferred stock from
1,000 to 5,000,000: (i) 14,613,192 votes were cast for,
(ii) 888,854 votes were cast against,
(iii) 284,060 shares abstained and (iv) there
were 10,103,278 broker non-votes with respect to the proposal.
Accordingly, the proposal was approved by our stockholders.

With respect to the proposal to ratify the
selection of Ernst & Young LLP as independent auditors
for the fiscal year ending December 31, 2003:
(i) 25,779,651 votes were cast for, (ii) 75,086 votes
were cast against, (iii) 34,647 shares abstained and
(iv) there were no broker non-votes with respect to the
proposal. Accordingly, the proposal was approved by our
stockholders.




PART II






|        |                                                                                                                     
|------- | --------------------------------------------------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity,
    Related Stockholder Matters and Issuer Purchases of Equity
    Securities

Our common stock is currently traded on the
Nasdaq SmallCap Market under the symbol CYTRE. The
following table sets forth the high and low sale prices for our
common stock for the periods indicated as

11



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reported by the NASDAQ Stock Market. Such prices
represent prices between dealers without adjustment for retail
mark-ups, mark-downs, or commissions and may not necessarily
represent actual transactions.


|     |                       |      |  |      |  |  |  |      | 
|---- | --------------------- | ---- |  | ---- |  |  |  | ---- | 
|     |                       | High |  | Low 
|     |                       |      |  |     
|2004 |                       |      |  |      |  |  |  |     
|     | January 1 to April 20 |      |  | 2.43 |  |  |  | 1.43 | 
|2003 |                       |      |  |      |  |  |  |     
|     | Fourth Quarter        |      |  | 2.50 |  |  |  | 1.75 | 
|     | Third Quarter         |      |  | 2.81 |  |  |  | 1.58 | 
|     | Second Quarter        |      |  | 3.74 |  |  |  | 0.62 | 
|     | First Quarter         |      |  | 0.61 |  |  |  | 0.23 | 
|2002 |                       |      |  |      |  |  |  |     
|     | Fourth Quarter        |      |  | 0.41 |  |  |  | 0.21 | 
|     | Third Quarter         |      |  | 0.75 |  |  |  | 0.34 | 
|     | Second Quarter        |      |  | 1.05 |  |  |  | 0.52 | 
|     | First Quarter         |      |  | 1.00 |  |  |  | 0.57 | 

On April 20, 2004, the closing price of our
common stock as reported on the Nasdaq SmallCap Market, was
$1.89 and there were approximately 9,570 holders of record of
our common stock. The number of record holders does not reflect
the number of beneficial owners of our common stock for whom
shares are held by brokerage firms and other institutions. We
have not paid any dividends since our inception and do not
contemplate payment of dividends in the foreseeable future.

On October 25, 2003, we issued a total of
25,000 shares of our common stock and warrants to purchase
a total of 6,250 shares of our common stock, at
$3.05 per share, to Troy & Gould Professional
Corporation, which renders legal services to us, for a total
purchase price of $52,500. On November 15, 2003, we issued
5,000 shares of our common stock to a company upon its
exercise of a warrant to purchase 5,000 shares of our
common stock at $0.72 per share. On November 22, 2003
we issued 15,000 shares of our common stock to an
individual upon his exercise of a warrant to purchase
15,000 shares of our common stock at $0.72 per share.
On December 1, 2003, we issued warrants to purchase up to
600,000 shares (100,000 of which vested at the time of
issuance and 500,000 of which have subsequently been cancelled)
of our common stock, at $2.25 per share, to an investor
relations company in partial consideration for services to be
rendered by that firm. The shares of common stock and warrants
were issued to each of the foregoing companies and individual in
reliance on an exemption from registration under the Securities
Act of 1933 provided by Regulation D.

12



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##### Table of Contents








|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following selected financial data are derived
from our audited financial statements. Our financial statements
for 2003 have been audited by BDO Seidman, LLP, independent
auditors. Our financial statements for 2002, 2001, 2000 and 1999
have been audited by Ernst & Young LLP, independent
auditors. These historical results do not necessarily indicate
future results. When you read this data, it is important that
you also read our financial statements and related notes, as
well as the section Managements Discussion and
Analysis of Financial Condition and Results of Operations.

|                                         |                                     |      |             |        |   |      |            |           |   |      |           |           |   |   |            |           |   |   |             |         |  
|---------------------------------------- | ----------------------------------- | ---- | ----------- | ------ | - | ---- | ---------- | --------- | - | ---- | --------- | --------- | - | - | ---------- | --------- | - | - | ----------- | ------- | -
|                                         |                                     | 2003 |             | 2002   |   | 2001 |            | 2000      |   | 1999
|                                         |                                     |      |             |        |   |      |            |           |   |     
|Statement of Operations Data:            |                                     |      |             |        |   |      |            |           |   |      |           |           |   |   |            |           |   |   |             |        
|Revenues                                 |                                     |      |             |        |   |      |            |           |   |      |           |           |   |   |            |           |   |   |             |        
|                                         | Service revenues                    |      | $           |       |   |      | $          | 22,453    |   |      | $         | 101,463   |   |   | $          | 451,031   |   |   | $           | 322,536 |  
|                                         | License fees                        |      |             | 94,000 |   |      |            | 1,051,000 |   |      |           | 3,751,000 |   |   |            | 2,000,000 |   |   |             |        |  
|                                         | Grant income                        |      |             |       |   |      |            | 46,144    |   |      |           | 156,729   |   |   |            | 348,790   |   |   |             | 464,442 |  
|                                         | Other income                        |      |             |       |   |      |            |          |   |      |           |          |   |   |            | 225,000   |   |   |             |        |  
|                                         |                                     |      |             |        |   |      |            |           |   |      |           |           |   |   |            |           |   |   |             |        
|Total revenues                           |                                     | $    | 94,000      |        |   | $    | 1,119,597  |           |   | $    | 4,009,192 |           |   | $ | 3,024,821  |           |   | $ | 786,978     |        
|                                         |                                     |      |             |        |   |      |            |           |   |      |           |           |   |   |            |           |   |   |             |        
|Loss from continuing operations          |                                     | $    | (17,844,600 | )      |   | $    | (6,175,636 | )         |   | $    | (931,341  | )         |   | $ | (1,147,457 | )         |   | $ | (15,269,918 | )      
|Income from discontinued operations      |                                     |      |            |        |   |      |           |           |   |      |          |           |   |   | 799,355    |           |   |   | 240,627     |        
|                                         |                                     |      |             |        |   |      |            |           |   |      |           |           |   |   |            |           |   |   |             |        
|Net loss                                 |                                     | $    | (17,844,600 | )      |   | $    | (6,175,636 | )         |   | $    | (931,341  | )         |   | $ | (348,102   | )         |   | $ | (15,029,291 | )      
|                                         |                                     |      |             |        |   |      |            |           |   |      |           |           |   |   |            |           |   |   |             |        
|Basic and diluted loss per common share: |                                     |      |             |        |   |      |            |           |   |      |           |           |   |   |            |           |   |   |             |        
|                                         | Loss from continuing operations     |      | $           | (0.65  | ) |      | $          | (0.39     | ) |      | $         | (0.09     | ) |   | $          | (0.12     | ) |   | $           | (1.99   | )
|                                         | Income from discontinued operations |      |             |       |   |      |            |          |   |      |           |          |   |   |            | 0.08      |   |   |             | 0.03    |  
|                                         |                                     |      |             |        |   |      |            |           |   |      |           |           |   |   |            |           |   |   |             |        
|                                         | Net Loss                            |      | $           | (0.65  | ) |      | $          | (0.39     | ) |      | $         | (0.09     | ) |   | $          | (0.04     | ) |   | $           | (1.96   | )
|                                         |                                     |      |             |        |   |      |            |           |   |      |           |           |   |   |            |           |   |   |             |        
|Balance Sheet Data:                      |                                     |      |             |        |   |      |            |           |   |      |           |           |   |   |            |           |   |   |             |        
|Total Assets                             |                                     | $    | 12,324,284  |        |   | $    | 9,283,584  |           |   | $    | 7,610,596 |           |   | $ | 6,859,238  |           |   | $ | 6,128,063   |        
|Long-term debt                           |                                     |      |            |        |   |      |           |           |   |      |          |           |   |   |           |           |   |   | 650,000     |        
|Other long-term liabilities              |                                     |      |            |        |   |      |           |           |   |      |          |           |   |   |           |           |   |   | 1,693,638   |        
|Total stockholders equity               |                                     | $    | 10,192,616  |        |   | $    | 7,959,347  |           |   | $    | 6,582,751 |           |   | $ | 5,618,814  |           |   | $ | 1,032,688   |        

Factors Affecting Comparability

In 2003, we recorded an impairment charge of
$5,869,000 related to our investments in Blizzards
acquired developed technology and Psynomics, based upon our
analysis of the recoverability of the carrying amount of these
assets in accordance with the Accounting Principles Board
(APB) Opinion No. 18, The Equity Method of
Accounting for Investments in Common Stock. This impairment
charge represented the total net book value of these assets at
the time of the write-off. See Note 11 to our financial
statements.

In 2002, we recorded an impairment charge of
$921,000 related to certain equipment and leasehold improvements
based on our evaluation of the recoverability of the carrying
amount of those assets in accordance with the Financial
Accounting Standards Board (FASB) Statement of
Financial Accounting Standards No. 144 
Accounting for the Impairment or Disposal of Long-Lived
Assets. This impairment charge represented the total net
book value of those assets. See Note 5 to our financial
statements.

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During 2002, we recorded a loss of $478,000
associated with the closure of our Atlanta headquarters and
relocation to Los Angeles, subsequent to our merger with Global
Genomics. This loss represents the total remaining lease
obligations and estimated operating costs through the remainder
of the lease, which expires in 2008, less estimated sublease
income. This accrued charge was combined with deferred rent of
$85,000 already recorded, so that the total accrual related to
the facility abandonment was $563,000 as of December 31,
2002. To the extent that we are able to negotiate a termination
of the Atlanta lease, our operating costs are different or our
estimates related to sublease income are different, the total
loss ultimately recognized may be different than the amount
recorded as of December 31, 2002 and such difference may be
material. As of December 31, 2003, we have a remaining
lease closure accrual of $418,000.

Pursuant to his employment agreement, our former
President and CEO, Jack Luchese, was entitled to a payment of
$435,000 upon the execution of the merger agreement between
Global Genomics and us and an additional $435,000 upon the
closing of the merger. In order to reduce the amount of cash
that we had to pay Mr. Luchese, Mr. Luchese and we
agreed that approximately $325,000 of the first $435,000 payment
would be satisfied by CytRx granting a stock award to
Mr. Luchese under our 2000 Long-Term Incentive Plan
pursuant to which we issued Mr. Luchese 558,060 shares of
our common stock. Those shares of stock were issued at a value
equal to 85% of the volume weighted average price of our common
stock for the 20 trading days ended on February 8, 2002.
The cash payment and fair value of the shares issued were
recognized as expense (total of $428,000) during the first
quarter of 2002.

The terms of our merger with Global Genomics
contemplated that its management team would replace ours
subsequent to the closing of the merger. On July 16, 2002,
we terminated the employment of all of our then-current
officers, resulting in total obligations for severance, stay
bonuses, accrued vacation and other contractual payments of
$1,394,000 (including the final $435,000 owed to
Mr. Luchese as discussed above). Prior to the merger
closing date, we advanced part of these amounts to three of our
officers (through salary continuance), such that the total
remaining obligation at the closing date was $1,179,000. Four of
our officers agreed to accept an aggregate total of $177,000 of
this amount in the form of our common stock, in lieu of cash,
resulting in the issuance of 248,799 shares. Thus, the net cash
payout in satisfaction of these obligations was $1,002,000,
before taxes. The severance payments and fair value of the
shares issued (total expense of $1,394,000) was recognized as
expense during the third quarter of 2002 and is reported as a
separate line item on the accompanying consolidated statement of
operations, together with the final payment to Mr. Luchese
discussed above.

License fees for 2002 include a $1,000,000
milestone payment received from Merck related to the
commencement by Merck of a Phase I human clinical trial
incorporating our TranzFect technology.

License fees for 2001 include a $3,750,000
up-front payment received from Vical related to a license of our
TranzFect technology.

License fees for 2000 consist of a $2,000,000
signature payment received from Merck related to a license of
our TranzFect technology.

From 1987 to 2000, we manufactured, marketed and
distributed Titermax, an adjuvant used to produce immune
responses in research animals. Effective June 15, 2000, we
entered into a Purchase Agreement with Titermax USA, Inc. (an
unaffiliated company) whereby Titermax USA purchased the
worldwide rights to market and distribute Titermax, including
all accounts receivable, inventory and other assets used in the
Titermax business. The gross purchase price was $750,000,
consisting of $100,000 in cash and a $650,000 five-year secured
promissory note bearing interest of 10% annually. Net income
associated with the Titermax activities included in income
(loss) from discontinued operations was approximately $119,000
and $241,000 for 2000 and 1999, respectively. A gain related to
the sale of $680,000 was recorded in 2000 and is also classified
as discontinued operations.

From 1996 to 2002, we marketed the services of a
small group of human resource professionals under the name of
Spectrum Recruitment Research (Spectrum) as a way of
offsetting our cost of maintaining this function. In February
2002, the operations of Spectrum were terminated and the rights
to use the Spectrum tradenames were transferred to Albert, Isaac
& Alexander, Inc., a consulting firm comprised of former
CytRx

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(Spectrum) employees. Net income (loss)
associated with the Spectrum activities included in income
(loss) from operations was approximately $5,000, $(18,000),
$146,000 and $75,000 for 2002, 2001, 2000, and 1999,
respectively.







|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

The following discussion and analysis of our
financial condition and results of operations should be read
together with Selected Financial Data, and our
consolidated financial statements included in this Annual
Report. This discussion contains forward-looking statements,
based on current expectations and related to future events and
our future financial performance, that involve risks and
uncertainties. Our actual results may differ materially from
those anticipated in these forward-looking statements as a
result of many important factors, including those set forth
under Risk Factors and elsewhere in this Annual
Report.



| |         
| | --------
| | Overview

We are in the process of developing products,
primarily in the areas of RNAi and small molecule therapeutics,
for the human health care market. RNAi is a new technology for
silencing genes in living cells and organisms. Development work
on RNAi is still at an early stage, and we are not aware of any
clinical testing of medical applications using RNAi that have
yet been initiated by any party. In addition to our work in
RNAi, we are involved in the development of a DNA-based HIV
vaccine and have entered into strategic alliances with respect
to the development of several other products using our other
technologies.

Subsequent to our merger with Global Genomics, in
July 2002, we modified our business strategy by discontinuing
any further research and development efforts for our pre-merger
pharmaceutical technologies and began to seek strategic
relationships with other pharmaceutical companies to complete
the development of those technologies. Instead of continuing
research and development for those technologies, we focused our
efforts on acquiring new technologies and products to serve as
the foundation for the future of the company.

In April 2003, we acquired our first new
technologies by entering into exclusive license agreements with
UMMS covering potential applications for its proprietary RNAi
technology in the treatment of specified diseases. At that time,
we also acquired an exclusive license from UMMS covering its
proprietary technology with potential gene therapy applications
within the area of cancer. In May 2003, we broadened our
strategic alliance with UMMS by acquiring an exclusive license
from it covering a proprietary DNA-based HIV vaccine technology.

As part of our strategic alliance with UMMS, we
agreed to fund certain discovery and pre-clinical research at
the medical school relating to the use of our technologies,
licensed from UMMS, for the development of therapeutic products
within certain fields. Although we intend to internally fund the
early stage development work for certain product applications
(including obesity, type 2 diabetes and ALS) and may seek to
fund the completion of the development of certain of these
product applications (such as ALS), we may also seek to secure
strategic alliances or license agreements with larger
pharmaceutical companies to fund the early stage development
work for other gene silencing product applications and for
subsequent development of those potential products where we fund
the early stage development work.

We have not achieved profitability on a quarterly
or annual basis and we expect to continue to incur significant
additional losses over the next several years. We expect our net
losses to increase primarily due to activities related to our
collaborations, technology acquisitions, research and
development programs and other general corporate activities. We
anticipate that our operating results will fluctuate for the
foreseeable future. Therefore, period-to-period comparisons
should not be relied upon as predictive of the results in future
periods.

To date, we have relied primarily upon the sale
of equity securities and payments from our strategic partners
and licensees to generate the funds needed to finance the
implementation of our business plans. We will be required to
obtain additional funding in order to execute our long-term
business plans. Our sources of potential funding for the next
several years are expected to consist primarily of proceeds from
sales of equity,

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but could also include license and other fees,
funded research and development payments, and milestone payments
under existing and future collaborative arrangements.




| |                         
| | ------------------------
| | Research and Development

Following our 2003 acquisition of rights from
UMMS to the new technologies, we initiated research and
development programs for products based upon those technologies.
Expenditures for research and development activities related to
continuing operations were $4,388,000, $767,000 and $1,844,000
during the years ended December 31, 2003, 2002 and 2001,
respectively, with research and development expenses
representing approximately 39% of our total expenses for 2003.
Research and development expenses are further discussed below
under Critical Accounting Policies and Estimates and
Results of Operations.

In September 2003, we invested in a subsidiary to
develop orally active small molecule-based drugs for the
prevention, treatment and cure of obesity and type 2 diabetes.
Utilizing the RNAi technology that we have licensed from UMMS,
in combination with state of the art target identification
methods, our subsidiary will focus on using a genomic and
proteomic based drug discovery approach to accelerate the
process of screening and identifying potential drug targets and
pathways for these diseases to discover and develop molecular
based medicines for the treatment of obesity and type 2
diabetes. We have provided our subsidiary with initial capital
of approximately $7,000,000 to fund the staffing of its
operations with managerial and scientific personnel and its
initial drug development activities.

There is a risk that any drug discovery and
development program may not produce revenue because of the risks
inherent in drug discovery and development. Moreover, there are
uncertainties specific to any new field of drug discovery,
including RNAi. The successful development of any product
candidate we develop is highly uncertain. We cannot reasonably
estimate or know the nature, timing and costs of the efforts
necessary to complete the development of, or the period in which
material net cash inflows are expected to commence from any
product candidate, due to the numerous risks and uncertainties
associated with developing drugs, including the uncertainty of:



| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to advance product candidates into
    pre-clinical and clinical trials;                                                 
|
| |  | the scope, rate and progress of our pre-clinical
    trials and other research and development activities;                           
|
| |  | the scope, rate of progress and cost of any
    clinical trials we commence;                                                         
|
| |  | the cost of filing, prosecuting, defending and
    enforcing any patent claims and other intellectual property
    rights;           
|
| |  | future clinical trial results;                                                                                                       
|
| |  | the terms and timing of any collaborative,
    licensing and other arrangements that we may establish;                               
|
| |  | the cost and timing of regulatory approvals;                                                                                         
|
| |  | the cost and timing of establishing sales,
    marketing and distribution capabilities;                                              
|
| |  | the cost of establishing clinical and commercial
    supplies of our product candidates and any products that we may
    develop; and
|
| |  | the effect of competing technological and market
    developments.                                                                   

Any failure to complete any stage of the
development of our products in a timely manner could have a
material adverse effect on our operations, financial position
and liquidity. A discussion of the risks and uncertainties
associated with completing our projects on schedule, or at all,
and the potential consequences of failing to do so, are set
forth in the Risk Factors section of this Annual
Report.



| |                                               
| | ----------------------------------------------
| | Critical Accounting Policies and
    Estimates

Managements discussion and analysis of our
financial condition and results of operations are based on our
consolidated financial statements, which have been prepared in
accordance with accounting principles

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generally accepted in the United States. The
preparation of these financial statements requires management to
make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing
basis, management evaluates its estimates, including those
related to revenue recognition, bad debts, impairment of
long-lived assets, including finite lived intangible assets,
accrued liabilities and certain expenses. We base our estimates
on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ
materially from these estimates under different assumptions or
conditions.


Our significant accounting policies are
summarized in Note 2 to our financial statements. We
believe the following critical accounting policies affect our
more significant judgments and estimates used in the preparation
of our consolidated financial statements.



| |                    
| | -------------------
| | Revenue Recognition

Nonrefundable license fee revenue is recognized
when collectibility is reasonably assured, which is generally
upon receipt, when no continuing involvement on our part is
required and payment of the license fee represents the
culmination of the earnings process. Nonrefundable license fees
received subject to future performance by us or that are
credited against future payments due to us are deferred and
recognized as services are performed and collectibility is
reasonably assured, which is generally upon receipt, or upon
termination of the agreement and all related obligations
thereunder, whichever is earliest. Our revenue recognition
policy may require us to defer significant amounts of revenue.



| |                                  
| | ---------------------------------
| | Research and Development Expenses

Research and development expenses consist of
costs incurred for direct and overhead-related research expenses
and are expensed as incurred. Costs to acquire technologies
which are utilized in research and development and which have no
alternative future use are expensed when incurred. Technology
developed for use in our products is expensed as incurred, until
technological feasibility has been established. Expenditures, to
date, have been classified as research and development expense
in the consolidated statements of operations and we expect to
continue to expense research and development for the foreseeable
future.



| |                         
| | ------------------------
| | Stock-based Compensation

We grant stock options and warrants for a fixed
number of shares to key employees and directors with an exercise
price equal to the fair market value of the shares at the date
of grant. We account for stock option grants and warrants in
accordance with APB Opinion No. 25, Accounting for Stock
Issued to Employees(APB 25) and related
interpretations, and, accordingly, recognize no compensation
expense for the stock option grants and warrants issued to
employees for which the terms are fixed.

For stock option grants and warrants which vest
based on certain corporate performance criteria, compensation
expense is recognized to the extent that the quoted market price
per share exceeds the exercise price on the date such criteria
are achieved or are probable. At each reporting period end, we
must estimate the probability of the criteria specified in the
stock based awards being met. Different assumptions in assessing
this probability could result in additional compensation expense
being recognized.

In October 1995, the FASB issued Statement of
Financial Accounting Standards No. 123, Accounting for
Stock-based Compensation(SFAS 123), which provides an
alternative to APB 25 in accounting for stock-based
compensation issued to employees. However, we have continued to
account for stock-based compensation in accordance with
APB 25 (See Notes 2 and 13 to financial statements).

We have also granted stock options and warrants
to certain consultants and other third parties. Stock options
and warrants granted to consultants and other third parties are
accounted for in accordance with SFAS 123 and related
interpretations and are valued at the fair market value of the
options and warrants granted, as of the date of grant or
services received, whichever is more reliably measurable.
Expense is

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recognized in the period in which a performance
commitment exists or the period in which the services are
received, whichever is earlier. The Company anticipates that it
will continue to rely on the use of consultants and that it will
be required to expense the associated costs. The Company
anticipates continuing the use of stock options to compensate
employees, and continuing to expense the options in accordance
with APB 25.




| |                                
| | -------------------------------
| | Impairment of Long-Lived Assets

We review long-lived assets, including finite
lived intangible assets, for impairment on an annual basis, as
of December 31, or on an interim basis if an event occurs
that might reduce the fair value of such assets below their
carrying values. An impairment loss would be recognized based on
the difference between the carrying value of the asset and its
estimated fair value, which would be determined based on either
discounted future cash flows or other appropriate fair value
methods.

In 2002, we recorded an impairment charge of
$921,000 related to certain equipment and leasehold improvements
based on our evaluation of the recoverability of the carrying
amount of these assets in accordance with the FASB Statement of
Financial Accounting Standards No. 144 
Accounting for the Impairment or Disposal of Long-Lived
Assets(SFAS 144). This impairment charge represented
the total net book value of these assets. See Note 5 to our
financial statements.

In 2003, we recorded an impairment charge of
$5,869,000 related to our investments in Blizzard Genomics
acquired developed technology and Psynomics, based upon our
analysis of the recoverability of the carrying amount of these
assets in accordance with the Accounting Principles Board
Opinion No. 18, The Equity Method of Accounting for
Investments in Common Stock(APB 18). This impairment
charge represented the total net book value of these assets at
the time of the write-off. See Note 11 to our financial
statements.



| |                                           
| | ------------------------------------------
| | Estimated Facility Abandonment
    Accrual

During 2002, we recorded a loss of $478,000
associated with the closure of our Atlanta headquarters and
relocation to Los Angeles, subsequent to our merger with Global
Genomics. This loss represents the total remaining lease
obligations and estimated operating costs through the remainder
of the lease term, less estimated sublease income. This accrued
charge was combined with deferred rent of $85,000 already
recorded, so that the total accrual related to the facility
abandonment was $563,000 as of December 31, 2002. To the
extent that we are able to negotiate a termination of the
Atlanta lease, our operating costs are different or our
estimates related to sublease income are different, the total
loss ultimately recognized may be different than the amount
recorded as of December 31, 2002 and such difference may be
material. As of December 31, 2003, we have a remaining
lease closure accrual of $418,000.



| |                         
| | ------------------------
| | Quarterly Financial Data

The following table sets forth unaudited
statement of operations data for our most recent two completed
fiscal years. This quarterly information has been derived from
our unaudited financial statements and, in the opinion of
management, includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the
information for the periods covered. The quarterly financial
data should be read in

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conjunction with our financial statements and
related notes. The operating results for any quarter are not
necessarily indicative of the operating results for any future
period.


|                                         |          |                                       |       |         |   |              |        |             |   |   |        |       |   |   |        |       |  
|---------------------------------------- | -------- | ------------------------------------- | ----- | ------- | - | ------------ | ------ | ----------- | - | - | ------ | ----- | - | - | ------ | ----- | -
|                                         |          |                                      
|                                         |          | Quarter Ended                        
|                                         |          |                                      
|                                         |          | March 31                              |       | June 30 |   | September 30 |        | December 31
|                                         |          |                                       |       |         |   |              |        |            
|                                         |          |                                      
|                                         |          | (In thousands, except per share data)
|2003                                     |          |                                       |       |         |   |              |        |             |   |   |        |       |   |   |        |      
|Total revenues                           |          | $                                     |      |         |   | $            | 3      |             |   | $ | 1      |       |   | $ | 90     |      
|Net loss                                 |          |                                       | (914  | )       |   |              | (5,046 | )           |   |   | (8,777 | )     |   |   | (3,108 | )    
|Basic and diluted loss per common share: |          |                                       |       |         |   |              |        |             |   |   |        |       |   |   |        |      
|                                         | Net loss |                                       |       | (0.04   | ) |              |        | (0.21       | ) |   |        | (0.30 | ) |   |        | (0.09 | )
|2002                                     |          |                                       |       |         |   |              |        |             |   |   |        |       |   |   |        |      
|Total revenues                           |          |                                       | 1,054 |         |   |              | 15     |             |   |   | 1      |       |   |   | 50     |      
|Gross profit                             |          |                                       | 11    |         |   |              |       |             |   |   |       |       |   |   |       |      
|Net loss                                 |          |                                       | (179  | )       |   |              | (931   | )           |   |   | (2,547 | )     |   |   | (2,519 | )    
|Basic and diluted loss per common share: |          |                                       |       |         |   |              |        |             |   |   |        |       |   |   |        |      
|                                         | Net loss |                                       | $     | (0.02   | ) |              | $      | (0.08       | ) |   | $      | (0.13 | ) |   | $      | (0.12 | )



| |                                    
| | -----------------------------------
| | Liquidity and Capital
    Resources

At December 31, 2003, we had cash, cash
equivalents and short-term investments of $11,644,000 and net
assets of $10,193,000, compared to $1,789,000 and $7,959,000,
respectively, at December 31, 2002. Working capital totaled
$10,761,000 at December 31, 2003, compared to $1,638,000 at
December 31, 2002.

To date, we have relied primarily upon selling
equity securities and payments from our strategic partners and
licensees to generate funds needed to finance the implementation
of our plans of operations. We believe that the cash and cash
equivalents balances will be sufficient to meet cash
requirements through the next twelve months. We will be required
to obtain significant additional funding in order to execute our
long-term business plans. We cannot assure that additional
funding will be available on favorable terms, if at all. If we
fail to obtain additional funding when needed, we may not be
able to execute our business plan and our business may suffer,
which would have a material adverse effect on our financial
position, results of operations and cash flows.

Net cash flows provided by investing activities
was $1,200,000 in 2003, compared to net cash used in investing
activities of $2,000,000 in 2002. The change was primarily due
to (i) the purchase, in 2002, of held-to-maturity
investments, which subsequently matured in 2003, (ii) an
increase in fixed asset purchases in 2003, as compared to 2002
and (iii) the absence of acquisition costs in 2003, as
compared to 2002.

Net cash provided by financing activities was
$14,400,000 in 2003, compared to net cash provided by financing
activities of $628,000 in 2002. In May 2003, we completed a
private equity financing raising net proceeds of $4,800,000. In
September 2003, we completed a private equity financing raising
net proceeds of $7,700,000. In 2003, we also received proceeds
from the exercise of stock options and warrants totaling
$1,900,000. Cash provided by financing activities in 2002 was
comprised primarily of the exercise of stock options and
warrants.

Net cash used in operating activities was
$4,300,000 in 2003, compared to net cash used in operating
activities of $3,500,000 in 2002. Net cash inflows decreased,
due primarily to significantly higher license revenues in 2002,
relating to a $1,000,000 milestone payment received from
Merck, during the first quarter, related to the commencement by
Merck of a Phase I human clinical trial incorporating our
TranzFect technology. In 2002, we paid $1,000,000 in severance
and other contractual payments to officers. In 2003, we paid
$1,100,000 in licensing, patent and sponsored research fees in
connection with our new business strategy.

There can be no assurance that we will become
profitable. If we do, we may never be able to sustain
profitability. We expect to incur significant losses for the
foreseeable future. We are making efforts to reduce expenses and
may take steps to raise additional capital.

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The above statements regarding our plans and
expectations for future financing are forward-looking statements
that are subject to a number of risks and uncertainties. Our
ability to obtain future financings through joint ventures,
product licensing arrangements, equity financings or otherwise
is subject to market conditions and our ability to identify
parties that are willing and able to enter into such
arrangements on terms that are satisfactory to us. There can be
no assurance that we will be able to obtain future financing
from these sources. Additionally, depending upon the outcome of
our fund raising efforts, the accompanying financial information
may not necessarily be indicative of future operating results or
future financial condition.



| |                        
| | -----------------------
| | Contractual Obligations

We have no current commitments for capital
expenditures in 2004, however, we anticipate incurring capital
expenditures in connection with the expansion of our
subsidiarys laboratory. We have no committed lines of
credit or other committed funding or long-term debt. Minimum
annual future obligations for operating leases, minimum annual
future obligations under various license agreements and minimum
annual future obligations under employment agreements consist of
the following:

|                    |  |                |       |            |  |            |       |       |  |   |       |  |  |   |        | 
|------------------- |  | -------------- | ----- | ---------- |  | ---------- | ----- | ----- |  | - | ----- |  |  | - | ------ | 
|                    |  | Operating      |       | License    |  | Employment |       |      
|                    |  | Leases         |       | Agreements |  | Agreements |       | Total
|                    |  |                |       |            |  |            |       |      
|                    |  |               
|                    |  | (In thousands)
|2004                |  | $              | 560   |            |  | $          | 1,778 |       |  |   | 1,075 |  |  | $ | 3,413  | 
|2005                |  |                | 478   |            |  |            | 1,810 |       |  |   | 670   |  |  |   | 2,958  | 
|2006                |  |                | 285   |            |  |            | 897   |       |  |   | 375   |  |  |   | 1,557  | 
|2007                |  |                | 229   |            |  |            | 310   |       |  |   |      |  |  |   | 539    | 
|2008                |  |                | 76    |            |  |            | 330   |       |  |   |      |  |  |   | 406    | 
|2009 and thereafter |  |                |      |            |  |            | 1,320 |       |  |   |      |  |  |   | 1,320  | 
|                    |  |                |       |            |  |            |       |       |  |   |       |  |  |   |        | 
|Total               |  | $              | 1,628 |            |  | $          | 6,445 |       |  | $ | 2,120 |  |  | $ | 10,193 | 
|                    |  |                |       |            |  |            |       |       |  |   |       |  |  |   |        | 

We have employment agreements with our executive
officers, the terms of which expire at various times through
July 2006. Certain agreements, which have been revised from time
to time, provide for minimum salary levels, adjusted annually at
the Compensation Committees determination, as well as for
minimum bonuses that are payable. The aggregate commitment for
future salaries at December 31, 2003, including guaranteed
bonuses and salary continuation, was approximately $2,120,000.
Certain of these employment agreements have been terminated and
the guaranteed salaries may be less.



| |                   
| | ------------------
| | License Agreements

In April 2003, we acquired new technologies by
entering into exclusive license arrangements with UMMS covering
potential applications of the medical institutions
proprietary RNAi technology in the treatment of specified
diseases, including those within the areas of obesity,
type 2 diabetes ALS, CMV and covering UMMSs
proprietary technology with potential gene therapy applications
within the area of cancer. In consideration of the licenses, we
made cash payments to UMMS totaling $186,000 and issued it a
total of 1,613,258 shares of our common stock which were
valued, for financial statement purposes, at $1,468,000. In May
2003, we broadened our strategic alliance with UMMS by acquiring
an exclusive license from that institution covering a
proprietary DNA-based HIV vaccine technology. In consideration
of this license, we made cash payments to UMMS totaling $18,000
and issued it 215,101 shares of our common stock which were
valued, for financial statement purposes, at $361,000. As the
RNAi technology from UMMS had not achieved technological
feasibility at the time of its license by us, had no alternative
future uses and, therefore, no separate economic value, the
aggregate total of $2,033,000 in cash payments and stock issued
for acquisition of the technology was expensed as research and
development in our financial statements.



| |                                
| | -------------------------------
| | Net Operating Loss Carryforward

At December 31, 2003, we had consolidated
net operating loss carryforwards for income tax purposes of
$67,200,000, which will expire in 2004 through 2023 if not
utilized. We also have research and development

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tax credits and orphan drug tax credits available
to reduce income taxes, if any, of $6,600,000, which will expire
in 2004 through 2020 if not utilized. Based on an assessment of
all available evidence including, but not limited to, our
limited operating history in our core business and lack of
profitability, uncertainties of the commercial viability of our
technology, the impact of government regulation and healthcare
reform initiatives, and other risks normally associated with
biotechnology companies, we have concluded that it is more
likely than not that these net operating loss carryforwards and
credits will not be realized and, as a result, a 100% deferred
tax valuation allowance has been recorded against these assets.




| |                                     
| | ------------------------------------
| | Impairment Test of Intangible Assets

In accordance with the provisions of Accounting
Principles Board Opinion No. 18, The Equity Method of
Accounting for Investments in Common Stock(APB 18), we reviewed the net values on our
balance sheet, as of September 30, 2003, assigned to
Investment in Minority  Owned Entity 
Acquired Developed Technology resulting from our acquisition of
Global Genomics. APB 18 requires that a loss in value of an
investment, which is other than a temporary decline, should be
recognized as an impairment loss. Through the third quarter of
2003, Blizzard had been unsuccessful in its attempts to raise a
significant amount of financing necessary for it to pursue its
commercialization strategy for its products and we subsequently
decided not to further invest in this entity. Our analysis
consisted of a review of the financial projections prepared by
Blizzard, application of a discounted cash flow valuation model
of Blizzards projected cash flows, and consideration of
other qualitative factors. Based upon the quantitative and
qualitative factors described above, in addition to others, our
management determined that the estimated fair value of our
investment in Blizzard was $0 and that an impairment charge of
$5,869,000 was necessary. The write off had no impact upon our
cash or working capital position.



| |                      
| | ---------------------
| | Results of Operations

|                |  |                         |    |      |  |      |       |  |  |   |       | 
|--------------- |  | ----------------------- | -- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                |  |                        
|                |  | Year Ended December 31,
|                |  |                        
|                |  | 2003                    |    | 2002 |  | 2001
|                |  |                         |    |      |  |     
|                |  |                        
|                |  | (in thousands)         
|Service revenue |  | $                       |   |      |  | $    | 23    |  |  | $ | 101   | 
|Grant revenue   |  |                         | 94 |      |  |      | 1,051 |  |  |   | 3,751 | 
|License fees    |  |                         |   |      |  |      | 46    |  |  |   | 157   | 
|                |  |                         |    |      |  |      |       |  |  |   |       | 
|                |  | $                       | 94 |      |  | $    | 1,120 |  |  | $ | 4,009 | 
|                |  |                         |    |      |  |      |       |  |  |   |       | 

Service
revenue From 1996 to 2002,
we marketed the services of a small group of human resources
professionals under the name of Spectrum Recruitment Research as
a way of offsetting our cost of maintaining this function. In
February 2002, the operations of Spectrum were terminated and
the rights to use the Spectrum tradenames were transferred to
Albert, Isaac & Alexander, Inc., a consulting firm
comprised of former Spectrum employees. Service revenues related
to Spectrum were $22,000 in 2002 and $101,000 in 2001. Cost of
service revenues was $11,000 in 2002 and $71,000 in 2001, or 50%
and 70% of service revenues, respectively.

Grant
revenue Grant income was
$0 in 2003 compared to $46,000 in 2002 and $157,000 in 2001.
Grant income primarily relates to several Small Business
Innovative Research (SBIR) grants we received from the NIH in
support of our FLOCOR studies. We do not currently plan to seek
NIH or other similar grants that would provide us with any
funding during 2004.

License
fees License fee income
was $94,000 in 2003, $1,051,000 in 2002 and $3,751,000 in 2001
and relates primarily to our licenses of TranzFect to Vical and
Merck. License fees for 2002 include a $1,000,000 milestone
payment received from Merck, during the first quarter, related
to the commencement by Merck of a Phase I human clinical
trial incorporating our TranzFect technology. License fees in
2001 include a $3,750,000 up-front payment received from Vical
related to a license of our TranzFect technology. Other than a
$100,000 milestone fee that we received from Vical in April
2004, we do not anticipate receiving any

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significant licensing fee revenue during 2004
with respect to either our FLOCOR or TranzFect technologies,
although our agreement with SynthRx contemplates that company
making a payment to us in 2004.


Research and development

|                                                         |  |                         |       |      |  |      |     |  |  |   |       | 
|-------------------------------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | --- |  |  | - | ----- | 
|                                                         |  |                        
|                                                         |  | Year Ended December 31,
|                                                         |  |                        
|                                                         |  | 2003                    |       | 2002 |  | 2001
|                                                         |  |                         |       |      |  |     
|                                                         |  |                        
|                                                         |  | (in thousands)         
|Research and development expense                         |  | $                       | 1,485 |      |  | $    | 689 |  |  | $ | 1,844 | 
|Non-cash research and development expense                |  |                         | 2,903 |      |  |      |    |  |  |   |      | 
|Acquired in-process research and development
    expense |  |                         |      |      |  |      | 78  |  |  |   |      | 
|                                                         |  |                         |       |      |  |      |     |  |  |   |       | 
|                                                         |  | $                       | 4,388 |      |  | $    | 767 |  |  | $ | 1,844 | 
|                                                         |  |                         |       |      |  |      |     |  |  |   |       | 

Research and development expense during 2003 were
$4,388,000 versus $767,000 in 2002 and $1,844,000 in 2001. In
2003, as a result of the change in our business strategy
following our merger with Global Genomics, our research and
development expenditures related primarily to new licensing and
sponsored research agreements, and the commencement of our
subsidiarys operations. Research and development
expenditures for 2002 and 2001 were primarily related to the
development of our FLOCOR technology. The research and
development expense for 2002 also includes $78,000 which was
allocated from the purchase price of Global Genomics as
in-process research and development and, therefore, expensed in
connection with the acquisition. Although our actual research
and development expenditures for 2004 could vary substantially,
depending upon the progress we make in certain of our research
programs and the possible addition of new programs, we
anticipate that these expenditures will be somewhat larger than
were our research and development expenditures in 2003.

Selling, general and administrative

|                                                                                                    |  |                         |       |      |  |      |       |  |  |   |       | 
|--------------------------------------------------------------------------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                                                                    |  |                        
|                                                                                                    |  | Year Ended December 31,
|                                                                                                    |  |                        
|                                                                                                    |  | 2003                    |       | 2002 |  | 2001
|                                                                                                    |  |                         |       |      |  |     
|                                                                                                    |  |                        
|                                                                                                    |  | (in thousands)         
|Common stock, stock options and warrants issued
    for selling, general and administrative expense |  | $                       | 3,148 |      |  | $    | 230   |  |  | $ | 1,441 | 
|Selling, general and administrative expense                                                         |  |                         | 3,841 |      |  |      | 1,703 |  |  |   | 1,161 | 
|                                                                                                    |  |                         |       |      |  |      |       |  |  |   |       | 
|                                                                                                    |  | $                       | 6,989 |      |  | $    | 1,933 |  |  | $ | 2,602 | 
|                                                                                                    |  |                         |       |      |  |      |       |  |  |   |       | 

We recorded non-cash charges of $3,148,000,
$230,000, and $1,441,000 during 2003, 2002 and 2001,
respectively, related to the issuance of stock warrants to
certain consultants and certain vesting events for management
stock options. These fees relate primarily to common stock,
stock options and warrants issued in connection with the
engagement and retention of financial and business development
advisors. The significant increase in 2003 was due primarily to
the change in our business strategy, which led to an increase in
activity and, as a result, a greater use of consultants for
financial and business development advisory services. The
difference between 2002 and 2001 is primarily due to the warrant
that we granted to Cappello Capital, in 2001, as compensation
for its services.

Selling, general and administrative expenses
during 2003 were $3,841,000 as compared to $1,703,000 in 2002
and $1,161,000 in 2001. The increase in 2003 was due primarily
to the change in our business strategy following our merger with
Global Genomics, which led to an increase in activity and, as a
result, a greater use of consultants for technical, financial
and business development advisory services, in addition to
higher legal and accounting costs. The increase from 2001 to
2002 is due primarily to the increase in the percentage of
facilities costs allocated to administrative expense versus
research and development expense, and higher legal and
accounting costs subsequent to the merger. Our legal and
accounting costs are expected to increase during 2004 as a
result of certain costs associated with our change of
accountants during the first half of 2004 and certain pending
legal proceedings.

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Depreciation and amortization
expense Depreciation and
amortization expense was $2,000, $794,000 and $586,000 in 2003,
2002 and 2001, respectively. Due to the impairment charge
(discussed below), our property balances had been reduced to a
nominal amount as of December 31, 2002 and, therefore, our
depreciation expense will be nominal for the foreseeable future.

Severance and other contractual payments to
officers Pursuant to his
employment agreement, our former President and CEO, Jack
Luchese, was entitled to a payment of $435,000 upon the
execution of the merger agreement between Global Genomics and us
and an additional $435,000 upon the closing of the merger. In
order to reduce the amount of cash that we had to pay to
Mr. Luchese, Mr. Luchese and we agreed that
approximately $325,200 of the first $435,000 payment would be
satisfied by CytRx granting a stock award to Mr. Luchese
under our 2000 Long-Term Incentive Plan pursuant to which we
issued Mr. Luchese 558,060 shares of our common stock.
Those shares of stock were issued at a value equal to 85% of the
volume weighted average price of our common stock for the
20 trading days ended on February 8, 2002. The cash
payment and fair value of the shares issued were recognized as
expense (total of $428,000) during the first quarter of 2002.

The terms of our merger with Global Genomics
contemplated that their management team would replace ours
subsequent to the closing of the merger. On July 16, 2002,
we terminated the employment of all of our then current
officers, resulting in total obligations for severance, stay
bonuses, accrued vacation and other contractual payments of
$1,394,000 (including the final $435,000 owed to
Mr. Luchese as discussed above). Prior to the merger
closing date, we advanced part of these amounts to three of our
officers (through salary continuance), such that the total
remaining obligation at the closing date was $1,179,000. Four of
our officers agreed to accept an aggregate total of $177,000 of
this amount in the form of our Common Stock in lieu of cash,
resulting in the issuance of 248,799 shares. Thus, the net
cash payout in satisfaction of these obligations was $1,002,000,
before taxes. The severance payments and fair value of the
shares issued (total expense of $1,394,000) was recognized as
expense during the third quarter of 2002 and is reported as a
separate line item on the accompanying consolidated statement of
operations, together with the final payment to Mr. Luchese
discussed above.

Asset impairment
charge During the fourth
quarter of 2002, we recognized an asset impairment charge of
approximately $921,000 related to our equipment and facility
used for FLOCOR production. We recorded an impairment loss equal
to the net book value of the equipment and related leasehold
improvements.

Loss on facility
abandonment During the
fourth quarter of 2002, we recognized a loss of $478,000
associated with the closure of our Atlanta headquarters and
relocation to Los Angeles subsequent to our merger with Global
Genomics. This loss represents the difference between the total
remaining lease obligations and estimated operating costs
through the remainder of the lease, which expires in 2008, less
estimated sublease income.

Interest
income Interest income was
$82,000 in 2003 as compared to $96,000 in 2002 and $162,000 in
2001. The variance between years is primarily attributable to
fluctuating cash balances.

Equity losses from minority-owned
entity

|                                              |  |                         |       |      |  |      |     |  |  |   |   | 
|--------------------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | --- |  |  | - | - | 
|                                              |  |                        
|                                              |  | Year Ended December 31,
|                                              |  |                        
|                                              |  | 2003                    |       | 2002 |  | 2001
|                                              |  |                         |       |      |  |     
|                                              |  |                        
|                                              |  | (in thousands)         
|Equity losses from minority-owned entity      |  | $                       | 245   |      |  | $    | 330 |  |  | $ |  | 
|Asset impairment charge                       |  |                         | 5,869 |      |  |      |    |  |  |   |  | 
|Amortization of acquired developed technology |  |                         | 548   |      |  |      | 335 |  |  |   |  | 
|                                              |  |                         |       |      |  |      |     |  |  |   |   | 
|                                              |  | $                       | 6,662 |      |  | $    | 665 |  |  | $ |  | 
|                                              |  |                         |       |      |  |      |     |  |  |   |   | 

We record our portion of the net loss of Blizzard
Genomics in accordance with the equity method of accounting. In
2003, we recorded $6,662,000 in equity losses, of which
$5,869,000 was an asset impairment charge, $237,000 was our 40%
share of the net loss in Blizzard Genomics and $731,000 was
amortization of acquired developed technology. For the period
July 19, 2002 (date of acquisition of Global Genomics) to

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December 31, 2002, we recorded $665,000 in
equity losses, of which $330,000 was our share in the net loss
of Blizzard Genomics and $335,000 was amortization of acquired
developed technology.


Minority interest in losses of
subsidiary We recorded
$20,000 related to the 5% minority interest in losses of our
subsidiary, which we established in September 2003.



| |                                         
| | ----------------------------------------
| | Recently Issued Accounting
    Standards

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity(SFAS 150). This statement changes the classification
of certain financial instruments from equity to liabilities. The
three types of financial instruments requiring the change in
classification are: (1) mandatorily redeemable shares,
which the issuing company is obligated to buy back in exchange
for cash or other assets; (2) put options and forward
purchase contracts; and (3) obligations that can be settled
with shares, the monetary value of which is fixed, tied solely
or predominantly to a variable such as a market index, or varies
inversely with the value of the issuers shares. This
statement is effective for all financial instruments entered
into or modified after May 31, 2003, and is otherwise
effective at the beginning of the first interim period beginning
after June 15, 2003. We adopted SFAS 150 as of July 1,
2003, which did not have a material impact on our consolidated
financial statements.

In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities(SFAS 149). This statement amends and
clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded
in other contracts (collectively referred to as derivatives) and
for hedging activities under SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities(SFAS
133). SFAS 133 is generally effective for contracts entered into
or modified after June 30, 2003 and hedging relationships
designated after June 30, 2003. We will apply the
provisions of SFAS 149 for any derivative instruments or hedging
activities entered into after June 30, 2003. As we have not
entered into derivative instruments or hedging activities,
adoption of this statement does not have a material impact on
our consolidated financial statements.

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest Entities(FIN 46) as superseded in December 2003 by FASB-issued
Interpretation No. 46R, Consolidation of Variable
Interest Entities   an interpretation of ARB 51(FIN 46R). FIN 46R requires the primary
beneficiary of a variable interest entity (VIE) to
consolidate the entity and also requires majority and
significant variable interest investors to provide certain
disclosures. A VIE is an entity in which the equity investors do
not have a controlling interest, equity investors participate in
losses or residual interests of the entity on a basis that
differs from its ownership interest, or the equity investment at
risk is insufficient to finance the entitys activities
without receiving additional subordinated financial support from
the other parties. FIN 46R is applicable starting
January 1, 2004. We do not believe the effect of
FIN 46R on our consolidated financial statements will be
material.

In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting for
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, an interpretation of FASB
Statements No. 5, 57, and 107 and rescission of FASB
Interpretation No. 34, Disclosure of Indirect Guarantees of
Indebtedness of Others(FIN 45). FIN 45 clarifies
the requirements for a guarantors accounting for and
disclosure of certain guarantees issued and outstanding. It also
requires a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 also
incorporates without reconsideration the guidance in FASB
Interpretation No. 34, which is being superseded. We
adopted FIN 45 effective January 1, 2003. Adoption did
not have a material impact on our financial statements.



| |                           
| | --------------------------
| | Related Party Transactions

In July 2002, we entered into an agreement with
Kriegsman Capital Group (KCG), whereby KCG or its
affiliate The Kriegsman Group (TKG) agreed to
provide us with office space and certain administrative
services. KCG and TKG are owned by Steven A. Kriegsman, our
President and CEO. During the years ended December 31, 2003
and 2002, we paid approximately $70,000 and $59,000,
respectively, to KCG under this

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agreement. The charges were determined based upon
actual space used and estimated percentages of employee time
used. We believe that such charges approximate the fair value of
the space and services provided. In October 2003, the services
and facilities agreement with KCG was terminated as
substantially all of the on-going operations of KCG have ceased.
The obligations under the facility lease at our headquarters
were transferred from KCG to us in July 2003.


We entered into various agreements, expiring in
May 2004, with Cappello Capital Corp. (Cappello Capital) in
which Cappello Capital will serve as our exclusive financial
advisor. Alexander L. Cappello, one of our directors, is
Chairman and Chief Executive Officer of Cappello
Group, Inc., an affiliate of Cappello Capital. Under these
agreements, Cappello Capital assisted us with the analysis of
potential transactions and strategic alternatives. The types of
transactions that Cappello Capital may assist us with include
the private placement of equity, debt or convertible securities,
strategic alliances, the sale of all or a portion of us, a
recapitalization or strategic acquisitions. If we proceed with
any of the transactions described in the agreement, we are to
pay Cappello Capital a fee of between 3% and 7.5%, depending
upon the nature of the transaction and the dollar amount
involved. In 2001, as compensation for its services, we granted
Cappello Capital a ten-year warrant to purchase
1,272,492 shares of our common stock (subject to downward
adjustment under certain conditions) with an exercise price of
$1.00 per share (fair value of $1,063,000), which was fully
vested at December 31, 2003. During 2002, we paid Cappello
Capital a monthly retainer of $10,000 for the final six months
of the year, or a total of $60,000. The fair value of the
warrant issued to Cappello Capital was recognized as common
stock, stock options and warrants issued for services in the
accompany statements of operations and recognized based on the
vesting terms of the warrant. The fee paid to Cappello Capital
upon the closing of the merger with Global Genomics was
448,330 shares of our common stock, or 4.5% of the shares
issuable in the merger. The fair value of those shares issued
($247,000) was considered as a transaction cost of the merger
and was included in the purchase price of Global Genomics. Fees
paid to Cappello Capital in connection with the closing of the
May 2003 Financing and the September 2003 Financing consisted of
$1,076,000 and fully vested, ten-year warrants to purchase
794,771 shares of common stock with exercise prices ranging
from $1.85 per share to $3.05 per share. During 2003
from May through December, we paid Cappello Capital a monthly
retainer of $20,000, or a total of $160,000.

Dr. Michael Czech, a 5% minority shareholder
of our subsidiary (see Note 9) and a member of our and
our subsidiarys Scientific Advisory Boards, is an employee
of UMMS and party, as the principal investigator, to a sponsored
research agreement between UMMS and us. We recorded a minority
interest liability of $350,000 representing the 5% interest in
our subsidiary held by Dr. Czech. Additionally, we have
recorded the fair value of 300,000 shares of our common
stock as additional paid-in capital for our right to call and
the Dr. Czechs right to put the remaining 5% interest
to us in exchange for a guaranteed amount of 300,000 shares
of our common stock. The fair value of these shares on the
purchase date was approximately $723,000. During 2003,
Dr. Czech was paid $18,000 for his Scientific Advisory
Board services. During 2003, we paid UMMS $403,000 under a
sponsored research agreement to fund a portion of
Dr. Czechs research.



| |                                   
| | ----------------------------------
| | Off-Balance Sheet
    Arrangements

We have not entered into off-balance sheet
financing arrangements, other than operating leases.

RISK FACTORS

If any of the following risks actually occur, our
business or prospects could be materially adversely affected.
You should also refer to the other information in this Annual
Report, including our financial statements and the related notes.

We Have Operated at a Loss and Will Likely
Continue to Operate at a Loss For the Foreseeable
Future

We have incurred significant losses over the past
five years, including net losses of approximately $17,845,000,
$6,176,000, and $931,000 for 2003, 2002, and 2001, respectively,
and we had an accumulated deficit of approximately $89,802,000
as of December 31, 2003. Our operating losses have been due
primarily to our expenditures for research and development on
our products and for general and administrative expenses,

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and our lack of significant revenues. We are
likely to continue to incur operating losses until such time, if
ever, that we generate significant recurring revenues. Unless we
are able to acquire products from third parties that are already
being marketed and that can be profitably marketed by us, it
will take a minimum of three years (and possibly longer) for us
to generate recurring revenues, since we anticipate that it will
take at least several years before the development of any of our
licensed or other current potential products is completed, FDA
marketing approvals are obtained and commercial sales of any of
these products can begin.


We Have No Source of Significant Recurring
Revenues, Which May Make Us Dependent on Financing to Sustain
Our Operations

Although we generated $3,751,000 in revenues from
milestone payments and license fees from our licensees during
2001 and $1,051,000 from these sources during 2002, we generated
only $94,000 in such revenues in 2003 and we do not have any
significant sources of recurring operating revenues. We will not
have significant recurring operating revenues until at least one
of the following occurs:



| |   |                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | we are able to complete the development of and
    commercialize one or more of the products that we are currently
    developing, which may require us to first enter into license or
    other arrangements with third parties
|
| |  | one or more of our currently licensed products is
    commercialized by our licensees, thereby generating royalty
    income for us                                                                                             
|
| |  | we are able to acquire products from third
    parties that are already being marketed or are approved for
    marketing                                                                                                        

We are likely to incur negative cash from
operations until such time, if ever, as we can generate
significant recurring revenues. Although we believe that we have
adequate financial resources to support our currently planned
levels of operations through at least early 2005, should we
thereafter be unable to generate recurring revenues, it is
likely that we will become dependent on obtaining financing from
third parties to continue to meet our obligations to the
University of Massachusetts Medical School (UMMS) and
maintain our operations, including our planned levels of
operations for our obesity and type 2 diabetes subsidiary. We
have no commitments from third parties to provide us with any
debt or equity financing. Accordingly, financing may be
unavailable to us or only available on terms that substantially
dilute our existing stockholders. A lack of needed financing
could force us to reduce the scope of or terminate our
operations, or to seek to merge with or be acquired by another
company. There can be no assurance that we would be able to
identify an appropriate company to merge with or be acquired by
or that we could consummate such a transaction on terms that
would be attractive to our stockholders or at all.

Most of Our Revenues Have Been Generated by
License Fees for TranzFect, Which May Not be a Recurring Source
of Revenue for Us

License fees paid to us with respect to our
TranzFect technology have represented 81%, 94% and 94% of our
total revenues for 2003, 2002 and 2001, respectively. We have
already licensed most of the potential applications for this
technology, and there can be no assurance that we will be able
to generate additional license fee revenues from any new
licensees for this technology. Our current licensees for
TranzFect, Merck & Co. (Merck) and Vical Incorporated
(Vical) may be required to make further milestone payments to us
under their licenses based on their future development of
products using TranzFect. However, Merck is at an early stage of
clinical trials of a product utilizing TranzFect, and Vical has
only recently commenced a Phase I clinical trial of a
product utilizing TranzFect. In the Merck trials, although the
formulation of the tested vaccine using TranzFect was generally
safe, well-tolerated and generated an immune response, the
addition of TranzFect to the vaccine did not increase this
immune response. Moreover, the DNA single-modality vaccine
regimen with TranzFect, when tested in humans, yielded immune
responses that were inferior to those obtained with the DNA
vaccines in macaque monkeys. Accordingly, there is likely to be
a substantial period of time, if ever, before we receive any
further significant payments from Merck or Vical under their
TranzFect licenses.

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We Have Changed Our Business Strategy, Which
Will Require Us, in Certain Cases, to Find and Rely Upon Third
Parties for the Development of Our Products and to Provide Us
With Products

Following our merger with Global Genomics, we
modified our business strategy of internally developing FLOCOR
and the other, then-current, potential products that we had not
yet licensed to third parties. Instead, we began to seek to
enter into strategic alliances, license agreements or other
collaborative arrangements with other pharmaceutical companies
that would provide for those companies to be responsible for the
development and marketing of those products. In October 2003, we
entered into an agreement to license FLOCOR, the primary
potential product that we held prior to the Global Genomics
merger and which we had not already licensed to a third party,
to SynthRx and entered into a strategic alliance with that
company. Although we intend to internally fund or carry out,
through our obesity and type 2 diabetes subsidiary, the
early stage development work for certain product applications
based on the RNAi and other technologies that we licensed from
UMMS, and we may seek to fund all of the later stage development
work for our potential ALS products, the completion of the
development, manufacture and marketing of these products is
likely to require, in many cases, that we enter into strategic
alliances, license agreements or other collaborative
arrangements with larger pharmaceutical companies for this
purpose.

There can be no assurance that our products will
have sufficient potential commercial value to enable us to
secure strategic alliances, license agreements or other
collaborative arrangements with suitable companies on attractive
terms or at all. If we enter into these arrangements, we will be
dependent upon the timeliness and effectiveness of the
development and marketing efforts of our contractual partners.
If these companies do not allocate sufficient personnel and
resources to these efforts or encounter difficulties in
complying with applicable regulatory (including FDA)
requirements, the timing of our receipt or the volume of
revenues we receive from these arrangements may be materially
adversely affected. By entering into these arrangements rather
than completing the development and marketing of these products
on our own, we may ultimately receive less income for these
products. In addition, if we are unable to enter into a
strategic relationship for a particular product, we may be
required to either sell our rights in the product to a third
party or abandon it unless we are able to raise sufficient
capital to fund the substantial expenditures necessary for the
development and marketing of that product.

We will also seek to acquire products from third
parties that already are being marketed or have previously been
marketed. We have not yet identified any of these products. Even
if we do identify such products, it may be difficult for us to
acquire them with our limited financial resources, and, if we
acquire products using our securities as currency, we may incur
substantial shareholder dilution. We do not have any prior
experience in acquiring or marketing products and may need to
find third parties to market these products for us. We may also
seek to acquire products through a merger with one or more
companies that own such products. In any such merger, the owners
of our merger partner could be issued or hold a substantial, or
even controlling, amount of stock in our company or, in the
event that the other company is the surviving company, in that
other company.

Our Current Financial Resources May Limit Our
Ability to Execute Certain Strategic Initiatives

On December 31, 2003 we had approximately
$11,644,000 in cash and cash equivalents and approximately
$10,761,000 in working capital. Our significantly improved
working capital position is due primarily to our completing a
$5,440,000 private equity financing in May 2003 and an
$8,695,000 private equity financing in September 2003, although
we have used approximately $7,000,000 of the net proceeds of the
September 2003 financing as initial capital for our obesity and
type 2 diabetes subsidiary and we currently expect the
balance of such proceeds to be available for the future
operating needs of that subsidiary.

In October 2003, we entered into an agreement to
license FLOCOR to SynthRx, which will be responsible for
developing potential product applications for FLOCOR. As a
result of the agreement, we may be entitled to receive future
milestone payments and royalties. Although we are not doing any
further development work on TranzFect, should our two principal
licensees for this technology successfully meet the defined
milestones, we could receive future milestone payments and,
should either of the licensees commercialize products based upon
our technology, future royalty payments. However, there can be
no assurance that

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our licensees will continue to develop or ever
commercialize any products that are based on our FLOCOR or our
TranzFect technology.


Our strategic alliance with UMMS may require us
to make significant expenditures to fund research at the
institution relating to the development of therapeutic products
based on the UMMS proprietary technology that we have licensed.
We estimate that the aggregate amount of these sponsored
research expenditures under our current commitments will be
approximately $1,400,000 for 2004, approximately $1,500,000 for
2005 and approximately $800,000 for 2006. We have also agreed to
fund approximately $487,000 of sponsored research at
Massachusetts General Hospital over the next two years. Our
license agreements with UMMS also provide, in certain cases, for
milestone payments based on the progress we make in the clinical
development and marketing of products utilizing the licensed
technologies. In the event that we were to successfully develop
a product in each of the categories of obesity/type 2 diabetes,
ALS, CMV, cancer and an HIV vaccine, under our licenses, those
milestone payments could aggregate up to $16,055,000. Those
milestone payments, however, could vary significantly based upon
the milestones we achieve and the number of products we
ultimately undertake to develop.

Although we believe that an existing NIH grant
will be sufficient to fund substantially all of the costs of the
currently planned Phase I trial of the HIV vaccine
candidate using the technology we licensed from UMMS and
Advanced BioScience Laboratories (ABL), we could be required to
fund expenses of the trial not covered by the grant, which
expenses could be significant. Under our license for this
technology, following the completion of the currently planned
Phase I trial, we will be responsible for all of the costs
for subsequent clinical trials for this vaccine. The costs of
subsequent trials for the HIV vaccine will be very substantial.
We do not have any NIH or other governmental funding for these
future trials, and there can be no assurance that we will be
able to secure such funding for any of these trials.

The expenditures potentially required under our
agreements with the UMMS and ABL, together with the operating
capital requirements of our obesity and type 2 diabetes
subsidiary and our planned sponsored research funding for
Massachusetts General Hospital, substantially exceed our current
financial resources. Those required expenditures could require
us to raise additional capital or to secure a licensee or
strategic partner to fulfill our obligations to UMMS and to
develop any products based on the technologies that we have
licensed from UMMS, or to continue the operations of our obesity
and type 2 diabetes subsidiary at the currently
contemplated level. If we are unable to meet our various
financial obligations under license agreements with UMMS, we
could lose all of our rights under those agreements. If we were
to have inadequate financial resources at that time, we also
could be forced to reduce the level of, or discontinue,
operations at our subsidiary.

Our New Obesity and Type 2 Diabetes Subsidiary
May Not Be Able to Develop Products

In order to develop obesity and type 2
diabetes products, our new subsidiary will first need to
identify appropriate drug targets and pathways. We will be using
novel RNAi-based techniques to accelerate this process, but
there is no assurance that these techniques will accelerate our
work or that we will be able to identify highly promising
targets or pathways using these techniques or otherwise. Even if
we are successful in identifying targets or pathways, we will
also need to develop proprietary molecules that are safe and
effective against those targets. The development process and the
clinical testing of potential products will take a lengthy
period of time and involve expenditures substantially in excess
of our current financial resources. We currently plan to seek a
strategic alliance with a major pharmaceutical company at a
relatively early stage in our development work to complete the
development, clinical testing, manufacturing and marketing of
our obesity and type 2 diabetes products, but we may not be
able to secure such a strategic partner on attractive terms or
at all. Furthermore, we do not have prior experience in
operating a genomic and proteomic-based drug discovery company.
Accordingly, we will be heavily dependent on the prior
experience and current efforts of Dr. Michael P. Czech, the
Chairman of the Scientific Advisory Board of our subsidiary, in
establishing the scientific goals and strategies of our
subsidiary, and Dr. Mark A. Tepper, the President of our
subsidiary, in managing the operations of this subsidiary.

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We Will Be Reliant Upon SynthRx to Develop and
Commercialize FLOCOR

In October 2003, we entered into an agreement
under which we will license FLOCOR and our other co-polymer
technologies to SynthRx and acquire a 19.9% equity interest in
that newly formed biopharmaceutical company. SynthRx has limited
financial resources and will have to either raise significant
additional capital or secure a licensee or strategic partner to
complete the development and commercialization of FLOCOR and
these other technologies. SynthRx does not have any commitments
from third parties to provide the capital that it will require
and there can be no assurance that it will be able to obtain
this capital or a licensee or strategic partner on satisfactory
terms or at all.

Our prior Phase III clinical trial of FLOCOR
for the treatment of sickle cell disease patients experiencing
an acute vaso-occlusive crisis did not achieve its primary
objective. However, in that study, for patients 15 years of
age and younger, the number of patients achieving a resolution
of crisis was higher for FLOCOR-treated patients at all time
periods than for placebo-treated patients, which may indicate
that future clinical trials should focus on juvenile patients.
To generate sufficient data to seek FDA approval for FLOCOR will
require additional clinical studies, which will entail
substantial time and expense for SynthRx.

The manufacture of FLOCOR involves obtaining new
raw drug substance and a supply of the purified drug from the
raw drug substance, which requires specialized equipment. Should
SynthRx encounter difficulty in obtaining the purified drug
substance in sufficient amounts or at acceptable prices, SynthRx
may be unable to complete the development or commercialization
of FLOCOR on a timely basis or at all.

If Our Products Are Not Successfully Developed
and Approved by the FDA, We May Be Forced to Reduce or Terminate
Our Operations

Each of our products is in the development stage
and must be successfully developed and then approved by the FDA
or similar foreign governmental agencies before it can be
marketed. The process for obtaining FDA approval is both
time-consuming and costly, with no certainty of a successful
outcome. This process typically includes the conduct of
extensive pre-clinical and clinical testing, which may take
longer or cost more than we or our licensees currently
anticipate, due to numerous factors such as:



| |   |                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------
| |  | difficulty in securing centers to conduct trials                                                            
|
| |  | difficulty in enrolling patients in conformity
    with required protocols or projected timelines           
|
| |  | unexpected adverse reactions by patients in trials                                                          
|
| |  | difficulty in obtaining clinical supplies of the
    product                                                
|
| |  | changes in the FDAs requirements for our
    testing during the course of that testing                     
|
| |  | inability to generate statistically significant
    data confirming the efficacy of the product being tested

The RNAi and other technologies that we have
acquired from UMMS have not yet been clinically tested by us,
nor are we aware of any clinical trials having been conducted by
third parties involving similar technologies. Successful
development of RNAi-based products will require solving a number
of issues, including providing suitable methods of stabilizing
the RNAi drug material and delivering it into target cells in
the human body.

In connection with the currently planned
Phase I clinical trial being conducted by UMMS and ABL, we
do not have a commercial relationship with a company that is
providing an adjuvant for the HIV vaccine candidate, utilizing
the technology that we have licensed from UMMS, that will be
tested in that trial. We may be unable to use some or all of the
results of that trial as part of our clinical data for obtaining
FDA approval of this vaccine if we are unable or choose not to
enter into an agreement to acquire the rights to use that third
partys adjuvant.

Our TranzFect technology is currently in
Phase I clinical trials that are being conducted by our
licensee, Merck, as a component of a vaccine to prevent AIDS.
Since TranzFect is to be used as a component in vaccines, we do
not need to seek FDA approval, but the vaccine manufacturer will
need to seek FDA approval

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for the final vaccine formulation containing
TranzFect. Merck has completed a multi-center, blinded, placebo
controlled Phase I trial of an HIV vaccine utilizing
TranzFect as a component. Although the formulation of this
tested vaccine was generally safe and well-tolerated and
generated an immune response, the addition of TranzFect to the
vaccine did not increase this immune response. Moreover, the DNA
single-modality vaccine regimen with TranzFect when tested in
humans yielded immune responses that were inferior to those
obtained with the DNA vaccines in macaque monkeys.


We Are Unlikely to Recover Any Amounts from
Global Genomics Portfolio Companies

Due to its inability to raise needed capital,
Blizzard Genomics, Inc. (Blizzard), which was Global
Genomics principal portfolio company, has been unable to
complete the development of any of its products and has been
notified by the licensor of its core technologies that it is in
default under its license for those technologies. Global
Genomics other portfolio company is at a very early stage,
is operating without any full-time or salaried employees and has
not been able to raise the capital it will need to fund its
planned operations and to acquire licenses to certain
technologies that it will require. Accordingly, it appears
unlikely that either of Global Genomics portfolio
companies will generate revenues for us in the future and, in
2003, we recorded a write-off of the carrying value of our
investments in those companies.

We May Be Involved in Legal Proceedings That
Could Affect Our Business Operations or Financial
Condition

The Company may be involved, from time to time,
in investigations and proceedings by governmental and
self-regulatory agencies, certain of which could result in
adverse judgments, fines, or other sanctions. We have recently
been notified by the Massachusetts State Ethics Commission
(Massachusetts Commission) that it has initiated a Preliminary
Inquiry into whether our previous retention of a consultant who
introduced us to UMass constituted an improper conflict of
interest under Massachusetts ethics laws. Since the
inquiry is at a very preliminary stage, it is inherently
difficult to predict whether the Massachusetts Commission will
decide to initiate any formal proceedings, whether these
proceedings will be directed at us or whether we will be found
in any such proceedings to have violated any Massachusetts
ethics laws. We also cannot estimate what our legal costs will
be in connection with this proceeding, although these expenses
could be substantial if a formal proceeding is initiated.
Moreover, if the Massachusetts Commission were to determine that
our conduct was unlawful, the Commission could impose a number
of different penalties or sanctions upon us which under certain
circumstances would have a material adverse effect on our
business and financial condition.

We Are Subject to Intense Competition That
Could Materially Impact Our Operating Results

We and our strategic partners or licensees may be
unable to compete successfully against our current or future
competitors. The pharmaceutical, biopharmaceutical and
biotechnology industry is characterized by intense competition
and rapid and significant technological advancements. Many
companies, research institutions and universities are working to
develop new products in a number of areas similar to our primary
fields of interest. There also is intense competition among
companies seeking to acquire products that are already being
marketed. Many of the companies with which we compete have, or
are likely to have, substantially greater research and product
development capabilities and financial, technical, scientific,
manufacturing, marketing, distribution and other resources than
we and at least some of our present or future strategic partners
or licensees.

As a result, competitors may:



| |   |                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------
| |  | succeed in developing competitive products
    earlier than we or our strategic partners or licensees                                              
|
| |  | obtain approvals for such products from the FDA
    or other regulatory agencies more rapidly than we or our
    strategic partners or licensees do
|
| |  | develop or otherwise obtain patents that block or
    inhibit the development and commercialization of our product
    candidates                  

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| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| |  | develop treatments or cures that are safer or
    more effective than those we propose for our products
|
| |  | devote greater resources to marketing or selling
    their products                                    
|
| |  | introduce or adapt more quickly to new
    technologies or scientific advances                         
|
| |  | introduce products that make the continued
    development of our product candidates uneconomical      
|
| |  | withstand price competition more successfully
    than we or our strategic partners or licensees can   
|
| |  | more effectively negotiate third-party strategic
    alliances or licensing arrangements               
|
| |  | take advantage of product acquisition or other
    opportunities more readily than we can              

A number of medical institutions and
pharmaceutical companies are seeking to develop products based
on gene silencing technologies. Companies working in this area
include a number of biopharmaceutical companies such as Sirna
Therapeutics, Inc., Alnylam, Inc. and Benitec Ltd., as
well as the multinational pharmaceutical companies that either
have their own gene silencing product development programs or
are working in collaboration with smaller biopharmaceutical
companies that are focused on this area. A number of products
currently are being marketed by a variety of the multinational
or other pharmaceutical companies for treating type 2 diabetes,
including among others the diabetes drugs Avandia by Glaxo
SmithKline PLC, Actos by Eli Lilly & Co., Glucophage by
Bristol Myers Squibb Co., and Starlix by Novartis and the
obesity drugs Xenical by F. Hoffman-La Roche Ltd. and
Meridia by Abbott Laboratories. Many major pharmaceutical
companies are also seeking to develop new therapies for these
disease indications. Companies developing HIV vaccines that
could compete with our HIV vaccine technology include Merck,
VaxGen, Inc., Epimmune, Inc., AlphaVax, Inc. and
Immunitor Corporation, and ABL may also seek to develop
competing HIV vaccines that could utilize a portion of the
technology that we have licensed from UMMS and ABL.

Although we do not expect FLOCOR to have direct
competition from other products currently available or that we
are aware of that are being developed related to FLOCORs
ability to reduce blood viscosity in the cardiovascular area,
there are a number of anticoagulant products that FLOCOR would
have to compete against, such as tissue plasminogen activator
(t-PA) and streptokinase (blood clot dissolving enzymes) as well
as blood thinners such as heparin and coumatin, even though
FLOCOR acts by a different mechanism to prevent damage due to
blood coagulation. In the sickle cell disease area, FLOCOR would
compete against companies that are developing or marketing other
products to treat sickle cell disease, such as Droxia
(hydroxyurea) marketed by Bristol-Myers Squibb Co. and
Decitabine, which is being developed by SuperGen, Inc. Our
TranzFect technology will compete against a number of companies
that have developed adjuvant products, such as the adjuvant
QS-21 marketed by Antigenics, Inc. and adjuvants marketed
by Corixa Corp. Blizzard Genomics products, if ever
developed, would compete with a number of currently marketed
products, including those offered by Axon
Instruments, Inc., Affymetrix, Inc., Applied
Precision, LLC, Perkin Elmer, Inc. and Agilent
Technologies, Inc.

We Do Not Have the Ability to Manufacture Any
of Our Products and Will Need to Rely upon Third Parties for the
Manufacture of Our Clinical and Commercial Product
Supplies

We do not currently have the facilities or
expertise to manufacture any of the clinical or commercial
supplies of any of our products. Accordingly, we will be
dependent upon contract manufacturers or our strategic alliance
partners to manufacture these supplies, or we will need to
acquire the ability to manufacture these supplies ourselves,
which could be very difficult, time-consuming and costly. We do
not have manufacturing supply arrangements for our products,
including any of the licensed RNAi technology or, with the
exception of the clinical supplies for the currently planned
Phase I trial, the HIV vaccine product that utilizes the
HIV vaccine technology that we have licensed from UMMS. There
can be no assurance that we will be able to secure needed
manufacturing supply arrangements, or acquire the ability to
manufacture the products ourselves, on attractive terms or at
all. Delays in, or a failure to, secure these arrangements or
abilities could have a materially adverse effect on our ability
to complete the development of our products or to commercialize
them.

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We May Be Unable to Obtain or Protect Our
Intellectual Property Rights, Which Could Adversely Affect the
Value of Our Assets

Obtaining and maintaining patent and other
intellectual property rights for our technologies and potential
products is critical to establishing and maintaining the value
of our assets and our business. Although we believe that we have
significant patent coverage for our TranzFect technologies,
there can be no assurance that this coverage will be broad
enough to prevent third parties from developing or
commercializing similar or identical technologies, that the
validity of our patents will be upheld if challenged by third
parties or that our technologies will not be deemed to infringe
the intellectual property rights of third parties. We have a
non-exclusive license to a patent owned by UMMS and the Carnegie
Institution of Washington that covers the general field of gene
silencing. The specific medical applications of the gene
silencing technology and the other technologies that we have
licensed from the UMMS are covered by a number of pending patent
applications, but there can be no assurance that any of these
patents will be issued. Moreover, other organizations and
researchers have been active in the field of gene silencing,
many patent applications covering different methods and
compositions in the field of RNAi therapeutics have been and are
expected to be filed, and certain organizations or researchers
may hold or seek to obtain patents that could make it more
difficult or impossible for us to develop products based on the
gene silencing technology that we have licensed. At least one of
our competitors is seeking broad patent coverage in the RNAi
field that could restrict the ability of others to develop
certain RNAi-based therapeutics.

Any litigation brought by us to protect our
intellectual property rights or by third parties asserting
intellectual property rights against us could be costly and have
a material adverse effect on our operating results or financial
condition, make it more difficult for us to enter into strategic
alliances with third parties to develop our products, or
discourage our existing licensees from continuing their
development work on our potential products. If our patent
coverage is insufficient to prevent third parties from
developing or commercializing similar or identical technologies,
the value of our assets is likely to be materially and adversely
affected.

We are sponsoring research at UMMS and
Massachusetts General Hospital under agreements that give us
certain rights to acquire licenses to inventions that arise from
that research and we may enter into additional research
agreements with those institutions, or others, in the future.
There can be no assurance, however, that we will be able to
acquire those licenses under satisfactory terms or at all.

We May Incur Substantial Costs from Future
Clinical Testing or Product Liability Claims

If any of our products are alleged to be
defective, they may expose us to claims for personal injury by
patients in clinical trials of our products or by patients using
our commercially marketed products. Even if the
commercialization of one or more of our products is approved by
the FDA, users may claim that such products caused unintended
adverse effects. We currently do not carry product liability
insurance covering the use of our products in human clinical
trials or the commercial marketing of these products, but
anticipate that our licensees who are developing our products
will carry liability insurance covering the clinical testing and
marketing of those products. We may, in the future, seek to
obtain clinical trial or product liability insurance for trials
that we sponsor or products that we market, although there can
be no assurance that we will be able to obtain this insurance at
economically attractive rates or at all. However, if someone
asserts a claim against us and the insurance coverage of our
licensees or their other financial resources are inadequate to
cover a successful claim, such successful claim may exceed our
financial resources and cause us to discontinue operations. Even
if claims asserted against us are unsuccessful, they may divert
managements attention from our operations and we may have
to incur substantial costs to defend such claims.

Our Anti-Takeover Provisions May Make It More
Difficult to Change Our Management or May Discourage Others from
Acquiring Us and, Thereby, Adversely Affect Stockholder
Value

We have a stockholder rights plan and provisions
in our bylaws that may discourage or prevent a person or group
from acquiring us without the approval of our board of
directors. The intent of the rights plan and our

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bylaw provisions is to protect our
stockholders interests by encouraging anyone seeking
control of our company to negotiate with our board of directors.


We have a classified board of directors, which
requires that at least two stockholder meetings, instead of one,
will be required to effect a change in the majority control of
our board of directors. This provision applies to every election
of directors, not just an election occurring after a change in
control. The classification of our board increases the amount of
time it takes to change majority control of our board of
directors and may cause potential purchasers to lose interest in
the potential to purchase us, regardless of whether our purchase
would be beneficial to us or our stockholders. The additional
time and cost to change a majority of the members of our board
of directors makes it more difficult and may discourage our
existing stockholders from seeking to change our existing
management in order to change the strategic direction or
operational performance of our company.

Our bylaws provide that directors may only be
removed for cause by the affirmative vote of the holders of at
least a majority of the outstanding shares of our capital stock
then entitled to vote at an election of directors. This
provision prevents stockholders from removing any incumbent
director without cause. Our bylaws also provide that a
stockholder must give us at least 120 days notice of a
proposal or director nomination that such stockholder desires to
present at any annual meeting or special meeting of
stockholders. Such provision prevents a stockholder from making
a proposal or director nomination at a stockholder meeting
without our having advance notice of that proposal or director
nomination. This could make a change in control more difficult
by providing our directors with more time to prepare an
opposition to a proposed change in control. By making it more
difficult to remove or install new directors, the foregoing
bylaw provisions may also make our existing management less
responsive to the views of our stockholders with respect to our
operations and other issues such as management selection and
compensation.

Our Outstanding Options and Warrants and the
Registrations of Our Shares Issued in the Global Genomics Merger
and Our Recent Private Financings May Adversely Affect the
Trading Price of Our Common Stock

As of December 31, 2003, there were
outstanding stock options and warrants to purchase
10,130,119 shares of our common stock at exercise prices
ranging from $0.01 to $7.75 per share. Our outstanding
options and warrants could adversely affect our ability to
obtain future financing or engage in certain mergers or other
transactions, since the holders of options and warrants can be
expected to exercise them at a time when we may be able to
obtain additional capital through a new offering of securities
on terms more favorable to us than the terms of outstanding
options and warrants. For the life of the options and warrants,
the holders have the opportunity to profit from a rise in the
market price of our common stock without assuming the risk of
ownership. To the extent the trading price of our common stock,
at the time of exercise of any such options or warrants, exceeds
the exercise price, such exercise will also have a dilutive
effect to our stockholders.

In August 2003, we registered a total of
14,408,252 shares of our outstanding common stock and an
additional 3,848,870 shares of our common stock issuable
upon exercise of outstanding options and warrants, which shares
and options and warrants were issued primarily in connection
with our merger with Global Genomics and the $5,440,000 private
equity financing that we completed in May 2003. In December
2003, we registered a total of 6,113,448 shares of our
common stock, consisting of the 5,175,611 shares we issued
or that are issuable upon exercise of the warrants that we
issued to the investors in connection with the $8,695,000
private equity financing in September 2003, and an additional
937,837 shares of our common stock that we issued or that
are issuable upon the exercise of warrants having exercise
prices ranging from $2.00 to $3.05 per share that we issued
to certain other third parties. Both the availability for public
resale of these various shares and the actual resale of these
shares could adversely affect the trading price of our common
stock.

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We May Experience Volatility in Our Stock
Price, Which May Adversely Affect the Trading Price of Our
Common Stock

The market price of our common stock has
experienced significant volatility in the past and may continue
to experience significant volatility from time to time. Our
stock price has ranged from $0.21 to $3.74 over the past three
years. Factors such as the following may affect such volatility:



| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | our quarterly operating results                                                                   
|
| |  | announcements of regulatory developments or
    technological innovations by us or our competitors
|
| |  | government regulation of drug pricing                                                             
|
| |  | developments in patent or other technology
    ownership rights                                   
|
| |  | public concern regarding the safety of our
    products                                           

Other factors which may affect our stock price
are general changes in the economy, financial markets or the
pharmaceutical or biotechnology industries.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

Our exposure to market risk is limited primarily
to interest income sensitivity, which is affected by changes in
the general level of United States interest rates, particularly
because a significant portion of our investments are in
short-term debt securities issued by the U.S. government
and institutional money market funds. The primary objective of
our investment activities is to preserve principal while at the
same time maximizing the income received without significantly
increasing risk. Due to the nature of our short-term
investments, we believe that we are not subject to any material
market risk exposure. We do not have any derivative financial
instruments.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

Our consolidated financial statements and
supplemental schedule and notes thereto as of December 31,
2003 and 2002, and for each of the three years ended
December 31, 2003, 2002 and 2001, together with the
independent auditors reports thereon, are set forth on
pages F-1 to F-23 of this Annual Report.

Blizzard Genomics financial statements and
the notes thereto as of December 31, 2003 and 2002, and for
each of the three years ended December 31, 2003, 2002, and
2001 and the period from December 1, 1999 (date of
inception) to December 31, 2003, together with the
independent auditors reports thereon are set forth on
pages F-25 to F-41 of this Annual Report.






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

Effective as of January 20, 2004, the Audit
Committee of our Board of Directors dismissed Ernst &
Young LLP (E&Y) as our independent auditors.
Effective as of January 30, 2004, the Audit Committee of
our Board of Directors engaged PricewaterhouseCoopers LLP
(PwC) as our new independent auditors. During the
years ended December 31, 2002 and December 31, 2001
and the subsequent period through January 30, 2004, neither
we nor anyone on our behalf consulted with PwC regarding either
(i) the application of accounting principles to a specified
transaction, either completed or proposed or the type of audit
opinion that might be rendered on our financial statements, and
either a written report was provided to us or oral advice was
provided that PwC concluded was an important factor considered
by us in reaching a decision as to the accounting, auditing or
financial reporting issue; or (ii) any matter that was
either the subject of a disagreement, as that term is defined in
Item 304(a)(1)(iv) of Regulation S-K and the related
instructions thereof, or a reportable event, as that term is
defined in Item 304(a)(1)(v) of Regulation S-K.

On April 12, 2004, the Audit Committee of
our Board of Directors dismissed PwC as our independent
auditors. PwC was dismissed prior to completing its audit
procedures and did not issue any report on our financial
statements. On April 14, 2004, the Audit Committee engaged
BDO Seidman, LLP (BDO) to serve as our independent
auditors and to audit our financial statements for the year
ended December 31, 2003.

34



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Based on our desire to have the audit of these
financial statements completed in as expeditious a fashion as
possible, our Audit Committee had concluded that it was in our
best interests to dismiss PwC and to engage new independent
accountants to complete the audit of these financial statements.


During the period from January 30, 2004
through April 12, 2004, there had been no disagreements
with PwC on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure,
which disagreements if not resolved to the satisfaction of PwC
would have caused it to make reference thereto in its report had
it completed an audit and issued a report on our financial
statements, except as disclosed in the sixth paragraph below. In
addition, for the same period, there had been no reportable
events (as defined in Regulation S-K
Item 304(a)(1)(v)), except as described in the sixth
paragraph below.

As previously reported in our Current Report on
Form 8-K that was filed on April 1, 2004, we were
unable to file this Annual Report by the extended April 14,
2004 deadline for that filing. Our Form 8-K also indicated
that we were reviewing, with the assistance of PwC, the
accounting treatment of our July 2002 acquisition of Global
Genomics and Global Genomics assets at the time of its
merger with us, which included Global Genomics and its existing
investments in two genomics companies, Blizzard and Psynomics.
These investments had an aggregate carrying value on our
financial statements, as of September 30, 2003, of
approximately $5.87 million. This accounting review delayed
the completion of our financial statements for the year ended
December 31, 2003 and, therefore, the filing of this Annual
Report.

Although we had previously disclosed, in our
Current Report on Form 8-K dated January 16, 2004,
that we would write off our investments in the two genomics
companies in the quarter ended December 31, 2003, the
following principal issues were identified during our accounting
review:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) whether a portion of the purchase price
    in our July 2002 merger with Global Genomics (accounted for
    as a purchase of a group of assets, not a business combination)
    should have been allocated to an acquired assembled workforce,
    which would have reduced the amount of the purchase price
    allocated to the Blizzard and Psynomics investments ($7,309,000
    and $78,000, respectively) and whether the amount originally
    determined to be the fair value of the Blizzard investment was
    overstated, and
|
| | (b) whether an other-than-temporary
    impairment charge should have been taken by us against the
    appropriate carrying value of the Blizzard investment earlier
    than in the fourth quarter of 2003.                                                                                                                                                                                                                                                                                                                                

The resolution of these issues in a manner that
would result in a different accounting than originally reported
would have had no effect on our cash or working capital position
for any accounting period nor would it have had a material
effect on our net worth as of December 31, 2003. One
possible resolution could, however, have resulted in our net
loss for the year ended December 31, 2002 being materially
larger than that reported by us in our financial statements for
that year and in our reporting a net worth significantly lower
than the net worth we reported in our financial statements for
that year. Such a resolution, in turn, could have required a
restatement of those financial statements as well as our
unaudited financial statements for the quarterly periods ended
March 31, 2003, June 30, 2003 and September 30,
2003. Other possible resolutions could have resulted in the
recognition of an other-than-temporary impairment charge in an
earlier 2003 quarter and could have required a restatement of
our unaudited financial statements for that and any subsequent
quarter(s). However, the impact of the resolution of these
issues on our net loss for the year ended December 31, 2002
and/or subsequent periods were not readily estimable by us
because it would have depended on the amount of the purchase
price to be allocated to other assets and the nature of those
assets and the valuation of our investment in Blizzard as of
December 31, 2002 and as of the end of each of the three
subsequent quarters, each of which would be dependent upon
various assumptions and valuation methods.

Based upon the issues raised by PwC we thoroughly
re-reviewed, in late March and early April 2004, the prior
accounting treatment for the Global Genomics acquisition and the
Blizzard investment. This review included, among other things,
(i) our submission of additional documentation to PwC,
(ii) discussions of these issues by our Audit Committee
with PwC, (iii) discussions between PwC and us,
(iv) discussions between E&Y and us and (v) the
retention of a nationally respected valuation firm to review
certain of the methodologies that were used by us in connection
with the purchase price allocation for Global Genomics,
including amounts, if any, that would be attributable to an
acquired assembled workforce and methodologies utilized in our
other-than-temporary impairment analyses and to assess what
amount of the

35



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##### Table of Contents



purchase price for Global Genomics could
appropriately have been attributable to an acquired assembled
work force, if any.


Following our re-review of the accounting
treatment for the purchase price for the Global Genomics merger
and the carrying value of the Blizzard investment, we advised
PwC, in early April 2004, that we continued to believe that the
prior accounting treatment was correct in all material respects.
We also advised PwC that our valuation firm had concluded that,
even if any amount were to be allocated to an acquired assembled
workforce, the valuation of such an acquired workforce would be
only $250,000.

During the course of its engagement PwC informed
us that it disagreed with the timing of the fourth quarter 2003
other-than-temporary impairment charge that we had recorded
related to our investment in Blizzard. PwC also informed us that
PwC needed to significantly expand the scope of its audit
procedures with respect to the matters identified in
(a) and (b) above, including procedures designed to
understand the impact, if any, of certain third party comments
regarding indicators of value, and that it had not completed
audit procedures regarding the nature and timing of our
impairment of Blizzard and the original purchase price
allocation upon our acquisition of Global Genomics in 2002.

E&Ys report on our financial statements
for the years ended December 31, 2001 and December 31,
2002 did not contain any adverse opinion or a disclaimer of an
opinion or any qualification as to uncertainty, audit scope or
accounting principles. In connection with E&Ys audits
for those years there were no disagreements or
reportable events as defined in Item 304 of
Regulation S-K, except as described in this paragraph.
However, we were informed by E&Y, in April 2004, that, until
such time as the impact of the third party comments regarding
indicators of value concerning Blizzard, referred to by PwC,
were further evaluated, E&Y was not able to conclude as to
whether the prior accounting treatment was appropriate in all
material respects. E&Y advised us that, depending upon the
outcome of those procedures, the financial statements for the
year ended December 31, 2002, audited by E&Y, or the
unaudited interim financial statements for the quarters ended
March 31, June 30, and September 30, 2003, might
require restatement. However, at no time did E&Y withdraw
its opinion on our 2002 audited financial statements.

A special committee of our Audit Committee
subsequently performed an evaluation of the impact of the third
party comments regarding indicators of value concerning
Blizzard. This special committee concluded that we did not
withhold from E&Y any documents that would have changed the
conclusions reached by E&Y relative to the carrying value of
Blizzard and its audit of our financial statements. After
reviewing this evaluation, E&Y advised us that it had
concluded that our audited 2002 financial statements and our
unaudited interim financial statements for the quarters ended
March 31, 2003 and June 30, 2003 did not require any
restatement.

During our two fiscal years ended
December 31, 2002 and December 31, 2003 and the
interim period through the date of our engagement of BDO to
perform the audit of our financial statements for the year ended
December 31, 2003, we did not consult with BDO regarding
(i) the application of accounting principles to a specified
transaction, either completed or proposed or the type of audit
opinion that might be rendered on our financial statements, and
either a written report was provided to us or oral advice was
provided that BDO concluded was an important factor considered
by us in reaching a decision as to an accounting, auditing or
financial reporting issue or (ii) any matter that was
either the subject of a disagreement (as defined in paragraph
304(a)(1)(iv) of Regulation S-K and the related
instructions to this item) or a reportable event (as described
in paragraph 304(a)(1)(v) of Regulation S-K), except
as follows:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) On April 3, 2004, our Audit
    Committee engaged BDO to perform an extensive number of
    specified procedures with respect to our financial statements
    for the year ended December 31, 2003 which did not
    constitute an examination or review of those financial
    statements but which would assist BDO in completing an audit of
    those financial statements in a timely fashion in the event the
    Audit Committee subsequently engaged BDO to audit those
    financial statements. Subsequent to engaging BDO to perform
    these preliminary procedures, we consulted with BDO concerning
    the need to include separate audited financial statements of
    Blizzard in this Annual Report. BDO orally advised us that
    separate audited Blizzard financial statements were required to
    be included in this Annual Report. This advice was consistent
    with the advice previously received by us from PwC on this
    issue, no disagreement on this issue

36



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##### Table of Contents



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | existed between PwC and us, and we subsequently
    filed these financial statements in this Annual Report, together
    with our financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (b) During the course of BDOs
    performance of the above preliminary procedures, we did not
    solicit or receive any oral or written opinion from BDO with
    respect to the proper accounting treatment for the allocation of
    the purchase price paid by us in connection with its merger with
    Global Genomics or the subsequent carrying value of our
    investment in Blizzard. However, we did discuss with BDO our
    views on the proper accounting treatment for these items and
    provided BDO with certain of our accounting records, a valuation
    analysis prepared by a valuation firm in 2002 utilized by
    management in connection with its allocation of the purchase
    price for the Global Genomics merger and an analysis prepared in
    April 2004 by another valuation firm covering certain aspects of
    the allocation of that purchase price and the subsequent
    carrying value of Blizzard.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

An evaluation was performed by our management
team, with the participation of our Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and
operation of our disclosure controls and procedures as of the
end of the period covered by this report. Based on that
evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and
procedures were effective as of December 31, 2003 to
provide reasonable assurance that information required to be
disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange
Commission rules and forms.

There were no changes in our internal control
over financial reporting that occurred during the year ended
December 31, 2003, that materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.






PART III







|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The following table provides information
concerning our directors and executive officers:

|                        |  |     |    |              |  |          |     |  |  |                                                        
|----------------------- |  | --- | -- | ------------ |  | -------- | --- |  |  | -------------------------------------------------------
|                        |  |     |    | Class of     |  |         
|Name                    |  | Age |    | Directors(1) |  | Position
|                        |  |     |    |              |  |         
|Steven A. Kriegsman     |  |     | 62 |              |  |          | II  |  |  | Director, Chief Executive Officer, President           
|Alexander L. Cappello   |  |     | 48 |              |  |          | III |  |  | Director                                               
|Louis Ignarro, Ph.D.    |  |     | 62 |              |  |          | I   |  |  | Director                                               
|Max Link                |  |     | 63 |              |  |          | III |  |  | Director, Chairman(2)                                  
|C. Kirk Peacock         |  |     | 36 |              |  |          |    |  |  | Chief Financial Officer, Treasurer(3)                  
|Joseph Rubinfeld, Ph.D. |  |     | 71 |              |  |          | I   |  |  | Director(2)                                            
|Marvin R. Selter        |  |     | 76 |              |  |          | II  |  |  | Director(2)                                            
|Mark A. Tepper, Ph.D.   |  |     | 46 |              |  |          |    |  |  | Vice President; President, CytRx Laboratories,
    Inc.
|Richard L. Wennekamp    |  |     | 61 |              |  |          | II  |  |  | Director(2)                                            



---



|    |                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Class I directors serve on the Board of
    Directors until the 2004 annual meeting of stockholders,
    Class II directors serve on the Board of Directors until
    the 2005 annual meeting of stockholders and Class III
    directors serve on the Board of Directors until the 2006 annual
    meeting of stockholders.
|   
|(2) | These directors constitute the four members of
    the Companys Audit Committee. Marvin R. Selter is the
    Chairman of the Audit Committee.                                                                                                                                                                              
|   
|(3) | Mr. Peacock will continue to serve as our
    Chief Financial Officer and Treasurer until June 15, 2004.                                                                                                                                                                                                                    

37



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##### Table of Contents



Steven A. Kriegsmanhas been a director and our Chief
Executive Officer since July 2002. He previously served as a
director and the Chairman of Global Genomics since June 2000.
Mr. Kriegsman is Chairman and founder of Kriegsman Capital
Group LLC, a financial advisory firm specializing in the
development of alternative sources of equity capital for
emerging growth companies. Mr. Kriegsman has advised such
companies as Closure Medical Corporation, Novoste Corporation,
Miravant Medical Technologies, Maxim Pharmaceuticals and
Supergen Inc. Mr. Kriegsman has a B.S. degree from
New York University in accounting and completed the
Executive Program in Mergers and Acquisitions at New York
University, The Management Institute. Mr. Kriegsman serves
as a director of Bradley Pharmaceuticals, Inc.

Alexander L. Cappellohas been a director since January
2001. Since 1981, Mr. Cappello has served as Chairman of
Cappello Group, Inc. Mr. Cappello has been active in the
investment banking, merchant banking, project finance and
venture capital arena since 1975. Prior to his current role with
Cappello Group Inc., he was the founder of both Swiss American
Financial and Euro American Financial Corp., two merchant and
investment banking firms that progressively expanded operations
throughout North America and Europe. Mr. Cappellos
early career experience was in sales with IBM and corporate
finance with Union Bank of California. Mr. Cappello also
serves as a director of Advanced Biotherapy, Inc.

Louis Ignarro, Ph.D.has been a director since July 2002.
He previously served as a director of Global Genomics since
November 20, 2000. Dr. Ignarro serves as the
Jerome J. Bezler, M.D. Distinguished Professor of
Pharmacology in the Department of Molecular and Medical
Pharmacology at the UCLA School of Medicine. Dr. Ignarro
has been at the UCLA School of Medicine since 1985 as a
professor, acting chairman and assistant dean. Dr. Ignarro
received the Nobel Prize for Medicine in 1998. Dr. Ignarro
received a B.S. in pharmacy from Columbia University and his
Ph.D. in Pharmacology from the University of Minnesota.

Max Linkhas been a
director since 1996. Dr. Link has been retired from
business since 1994. From May 1993 to June 1994, Dr. Link
served as the Chief Executive Officer of Corange
U.S. Holdings, Inc. (the holding company for Boehringer
Mannheim Therapeutics, Boehringer Mannheim Diagnostics and DePuy
International). From 1992 to 1993, Dr. Link was Chairman of
Sandoz Pharma, Ltd.. From 1987 to 1992, Dr. Link was the
Chief Executive Officer of Sandoz Pharma and a member of the
Executive Board of Sandoz, Ltd., Basel. Prior to 1987,
Dr. Link served in various capacities with the United
States operations of Sandoz, including President and Chief
Executive Officer. Dr. Link also serves as a director of
Access Pharmaceuticals, Inc., Alexion Pharmaceuticals, Inc.,
Cell Therapeutics, Inc., Celsion Corporation, Columbia
Laboratories, Inc., Discovery Laboratories, Inc., Human Genome
Sciences, Inc. and Protein Design Laboratories, Inc.

C. Kirk Peacockhas been our Chief Financial Officer
since August 2003. From December 2001 to March 2003, he was the
Chief Financial Officer and Vice President of Operations at
DigitalMed, Inc., a venture-backed subsidiary of Tenet
Healthcare, the second largest U.S. healthcare provider.
Prior to that, from October 2000 to July 2001, he was Chief
Financial Officer at Ants.com, Inc., a venture-backed enterprise
software concern, and Director-Accounting of Global Crossing
Ltd. from February 1999 to October 2000. He also was the
Controller at Equity Marketing, Inc. from August 1997 to
February 1999. Mr. Peacock is a CPA who worked at Arthur
Andersen LLP until August 1997.

Joseph
Rubinfeld, Ph.D.has been a
director since July 2002. He co-founded SuperGen, Inc. in 1991
and has served as its Chief Executive Officer and President and
as a director since its inception. Dr. Rubinfeld was also
Chief Scientific Officer of SuperGen from 1991 until September
1997. Dr. Rubinfeld was one of the four initial founders of
Amgen, Inc. in 1980 and served as a Vice President and its Chief
of Operations until 1983. From 1987 until 1990,
Dr. Rubinfeld was a Senior Director at Cetus Corporation
and from 1968 to 1980, Dr. Rubinfeld was employed at
Bristol-Myers Company, International Division in a variety of
positions. Dr. Rubinfeld is a member of the board of
directors of AVI BioPharma, Inc. and NeoTherapeutics, Inc.
Dr. Rubinfeld received a BS degree in chemistry from
C.C.N.Y. and a M.A. and Ph.D. in chemistry from Columbia
University.

Marvin R. Selterhas
been a director since October 2003. He has been the President of
CMS, Inc. since he founded that firm in 1968. CMS, Inc. is a
national management consulting firm. Mr. Selter serves on
the Executive Committee of the SFV Economic Alliance, is
Chairman of the Valley Economic Development Center, is a member
of the Business Tax Advisory Committee-City of Los Angeles, and
is a member of the

38



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##### Table of Contents



Small Business Board and Small Business Advisory
Commission-State of California. He has served, and continues to
serve, as a member of boards of directors of various hospitals,
universities, private medical companies and other organizations.
Mr. Selter attended Rutgers University and majored in
Accounting and Business Administration.


Mark A.
Tepper, Ph.D.is the President
and co-founder of our subsidiary CytRx Laboratories (formerly
Araios, Inc.) and our Corporate Vice President since September
2003. From November 2002 to August 2003, he served as an
independent pharmaceutical consultant. Prior to that, from April
2002 to October 2002, he served as President and CEO of
Arradial, Inc., an Oxford Biosciences Venture-backed company
developing a novel microfluidics based drug discovery platform.
From April 1995 to March 2002, Dr. Tepper served in a
number of senior management roles at Serono including Vice
President, Research and Operations for the US Pharmaceutical
Research Institute and Executive Director of Lead Discovery.
From 1988 to 1995, Dr. Tepper was Sr. Research Investigator
at the Bristol Myers Squibb Pharmaceutical Research Institute
where he worked on the discovery and development of novel drugs
in the area of Oncology and Immunology. Prior to that,
Dr. Tepper was a post-doctoral fellow at the University of
Massachusetts Medical School in the laboratory of
Dr. Michael Czech. Dr. Tepper received a B.A. in
Chemistry from Clark University with highest honors, and a Ph.D.
in Biochemistry and Biophysics from Columbia University.

Richard L. Wennekamphas been a director since October
2003. He has been the Senior Vice President-Credit
Administration of Community Bank since October 2002. From
September 1998 to July 2002, Mr. Wennekamp was an executive
officer of Bank of America Corporation, holding various
positions, including Managing Director-Credit Product Executive
for the last four years of his 22-year term with the bank. From
1977 through 1980, Mr. Wennekamp was a Special Assistant to
former President of the United States, Gerald R. Ford, and the
Executive Director of the Ford Transition Office. Prior thereto,
he served as Staff Assistant to the President of the United
States for one year, and as the Special Assistant to the
Assistant Secretary of Commerce of the U.S.

The Board of Directors has determined that Max
Link, Joseph Rubinfeld, Marvin Selter and Richard Wennekamp are
independent, under the current independence standards of both
the Nasdaq Stock Market and the Securities and Exchange
Commission, and have no material relationships with us (either
directly or as a partner, shareholder or officer of any entity)
which could be inconsistent with a finding of their independence
as members of our Board of Directors or as the members of our
Audit Committee. In making these determinations, the Board of
Directors has broadly considered all relevant facts and
circumstances, recognizing that material relationships can
include commercial, banking, consulting, legal, accounting, and
familial relationships, among others.

The Board of Directors has determined that
Marvin R. Selter is an independent director serving on the
Audit Committee who is an audit committee financial expert as
defined by the SECs rules.

Section 16(a) Beneficial Ownership
Reporting Compliance

Our executive officers and directors and any
person who owns more than 10% of our outstanding shares of
common stock are required by Section 16(a) of the
Securities Exchange Act to file with the SEC initial reports of
ownership and reports of changes in ownership of our common
stock and to furnish us with copies of those reports. Based
solely on our review of copies of reports we have received and
written representations from certain reporting persons, we
believe that all Section 16(a) filing requirements
applicable to our directors and executive officers and greater
than 10% shareholders for 2003 were complied with, except as
follows:

Messrs. Ignarro, Rubinfeld, Link and
Cappello, directors of the Company, each did not file a timely
report on Form 4 of a grant to each of them of stock
options. As to Mr. Cappello, the late filing included two
grants of warrants that would otherwise have been filed on two
additional reports. Messrs. McDade and Carnahan, former
directors of the Company, each did not file a timely report on
Form 4 of a grant to each of them of stock options.
Forms 3 and/or 4 reporting each of the above
transactions were subsequently filed by these individuals.

39



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##### Table of Contents



Code of Ethics

We have adopted a Code of Ethics applicable to
our principal executive officer, principal financial officer,
and principal accounting officer or controller, a copy of which
is filed as an exhibit to this Form 10-K.



|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Summary Compensation Table

The following table presents summary information
concerning compensation paid or accrued by us for services
rendered in all capacities during the fiscal years ended
December 31, 2001, 2002 and 2003 for our President and
Chief Executive Officer.

|                                      |  |      |      |        |  |       |         |              |  |              |         |  |  |  |           |  |  |   |   | 
|------------------------------------- |  | ---- | ---- | ------ |  | ----- | ------- | ------------ |  | ------------ | ------- |  |  |  | --------- |  |  | - | - | 
|                                      |  |      |      |        |  |       |         | Long-Term    |  |             
|                                      |  |      |      |        |  |       |         | Compensation |  |             
|                                      |  |      |      |        |  |       |         |              |  |             
|                                      |  |      |      |        |  |       |         | Securities   |  |             
|                                      |  |      |      |        |  |       |         | Underlying   |  | All Other   
|Name and Principal Position           |  | Year |      | Salary |  | Bonus |         | Options (#)  |  | Compensation
|                                      |  |      |      |        |  |       |         |              |  |             
|Steven A. Kriegsman                   |  |      | 2003 |        |  | $     | 313,772 |              |  | $            | 150,000 |  |  |  | 1,000,000 |  |  | $ |  | 
|President and Chief Executive Officer |  |      | 2002 | (1)    |  |       | 110,000 |              |  |              |        |  |  |  |          |  |  |   |  | 
|                                      |  |      | 2001 | (1)    |  | $     |        |              |  | $            |        |  |  |  |          |  |  | $ |  | 



---



|    |                                                                        
|--- | -----------------------------------------------------------------------
|(1) | Mr. Kriegsman has been our Chief Executive
    Officer since July 2002.

Option Grants in Last Fiscal Year

As a bonus for his services under his prior
employment agreement with us, Mr. Kriegsman was granted as
of June 20, 2003 a fully vested ten-year, nonqualified
option under the 2000 Long-Term Incentive Plan to
purchase 250,000 shares of our common stock at a price
of $2.47 per share. As an incentive to enter into the
amended and restated employment agreement, Mr. Kriegsman
was granted as of June 20, 2003 a ten-year, nonqualified
option under the Plan to purchase 750,000 shares of
our common stock at a price of $2.47 per share.

The following table contains information
concerning grants of stock options during the fiscal year ended
December 31, 2003 to the named executive officer listed in
the Summary Compensation Table.

Option Grants in Twelve Months Ended
December 31, 2003

|                    |  |                   |           |              |  |                             |      |                              |  |     |      |  |  |   |           |  |  |   |           | 
|------------------- |  | ----------------- | --------- | ------------ |  | --------------------------- | ---- | ---------------------------- |  | --- | ---- |  |  | - | --------- |  |  | - | --------- | 
|                    |  |                   |           |              |  |                             |      |                             
|                    |  | Individual Grants |           |              |  |                            
|                    |  |                   |           |              |  | Potential Realized Value at
|                    |  | Number of         |           | % of Total   |  |                             |      | Assumed Annual Rates of     
|                    |  | Shares            |           | Options      |  |                             |      | Stock Price Appreciation for
|                    |  | Underlying        |           | Granted to   |  |                             |      | Option Term(2)              
|                    |  | Options           |           | Employees In |  | Exercise                    |      |                             
|Name                |  | Granted(1)        |           | Fiscal Year  |  | Price                       |      | 5%                           |  | 10%
|                    |  |                   |           |              |  |                             |      |                              |  |    
|Steven A. Kriegsman |  |                   | 1,000,000 |              |  |                             | 71.2 | %                            |  | $   | 2.47 |  |  | $ | 1,553,370 |  |  | $ | 6,114,908 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Options to purchase 250,000 shares vested on
    the date of grant. The options to purchase up to
    750,000 shares will vest as to 250,000 shares of
    common stock on June 20, 2004 and will vest as to the
    remaining 500,000 shares in monthly installments of 1/24th
    each on the 20th day of each month thereafter, provided that
    Mr. Kriegsman remains in our continuous employ.
|   
|(2) | The potential realizable value shown in this
    table represents the hypothetical gain that might be realized
    based on assumed 5% and 10% annual compound rates of stock price
    appreciation over the full option term. These prescribed rates
    are not intended to forecast possible future appreciation of the
    common stock.                                                       

Fiscal Year-End Option Values

The following table sets forth the number of
options and total value of unexercised in-the-money options and
warrants at December 31, 2003 for the executive officer
named in the Summary Compensation Table

40



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##### Table of Contents



above, using the price per share of our common
stock of $1.86 on December 31, 2003. No stock options were
exercised during 2003 by the named executive officer listed in
the Summary Compensation Table above. The following table
includes warrants issued to Steven A. Kriegsman by Global
Genomics prior to our merger with that company that have been
assumed by us covering 459,352 shares of our common stock.


|                    |  |                                |         |                         |  |             |         |               |  |   |         |  |  |   |   | 
|------------------- |  | ------------------------------ | ------- | ----------------------- |  | ----------- | ------- | ------------- |  | - | ------- |  |  | - | - | 
|                    |  |                                |         |                        
|                    |  | Number of Securities           |         | Value of Unexercised   
|                    |  | Underlying Unexercised Options |         | In-the-Money Options at
|                    |  | at December 31, 2003 (#)       |         | December 31, 2003 ($)  
|                    |  |                                |         |                        
|Name                |  | Exercisable                    |         | Unexercisable           |  | Exercisable |         | Unexercisable
|                    |  |                                |         |                         |  |             |         |              
|Steven A. Kriegsman |  |                                | 709,352 |                         |  |             | 750,000 |               |  | $ | 849,801 |  |  | $ |  | 

Compensation of Directors

Periodically, our Board of Directors reviews the
then-current director compensation policies and, from time to
time, makes changes to such policies based on various criteria
the Board deems relevant. Directors who are employees of our
company receive no compensation for their service as directors
or as members of Board committees.

For the period January 1, 2003 to
December 31, 2003, non-employee directors received a
quarterly retainer of $1,500 and a fee of $1,500 for each Board
meeting attended ($750 for meetings attended by teleconference
and for Board actions taken by unanimous written consent) and
$750 for each committee meeting attended. Non-employee directors
who chair the Board or a Board committee receive an additional
$250 for each meeting attended as the chair. During 2003, a
payment of $2,500 was made to Raymond Carnahan, formerly the
Chairman of our Audit Committee, in connection with internal
auditing services provided to that committee. Options to
purchase 10,000 shares of common stock are granted to
each non-employee director annually. Such option grants are made
subject to vesting in annual increments of one-third each.

Employment Agreements; Change in Control
Agreements



| |                                                   
| | --------------------------------------------------
| | Employment Agreement with Steven A.
    Kriegsman.

Steven A. Kriegsman became our Chief
Executive Officer on July 16, 2002 pursuant to a one-year
employment agreement with us. Mr. Kriegsmans
employment agreement with us was amended and restated as of
June 10, 2003 to continue through July 15, 2006. The
employment agreement will automatically renew in July 2006 for
an additional one-year period, unless either Mr. Kriegsman
or we elect not to renew it.

Under his prior employment agreement with us,
Mr. Kriegsman was permitted to serve as the President of
the Kriegsman Capital Group and its affiliates, otherwise known
as The Kriegsman Group. Pursuant to Mr. Kriegsmans
amended and restated employment agreement with us, we have
agreed that he shall serve on a full-time basis as our Chief
Executive Officer and that he may continue to serve as President
of The Kriegsman Group only so long as necessary to complete
certain current assignments.

Under his prior employment agreement with us,
Mr. Kriegsman was paid an annual base salary of $240,000.
Under our amended and restated employment agreement with
Mr. Kriegsman, effective July 16, 2003 his annual base
salary was increased to $360,000. Our Board of Directors (or its
Compensation Committee) will review the base salary annually and
may increase (but not decease) the base salary at its sole
discretion. In addition to his annual base salary,
Mr. Kriegsman is eligible to receive an annual bonus,
determined by our Board of Directors (or its Compensation
Committee) in its sole discretion, but not to be less than
$150,000. As a bonus for his services under his prior employment
agreement with us, Mr. Kriegsman was paid a cash bonus of
$150,000 on June 16, 2003.

As a bonus for his services under his prior
employment agreement with us, Mr. Kriegsman was granted as
of June 20, 2003 a fully vested ten-year, nonqualified
option under the 2000 Long-Term Incentive Plan to
purchase 250,000 shares of our common stock at a price
of $2.47 per share. As an incentive to enter into the
amended and restated employment agreement, Mr. Kriegsman
was granted as of June 20, 2003 a ten-year, nonqualified
option under the Plan to purchase 750,000 shares of
our common stock at a price of $2.47 per

41



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##### Table of Contents



share. This option will vest as to 1/3rd of
the shares covered thereby on June 20, 2004 and will vest
as to the remaining 2/3rds of such shares in monthly
installments of 1/24 each on the 20th day of each month
thereafter, provided that Mr. Kriegsman remains in our
continuous employ.


Mr. Kriegsman is also eligible to receive
additional grants of options to purchase shares of our common
stock. The number and terms of those options, including the
vesting schedule, will be determined by our Board of Directors
(or its Compensation Committee) in its sole discretion.

In the event we terminate
Mr. Kriegsmans employment without cause
(as defined), or if Mr. Kriegsman terminates his employment
with good reason (as defined), (i) we have
agreed to pay Mr. Kriegsman a lump-sum equal to his salary
and prorated minimum annual bonus through to his date of
termination, plus his salary and minimum annual bonus for a
period of two years after his termination date, or until the
expiration of the amended and restated employment agreement,
whichever is later, (ii) he will be entitled to immediate
vesting of all stock options or other awards based on our equity
securities, and (iii) he will also be entitled to
continuation of his life insurance premium payments and
continued participation in any of our health plans through to
the later of the expiration of the amended and restated
employment agreement or 24 months following his termination
date. Mr. Kriegsman will have no obligation in such events
to seek new employment or offset the severance payments to him
by the Company by any compensation received from any subsequent
reemployment by another employer.

Under Mr. Kriegsmans amended and
restated employment agreement with us, he and The Kriegsman
Group are to provide us during the term of his employment with
the first opportunity to conduct or take action with respect to
any acquisition opportunity or any other potential transaction
identified by them within the biotech, pharmaceutical or health
care industries and that is within the scope of the business
plan adopted by our Board of Directors.
Mr. Kriegsmans amended and restated employment
agreement with us also contains confidentiality provisions
relating to our trade secrets and any other proprietary or
confidential information, which provisions shall remain in
effect for five years after the expiration of the employment
agreement with respect to proprietary or confidential
information and for so long as our trade secrets remain trade
secrets.



| |                                                          
| | ---------------------------------------------------------
| | Change in Control Agreement with Steven A.
    Kriegsman.

Mr. Kriegsmans amended and restated
employment agreement with us contains no provision for payment
to him in the event of a change in control of CytRx. If,
however, a change in control (as defined in our 2000 Long-Term
Incentive Plan) occurs during the term of the amended and
restated employment agreement, and if, during the term and
within two years after the date on which the change in control
occurs, Mr. Kriegsmans employment is terminated by us
without cause or by him for good reason, then, to the extent
that any payment or distribution of any type to or for
Mr. Kriegsman by us resulting from the termination of his
employment is or will be subject to the excise tax (Excise
Tax) imposed under Section 4999 of the Internal
Revenue Code of 1986, as amended, we have agreed to pay
Mr. Kriegsman, prior to the time the Excise Tax is payable
with respect to any such payment (through withholding or
otherwise), an additional amount that, after the imposition of
all income, employment, excise and other taxes, penalties and
interest thereon, is equal to the sum of (i) the Excise Tax
on such payments plus (ii) any penalty and interest
assessments associated with such Excise Tax.

Compensation Committee Interlocks and Insider
Participation in Compensation Decisions

There are no interlocks, as defined
by the SEC, with respect to any member of the compensation
committee. Joseph Rubinfeld, Ph.D., Marvin R. Selter
and Richard L. Wennekamp are the current members of the
compensation committee.



|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

The following table sets forth certain
information as of December 31, 2003 regarding securities
authorized for issuance under our equity compensation plans.
This table excludes warrants previously issued to

42



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##### Table of Contents



Steven A. Kriegsman by Global Genomics that
we assumed in connection with our merger with Global Genomics.


|                                                                |                               |                         |           |                      |  |                             |      |      |  |  |           |           | 
|--------------------------------------------------------------- | ----------------------------- | ----------------------- | --------- | -------------------- |  | --------------------------- | ---- | ---- |  |  | --------- | --------- | 
|                                                                |                               |                         |           |                      |  | (c)                        
|                                                                |                               | (a)                     |           |                      |  | Number of securities       
|                                                                |                               | Number of securities    |           | (b)                  |  | remaining available        
|                                                                |                               | to be issued upon       |           | Weighted-average     |  | for issuance under         
|                                                                |                               | exercise of outstanding |           | exercise price of    |  | equity compensation        
|                                                                |                               | options, warrants       |           | outstanding options, |  | plans (excluding securities
|                                                                |                               | and rights              |           | warrants and rights  |  | reflected in column (a))   
|                                                                |                               |                         |           |                      |  |                            
|Plan Category                                                   |                               |                         |           |                      |  |                             |      |      |  |  |           |          
|Equity compensation plans approved by our
    stockholders:     |                               |                         |           |                      |  |                             |      |      |  |  |           |          
|                                                                | 1994 Stock Option Plan        |                         |           | 40,834               |  |                             | $    | 1.80 |  |  |           | 60,850    | 
|                                                                | 1995 Stock Option Plan        |                         |           |                     |  |                             |      |     |  |  |           | 22,107    | 
|                                                                | 1998 Long-Term Incentive Plan |                         |           | 132,541              |  |                             | $    | 1.00 |  |  |           | 29,517    | 
|                                                                | 2000 Long-Term Incentive Plan |                         |           | 1,604,667            |  |                             | $    | 2.00 |  |  |           | 6,270,702 | 
|Equity compensation plans not approved by our
    stockholders: |                               |                         |           |                      |  |                             |      |      |  |  |           |          
|                                                                | Outstanding Warrants(1)       |                         |           | 6,892,725            |  |                             | $    | 1.72 |  |  |           |          | 
|                                                                |                               |                         |           |                      |  |                             |      |      |  |  |           |          
|Total:                                                          |                               |                         | 8,670,767 |                      |  | $                           | 1.76 |      |  |  | 6,383,176 |          
|                                                                |                               |                         |           |                      |  |                             |      |      |  |  |           |          



---



|    |                                             
|--- | --------------------------------------------
|(1) | Issued as compensation for various services.

Based solely upon information made available to
us, the following table sets forth information with respect to
the beneficial ownership of our common stock as of
April 20, 2004 by (1) each person who is known by us
to beneficially own more than five percent of the common stock;
(2) each director and nominee for director; (3) the
named executive officer listed in the Summary Compensation Table
under Item 11; and (4) all executive officers and
directors as a group. Except as otherwise indicated, the holders
listed below have sole voting and investment power with respect
to all shares of common stock beneficially owned by them.

|                                                                   |                                                                |                        |           |            |  |  |      |   | 
|------------------------------------------------------------------ | -------------------------------------------------------------- | ---------------------- | --------- | ---------- |  |  | ---- | - | 
|                                                                   |                                                                |                       
|                                                                   |                                                                | Shares of Common Stock
|                                                                   |                                                                |                       
|Name of Beneficial Owner**                                         |                                                                | Number                 |           | Percentage
|                                                                   |                                                                |                        |           |           
|University of Massachusetts Medical School                         |                                                                |                        | 1,828,359 |            |  |  | 5.3  | %
|                                                                   | 365 Plantation Street, Suite 130
     Worcester, MA 01605-2398 |                        |           |            |  |  |      |   | 
|Alexander L. Cappello(1)                                           |                                                                |                        | 966,344   |            |  |  | 2.8  | %
|Louis Ignarro, Ph.D.(2)                                            |                                                                |                        | 255,541   |            |  |  | *    |  
|Steven A. Kriegsman(3)                                             |                                                                |                        | 4,521,100 |            |  |  | 13.3 | %
|Max Link(4)                                                        |                                                                |                        | 42,083    |            |  |  | *    |  
|Joseph Rubinfeld(5)                                                |                                                                |                        | 5,333     |            |  |  | *    |  
|Marvin R. Selter(6)                                                |                                                                |                        | 357,451   |            |  |  | 1.0  | %
|Richard Wennekamp                                                  |                                                                |                        |          |            |  |  |     |  
|All executive officers and directors as a group
    (9 persons)(7) |                                                                |                        | 6,147,852 |            |  |  | 18.0 | %



---



| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| | * | Represents beneficial ownership of less than one
    percent of common stock.



|   |                                                                                                                                                                                             
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|** | Except as otherwise indicated, the address of
    each of the beneficial owners listed below is
    c/o CytRx Corporation, 11726 San Vicente
    Boulevard, Suite 650, Los Angeles, CA 90049



|    |                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes 813,082 shares subject to options
    or warrants exercisable within 60 days. Shares of our
    common stock and options to purchase shares of our common stock
    beneficially owned by Mr. Cappello are held through the
    Alexander L. and Linda Cappello 2001 Family Trust.
|   
|(2) | Includes 163,625 shares subject to options
    or warrants exercisable within 60 days.                                                                                                                                                                                                     

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##### Table of Contents





|    |                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------
|(3) | Includes 959,352 shares subject to options
    or warrants exercisable within 60 days.                                               
|   
|(4) | Includes 12,876 shares subject to options or
    warrants exercisable within 60 days.                                                
|   
|(5) | Includes 5,333 shares subject to options or
    warrants exercisable within 60 days.                                                 
|   
|(6) | Shares of our common stock beneficially owned by
    Mr. Selter are held through the Selter Family Trust and
    Selter IRA Rollover.
|   
|(7) | Includes 1,954,268 shares subject to options
    or warrants exercisable within 60 days.                                             



|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

Effective January 1, 2001, we entered into
an agreement with Cappello Capital Corp. in which Cappello
Capital served as our exclusive financial advisor. The initial
term of that agreement was for a period of twelve months and was
subsequently extended for an additional twelve-month period to
December 31, 2002. Under the agreement, Cappello Capital
assisted us with analysis of potential transactions and
strategic alternatives, including possible private placements of
equity, debt or convertible securities, strategic alliances, the
sale of all or a portion of CytRx, recapitalization or strategic
acquisitions.

In May 2003, we entered into a new agreement with
Cappello Capital in which Cappello Capital serves as our
exclusive financial advisor and offers similar services as under
the prior agreement described above. The term of this agreement
is for a period of twelve months, subject to earlier termination
by either party upon 30 days notice. As compensation for
its services, we agreed to pay Cappello Capital a retainer fee
of $20,000 per month for the duration of the engagement.
Additionally, if we proceed with any of the transactions
described in the agreement, we are required to pay Cappello
Capital a fee equal to between 3% and 7.5% of the value of the
applicable transaction, depending upon the nature of the
transaction and the dollar amount involved. We also will be
required upon the closing of a financing transaction to issue
Cappello Capital a warrant to purchase shares of our common
stock equal to 10% of the number of our shares issued in the
transaction at the same exercise price at which the shares were
issued in that transaction.

Pursuant to our May 2003 agreement, we paid
Cappello Capital a placement fee of $408,000 in connection with
our May 2003 private placement and issued warrants to purchase a
total of 367,569 shares of our common stock to certain
persons designated by that firm. One of the designees was the
Alexander L. and Linda Cappello 2001 Family Trust, to which
we issued warrants to purchase 133,767 shares of our
common stock at $1.85 per share and warrants to
purchase 33,132 shares of our common stock at
$3.05 per share. We valued all of the warrants to
purchase 367,569 of shares of our common stock at
$1,060,066 and the warrants issued to the Alexander L. and
Linda Cappello 2001 Family Trust to purchase a total of
166,899 shares of our common stock at $481,357 for
financial statement purposes. Alexander L. Cappello, one of
our directors, is Chairman and Chief Executive Officer of
Cappello Group, Inc., an affiliate of Cappello Capital. We
believe that the terms under which we engaged Cappello Capital
were at least as favorable to us as could have been obtained
from an unrelated third party.

Since July 16, 2002, Steven A. Kriegsman has
been our Chief Executive Officer and one of our directors. In
July 2002, we entered into an agreement with the Kriegsman
Capital Group, an affiliate of Mr. Kriegsman, whereby the
Kriegsman Capital Group agreed to provide us with office space
and certain administrative services. In 2003, we paid a total of
approximately $70,000 to the Kriegsman Capital Group under this
agreement. The charges were determined based upon actual space
used and estimated percentages of employee time used. We believe
that the terms under which we paid the Kriegsman Capital Group
for rent and other expenses are at least as favorable to us as
could have been obtained from an unrelated third party.

We entered into an agreement, dated as of
July 17, 2003 (and subsequently amended on October 18,
2003), with Louis Ignarro, Ph.D., one of our current
directors. Pursuant to the agreement, Dr. Ignarro agreed to
serve as our Chief Scientific Spokesperson to the medical and
financial communities. As payment for his services,
Dr. Ignarro was granted a non-qualified stock option under
our 2000 Long-Term Incentive Plan to purchase 350,000
registered shares of our common stock at an exercise price equal
to $1.89, the closing price for our common stock on Nasdaq on
the date of grant. The option has a term of seven years, from
July 17, 2003 to October 17, 2003, vested monthly at
the rate of 4,839 shares for each day of services provided
by

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Dr. Ignarro in that month and, from
October 18, 2003, vests monthly at a rate of
15,975 shares for the remaining term of the agreement.
Either party may terminate the agreement at any time, and any
unvested shares under the option as of the date of termination
of the agreement will be cancelled. As of December 31,
2003, 62,442 shares of common stock under the option had
vested.




|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

In April 2004, we engaged BDO Seidman, LLP
(BDO) to audit our financial statements for the year
ended December 31, 2003, but have not paid or agreed to pay
that firm any fees for services rendered with respect to any
period ending on or before December 31, 2003, except for
their fees to audit our financial statements for the year ended
December 31, 2003. Ernst & Young LLP
(E&Y) previously served as our independent
accountants and audited our financial statements for the year
ended December 31, 2002.

Audit Fees

The aggregate fees billed for professional
services rendered for the audit of the Companys annual
financial statements for the fiscal year ended December 31,
2002 and the estimated fees for the audit for the fiscal year
ended December 31, 2003 are as follows:

|      |  |     |        |     |  |   |         | 
|----- |  | --- | ------ | --- |  | - | ------- | 
|Year: |  | BDO |        | E&Y
|      |  |     |        |    
|2003  |  | $   | 45,000 |     |  |   | n/a     | 
|2002  |  |     | n/a    |     |  | $ | 226,100 | 

E&Y reviewed our financial statements
included in our Form 10-Qs during the years ended
December 31, 2002 and December 31, 2003. The aggregate
fees billed for professional services rendered by E&Y for
the review of such financial statements were as follows:

|                        |  |   |        | 
|----------------------- |  | - | ------ | 
|2003 Quarterly Reviews: |  | $ | 23,000 | 
|2002 Quarterly Reviews: |  | $ | 12,100 | 

Audit Related Fees

For the fiscal year ended December 31, 2003,
BDO rendered $160,000 of other audit-related services. No
assurance or other audit related services were rendered by
E&Y for the fiscal years ended December 31, 2002 or
December 31, 2003.

Tax Fees

The aggregate fees billed by E&Y for
professional services for tax compliance, tax advice and tax
planning for the year ended December 31, 2002 and during
the year ended December 31, 2003 and the estimated fees for
such services being provided by BDO for the year ended
December 31, 2003 are as follows:

|      |  |     |        |     |  |   |        | 
|----- |  | --- | ------ | --- |  | - | ------ | 
|Year: |  | BDO |        | E&Y
|      |  |     |        |    
|2003  |  | $   | 25,000 |     |  | $ | 0      | 
|2002  |  |     | n/a    |     |  | $ | 14,190 | 

All Other Fees

No other services were rendered by E&Y or BDO
for the years ended December 31, 2002 or December 31,
2003. Our Audit Committee has pre-approved all services (audit
and non-audit) provided or to be provided to us by E&Y or
BDO for the years ended December 31, 2002 and
December 31, 2003.

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##### Table of Contents






PART IV






|         |                                                                     
|-------- | --------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules,
    and Reports on Form 8-K

(a) Documents filed as part of this 10-K:

(1) Financial Statements

The consolidated financial statements of the
Company and the related report of independent auditors thereon
are set forth on pages F-1 to F-22 of this Annual Report on
Form 10-K. These consolidated financial statements are as
follows:



| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | Consolidated Balance Sheets as of
    December 31, 2003 and 2002                                            
|
| | Consolidated Statements of Operations for the
    Years Ended December 31, 2003, 2002 and 2001              
|
| | Consolidated Statements of Stockholders
    Equity for the Years Ended December 31, 2003, 2002
    and 2001
|
| | Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2003, 2002 and 2001              
|
| | Notes to Consolidated Financial Statements                                                                  
|
| | Reports of Independent Auditors                                                                             

The financial statements of the Blizzard
Genomics, Inc. and the related report of independent
auditors thereon are set forth on pages F-25 to F-41 of this
Annual Report on Form 10-K. These consolidated financial
statements are as follows:



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | Balance Sheets as of December 31, 2003 and
    2002                                        
|
| | Statements of Operations for the Years Ended
    December 31, 2003, 2002 and 2001          
|
| | Statements of Stockholders Equity for the
    Years Ended December 31, 2003, 2002 and 2001
|
| | Statements of Cash Flows for the Years Ended
    December 31, 2003, 2002 and 2001          
|
| | Notes to Consolidated Financial Statements                                                 
|
| | Reports of Independent Auditors                                                            

(2) Financial Statement Schedules

The following financial statement schedule is set
forth on page F-24 of this Annual Report on Form 10-K.



| |                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Schedule II  Valuation and
    Qualifying Accounts for the years ended December 31, 2003,
    2002 and 2001                                                       
|
| | All other schedules are omitted because they are
    not required, not applicable, or the information is provided in
    the financial statements or notes thereto.

(3) Exhibits

See Exhibit Index on page 47 of this
Annual Report on Form 10-K.

(b) Reports on Form 8-K.

None.

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##### Table of Contents



CytRx Corporation

Form 10-K Exhibit Index

|        |        |  |  |                                                                                                                                                              |  |  |    |  
|------- | ------ |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  | -- | -
|Exhibit |        |  |  |                                                                                                                                                             
|Number  |        |  |  |                                                                                                                                                             
|        |        |  |  |                                                                                                                                                             
|        | 2.1    |  |  | Agreement and Plan of Merger dated
    February 11, 2002 among CytRx Corporation, GGC Merger
    Corporation and Global Genomics Capital, Inc.               |  |  | (m | )
|        | 2.2    |  |  | First Amendment to Agreement and Plan of Merger
    dated May 22, 2002 among CytRx Corporation, GGC Merger
    Corporation and Global Genomics Capital, Inc. |  |  | (m | )
|        | 3.1    |  |  | Restated Certificate of Incorporation                                                                                                                        |  |  | (a | )
|        | 3.2    |  |  | Restated By-Laws                                                                                                                                             |  |  | (b | )
|        | 3.3    |  |  | Certificate of Amendment to Restated Certificate
    of Incorporation                                                                                        |  |  | (m | )
|        | 3.4    |  |  | Corrected Restated Certificate of Incorporation                                                                                                              |  |  | (n | )
|        | 3.5    |  |  | Certificate of Amendment to Restated Certificate
    of Incorporation                                                                                        |  |  |    |  
|        | 4.1    |  |  | Shareholder Protection Rights Agreement dated
    April 16, 1997 between CytRx Corporation and American Stock
    Transfer & Trust Company as Rights Agent   |  |  | (c | )
|        | 4.2    |  |  | Amendment No. 1 to Shareholder Protection
    Rights Agreement                                                                                               |  |  | (k | )
|        | 4.3    |  |  | Stock Restriction and Registration Rights
    Agreement                                                                                                      |  |  | (o | )
|        | 4.4    |  |  | Warrant issued on July 20, 2002 to Corporate
    Consulting International Group pursuant to Consulting Engagement
    Letter dated July 20, 2002             |  |  | (p | )
|        | 4.5    |  |  | Warrant issued on February 21, 2003 to
    Corporate Capital Group International Ltd. Inc.                                                                   |  |  | (r | )
|        | 4.6    |  |  | Form of Common Stock Purchase Warrant between
    CytRx Corporation and each of the investors in the May 29,
    2003 private placement                      |  |  | (s | )
|        | 4.7    |  |  | Form of Common Stock Purchase Warrant between
    CytRx Corporation and each of the investors in the
    September 16, 2003 private placement                |  |  | (v | )
|        | 4.8    |  |  | Warrant issued on December 1, 2003 to MBN
    Consulting, LLC                                                                                                |  |  |    |  
|        | 10.1   |  |  | Agreement with Emory University, as amended                                                                                                                  |  |  | (d | )
|        | 10.2   |  |  | Option Agreement granting PSMA Development
    Company option to enter into a license agreement with CytRx
    Corporation dated December 23, 2002           |  |  | (q | )
|        | 10.3*  |  |  | Amended and Restated Employment Agreement between
    CytRx Corporation and Jack J. Luchese                                                                  |  |  | (i | )
|        | 10.4*  |  |  | Amended and Restated Change of Control Employment
    Agreement between CytRx Corporation and Jack J. Luchese                                                |  |  | (i | )
|        | 10.5*  |  |  | Amendment No. 1 to Employment Agreement with
    Jack J. Luchese                                                                                             |  |  | (k | )
|        | 10.6*  |  |  | Amendment No. 1 to Change in Control
    Employment Agreement with Jack J. Luchese                                                                           |  |  | (k | )
|        | 10.7*  |  |  | 1986 Stock Option Plan, as amended and restated                                                                                                              |  |  | (f | )
|        | 10.8*  |  |  | 1994 Stock Option Plan, as amended and restated                                                                                                              |  |  | (e | )
|        | 10.9*  |  |  | 1995 Stock Option Plan                                                                                                                                       |  |  | (g | )
|        | 10.10* |  |  | 1998 Long-Term Incentive Plan                                                                                                                                |  |  | (h | )
|        | 10.11* |  |  | 2000 Long-Term Incentive Plan                                                                                                                                |  |  | (k | )
|        | 10.12* |  |  | Amendment No. 1 to 2000 Long-Term Incentive
    Plan                                                                                                         |  |  | (m | )
|        | 10.13* |  |  | Amendment No. 2 to 2000 Long-Term Incentive
    Plan                                                                                                         |  |  | (m | )
|        | 10.14* |  |  | Amendment No. 3 to 2000 Long-Term Incentive
    Plan                                                                                                         |  |  |    |  
|        | 10.15* |  |  | Amendment No. 4 to 2000 Long-Term Incentive
    Plan                                                                                                         |  |  |    |  
|        | 10.16+ |  |  | License Agreement dated November 1, 2000 by
    and between CytRx Corporation and Merck & Co., Inc.                                                          |  |  | (j | )
|        | 10.17  |  |  | License Agreement dated February 16, 2001 by
    and between CytRx Corporation and Ivy Animal Health, Inc.                                                   |  |  | (k | )

47



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##### Table of Contents



|        |        |  |  |                                                                                                                                                                                                                           |  |  |    |  
|------- | ------ |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | -- | -
|Exhibit |        |  |  |                                                                                                                                                                                                                          
|Number  |        |  |  |                                                                                                                                                                                                                          
|        |        |  |  |                                                                                                                                                                                                                          
|        | 10.18+ |  |  | License Agreement dated December 7, 2001 by
    and between CytRx Corporation and Vical Incorporated                                                                                                                      |  |  | (l | )
|        | 10.19* |  |  | Amended and Restated Employment Agreement dated
    as of May 2002 between CytRx Corporation and Steven A. Kriegsman                                                                                                      |  |  | (p | )
|        | 10.20  |  |  | Extension of financial advisory agreement between
    CytRx Corporation and Cappello Capital Corp. dated
    January 1, 2002                                                                                              |  |  | (p | )
|        | 10.21  |  |  | Agreement between Kriegsman Capital Group and
    CytRx Corporation dated February 11, 2002 regarding office
    space rental                                                                                             |  |  | (p | )
|        | 10.22  |  |  | Marketing Agreement with Madison & Wall
    Worldwide, Inc. dated August 14, 2002                                                                                                                                         |  |  | (p | )
|        | 10.23  |  |  | Non-exclusive financial advisory agreement
    between CytRx Corporation and Sands Brothers & Co. Ltd.
    dated September 12, 2002                                                                                       |  |  | (p | )
|        | 10.24  |  |  | Agreement between Kriegsman Capital Group and
    CytRx Corporate dated January 29, 2003 regarding office
    space rental and shared services                                                                            |  |  | (r | )
|        | 10.25  |  |  | Consulting Agreement, dated February 21,
    2003 between CytRx Corporation and Corporate Capital Group
    International Ltd. Inc.                                                                                       |  |  | (r | )
|        | 10.26  |  |  | Securities Purchase Agreement, dated as of
    May 29, 2003, between CytRx Corporation and the Purchasers
    identified on the signatory page thereof                                                                    |  |  | (s | )
|        | 10.27  |  |  | Registration Rights Agreement, dated as of
    May 29, 2003, between CytRx Corporation and the Purchasers
    identified on the signature page thereof                                                                    |  |  | (s | )
|        | 10.28+ |  |  | Non-Exclusive License Agreement dated as of
    April 15, 2003 between University of Massachusetts Medical
    School and CytRx Corporation covering RNA sequence specific
    mediators of RNA interference              |  |  | (t | )
|        | 10.29+ |  |  | Exclusive License Agreement dated as of
    April 15, 2003 between University of Massachusetts Medical
    School and CytRx Corporation covering in vivo production of
    small interfering RNAs                         |  |  | (t | )
|        | 10.30+ |  |  | Exclusive License Agreement dated as of
    April 15, 2003 between University of Massachusetts Medical
    School and CytRx Corporation covering inhibitation of gene
    expression in adipocytes using interference RNA |  |  | (t | )
|        | 10.31+ |  |  | Exclusive License Agreement dated as of
    April 15, 2003 between University of Massachusetts Medical
    School and CytRx Corporation covering RNAi targeting of viruses                                                |  |  | (t | )
|        | 10.32+ |  |  | Exclusive License Agreement dated as of
    April 15, 2003 between University of Massachusetts Medical
    School and CytRx Corporation covering primary and polyvalent
    HIV-1 envelope glycoprotein DNA vaccines      |  |  | (t | )
|        | 10.33+ |  |  | Exclusive License Agreement dated as of
    April 15, 2003 between University of Massachusetts Medical
    School and CytRx Corporation covering gene based therapeutics
    for solid tumor treatments                   |  |  | (t | )
|        | 10.34+ |  |  | Exclusive License Agreement dated as of
    April 15, 2003 between University of Massachusetts Medical
    School and CytRx Corporation covering selective silencing of a
    dominant ALS gene by RNAi                   |  |  | (t | )
|        | 10.35  |  |  | Investment Banking Agreement dated April 1,
    2003 between Rockwell Asset Management Inc. and CytRx Corporation                                                                                                         |  |  | (u | )
|        | 10.36  |  |  | Investment Banking Agreement dated April 3,
    2003 between J.P. Turner & Company, LLC and CytRx
    Corporation                                                                                                         |  |  | (u | )
|        | 10.37  |  |  | First Amendment to Investment Banking Agreement
    dated June 4, 2003 between J.P. Turner & Company,
    LLC and CytRx Corporation                                                                                       |  |  | (u | )
|        | 10.38  |  |  | Exclusive Financial Advisor Engagement Agreement
    dated May 16, 2003 between Cappello Capital Corp. and CytRx
    Corporation                                                                                          |  |  | (u | )
|        | 10.39  |  |  | Modification letter dated June 6, 2003 to
    Engagement Agreement between Cappello Capital Corp. and CytRx
    Corporation                                                                                               |  |  | (u | )
|        | 10.40  |  |  | Engagement Letter dated May 27, 2003 between
    Cardinal Securities, LLC and CytRx Corporation                                                                                                                           |  |  | (u | )

48



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##### Table of Contents



|        |        |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |  |    |  
|------- | ------ |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  | -- | -
|Exhibit |        |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                     
|Number  |        |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        |        |  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                     
|        | 10.41* |  |  | Second Amended and Restated Employment Agreement
    dated June 10, 2003 between Steven A. Kriegsman and
    CytRx Corporation                                                                                                                                                                                                                                                                                                       |  |  | (u | )
|        | 10.42  |  |  | Financial Consulting Agreement dated May 10,
    2003 between James Skalko and CytRx Corporation                                                                                                                                                                                                                                                                                                                                     |  |  | (u | )
|        | 10.43  |  |  | Form of Securities Purchase Agreement, dated as
    of September 15, 2003, between CytRx Corporation and the
    Purchasers identified on the signatory page thereof                                                                                                                                                                                                                                                                 |  |  | (v | )
|        | 10.44  |  |  | Form of Registration Rights Agreement, dated as
    of September 15, 2003, between CytRx Corporation and the
    Purchasers identified on the signature page thereof                                                                                                                                                                                                                                                                 |  |  | (v | )
|        | 10.45+ |  |  | Amended and Restated License Agreement dated as
    of September 15, 2003 between University of Massachusetts
    Medical School and CytRx Corporation covering inhibition of gene
    expression in adipocytes using interference RNA, certain data
    bases, the use of endoplasmic reticulum stress response pathway
    of adipose cells to enhance whole body insulin sensitivity, and
    receptor-activated reporter systems |  |  | (w | )
|        | 10.46  |  |  | Second Amendment to Investment Banking Agreement
    dated as of August 13, 2003 between J.P. Turner &
    Company, LLC and CytRx Corporation                                                                                                                                                                                                                                                                                        |  |  | (w | )
|        | 10.47* |  |  | Agreement dated as of July 17, 2003 between
    Dr. Louis J. Ignarro and CytRx Corporation                                                                                                                                                                                                                                                                                                                                           |  |  | (w | )
|        | 10.48* |  |  | Employment Agreement dated as of August 1,
    2003 between C. Kirk Peacock and CytRx Corporation                                                                                                                                                                                                                                                                                                                                    |  |  | (w | )
|        | 10.49* |  |  | Employment Agreement dated as of
    September 17, 2003 between Mark A. Tepper and
    Araios, Inc.                                                                                                                                                                                                                                                                                                                                  |  |  | (w | )
|        | 10.50  |  |  | Agreement of Settlement and Release dated
    August 8, 2003 among Corporate Capital Group International
    Ltd., Inc, Peter Simone and CytRx Corporation                                                                                                                                                                                                                                                                           |  |  | (w | )
|        | 10.51  |  |  | Confirming letter dated September 19, 2003
    to the engagement agreement dated May 16, 2003 between
    Cappello Capital Corp. and CytRx Corporation                                                                                                                                                                                                                                                                               |  |  | (w | )
|        | 10.52  |  |  | Preferred Stock Purchase Agreement dated as of
    September 16, 2003 between Araios, Inc. and CytRx
    Corporation                                                                                                                                                                                                                                                                                                                 |  |  | (w | )
|        | 10.53  |  |  | Stockholders Agreement dated as of
    September 17, 2003 among Araios, Inc.,
    Dr. Michael Czech and CytRx Corporation                                                                                                                                                                                                                                                                                                            |  |  | (w | )
|        | 10.54  |  |  | Private Placement Agent Agreement dated
    September 15, 2003 between Dunwoody Brokerage
    Services, Inc. and CytRx Corporation                                                                                                                                                                                                                                                                                                   |  |  | (w | )
|        | 10.55  |  |  | Private Placement Agent Agreement dated
    September 15, 2003 between Gilford Securities Incorporated
    and CytRx Corporation                                                                                                                                                                                                                                                                                                     |  |  | (w | )
|        | 10.56  |  |  | Agreement dated as of September 16, 2003
    between Maxim Group, LLC and CytRx Corporation                                                                                                                                                                                                                                                                                                                                          |  |  | (w | )
|        | 10.57  |  |  | Amended and Restated Professional Services
    Agreement among CytRx Corporation, The Kriegsman Group and
    Kriegsman Capital Group, dated as of July 1, 2003                                                                                                                                                                                                                                                                      |  |  |    |  
|        | 10.58+ |  |  | Agreement among University of Massachusetts,
    Advanced BioScience Laboratories, Inc. and CytRx
    Corporation, dated as of December 3, 2003                                                                                                                                                                                                                                                                                      |  |  |    |  
|        | 10.59+ |  |  | Amended and Restated Exclusive License Agreement
    among University of Massachusetts Medical School, CytRx
    Corporation and Advanced BioScience Laboratories, Inc.,
    dated as of December 22, 2003                                                                                                                                                                                                                           |  |  |    |  
|        | 10.60+ |  |  | Collaboration Agreement among University of
    Massachusetts, Advanced BioScience Laboratories, Inc. and
    CytRx Corporation, dated as of December 22, 2003                                                                                                                                                                                                                                                                       |  |  |    |  
|        | 10.61+ |  |  | Sublicense Agreement between CytRx Corporation
    and Advanced BioScience Laboratories, Inc., dated as of
    December 22, 2003                                                                                                                                                                                                                                                                                                     |  |  |    |  
|        | 10.62+ |  |  | Agreement between CytRx Corporation and
    Dr. Robert Hunter regarding SynthRx, Inc. dated
    October 20, 2003                                                                                                                                                                                                                                                                                                                     |  |  |    |  
|        | 10.63  |  |  | Office Lease between The Kriegsman Group and
    Douglas Emmett, dated April 13, 2000                                                                                                                                                                                                                                                                                                                                                |  |  |    |  

49



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##### Table of Contents



|        |        |  |  |                                                                                                                                                     |  |  |  | 
|------- | ------ |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|Exhibit |        |  |  |                                                                                                                                                    
|Number  |        |  |  |                                                                                                                                                    
|        |        |  |  |                                                                                                                                                    
|        | 10.64  |  |  | Assignment to CytRx Corporation effective
    July 1, 2003 of Office Lease between The Kriegsman Group
    and Douglas Emmett, dated April 13, 2000 |  |  |  | 
|        | 10.65* |  |  | Amendment dated October 18, 2003 to
    Agreement between Dr. Louis J. Ignarro and CytRx
    Corporation dated as of July 17, 2003                  |  |  |  | 
|        | 10.66  |  |  | Consulting Agreement dated December 1, 2003
    between CytRx Corporation and MBN Consulting, LLC                                                   |  |  |  | 
|        | 10.67  |  |  | Office Lease between Araios, Inc. and
    Are-One Innovation Drive, LLC dated 11-19-03                                                              |  |  |  | 
|        | 14.1   |  |  | Code of Ethics                                                                                                                                      |  |  |  | 
|        | 21.1   |  |  | Subsidiaries                                                                                                                                        |  |  |  | 
|        | 23.1   |  |  | Consent of BDO Seidman, LLP                                                                                                                         |  |  |  | 
|        | 23.2   |  |  | Consent of Ernst & Young LLP                                                                                                                        |  |  |  | 
|        | 23.3   |  |  | Consent of BDO Seidman, LLP                                                                                                                         |  |  |  | 
|        | 23.4   |  |  | Consent of Silverman Olson Thorvilson &
    Kaufmann, Ltd.                                                                                          |  |  |  | 
|        | 23.5   |  |  | Consent of Ernst & Young LLP                                                                                                                        |  |  |  | 
|        | 31     |  |  | Rule 13a-14(a)/15d-14(a) Certifications                                                                                                             |  |  |  | 
|        | 32     |  |  | Certifications Pursuant to 18 U.S.C.
    Section 1350                                                                                               |  |  |  | 



---



|    |  |                                                                                                                                                                                                                                                                                                   
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   |  | Indicates a management contract or compensatory
    plan or arrangement.                                                                                                                                                                                                                          
|+   |  | Confidential treatment has been requested or
    granted for certain portions which have been blanked out in the
    copy of the exhibit filed with the Securities and Exchange
    Commission. The omitted information has been filed separately
    with the Securities and Exchange Commission.
|(a) |  | Incorporated by reference to the
    Registrants Registration Statement on Form S-3 (File
    No. 333-39607) filed on November 5, 1997                                                                                                                                                           
|(b) |  | Incorporated by reference to the
    Registrants Registration Statement on Form S-8 (File
    No. 333-37171) filed on July 21, 1997                                                                                                                                                              
|(c) |  | Incorporated by reference to the
    Registrants Current Report on Form 8-K filed on
    April 21, 1997                                                                                                                                                                                          
|(d) |  | Incorporated by reference to the
    Registrants Registration Statement on Form S-l (File
    No. 33-8390) filed on November 5, 1986                                                                                                                                                             
|(e) |  | Incorporated by reference to the
    Registrants Quarterly Report on Form 10-Q filed on
    November 13, 1997                                                                                                                                                                                    
|(f) |  | Incorporated by reference to the
    Registrants Annual Report on Form 10-K filed on
    March 27, 1996                                                                                                                                                                                          
|(g) |  | Incorporated by reference to the
    Registrants Registration Statement on Form S-8 (File
    No. 33-93818) filed on June 22, 1995                                                                                                                                                               
|(h) |  | Incorporated by reference to the
    Registrants Annual Report on Form 10-K filed on
    March 30, 1998                                                                                                                                                                                          
|(i) |  | Incorporated by reference to the
    Registrants Annual Report on Form 10-K filed on
    March 30, 2000                                                                                                                                                                                          
|(j) |  | Incorporated by reference to the
    Registrants Current Report on Form 8-K/ A filed on
    March 16, 2001                                                                                                                                                                                       
|(k) |  | Incorporated by reference to the
    Registrants Annual Report on Form 10-K filed on
    March 27, 2001                                                                                                                                                                                          
|(l) |  | Incorporated by reference to the
    Registrants Current Report on Form 8-K filed on
    December 21, 2001                                                                                                                                                                                       
|(m) |  | Incorporated by reference to the
    Registrants Proxy Statement filed June 10, 2002                                                                                                                                                                                                             
|(n) |  | Incorporated by reference to the
    Registrants Form S-8 (File No. 333-91068) filed
    on June 24, 2002                                                                                                                                                                                        
|(o) |  | Incorporated by reference to the
    Registrants 8-K filed on August 1, 2002                                                                                                                                                                                                                     
|(p) |  | Incorporated by reference to the
    Registrants 10-Q filed on November 14, 2002                                                                                                                                                                                                                 
|(q) |  | Incorporated by reference to the
    Registrants 10-K filed on March 31, 2003                                                                                                                                                                                                                    
|(r) |  | Incorporated by reference to the
    Registrants 10-Q filed on May 15, 2003                                                                                                                                                                                                                      
|(s) |  | Incorporated by reference to the
    Registrants 8-K filed on May 30, 2003                                                                                                                                                                                                                       
|(t) |  | Incorporated by reference to the
    Registrants S-3 Amendment No. 4 (File No. 333-100947)
    filed on August 5, 2003                                                                                                                                                                           
|(u) |  | Incorporated by reference to the
    Registrants 10-Q filed on August 14, 2003                                                                                                                                                                                                                   
|(v) |  | Incorporated by reference to the
    Registrants 8-K filed on September 17, 2003                                                                                                                                                                                                                 
|(w) |  | Incorporated by reference to the
    Registrants 10-Q filed on November 12, 2003                                                                                                                                                                                                                 

50



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                  
| | -----------------
| | CYTRX CORPORATION



| |     |                        
| | --- | -----------------------
| | By: | /s/ STEVEN A. KRIEGSMAN



| |                    
| | -------------------
| |                    
| | Steven A. Kriegsman



| |                                          
| | -----------------------------------------
| | President and Chief Executive
    Officer



Date: May 13, 2004

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

|                                                   |  |                                                                                      |  |              |  | 
|-------------------------------------------------- |  | ------------------------------------------------------------------------------------ |  | ------------ |  | 
|                                                   |  |                                                                                      |  |             
|Signature                                          |  | Title                                                                                |  | Date        
|                                                   |  |                                                                                      |  |             
|                                                  
|/s/ STEVEN A. KRIEGSMANSteven A. Kriegsman         |  | President and Chief Executive Officer and
    Director (principal executive officer) |  | May 13, 2004
|                                                  
|/s/ C. KIRK PEACOCKC. Kirk Peacock                 |  | Chief Financial Officer (principal financial and
    accounting officer)             |  | May 13, 2004
|                                                  
|/s/ ALEXANDER L. CAPPELLOAlexander L. Cappello     |  | Director                                                                             |  | May 13, 2004
|                                                  
|/s/ LOUIS J. IGNARRO, PH.D.Louis J. Ignarro, Ph.D. |  | Director                                                                             |  | May 13, 2004
|                                                  
|/s/ MAX LINKMax Link                               |  | Director                                                                             |  | May 13, 2004
|                                                  
|/s/ JOSEPH RUBINFELD, PH.D.Joseph Rubinfeld, Ph.D. |  | Director                                                                             |  | May 13, 2004
|                                                  
|/s/ MARVIN R. SELTERMarvin R. Selter               |  | Director                                                                             |  | May 13, 2004
|                                                  
|/s/ RICHARD L. WENNEKAMPRichard L. Wennekamp       |  | Director                                                                             |  | May 13, 2004

51



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##### Table of Contents



INDEX TO FINANCIAL STATEMENTS

AND FINANCIAL STATEMENT SCHEDULE

|                        |                                                     |                                                     |  |      |      | 
|----------------------- | --------------------------------------------------- | --------------------------------------------------- |  | ---- | ---- | 
|CytRx Corporation       |                                                     |                                                     |  |     
|                        | Consolidated Balance Sheets                         |                                                     |  | F-2  |     
|                        | Consolidated Statements of Operations               |                                                     |  | F-3  |     
|                        | Consolidated Statements of Stockholders
    Equity |                                                     |  | F-4  |     
|                        | Consolidated Statements of Cash Flows               |                                                     |  | F-5  |     
|                        | Notes to Consolidated Financial Statements          |                                                     |  | F-6  |     
|                        | Reports of Independent Auditors                     |                                                     |  | F-22 |     
|                        | Financial Statement Schedule                        |                                                     |  |      |     
|                        |                                                     | Schedule II  Valuation and
    Qualifying Accounts |  |      | F-24 | 
|Blizzard Genomics, Inc. |                                                     |                                                     |  |     
|                        | Balance Sheets                                      |                                                     |  | F-25 |     
|                        | Statements of Operations                            |                                                     |  | F-26 |     
|                        | Statements of Shareholders Deficit                 |                                                     |  | F-27 |     
|                        | Statements of Cash Flows                            |                                                     |  | F-28 |     
|                        | Notes to Financial Statements                       |                                                     |  | F-29 |     
|                        | Reports of Independent Auditors                     |                                                     |  | F-39 |     

F-1



---



##### Table of Contents



CYTRX CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                                                                 |                                            |         |             |            |  |         |             |           | 
|---------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------- | ----------- | ---------- |  | ------- | ----------- | --------- | 
|                                         |                                                                                                                                                                                 |                                           
|                                         |                                                                                                                                                                                 | December 31,                              
|                                         |                                                                                                                                                                                 |                                           
|                                         |                                                                                                                                                                                 | 2003                                       |         | 2002       
|                                         |                                                                                                                                                                                 |                                            |         |            
|ASSETS                                  
|Current assets:                          |                                                                                                                                                                                 |                                            |         |             |            |  |         |            
|                                         | Cash and cash equivalents                                                                                                                                                       |                                            | $       | 11,644,446  |            |  | $       | 387,314     |          
|                                         | Short-term investments                                                                                                                                                          |                                            |         |            |            |  |         | 1,401,358   |          
|                                         | Current portion of note receivable                                                                                                                                              |                                            |         |            |            |  |         | 135,291     |          
|                                         | Prepaid and other current assets                                                                                                                                                |                                            |         | 236,349     |            |  |         | 222,027     |          
|                                         |                                                                                                                                                                                 |                                            |         |             |            |  |         |            
|                                         |                                                                                                                                                                                 | Total current assets                       |         |             | 11,880,795 |  |         |             | 2,145,990 | 
|                                         |                                                                                                                                                                                 |                                            |         |             |            |  |         |            
|Property and equipment, net              |                                                                                                                                                                                 |                                            | 227,413 |             |            |  | 1,084   |            
|                                         |                                                                                                                                                                                 |                                            |         |             |            |  |         |            
|Other assets:                            |                                                                                                                                                                                 |                                            |         |             |            |  |         |            
|                                         | Investment in minority-owned entity 
    acquired developed technology                                                                                                         |                                            |         |            |            |  |         | 6,644,492   |          
|                                         | Note receivable, less current portion                                                                                                                                           |                                            |         |            |            |  |         | 229,958     |          
|                                         | Prepaid and other assets                                                                                                                                                        |                                            |         | 216,076     |            |  |         | 262,060     |          
|                                         |                                                                                                                                                                                 |                                            |         |             |            |  |         |            
|                                         |                                                                                                                                                                                 | Total other assets                         |         |             | 216,076    |  |         |             | 7,136,510 | 
|                                         |                                                                                                                                                                                 |                                            |         |             |            |  |         |            
|                                         |                                                                                                                                                                                 | Total assets                               |         | $           | 12,324,284 |  |         | $           | 9,283,584 | 
|                                         |                                                                                                                                                                                 |                                            |         |             |            |  |         |            
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                                                 |                                            |         |             |            |  |         |            
|                                         | Accounts payable                                                                                                                                                                |                                            | $       | 738,135     |            |  | $       | 79,947      |          
|                                         | Accrued expenses and other current liabilities                                                                                                                                  |                                            |         | 381,977     |            |  |         | 428,490     |          
|                                         |                                                                                                                                                                                 |                                            |         |             |            |  |         |            
|                                         |                                                                                                                                                                                 | Total current liabilities                  |         |             | 1,120,112  |  |         |             | 508,437   | 
|Accrued loss on facility abandonment     |                                                                                                                                                                                 |                                            | 312,433 |             |            |  | 419,038 |            
|Deferred gain on sale of building        |                                                                                                                                                                                 |                                            | 93,836  |             |            |  | 121,762 |            
|Deferred revenue                         |                                                                                                                                                                                 |                                            | 275,000 |             |            |  | 275,000 |            
|                                         |                                                                                                                                                                                 |                                            |         |             |            |  |         |            
|                                         |                                                                                                                                                                                 | Total liabilities                          |         |             | 1,801,381  |  |         |             | 1,324,237 | 
|                                         |                                                                                                                                                                                 |                                            |         |             |            |  |         |            
|Minority interest                        |                                                                                                                                                                                 |                                            | 330,287 |             |            |  |        |            
|                                         |                                                                                                                                                                                 |                                            |         |             |            |  |         |            
|Commitments and contingencies            |                                                                                                                                                                                 |                                            |        |             |            |  |        |            
|Stockholders equity:                    |                                                                                                                                                                                 |                                            |         |             |            |  |         |            
|                                         | Preferred Stock, $.01 par value, 5,000,000 shares
    authorized, including 5,000 shares of Series A Junior
    Participating Preferred Stock; no shares issued and outstanding |                                            |         |            |            |  |         |            |          
|                                         | Common stock, $.001 par value, 100,000,000 shares
    authorized; 34,392,000 and 22,143,927 shares issued at
    December 31, 2003 and 2002, respectively                       |                                            |         | 34,392      |            |  |         | 22,144      |          
|                                         | Additional paid-in capital                                                                                                                                                      |                                            |         | 102,239,460 |            |  |         | 82,173,839  |          
|                                         | Treasury stock, at cost (633,816 shares held at
    December 31, 2003 and 2002)                                                                                                 |                                            |         | (2,279,238  | )          |  |         | (2,279,238  | )        
|                                         | Accumulated deficit                                                                                                                                                             |                                            |         | (89,801,998 | )          |  |         | (71,957,398 | )        
|                                         |                                                                                                                                                                                 |                                            |         |             |            |  |         |            
|                                         |                                                                                                                                                                                 | Total stockholders equity                 |         |             | 10,192,616 |  |         |             | 7,959,347 | 
|                                         |                                                                                                                                                                                 |                                            |         |             |            |  |         |            
|                                         |                                                                                                                                                                                 | Total liabilities and stockholders equity |         | $           | 12,324,284 |  |         | $           | 9,283,584 | 
|                                         |                                                                                                                                                                                 |                                            |         |             |            |  |         |            

The accompanying notes are an integral part of
these consolidated balance sheets.

F-2



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##### Table of Contents



CYTRX CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                          |                                                                                             |                         |             |           |  |      |            |           |  |   |            |           | 
|--------------------------------------------------------- | ------------------------------------------------------------------------------------------- | ----------------------- | ----------- | --------- |  | ---- | ---------- | --------- |  | - | ---------- | --------- | 
|                                                          |                                                                                             |                        
|                                                          |                                                                                             | Year Ended December 31,
|                                                          |                                                                                             |                        
|                                                          |                                                                                             | 2003                    |             | 2002      |  | 2001
|                                                          |                                                                                             |                         |             |           |  |     
|Income:                                                   |                                                                                             |                         |             |           |  |      |            |           |  |   |            |          
|                                                          | Service revenues                                                                            |                         | $           |          |  |      | $          | 22,453    |  |   | $          | 101,463   | 
|                                                          | License fees                                                                                |                         |             | 94,000    |  |      |            | 1,051,000 |  |   |            | 3,751,000 | 
|                                                          | Grant revenue                                                                               |                         |             |          |  |      |            | 46,144    |  |   |            | 156,729   | 
|                                                          |                                                                                             |                         |             |           |  |      |            |           |  |   |            |          
|                                                          |                                                                                             |                         | 94,000      |           |  |      | 1,119,597  |           |  |   | 4,009,192  |          
|                                                          |                                                                                             |                         |             |           |  |      |            |           |  |   |            |          
|Expenses:                                                 |                                                                                             |                         |             |           |  |      |            |           |  |   |            |          
|                                                          | Cost of service revenues                                                                    |                         |             |          |  |      |            | 11,287    |  |   |            | 70,501    | 
|                                                          | Research and development (includes non-cash stock
    compensation of $2,902,484 in 2003)   |                         |             | 4,387,599 |  |      |            | 767,102   |  |   |            | 1,844,038 | 
|                                                          | Common stock, stock options and warrants issued
    for selling, general and administrative |                         |             | 3,148,047 |  |      |            | 229,550   |  |   |            | 1,440,934 | 
|                                                          | Selling, general and administrative                                                         |                         |             | 3,840,620 |  |      |            | 1,703,402 |  |   |            | 1,161,095 | 
|                                                          | Depreciation and amortization                                                               |                         |             | 2,130     |  |      |            | 793,563   |  |   |            | 586,249   | 
|                                                          | Severance and other contractual payments to
    officers                                    |                         |             |          |  |      |            | 1,822,454 |  |   |            |          | 
|                                                          | Asset impairment charge                                                                     |                         |             |          |  |      |            | 920,939   |  |   |            |          | 
|                                                          | Loss on facility abandonment                                                                |                         |             |          |  |      |            | 477,686   |  |   |            |          | 
|                                                          |                                                                                             |                         |             |           |  |      |            |           |  |   |            |          
|                                                          |                                                                                             |                         | 11,378,396  |           |  |      | 6,725,983  |           |  |   | 5,102,817  |          
|                                                          |                                                                                             |                         |             |           |  |      |            |           |  |   |            |          
|Loss before other income                                  |                                                                                             |                         | (11,284,396 | )         |  |      | (5,606,386 | )         |  |   | (1,093,625 | )        
|Other income                                             |                                                                                             |                         |             |           |  |      |            |           |  |   |            |          
|                                                          | Interest income                                                                             |                         |             | 82,064    |  |      |            | 95,508    |  |   |            | 162,284   | 
|                                                          |                                                                                             |                         |             |           |  |      |            |           |  |   |            |          
|                                                          |                                                                                             |                         | (11,202,332 | )         |  |      | (5,510,878 | )         |  |   | (931,341   | )        
|Equity in losses from minority-owned entity               |                                                                                             |                         | (6,662,031  | )         |  |      | (664,758   | )         |  |   |           |          
|Minority interest in losses of subsidiary                 |                                                                                             |                         | 19,763      |           |  |      |           |           |  |   |           |          
|                                                          |                                                                                             |                         |             |           |  |      |            |           |  |   |            |          
|Net loss                                                  |                                                                                             | $                       | (17,844,600 | )         |  | $    | (6,175,636 | )         |  | $ | (931,341   | )        
|                                                          |                                                                                             |                         |             |           |  |      |            |           |  |   |            |          
|Basic and diluted loss per common share                   |                                                                                             |                         | (0.65       | )         |  |      | (0.39      | )         |  |   | (0.09      | )        
|                                                          |                                                                                             |                         |             |           |  |      |            |           |  |   |            |          
|Basic and diluted weighted average shares
    outstanding |                                                                                             |                         | 27,324,794  |           |  |      | 16,004,155 |           |  |   | 10,358,381 |          
|                                                          |                                                                                             |                         |             |           |  |      |            |           |  |   |            |          

The accompanying notes are an integral part of
these consolidated financial statements.

F-3



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##### Table of Contents



CYTRX CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                             |                                                                                         |               |            |            |  |                 |        |          |  |       |             |            |  |   |             |             |   |   |            |   |  |   |            |             |  
|---------------------------- | --------------------------------------------------------------------------------------- | ------------- | ---------- | ---------- |  | --------------- | ------ | -------- |  | ----- | ----------- | ---------- |  | - | ----------- | ----------- | - | - | ---------- | - |  | - | ---------- | ----------- | -
|                             |                                                                                         |               |            |            |  |                 |        |          |  |      
|                             |                                                                                         | Common Stock  |            |            |  |                 |        |          |  |      
|                             |                                                                                         |               |            | Additional |  | Accumulated     |        | Treasury |  |      
|                             |                                                                                         | Shares Issued |            | Amount     |  | Paid-in Capital |        | Deficit  |  | Stock |             | Total     
|                             |                                                                                         |               |            |            |  |                 |        |          |  |       |             |           
|Balance at January 1, 2001   |                                                                                         |               | 10,734,012 |            |  | $               | 10,734 |          |  | $     | 72,737,739  |            |  | $ | (64,850,421 | )           |   | $ | (2,279,238 | ) |  | $ | 5,618,814  |            
|                             | Issuance of common stock                                                                |               |            | 725,000    |  |                 |        | 725      |  |       |             | 453,619    |  |   |             |            |   |   |            |  |  |   |            | 454,344     |  
|                             | Issuance of stock options/warrants                                                      |               |            |           |  |                 |        |         |  |       |             | 1,440,934  |  |   |             |            |   |   |            |  |  |   |            | 1,440,934   |  
|                             | Net loss                                                                                |               |            |           |  |                 |        |         |  |       |             |           |  |   |             | (931,341    | ) |   |            |  |  |   |            | (931,341    | )
|                             |                                                                                         |               |            |            |  |                 |        |          |  |       |             |            |  |   |             |             |   |   |            |   |  |   |            |            
|Balance at December 31, 2001 |                                                                                         |               | 11,459,012 |            |  |                 | 11,459 |          |  |       | 74,632,292  |            |  |   | (65,781,762 | )           |   |   | (2,279,238 | ) |  |   | 6,582,751  |            
|                             | Issuance of common stock                                                                |               |            | 324,999    |  |                 |        | 326      |  |       |             | 109,408    |  |   |             |            |   |   |            |  |  |   |            | 109,734     |  
|                             | Common stock issued for Acquisition of Global
    Genomics                              |               |            | 8,948,204  |  |                 |        | 8,948    |  |       |             | 5,785,014  |  |   |             |            |   |   |            |  |  |   |            | 5,793,962   |  
|                             | Common stock and warrants issued in conjunction
    with acquisition of Global Genomics |               |            | 548,330    |  |                 |        | 548      |  |       |             | 899,693    |  |   |             |            |   |   |            |  |  |   |            | 900,241     |  
|                             | Common stock issued in lieu of cash for officers
    severance and bonuses              |               |            | 863,382    |  |                 |        | 863      |  |       |             | 517,882    |  |   |             |            |   |   |            |  |  |   |            | 518,745     |  
|                             | Issuance of stock options/warrants                                                      |               |            |           |  |                 |        |         |  |       |             | 229,550    |  |   |             |            |   |   |            |  |  |   |            | 229,550     |  
|                             | Net loss                                                                                |               |            |           |  |                 |        |         |  |       |             |           |  |   |             | (6,175,636  | ) |   |            |  |  |   |            | (6,175,636  | )
|                             |                                                                                         |               |            |            |  |                 |        |          |  |       |             |            |  |   |             |             |   |   |            |   |  |   |            |            
|Balance at December 31, 2002 |                                                                                         |               | 22,143,927 |            |  |                 | 22,144 |          |  |       | 82,173,839  |            |  |   | (71,957,398 | )           |   |   | (2,279,238 | ) |  |   | 7,959,347  |            
|                             | Issuance of common stock for research and
    development                               |               |            | 1,828,359  |  |                 |        | 1,828    |  |       |             | 2,550,606  |  |   |             |            |   |   |            |  |  |   |            | 2,552,434   |  
|                             | Common stock and warrants issued in connection
    with private placements              |               |            | 7,081,025  |  |                 |        | 7,081    |  |       |             | 12,485,543 |  |   |             |            |   |   |            |  |  |   |            | 12,492,624  |  
|                             | Issuance of common stock for services                                                   |               |            | 700,000    |  |                 |        | 700      |  |       |             | 1,534,050  |  |   |             |            |   |   |            |  |  |   |            | 1,534,750   |  
|                             | Issuance of stock options/warrants                                                      |               |            |           |  |                 |        |         |  |       |             | 1,613,297  |  |   |             |            |   |   |            |  |  |   |            | 1,613,297   |  
|                             | Options and warrants exercised                                                          |               |            | 2,638,689  |  |                 |        | 2,639    |  |       |             | 1,882,125  |  |   |             |            |   |   |            |  |  |   |            | 1,884,764   |  
|                             | Net loss                                                                                |               |            |           |  |                 |        |         |  |       |             |           |  |   |             | (17,844,600 | ) |   |            |  |  |   |            | (17,844,600 | )
|                             |                                                                                         |               |            |            |  |                 |        |          |  |       |             |            |  |   |             |             |   |   |            |   |  |   |            |            
|Balance at December 31, 2003 |                                                                                         |               | 34,392,000 |            |  | $               | 34,392 |          |  | $     | 102,239,460 |            |  | $ | (89,801,998 | )           |   | $ | (2,279,238 | ) |  | $ | 10,192,616 |            
|                             |                                                                                         |               |            |            |  |                 |        |          |  |       |             |            |  |   |             |             |   |   |            |   |  |   |            |            

The accompanying notes are an integral part of
these consolidated financial statements.

F-4



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##### Table of Contents



CYTRX CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                      |                                                                                               |                                                         |                          |             |            |          |         |            |            |          |         |           |           |          |  
|------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------- | ------------------------ | ----------- | ---------- | -------- | ------- | ---------- | ---------- | -------- | ------- | --------- | --------- | -------- | -
|                                                                                      |                                                                                               |                                                        
|                                                                                      |                                                                                               | Years Ended December 31,                               
|                                                                                      |                                                                                               |                                                        
|                                                                                      |                                                                                               | 2003                                                    |                          | 2002        |            | 2001    
|                                                                                      |                                                                                               |                                                         |                          |             |            |         
|Cash flows from operating activities:                                                 |                                                                                               |                                                         |                          |             |            |          |         |            |            |          |         |          
|                                                                                      | Net loss                                                                                      |                                                         | $                        | (17,844,600 | )          |          | $       | (6,175,636 | )          |          | $       | (931,341  | )        
|                                                                                      | Adjustments to reconcile net loss to net cash
    (used in) provided by operating activities: |                                                         |                          |             |            |          |         |            |            |          |         |           |          
|                                                                                      |                                                                                               | Depreciation and amortization                           |                          |             | 2,130      |          |         |            | 793,563    |          |         |           | 586,249   |         
|                                                                                      |                                                                                               | Equity in losses from minority-owned entity             |                          |             | 6,662,031  |          |         |            | 664,758    |          |         |           |          |         
|                                                                                      |                                                                                               | Minority interest in losses of subsidiary               |                          |             | (19,763    | )        |         |            |           |          |         |           |          |         
|                                                                                      |                                                                                               | Stock option and warrant expense                        |                          |             | 1,613,297  |          |         |            | 229,550    |          |         |           | 1,440,934 |         
|                                                                                      |                                                                                               | Common stock issued for services                        |                          |             | 1,534,750  |          |         |            |           |          |         |           |          |         
|                                                                                      |                                                                                               | Non-cash research and development                       |                          |             | 2,902,484  |          |         |            |           |          |         |           |          |         
|                                                                                      |                                                                                               | Asset impairment charge                                 |                          |             |           |          |         |            | 920,939    |          |         |           |          |         
|                                                                                      |                                                                                               | Changes in assets and liabilities:                      |                          |             |            |          |         |            |            |          |         |           |           |         
|                                                                                      |                                                                                               |                                                         | Note receivable          |             |            | 365,249  |         |            |            | 122,467  |         |           |           | 110,860  |  
|                                                                                      |                                                                                               |                                                         | Prepaid and other assets |             |            | 14,123   |         |            |            | (379,849 | )       |           |           | 45,071   |  
|                                                                                      |                                                                                               |                                                         | Accounts payable         |             |            | 658,188  |         |            |            | (98,830  | )       |           |           | (119,459 | )
|                                                                                      |                                                                                               |                                                         | Other liabilities        |             |            | (181,044 | )       |            |            | 395,222  |         |           |           | (93,120  | )
|                                                                                      |                                                                                               |                                                         |                          |             |            |          |         |            |            |          |         |          
|                                                                                      | Total adjustments                                                                             |                                                         |                          | 13,551,445  |            |          |         | 2,647,820  |            |          |         | 1,970,535 |          
|                                                                                      |                                                                                               |                                                         |                          |             |            |          |         |            |            |          |         |          
|                                                                                      |                                                                                               | Net cash (used in) provided by operating
    activities |                          |             | (4,293,155 | )        |         |            | (3,527,816 | )        |         |           | 1,039,194 |         
|                                                                                      |                                                                                               |                                                         |                          |             |            |          |         |            |            |          |         |          
|Cash flows from investing activities:                                                 |                                                                                               |                                                         |                          |             |            |          |         |            |            |          |         |          
|                                                                                      | Purchases of held-to-maturity securities                                                      |                                                         |                          |            |            |          |         | (1,401,358 | )          |          |         |          |          
|                                                                                      | Redemption of held-to-maturity securities                                                     |                                                         |                          | 1,401,358   |            |          |         |           |            |          |         |          |          
|                                                                                      | Net cash paid related to acquisition                                                          |                                                         |                          |            |            |          |         | (615,064   | )          |          |         |          |          
|                                                                                      | Purchases of property and equipment                                                           |                                                         |                          | (228,459    | )          |          |         |           |            |          |         |          |          
|                                                                                      | Disposals of property and equipment, net                                                      |                                                         |                          |            |            |          |         | 30,142     |            |          |         |          |          
|                                                                                      |                                                                                               |                                                         |                          |             |            |          |         |            |            |          |         |          
|                                                                                      | Net cash provided by (used in) investing
    activities                                       |                                                         |                          | 1,172,899   |            |          |         | (1,986,280 | )          |          |         |          |          
|                                                                                      |                                                                                               |                                                         |                          |             |            |          |         |            |            |          |         |          
|Cash flows from financing activities 
    Net proceeds from issuance of common stock |                                                                                               |                                                         | 14,377,388               |             |            |          | 628,496 |            |            |          | 454,344 |          
|                                                                                      |                                                                                               |                                                         |                          |             |            |          |         |            |            |          |         |          
|                                                                                      | Net increase (decrease) in cash and cash
    equivalents                                      |                                                         |                          | 11,257,132  |            |          |         | (4,885,600 | )          |          |         | 1,493,538 |          
|                                                                                      | Cash and cash equivalents at beginning of year                                                |                                                         |                          | 387,314     |            |          |         | 5,272,914  |            |          |         | 3,779,376 |          
|                                                                                      |                                                                                               |                                                         |                          |             |            |          |         |            |            |          |         |          
|                                                                                      | Cash and cash equivalents at end of year                                                      |                                                         | $                        | 11,644,446  |            |          | $       | 387,314    |            |          | $       | 5,272,914 |          
|                                                                                      |                                                                                               |                                                         |                          |             |            |          |         |            |            |          |         |          

The accompanying notes are an integral part of
these consolidated financial statements.

F-5



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##### Table of Contents



CYTRX CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     Nature of
Business

CytRx Corporation (CytRx or the
Company) is a biopharmaceutical research and
development company, based in Los Angeles, California, with a
development-stage subsidiary, CytRx Laboratories, Inc. (the
Subsidiary), based in Worcester, Massachusetts (see
Note 10). The Company owns the rights to a portfolio of
technologies, including ribonueleic acid interference (RNAi or
gene silencing) technology in the treatment of specified
diseases, including those within the areas of amyotrophic
lateral sclerosis (ALS or Lou Gehrigs disease), obesity
and type 2 diabetes and human cytomegalovirus (CMV), as
well as a DNA-based HIV vaccine technology and a cancer
therapeutic technology. In addition, the Company has entered
into strategic alliances with third parties to develop several
of the Companys other products.

On July 19, 2002, CytRx consummated a merger
with Global Genomics Capital, Inc., a development-stage company
which became a wholly-owned subsidiary of the Company (see
Note 11). This subsidiary was renamed GGC Pharmaceuticals,
Inc., but is referred to herein as Global Genomics.
Global Genomics is a genomics holding company that has a 40%
ownership interest in Blizzard Genomics, Inc.
(Blizzard), a development-stage company based in
Minneapolis, Minnesota, and a 5% ownership interest in
Psynomics, Inc. (Psynomics), a development-stage
company based in San Diego, California. The Company accounts for
its investment in Blizzard using the equity method and in
Psynomics using the cost method. The Company recorded a write
off of its investments in Blizzard and Psynomics in 2003 (See
Note 11).

To date, the Company had relied primarily upon
selling equity securities and payments from our strategic
partners and licensees to generate the funds needed to finance
its operations. Management believes the Companys cash and
cash equivalents balances will be sufficient to meet cash
requirements through the next twelve months. The Company will be
required to obtain additional funding in order to execute its
long-term business plans. The Company cannot assure that
additional funding will be available on favorable terms, or at
all. If the Company fails to obtain significant additional
funding when needed, it may not be able to execute its business
plans and its business may suffer, which would have a material
adverse effect on its financial position, results of operations
and cash flows.

2.     Summary of
Significant Accounting Policies

Basis of Presentation and Principles of
Consolidation The
consolidated financial statements include the accounts of CytRx
together with those of its majority-owned subsidiaries. The
accounts of the Subsidiary are included since September 17,
2003 (see Note 10). The accounts of Global Genomics are
included since July 19, 2002 (see Note 11).

Revenue
Recognition Service
revenues relate to recruiting services rendered and are
recognized at the time services are rendered because all
obligations necessary to earn such revenues have been completed
by the Company at that time. Revenues from collaborative
research arrangements and grants are generally recorded as the
related costs are incurred. The costs incurred under such
arrangements are recorded as research and development expense
and approximate the revenues reported in the accompanying
statements of operations. Non-refundable license fee revenue is
recognized when collectibility is reasonably assured, which is
generally upon receipt, when no continuing involvement of the
Company is required and payment of the license fee represents
the culmination of the earnings process. Non-refundable license
fees received subject to future performance by the Company or
that are credited against future payments due to the Company are
deferred and recognized as services are performed and
collectibility is reasonably assured, which is generally upon
receipt, or recognized upon termination of the agreement and all
related obligations thereunder.

Cash
Equivalents The Company
considers all highly liquid debt instruments with an original
maturity of 90 days or less to be cash equivalents. Cash
equivalents consist primarily of amounts invested in money
market accounts.

F-6



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##### Table of Contents



CYTRX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Investments
Management determines the appropriate classification of debt
securities at the time of purchase. Debt securities are
classified as held-to-maturity when the Company has the positive
intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost.
Marketable equity securities and debt securities not classified
as held-to-maturity are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with
the unrealized gains and losses reported as a separate component
of stockholders equity. Realized gains and losses are
included in investment income and are determined on a first-in,
first-out basis.

Fair Value of Financial
Instruments The carrying
amounts reported in the balance sheet for cash and cash
equivalents, short-term investments, notes receivable and
accounts payable approximate their fair values.

Property and
Equipment Property and
equipment are stated at cost and depreciated using the
straight-line method based on the estimated useful lives
(generally five years for equipment and furniture) of the
related assets. Whenever there is a triggering event that might
suggest an impairment, management evaluates the realizability of
recorded long-lived assets to determine whether their carrying
values have been impaired. The Company records impairment losses
on long-lived assets used in operations when events and
circumstances indicate that the assets might be impaired and the
nondiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those assets. Any
impairment loss is measured by comparing the fair value of the
asset to its carrying amount.

Patents and Patent Application
Costs Although the Company
believes that its patents and underlying technology have
continuing value, the amount of future benefits to be derived
therefrom is uncertain. Patent costs are therefore expensed
rather than capitalized.

Basic and Diluted Loss per Common
Share Basic and diluted
loss per common share are computed based on the weighted average
number of common shares outstanding. Common share equivalents
(which consist of options, warrants and convertible Subsidiary
common stock) are excluded from the computation of diluted loss
per share since the effect would be antidilutive. Common share
equivalents which could potentially dilute basic earnings per
share in the future, and which were excluded from the
computation of diluted loss per share, totaled approximately
10,430,000 shares, 6,627,000 and 5,532,000 shares at
December 31, 2003, 2002 and 2001, respectively.

Shares Reserved for Future
Issuance As of
December 31, 2003, the Company has reserved approximately
6,383,000 of its authorized but unissued shares of common stock
for future issuance pursuant to its employee stock option plans
and warrants issued to consultants and investors.

Stock-based
Compensation The Company
grants stock options and warrants for a fixed number of shares
to key employees and directors with an exercise price equal to
the fair market value of the shares at the date of grant. The
Company accounts for stock option grants and warrants in
accordance with Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees
(APB 25) and related interpretations, and,
accordingly, recognizes no compensation expense for the stock
option grants and warrants issued to employees for which the
terms are fixed. For stock option grants and warrants which vest
based on certain corporate performance criteria, compensation
expense is recognized to the extent that the quoted market price
per share exceeds the exercise price on the date such criteria
are achieved or are probable. Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for
Stock-based Compensation (SFAS 123), provides an
alternative to APB 25 in accounting for stock-based
compensation issued to employees. However, the Company has
continued to account for stock-based compensation for employees
in accordance with APB 25 (See Note 13). The Company
has also granted stock options and warrants to certain
consultants and other third parties. Stock options and warrants
granted to consultants and other third parties are accounted for
in accordance with SFAS 123 and related interpretations and
are valued at the fair market value of the options and warrants
granted or the services received, whichever is more reliably
measurable.

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CYTRX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Expense is recognized in the period in which a
performance commitment exists or the period in which the
services are received, whichever is earlier.

SFAS 123, as amended by SFAS No. 148,
Accounting for Stock-Based Compensation   Transition
and Disclosure (SFAS 148), requires the
presentation of pro forma information as if the Company had
accounted for its employee stock options and performance awards
under the fair value method of that statement. For purposes of
pro forma disclosure, the estimated fair value of the options
and performance awards at the date of the grant is amortized to
expense over the vesting period. The following table illustrates
the effect on net loss and loss per share if the Company had
applied the fair value recognition provisions of SFAS 123
to stock-based employee compensation (amounts in thousands
except per share data):

|                                                                                                            |  |      |         |      |  |      |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                                                            |  | 2003 |         | 2002 |  | 2001
|                                                                                                            |  |      |         |      |  |     
|Net loss, as reported                                                                                       |  | $    | (17,845 | )    |  | $    | (6,176 | ) |  | $ | (931   | )
|Total stock-based employee compensation expense
    determined under fair value-based method for all awards |  |      | (928    | )    |  |      | (1,229 | ) |  |   | (663   | )
|                                                                                                            |  |      |         |      |  |      |        |   |  |   |        |  
|Pro forma net loss                                                                                          |  | $    | (18,773 | )    |  | $    | (7,405 | ) |  | $ | (1,594 | )
|                                                                                                            |  |      |         |      |  |      |        |   |  |   |        |  
|Loss per share, as reported (basic and diluted)                                                             |  | $    | (0.65   | )    |  | $    | (0.39  | ) |  | $ | (0.09  | )
|Loss per share, pro forma (basic and diluted)                                                               |  | $    | (0.69   | )    |  | $    | (0.46  | ) |  | $ | (0.15  | )

The fair value for the Companys options and
warrants was estimated at the date of grant using a
Black-Scholes option pricing model with the following
assumptions:

|                                                                                  |  |      |      |      |  |      |      |   |  |  |      |  
|--------------------------------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ---- | -
|                                                                                  |  | 2003 |      | 2002 |  | 2001
|                                                                                  |  |      |      |      |  |     
|Weighted average risk free interest rate                                          |  |      | 2.82 | %    |  |      | 2.74 | % |  |  | 5.29 | %
|Dividend yields                                                                   |  |      | 0    | %    |  |      | 0    | % |  |  | 0    | %
|Volatility factors of the expected market price
    of the Companys common stock |  |      | 0.99 |      |  |      | 0.99 |   |  |  | 0.98 |  
|Weighted average years outstanding                                                |  |      | 5.1  |      |  |      | 3.6  |   |  |  | 7.2  |  

The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options
which have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price
volatility. Because the Companys employee stock options
have characteristics significantly different from those of
traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value
of its warrants and employee stock options.

Research and Development
Expenses Research and
development expenses consist of costs incurred for direct and
overhead-related research expenses and are expensed as incurred.
Costs to acquire technologies which are utilized in research and
development and which have no alternative future use are
expensed when incurred. Technology developed for use in our
products is expensed as incurred until technological feasibility
has been established. Expenditures to date have been classified
as research and development expense.

Income
Taxes Income taxes are
accounted for using an asset and liability approach that
requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have
been recognized in the Companys financial statements or
tax returns. A valuation allowance is established to reduce
deferred tax assets if all, or some portion, of such assets will
more than likely not be realized.

Concentrations of Credit
Risk Financial instruments
that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and
cash equivalents, short-term investments and note receivable.
The Company maintains cash and cash equivalents in large
well-capitalized financial

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CYTRX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

institutions and the Companys investment
policy disallows investment in any debt securities rated less
than investment-grade by national ratings services.
The Company has not experienced any losses on its deposits of
cash and cash equivalents. The Company generally does not
require collateral or other security from its customers for
sales made on credit. The Company is at risk to the extent
accounts receivable and note receivable amounts become
uncollectible.

Use of
Estimates The preparation
of the financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.

Segment
Information Management
uses consolidated financial information in determining how to
allocate resources and assess financial performance. For this
reason, the Company has determined that it is principally
engaged in one industry segment.

Reclassifications
Certain prior year balances have been reclassified to conform
with the 2003 presentation.

Recently Issued Accounting
Standards In May 2003, the
Financial Accounting Standards Board (FASB) issued
SFAS No. 150, Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity
(SFAS 150). This statement changes the
classification of certain financial instruments from equity to
liabilities. The three types of financial instruments requiring
the change in classification are: (1) mandatorily
redeemable shares, which the issuing company is obligated to buy
back in exchange for cash or other assets; (2) put options
and forward purchase contracts; and (3) obligations that
can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such as a
market index, or varies inversely with the value of the
issuers shares. This statement is effective for all
financial instruments entered into or modified after
May 31, 2003, and is otherwise effective at the beginning
of the first interim period beginning after June 15, 2003.
The Company adopted SFAS 150 as of July 1, 2003, which
did not have a material impact on its consolidated financial
statements.

In April 2003, the FASB issued SFAS Standards
No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities (SFAS 149).
This statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under
SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This Statement is generally effective for
contracts entered into or modified after June 30, 2003 and
hedging relationships designated after June 30, 2003. The
Company will apply the provisions of SFAS 149 for any derivative
instruments or hedging activities entered into after
June 30, 2003. As the Company has not entered into
derivative instruments or hedging activities, adoption of this
statement does not have a material impact on the Companys
consolidated financial statements.

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest Entities,
(FIN No. 46) as superseded in December 2003 by
FASB-issued Interpretation No. 46R, Consolidation of
Variable Interest Entities  an interpretation of
ARB 51 (FIN 46R). FIN 46R requires
the primary beneficiary of a variable interest entity
(VIE) to consolidate the entity and also requires
majority and significant variable interest investors to provide
certain disclosures. A VIE is an entity in which the equity
investors do not have a controlling interest, equity investors
participate in losses or residual interests of the entity on a
basis that differs from its ownership interest, or the equity
investment at risk is insufficient to finance the entitys
activities without receiving additional subordinated financial
support from the other parties. FIN 46R is applicable
starting January 1, 2004. The Company does not believe the
effect of FIN 46R on the Companys consolidated
financial statements will be material.

In November 2002, the FASB issued Interpretation
No. 45, Guarantors Accounting for Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, an interpretation of

F-9



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CYTRX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

FASB Statements No. 5, 57, and 107 and
rescission of FASB Interpretation No. 34, Disclosure of
Indirect Guarantees of Indebtedness of Others
(FIN 45). FIN 45 clarifies the
requirements for a guarantors accounting for and
disclosure of certain guarantees issued and outstanding. It also
requires a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. This Interpretation also
incorporates without reconsideration the guidance in FASB
Interpretation No. 34, which is being superseded. The Company
adopted FIN 45 effective January 1, 2003. Adoption did
not have a material impact on the Companys financial
statements.

3.     Investments

At December 31, 2003 and 2002, the Company
held approximately $0 and $1,401,000, respectively, in
investments, reported as short-term investments in the
accompanying consolidated balance sheets. The contractual
maturities of securities held at December 31, 2002 were one
year or less. At December 31, 2002, the Company classified
all of its investments (consisting entirely of
U.S. Government obligations) as held-to-maturity. The fair
market value approximated the carrying costs and gross
unrealized and realized gains/losses were immaterial.

4.     Restricted
Assets

At December 31, 2003 and 2002, the Company
held approximately $50,000 and $0, respectively, in investments
(consisting entirely of Certificates of Deposit), reported in
Prepaid and Other Current Assets in the accompanying
consolidated balance sheets. The contractual maturities of
securities held at December 31, 2003 were one year or less.
At December 31, 2003, the investments were pledged as
collateral for a letter of credit for the same amount issued in
connection with one of the Companys lease agreements.

5.     Property and
Equipment

Property and equipment at December 31
consist of the following (in thousands):

|                              |  |      |     |      |  |   |   | 
|----------------------------- |  | ---- | --- | ---- |  | - | - | 
|                              |  | 2003 |     | 2002
|                              |  |      |     |     
|Equipment and furnishings     |  | $    | 229 |      |  | $ | 1 | 
|Less accumulated depreciation |  |      | (2  | )    |  |   |  | 
|                              |  |      |     |      |  |   |   | 
|                              |  | $    | 227 |      |  | $ | 1 | 
|                              |  |      |     |      |  |   |   | 

Asset Impairment
Loss In May 2002,
Organichem, Corp., which was to provide CytRx with commercial
supplies of FLOCOR purified drug substance, advised CytRx that
it did not intend to renew the Companys agreement when it
expired in December 2003. During the fourth quarter of 2002, the
Company determined that, in light of the relatively short
remaining term of the Organichem contract, the significant costs
that would be associated with relocating the equipment owned by
CytRx in connection with this contract and the Companys
lack of success to date in its continuing search for a strategic
partner for the development of FLOCOR, an impairment loss of
approximately $921,000 should be recorded, which equals the then
net book value of this equipment and related leasehold
improvements. This charge is reflected as a separate line item
in the accompanying consolidated statement of operations for the
year ended December 31, 2002 as an asset impairment charge.

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CYTRX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                 
|-- | ----------------
|6. | Accrued Expenses

Accrued
Expenses Accrued expenses
and other current liabilities at December 31, 2003 and 2002
are summarized below (in thousands).

|                                                           |  |      |     |      |  |   |     | 
|---------------------------------------------------------- |  | ---- | --- | ---- |  | - | --- | 
|                                                           |  | 2003 |     | 2002
|                                                           |  |      |     |     
|Clinical research activities                               |  | $    |    |      |  | $ | 97  | 
|Deferred gain on sale of building (current
    portion)    |  |      | 28  |      |  |   | 28  | 
|Accrued loss on facility abandonment (current
    portion) |  |      | 106 |      |  |   | 144 | 
|Professional fees                                          |  |      | 171 |      |  |   | 151 | 
|Other miscellaneous                                        |  |      | 77  |      |  |   | 8   | 
|                                                           |  |      |     |      |  |   |     | 
|Total                                                      |  | $    | 382 |      |  | $ | 428 | 
|                                                           |  |      |     |      |  |   |     | 



|   |                     
|-- | --------------------
|7. | Facility Abandonment

In the fourth quarter of 2002, the Company
recorded a loss of approximately $478,000 associated with the
closure of its Atlanta headquarters and relocation to Los
Angeles subsequent to its merger with Global Genomics (see
Note 11). This loss represents the total remaining lease
obligations and estimated operating costs through the remainder
of the lease term, less estimated sublease income and is
reflected in Note 8  Commitments and
Contingencies. This accrued charge was combined with deferred
rent of $85,000 already recorded, so that the total accrual
related to the facility abandonment was $563,000 as of
December 31, 2002, $144,000 of which was reflected as a
current liability and $419,000 as a non-current liability. As of
December 31, 2003, the accrued loss on facility abandonment
was $418,000, $106,000 of which was reflected as a current
liability and $312,000 as a non-current liability. During 2003,
the Company incurred expenditures totaling $224,000 for the
abandoned facility and utilized $145,000 of the accrual related
to the facility abandonment.



|   |                              
|-- | -----------------------------
|8. | Commitments and Contingencies

Minimum annual future obligations under operating
leases, minimum annual future obligations under various license
agreements and minimum annual future obligations under
employment agreements consist of the following (in thousands):

|                    |  |           |       |            |  |            |       |       |  |   |       |  |  |   |        | 
|------------------- |  | --------- | ----- | ---------- |  | ---------- | ----- | ----- |  | - | ----- |  |  | - | ------ | 
|                    |  | Operating |       | License    |  | Employment |       |      
|(in thousands)      |  | Leases    |       | Agreements |  | Agreements |       | Total
|                    |  |           |       |            |  |            |       |      
|2004                |  | $         | 560   |            |  | $          | 1,778 |       |  | $ | 1,075 |  |  | $ | 3,413  | 
|2005                |  |           | 478   |            |  |            | 1,810 |       |  |   | 670   |  |  |   | 2,958  | 
|2006                |  |           | 285   |            |  |            | 897   |       |  |   | 375   |  |  |   | 1,557  | 
|2007                |  |           | 229   |            |  |            | 310   |       |  |   |      |  |  |   | 539    | 
|2008                |  |           | 76    |            |  |            | 330   |       |  |   |      |  |  |   | 406    | 
|2009 and thereafter |  |           |      |            |  |            | 1,320 |       |  |   |      |  |  |   | 1,320  | 
|                    |  |           |       |            |  |            |       |       |  |   |       |  |  |   |        | 
|Total               |  | $         | 1,628 |            |  | $          | 6,445 |       |  | $ | 2,120 |  |  | $ | 10,193 | 
|                    |  |           |       |            |  |            |       |       |  |   |       |  |  |   |        | 

Under the various license agreements and
sponsored research agreements with University of Massachusetts
Medical School (UMMS) (see Note 19) and other
institutions, CytRx will be required to make annual license
maintenance payments as well as milestone payments, ranging from
$11,000,000 to $14,000,000 per approved product, to UMMS and/or
other institutions based on the development of products
utilizing the licensed technology and will be required to pay
royalties, based on future sales of those products, which will
generally range from 3% to 7.5% of such sales, depending upon
the product and the technology being utilized.

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CYTRX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In connection with the sponsored research
agreements, CytRx agreed to fund certain pre-clinical research
at UMMS and other institutions related to the use of
CytRxs licensed technologies for the development of
therapeutic products.

The Company has employment agreements with its
executive officers, the terms of which expire at various times
through July 2006. Certain agreements, which have been revised
from time to time, provide for minimum salary levels, adjusted
annually at the Compensation Committees determination, as
well as for minimum bonuses that are payable. The aggregate
commitment for future salaries at December 31, 2003,
including guaranteed bonuses and salary continuation, was
approximately $2,120,000.

Rent expense under operating leases during 2003,
2002 and 2001 was approximately $258,000, $171,000 and $154,000,
respectively.

9. Private Placement of Common
Stock

In September 2003, the Company entered into a
Stock Purchase Agreement with a group of institutional and other
investors (the September 2003 Investors). The
September 2003 Investors purchased, for an aggregate purchase
price of $8,695,000, 4,140,486 shares of the Companys
common stock and warrants to purchase an additional 1,035,125
shares of the Companys common stock, at $3.05 per share,
expiring in 2008. After consideration of offering expenses, net
proceeds to the Company were approximately $7,667,000. The
shares and the shares underlying the warrants issued to the
September 2003 Investors were subsequently registered.

In May 2003, the Company entered into a Stock
Purchase Agreement with a group of institutional investors (the
May 2003 Investors). The May 2003 Investors
purchased, for an aggregate purchase price of $5,440,000,
2,940,539 shares of the Companys common stock and warrants
to purchase an additional 735,136 shares of the Companys
common stock, at $3.05 per share, expiring in 2008. After
consideration of offering expenses, net proceeds to the Company
were approximately $4,826,000. The shares and the shares
underlying the warrants issued to the May 2003 Investors were
subsequently registered.

10. Investment in Subsidiary

On September 17, 2003, CytRx purchased 2,000
shares of convertible preferred stock for $7 million,
representing a 95% ownership interest in the Subsidiary. The
Subsidiary is a newly formed entity that plans to develop orally
active small molecule based drugs to prevent, treat and cure
obesity and type 2 diabetes. This funding was provided out of
the proceeds of CytRxs private placement financing that
was completed in September 2003. Since September 17, 2003,
CytRx has consolidated the Subsidiary, based on CytRxs
ability to control the stockholders votes and the Board of
Directors of the Subsidiary, and recorded a minority interest
liability of $350,000, representing the 5% interest in the
Subsidiary held by Dr. Michael Czech (see Note 19). Prior
to September 17, 2003, the Subsidiary had no operations.
Additionally, the Company has recorded the fair value of 300,000
shares of its common stock as additional paid-in capital for the
Companys right to call and Dr. Czechs right to
put his remaining 5% interest in the Subsidiary to CytRx in
exchange for a guaranteed amount of 300,000 shares of CytRx
common stock. The fair value of these shares on the purchase
date was approximately $723,000. In addition, upon the
occurrence of certain events, Dr. Czech may receive up to an
additional 350,000 shares of CytRx common stock.

In connection with the investment in the
Subsidiary, CytRx acquired the rights to certain in-process
research and development related to obesity and type 2 diabetes,
which was owned by Dr. Czech. Because the in-process
research and development acquired was not yet technologically
feasible, CytRx recorded research and development expense of
$1,073,000.

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##### Table of Contents



CYTRX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

11. Merger with Global Genomics

On February 11, 2002, CytRx entered into an
agreement to acquire Global Genomics, a privately-held genomics
holding company, through a merger of GGC Merger Corporation, a
wholly-owned subsidiary of CytRx, into Global Genomics. Global
Genomics is a genomics holding company that currently has a 40%
ownership interest in Blizzard and a 5% ownership interest in
Psynomics. CytRxs primary reasons for the acquisition were
to (a) expand its business into the genomics field to
diversify its product and technology base, and (b) gain the
management and directors of Global Genomics, who could assist
CytRx in developing corporate partnerships and acquisition,
investment and financing opportunities not previously available
to CytRx.

The transaction closed on July 19, 2002,
after approval by the stockholders of each company and
satisfaction of other customary closing conditions. Pursuant to
the merger agreement, each outstanding share of common stock of
Global Genomics was converted into .765967 shares of the
Companys common stock. The merger resulted in the issuance
of 8,948,204 shares of the Companys common stock and
options and warrants to purchase 1,014,677 shares of the
Companys common stock to the former security holders of
Global Genomics, with 498,144 shares of the Companys
common stock being held in escrow and subject to cancellation in
whole or in part to satisfy any indemnification claims made by
the Company under the merger agreement. These shares were
released from escrow in 2003. CytRx issued an additional 548,330
shares of its Common Stock for investment banking and legal fees
as part of the merger.

The merger was accounted for as a purchase by
CytRx of a group of assets of Global Genomics in a transaction
other than a business combination and was not considered to be a
reverse acquisition. The Company considered the provisions of
Statement of Financial Accounting Standards No. 141,
Business Combinations (SFAS 141) and determined
CytRx to be the acquiror for accounting purposes. Because the
current activities of Global Genomics were focused on the
development of a business rather than the operation of a
business and planned principal operations of Global Genomics had
not yet commenced, Global Genomics was considered a
development-stage company. Therefore, in accordance with the
guidance in Emerging Issues Task Force Issue No. 98-3
(EITF 98-3), Determining Whether a Nonmonetary
Transaction Involves Receipt of Productive Assets or of a
Business, Global Genomics did not constitute a business as
defined in SFAS 141. Therefore, the Company allocated the
purchase price in accordance with the provisions of Statement of
Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS 142) related to the purchase
of a group of assets. SFAS 142 provides that the cost of a group
of assets acquired in a transaction other than a business
combination shall be allocated to the individual assets acquired
based on their relative fair values and shall not give rise to
goodwill.

The purchase price was determined in accordance
with SFAS 141 and SFAS 142. A summary of the determination of
the purchase price is as follows:

|                                                                                  |  |   |           | 
|--------------------------------------------------------------------------------- |  | - | --------- | 
|Issuance of 8,948,204 shares of CytRx common
    stock at $0.6475 per share       |  | $ | 5,793,962 | 
|Fair value of 1,014,677 vested warrants issued to
    purchase CytRx common stock |  |   | 598,659   | 
|Transaction costs                                                                 |  |   | 971,869   | 
|                                                                                  |  |   |           | 
|Total purchase price                                                              |  | $ | 7,364,490 | 
|                                                                                  |  |   |           | 

Since Global Genomics was a development-stage
company and no goodwill can arise from the purchase of a
development-stage company, in accordance with the provisions of
SFAS 141 and SFAS 142, all identifiable assets acquired,
including identifiable intangible assets, were assigned a
portion of the purchase price on the basis of their relative
fair values. To this end, an independent appraisal of Global
Genomics assets was used as an aid in determining the fair
value of the identifiable assets, including identified
intangible assets, in allocating the purchase price among the
acquired assets. Global Genomics primary assets were its
investments in Blizzard and Psynomics and thus, the fair value
of each of these entities was determined. The

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CYTRX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

discounted cash flow approach was used to
determine the estimated fair value of the acquired intangible
assets of Blizzard and Psynomics underlying Global
Genomics investment in each company. Cash flows were
projected for a period of 10 years and were discounted to
net present value using discount factors of 46% to 60%. Material
cash inflows from product sales were projected to begin in 2003
for Blizzard. A summary of the purchase price allocation is as
follows:

|                                                                        |  |   |           |  
|----------------------------------------------------------------------- |  | - | --------- | -
|Current assets                                                          |  | $ | 33,129    |  
|Investment in minority-owned entity 
    acquired developed technology |  |   | 7,309,250 |  
|In-process research and development (recognized
    as an expense)      |  |   | 78,394    |  
|Less: Liabilities assumed                                               |  |   | (56,283   | )
|                                                                        |  |   |           |  
|Total purchase price                                                    |  | $ | 7,364,490 |  
|                                                                        |  |   |           |  

The in-process research and development was
recorded as a charge for acquired incomplete research and
development in the accompanying consolidated statement of
operations and relates primarily to Global Genomics
investment in Psynomics. The acquired developed technology
primarily represents values assigned to Global Genomics
investment in Blizzards DNA chip reader, thermal gradient
station and T-Chips. The acquired technology was being amortized
over a period of ten years until 2003, when CytRx wrote off its
investment in Blizzard. The ten-year amortization period was
determined through consideration of relevant patent terms (legal
life), estimated technological and economic life, and the range
of useful lives observed in public filings of other companies
involved in similar DNA technologies.

Equity in Losses of Blizzard.The Company recorded its portion of
the losses of Blizzard using the equity method. The equity in
losses of Blizzard and the amortization of the acquired
developed technology are reported as a separate line item in the
accompanying consolidated statement of operations.

Impairment Test of Intangible Assets.In accordance with the provisions of
Accounting Principles Board Opinion No. 18, The Equity
Method of Accounting for Investments in Common Stock
(APB 18), the Company reviewed the net values
on its balance sheet as of September 30, 2003 assigned to
Investment in Minority  Owned Entity 
Acquired Developed Technology resulting from its acquisition of
Global Genomics. APB 18 requires that a loss in value of an
investment, which is other than a temporary decline, should be
recognized as an impairment loss. Through the third quarter of
2003, Blizzard had been unsuccessful in its attempts to raise a
significant amount of the financing necessary for it to pursue
the commercialization strategy for its products.

CytRxs analysis consisted of a review of
current financial projections prepared by Blizzard, application
of a discounted cash flow valuation model of Blizzards
projected cash flows, and consideration of other qualitative
factors. Based upon the quantitative and qualitative factors
described above and in addition to others, CytRxs
management determined that the estimated fair value of
CytRxs investment in Blizzard was $0 and that an
impairment charge of $5,868,000 was necessary in 2003.

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CYTRX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

As of December 31, 2003 and 2002, the
following assets related to Blizzard were reflected in
CytRxs balance sheets:

|                                                                        |  |      |            |      |  |   |           |  
|----------------------------------------------------------------------- |  | ---- | ---------- | ---- |  | - | --------- | -
|                                                                        |  | 2003 |            | 2002
|                                                                        |  |      |            |     
|Investment in minority owned entity 
    acquired developed technology |  | $    | 7,309,250  |      |  | $ | 7,309,250 |  
|Receivable from Blizzard                                                |  |      | 16,640     |      |  |   | 16,640    |  
|Less: Accumulated amortization                                          |  |      | (883,311   | )    |  |   | (335,049  | )
|Less: Equity-method losses to date                                      |  |      | (574,381   | )    |  |   | (329,709  | )
|Less: Impairment charge                                                 |  |      | (5,868,198 | )    |  |   |          |  
|                                                                        |  |      |            |      |  |   |           |  
|                                                                        |  | $    |           |      |  | $ | 6,661,132 |  
|                                                                        |  |      |            |      |  |   |           |  

In addition, $16,640 of receivable from Blizzard
was recorded in prepaid and other current assets as of
December 31, 2002.



|    |                               
|--- | ------------------------------
|12. | Severance Payments to Officers

Pursuant to his employment agreement,
CytRxs former President and CEO (Former CEO)
was entitled to a payment of $435,150 upon the execution of the
merger agreement between CytRx and Global Genomics (see
Note 10) and an additional $435,150 upon the closing of the
merger. In order to reduce the amount of cash that CytRx had to
pay to the Former CEO, CytRx and the Former CEO agreed that
approximately $325,200 of the first $435,150 payment would be
satisfied by CytRx granting a stock award to the Former CEO
under the CytRx Corporation 2000 Long-Term Incentive Plan under
which CytRx issued the Former CEO 558,060 shares of the
Companys common stock. Those shares of stock were issued
at a value equal to 85% of the volume weighted average price of
CytRx common stock for the 20 trading days ended on
February 8, 2002. The cash payment and fair value of the
shares issued were recognized as expense during the first
quarter of 2002.

The terms of CytRxs merger with Global
Genomics contemplated that Global Genomics management team
would replace that of CytRxs subsequent to the closing of
the merger. On July 16, 2002, CytRx terminated the
employment of all of its then-current officers, resulting in
total obligations for severance, stay bonuses, accrued vacation
and other contractual payments of $1,394,000 (including the
final $435,150 owed to the Former CEO). Prior to the merger
closing date, CytRx advanced part of these amounts to three of
its officers, such that the total remaining obligation at the
closing date was $1,179,000. Four officers agreed to accept an
aggregate total of $177,000 of such amount in the form of the
Companys common stock, in lieu of cash, resulting in the
issuance of 248,799 shares. Thus, the net cash payout in
satisfaction of these obligations was $1,002,000, before taxes.
The severance payments and fair value of the shares issued were
recognized as expense during the third quarter of 2002 and is
reported as a separate line item on the accompanying
consolidated statement of operations together with the cash
payment and fair value of shares issued to the Former CEO
discussed above.



|    |                           
|--- | --------------------------
|13. | Stock Options and Warrants

CytRx has stock option plans pursuant to which
certain key employees, directors and consultants are eligible to
receive incentive and/or nonqualified stock options to purchase
shares of CytRxs common stock. Fixed options granted under
the plans generally become exercisable over a three-year period
from the dates of grant and have lives of ten years. The Company
may also grant stock options and/or warrants to its Chief
Executive Officer and other executive officers containing
alternative or additional vesting provisions based on the
achievement of corporate objectives. Exercise prices of all
stock options and warrants for employees and directors are set
at the fair market values of the common stock on the dates of
grant.

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CYTRX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

During 2001 and 2000, the Company made
modifications to and repriced certain outstanding employee and
director stock options and warrants. As a result of the
modification, these employee and director stock options and
warrants are required to be accounted for as variable options
under APB 25 and related Interpretations. Potential compensation
expense is measured for each reporting period based on the
intrinsic value of these employee stock options and warrants
until the stock options or warrants are ultimately exercised,
forfeited, cancelled or expire unexercised. In July 2002,
certain employees were terminated (see Note 12) and their then
outstanding stock options and warrants were modified to extend
the exercise period to the original contract term. At the time
of modification, no intrinsic value existed for these stock
options and warrants; therefore, no additional compensation
expense was recognized. For the years ended December 31,
2003, 2002 and 2001, compensation expense recognized was
$20,000, $0 and $0, respectively, related to these employee and
director stock options and warrants.

In connection with the Companys acquisition
of Global Genomics in July 2002 (see Note 11), CytRx issued
1,014,677 warrants to the holders of Global Genomics warrants in
return for the cancellation of all of their outstanding Global
Genomics warrants. The new warrants were 100% vested upon their
issuance, have an exercise price of $0.01 per share and expire
on January 31, 2007. Additionally, the acquisition of
Global Genomics triggered the Change of Control
provisions contained in the Companys stock option plans
and in the warrants held by the Companys Former CEO,
resulting in the immediate vesting of all outstanding warrants
held by the Former CEO and of all outstanding stock options
issued pursuant to the Companys various stock options
plans.

During 2003, 2002 and 2001, services were
received in exchange for stock options and warrants issued to
certain consultants, resulting in aggregate non-cash charges of
$1,613,000, $230,000 and $1,441,000, respectively.

A summary of the Companys stock option and
warrant activity and related information for the years ended
December 31 is shown below.

|                                                                                       |  |                            |            |                           |  |      |           |      |  |      |           |      |  |   |      |  |  |   |      |  |  |   |      | 
|-------------------------------------------------------------------------------------- |  | -------------------------- | ---------- | ------------------------- |  | ---- | --------- | ---- |  | ---- | --------- | ---- |  | - | ---- |  |  | - | ---- |  |  | - | ---- | 
|                                                                                       |  |                            |            |                           |  |      |           |     
|                                                                                       |  |                            |            | Weighted Average Exercise
|                                                                                       |  | Stock Options and Warrants |            | Price                    
|                                                                                       |  |                            |            |                          
|                                                                                       |  | 2003                       |            | 2002                      |  | 2001 |           | 2003 |  | 2002 |           | 2001
|                                                                                       |  |                            |            |                           |  |      |           |      |  |      |           |     
|Outstanding  beginning of year                                                        |  |                            | 6,626,826  |                           |  |      | 5,532,478 |      |  |      | 3,685,682 |      |  | $ | 1.00 |  |  | $ | 1.22 |  |  | $ | 1.57 | 
|Granted                                                                                |  |                            | 8,074,917  |                           |  |      | 1,752,178 |      |  |      | 2,404,297 |      |  |   | 1.95 |  |  |   | 0.32 |  |  |   | 1.03 | 
|Exercised                                                                              |  |                            | (2,900,881 | )                         |  |      | (200,000  | )    |  |      | (500,000  | )    |  |   | 0.78 |  |  |   | 0.01 |  |  |   | 0.50 | 
|Forfeited                                                                              |  |                            | (875,000   | )                         |  |      | (275,000  | )    |  |      | (7,501    | )    |  |   | 0.35 |  |  |   | 0.80 |  |  |   | 1.45 | 
|Expired                                                                                |  |                            | (795,743   | )                         |  |      | (182,830  | )    |  |      | (50,000   | )    |  |   | 2.30 |  |  |   | 1.28 |  |  |   | 1.00 | 
|                                                                                       |  |                            |            |                           |  |      |           |      |  |      |           |      |  |   |      |  |  |   |      |  |  |   |      | 
|Outstanding  end of year                                                              |  |                            | 10,130,119 |                           |  |      | 6,626,826 |      |  |      | 5,532,478 |      |  |   | 1.74 |  |  |   | 1.00 |  |  |   | 1.22 | 
|                                                                                       |  |                            |            |                           |  |      |           |      |  |      |           |      |  |   |      |  |  |   |      |  |  |   |      | 
|Exercisable at end of year                                                             |  |                            | 7,402,886  |                           |  |      | 6,559,326 |      |  |      | 4,764,137 |      |  | $ | 1.58 |  |  | $ | 1.00 |  |  | $ | 1.26 | 
|Weighted average fair value of stock options and
    warrants granted during the year: |  | $                          | 0.78       |                           |  | $    | 0.52      |      |  | $    | 0.66      |      |  |   |      |  |  |   |      |  |  |   |      | 

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##### Table of Contents



CYTRX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes additional
information concerning stock options and warrants outstanding
and exercisable at December 31, 2003:

|                         |  |                                        |            |                            |  |                  |     |             |  |                  |      |  |  |  |           |  |  |   |      | 
|------------------------ |  | -------------------------------------- | ---------- | -------------------------- |  | ---------------- | --- | ----------- |  | ---------------- | ---- |  |  |  | --------- |  |  | - | ---- | 
|                         |  |                                        |            |                            |  |                  |     |            
|                         |  |                                        |            | Stock Options and Warrants
|                         |  | Stock Options and Warrants Outstanding |            | Exercisable               
|                         |  |                                        |            |                           
|                         |  |                                        |            | Weighted Average           |  |                  |     |            
|                         |  |                                        |            | Remaining                  |  |                  |     | Number of   |  |                 
|                         |  | Number of                              |            | Contractual Life           |  | Weighted Average |     | Shares      |  | Weighted Average
|Range of Exercise Prices |  | Shares                                 |            | (years)                    |  | Exercise Price   |     | Exercisable |  | Exercise Price  
|                         |  |                                        |            |                            |  |                  |     |             |  |                 
|$0.01                    |  |                                        | 608,291    |                            |  |                  | 3.1 |             |  | $                | 0.01 |  |  |  | 608,291   |  |  | $ | 0.01 | 
|0.20 - 1.05              |  |                                        | 3,544,412  |                            |  |                  | 5.2 |             |  |                  | 0.80 |  |  |  | 3,417,737 |  |  |   | 0.80 | 
|1.80 - 2.67              |  |                                        | 4,014,353  |                            |  |                  | 8.3 |             |  |                  | 2.19 |  |  |  | 1,413,795 |  |  |   | 2.11 | 
|3.05                     |  |                                        | 1,958,063  |                            |  |                  | 4.8 |             |  |                  | 3.05 |  |  |  | 1,958,063 |  |  |   | 3.05 | 
|7.75                     |  |                                        | 5,000      |                            |  |                  | 1.2 |             |  |                  | 7.75 |  |  |  | 5,000     |  |  |   | 7.75 | 
|                         |  |                                        |            |                            |  |                  |     |             |  |                  |      |  |  |  |           |  |  |   |      | 
|                         |  |                                        | 10,130,119 |                            |  |                  | 6.2 |             |  | $                | 1.74 |  |  |  | 7,402,886 |  |  | $ | 1.58 | 
|                         |  |                                        |            |                            |  |                  |     |             |  |                  |      |  |  |  |           |  |  |   |      | 

14.     Stockholder
Protection Rights Plan

Effective April 16, 1997, the Companys
Board of Directors declared a distribution of one right
(Rights) for each outstanding share of the
Companys common stock to stockholders of record at the
close of business on May 15, 1997 and for each share of
common stock issued by the Company thereafter and prior to a
Flip-in Date (as defined below). Each Right entitles the
registered holder to purchase from the Company one-ten
thousandth (1/10,000th) of a share of Series A Junior
Participating Preferred Stock, at an exercise price of $30. The
Rights are generally not exercisable until 10 business days
after an announcement by the Company that a person or group of
affiliated persons (an Acquiring Person) has
acquired beneficial ownership of 15% or more of the
Companys then outstanding shares of common stock (a
Flip-in Date). In connection with the merger
agreement with Global Genomics, the Companys Board of
Directors amended the stockholders protection rights agreement
to exempt the merger from triggering a Flip-in Date.

In the event the Rights become exercisable as a
result of the acquisition of shares, each Right will enable the
owner, other than the Acquiring Person, to purchase at the
Rights then-current exercise price a number of shares of
common stock with a market value equal to twice the exercise
price. In addition, unless the Acquiring Person owns more than
50% of the outstanding shares of common stock, the Board of
Directors may elect to exchange all outstanding Rights (other
than those owned by such Acquiring Person) at an exchange ratio
of one share of common stock per Right. All Rights that are
owned by any person on or after the date such person becomes an
Acquiring Person will be null and void.

The Rights have been distributed to protect the
Companys stockholders from coercive or abusive takeover
tactics and to give the Board of Directors more negotiating
leverage in dealing with prospective acquirors.

15.     Income
Taxes

For income tax purposes, CytRx and its
subsidiaries have an aggregate of approximately
$67.2 million of net operating losses available to offset
against future taxable income, subject to certain limitations.
Such losses expire in 2004 through 2023 as of December 31,
2003. CytRx also has an aggregate of approximately
$6.6 million of research and development and orphan drug
credits available for offset against future income taxes that
expire in 2004 through 2021.

Deferred income taxes reflect the net effect of
temporary differences between the financial reporting carrying
amounts of assets and liabilities and income tax carrying
amounts of assets and liabilities. The

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CYTRX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

components of the Companys deferred tax
assets and liabilities, all of which are long-term, are as
follows (in thousands):

|                                                      |                                           |              |         |        |  |   |         |        | 
|----------------------------------------------------- | ----------------------------------------- | ------------ | ------- | ------ |  | - | ------- | ------ | 
|                                                      |                                           |             
|                                                      |                                           | December 31,
|                                                      |                                           |             
|                                                      |                                           | 2003         |         | 2002  
|                                                      |                                           |              |         |       
|Deferred tax assets:                                  |                                           |              |         |        |  |   |         |       
|                                                      | Net operating loss carryforward           |              | $       | 27,047 |  |   | $       | 22,101 | 
|                                                      | Tax credit carryforward                   |              |         | 6,628  |  |   |         | 6,627  | 
|                                                      | Property and equipment and capital losses |              |         | 5,488  |  |   |         | 3,129  | 
|                                                      |                                           |              |         |        |  |   |         |       
|Total deferred tax assets                             |                                           |              | 39,163  |        |  |   | 31,857  |       
|Deferred tax liabilities  Depreciation
    and other |                                           |              | (2,683  | )      |  |   | (2,793  | )     
|Net deferred tax assets                               |                                           |              | 36,476  |        |  |   | 29,064  |       
|Valuation allowance                                   |                                           |              | (36,476 | )      |  |   | (29,064 | )     
|                                                      |                                           |              |         |        |  |   |         |       
|                                                      |                                           | $            |        |        |  | $ |        |       
|                                                      |                                           |              |         |        |  |   |         |       

Based on assessments of all available evidence as
of December 31, 2003 and 2002, management has concluded
that the respective deferred income tax assets should be reduced
by valuation allowances equal to the amounts of the net deferred
income tax assets since it is managements conclusion that
it is more likely than not that the deferred tax assets will not
be realized. Furthermore, it is likely the July 19, 2002
acquisition of Global Genomics caused a change of ownership as
defined by Internal Revenue Code Section 382 which may
substantially limit the ability of the Company to utilize net
operating losses. Generally, the net operating losses will be
limited to an annual utilization of approximately 4.9% of the
purchase price of Global Genomics.

For all years presented, the Company did not
recognize any deferred tax assets or liabilities and deferred
tax provision or benefit.

The provision for income taxes differs from the
provision computed by applying the Federal statutory rate to net
loss before income taxes as follows (in thousands):

|                                                                 |  |              |        |      |  |      |        |   |  |   |      |  
|---------------------------------------------------------------- |  | ------------ | ------ | ---- |  | ---- | ------ | - |  | - | ---- | -
|                                                                 |  |             
|                                                                 |  | December 31,
|                                                                 |  |             
|                                                                 |  | 2003         |        | 2002 |  | 2001
|                                                                 |  |              |        |      |  |     
|Federal benefit at statutory rate                                |  | $            | (6,066 | )    |  | $    | (2,100 | ) |  | $ | (317 | )
|State income taxes, net of Federal taxes                         |  |              | (1,070 | )    |  |      | (371   | ) |  |   | (56  | )
|Provision (benefit) related to change in
    valuation allowance |  |              | 7,414  |      |  |      | 1,976  |   |  |   | (94  | )
|Other                                                            |  |              | (278   | )    |  |      | 495    |   |  |   | 467  |  
|                                                                 |  |              |        |      |  |      |        |   |  |   |      |  
|                                                                 |  | $            |       |      |  | $    |       |   |  | $ |     |  
|                                                                 |  |              |        |      |  |      |        |   |  |   |      |  

16.     License
Agreements

University of Massachusetts Medical
School In April 2003,
CytRx acquired the rights to new technologies by entering into
exclusive license arrangements with the UMMS covering potential
applications of the medical institutions proprietary gene
silencing technology in the treatment of specified diseases,
including those within the areas of obesity and type 2
diabetes, and amyotrophic lateral sclerosis, commonly known as
Lou Gehrigs disease (ALS), human cytomegalovirus, and
covering UMMSs proprietary technology with potential gene
therapy applications within the area of cancer. In consideration
of the licenses, CytRx made cash payments to UMMS totaling
approximately $186,000 and issued it a total of
1,613,258 shares of CytRx common stock, which were valued
for financial statement purposes at approximately $1,468,000. In
May 2003, CytRx broadened its strategic alliance with UMMS by
acquiring an exclusive license from that

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CYTRX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

institution covering a proprietary DNA-based HIV
vaccine technology. In consideration of this license, CytRx made
cash payments to UMMS totaling approximately $18,000 and issued
it 215,101 shares of CytRx common stock, which were valued
for financial statement purposes at approximately $361,000. As
the gene silencing technology from UMMS had not achieved
technological feasibility at the time of its license by CytRx
and had no alternative future uses and, therefore, no separate
economic value, the aggregate total of $2,033,000 in cash
payments and stock issued for acquisition of the technology was
expensed as research and development in 2003.

17.     Discontinued
and Transferred Operations

Spectrum Recruitment
Research From 1996 to
2002, CytRx marketed the services of a small group of human
resources professionals under the name of Spectrum Recruitment
Research (Spectrum) as a way of offsetting the
Companys cost of maintaining this function. In February
2002, the operations of Spectrum were terminated and the rights
to use the Spectrum tradenames were transferred to Albert, Isaac
& Alexander, Inc., a consulting firm comprised of former
CytRx (Spectrum) employees. Net income (loss) associated with
the Spectrum activities included in loss from operations was
approximately $5,000 and $(18,000) for 2002 and 2001,
respectively.

18.     Quarterly
Financial Data (unaudited)

Summarized quarterly financial data for 2003 and
2002 is as follows (in thousands, except per share data):

|                                        |  |               |       |         |  |              |        |             |  |   |        |   |  |   |        |  
|--------------------------------------- |  | ------------- | ----- | ------- |  | ------------ | ------ | ----------- |  | - | ------ | - |  | - | ------ | -
|                                        |  |              
|                                        |  | Quarter Ended
|                                        |  |              
|                                        |  | March 31      |       | June 30 |  | September 30 |        | December 31
|                                        |  |               |       |         |  |              |        |            
|2003                                    |  |               |       |         |  |              |        |             |  |   |        |   |  |   |        |  
|Total revenues                          |  | $             |      |         |  | $            | 3      |             |  | $ | 1      |   |  | $ | 90     |  
|Net loss                                |  |               | (914  | )       |  |              | (5,046 | )           |  |   | (8,777 | ) |  |   | (3,108 | )
|Basic and diluted loss per common share |  |               | (0.04 | )       |  |              | (0.21  | )           |  |   | (0.30  | ) |  |   | (0.09  | )
|                                       
|2002                                    |  |               |       |         |  |              |        |             |  |   |        |   |  |   |        |  
|Total revenues                          |  |               | 1,054 |         |  |              | 15     |             |  |   | 1      |   |  |   | 50     |  
|Net loss                                |  |               | (179  | )       |  |              | (931   | )           |  |   | (2,547 | ) |  |   | (2,519 | )
|Basic and diluted loss per common share |  | $             | (0.02 | )       |  | $            | (0.08  | )           |  | $ | (0.13  | ) |  | $ | (0.12  | )

19.     Related Party
Transactions

In July 2002, the Company entered into an
agreement with Kriegsman Capital Group (KCG),
whereby KCG or its affiliate The Kriegsman Group
(TKG) agreed to provide CytRx with office space and
certain administrative services. KCG and TKG are owned by Steven
A. Kriegsman, CytRxs President and CEO. During the years
ended December 31, 2003 and 2002, the Company made net
payments of $70,000 and $59,000, respectively, to KCG under this
agreement. The charges were determined based upon actual space
used and estimated percentages of employee time used. The
Company believes that such charges approximated the fair value
of the space and services provided. In October 2003, the
services and facilities agreement with KCG was terminated as
substantially all of the on-going operations of KCG have ceased.
The obligations under the facility lease at the Companys
headquarters were transferred from KCG to CytRx in July 2003 and
are reflected in Note 8  Commitments and
Contingencies.

CytRx has entered into various agreements,
expiring in May 2004, with Cappello Capital Corp.
(Cappello Capital), pursuant to which Cappello
Capital will serve as the Companys exclusive financial
advisor. Alexander L. Cappello, one of the Companys
directors, is Chairman and Chief Executive Officer of

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CYTRX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Cappello Group, Inc., an affiliate of Cappello
Capital. Under these agreements, Cappello Capital has assisted
the Company with the analysis of potential transactions and
strategic alternatives. The types of transactions that Cappello
Capital may assist the Company with include private placements
of equity, debt or convertible securities, strategic alliances,
sale of all or a portion of CytRx, recapitalization or strategic
acquisitions. If the Company proceeds with any of the
transactions described in the agreement, CytRx is to pay
Cappello Capital a fee equal to between 3% and 7.5% of the value
of such a transaction, depending upon the nature of the
transaction and the dollar amount involved. In 2001, as
compensation for its services, the Company granted Cappello
Capital a ten-year warrant to purchase 1,272,492 shares of
CytRxs common stock (subject to downward adjustment under
certain conditions) with an exercise price of $1.00 per share
(fair value of $1,063,000), which was fully vested at
December 31, 2002. The fair value of the warrant issued was
recognized as common stock, stock options and warrants issued
for selling, general and administrative in the accompanying
statements of operations and recognized based on the vesting
terms of the warrant. During 2002, CytRx paid Cappello Capital a
total retainer of $60,000. The fee paid to Cappello Capital upon
the closing of the merger with Global Genomics was 448,330
shares of CytRx common stock, or 4.5% of the shares issuable in
the merger. The fair value of those shares issued ($247,000) was
considered a transaction cost of the merger and was included in
the purchase price of Global Genomics. Fees paid to Cappello
Capital in connection with the closing of the May 2003 Financing
and the September 2003 Financing were $1,076,000 and
fully-vested, ten-year warrants to purchase 794,771 shares of
common stock with exercise prices ranging from $1.85 per share
to $3.05 per share. During 2003, CytRx paid Cappello Capital a
total retainer of $160,000.

Dr. Michael Czech, a 5% minority stockholder
of the Subsidiary (see Note 10) and a member of
CytRxs and the Subsidiarys Scientific Advisory
Boards, is an employee of UMMS and party, as the principal
investigator, to a sponsored research agreement between CytRx
and UMMS. The Company recorded a minority interest liability of
$350,050, representing the 5% interest in the Subsidiary held by
Dr. Czech. Additionally, the Company recorded the fair
value of 300,000 shares of its common stock as additional
paid-in capital for the Companys right to call and
Dr. Czechs right to put the remaining 5% interest in
the Subsidiary to CytRx in exchange for a guaranteed amount of
300,000 shares of CytRx common stock. The fair value of these
shares on the purchase date was approximately $723,000. During
2003, Dr. Czech was paid $18,000 for his Scientific
Advisory Board services. In addition, upon the occurrence of
certain events, Dr. Czech may receive up to an additional
350,000 shares of CytRx common stock. During 2003, CytRx paid
UMMS $403,000 under the sponsored research agreement to fund a
portion of Dr. Czechs research.

20.     Subsequent
Events

SynthRx,
Inc. In October 2003,
CytRx entered into an agreement to license its co-polymer
technologies, including FLOCOR, Opti-Vax and related
anti-infective products, on an exclusive basis to SynthRx, Inc.,
a Houston, Texas-based biopharmaceutical company that was formed
by Dr. Robert Hunter in January 2004. Upon the final
closing of this agreement, which the Company anticipates will
occur in the second quarter of 2004, CytRx will receive a 19.9%
ownership interest in SynthRx and an upfront payment of
approximately $228,000 from SynthRx in return for rights to the
technologies. CytRx will also receive significant milestone
payments and royalties upon commercialization of any products
developed under this alliance. The Company has no commitment for
continuing involvement to earn the upfront payment or the future
milestone payments. Dr. Hunter is a member of CytRxs
Scientific Advisory Board. In 2003, the Company did not record
any revenues or costs related to transaction with SynthRx.

Massachusetts State Ethics
Commission In February
2004, CytRx was notified by the Massachusetts State Ethics
Commission (the MSEC) that it has initiated a
Preliminary Inquiry into whether the Companys previous
retention of a consultant who introduced the Company to UMMS
constituted an improper conflict of interest under
Massachusettss ethics laws. Since the inquiry is at a very
preliminary stage, it is inherently difficult to predict whether
the MSEC will decide to initiate any formal proceedings,

F-20



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##### Table of Contents



CYTRX CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

whether any such proceedings will be directed at
the Company or whether the Company will be found in any such
proceedings to have violated any Massachusetts ethics laws. The
Company also cannot estimate what its legal costs will be in
connection with the matter, although such expenses could be
substantial if a formal proceeding is initiated. Moreover, if
the MSEC were to determine that CytRxs conduct was
unlawful, the MSEC could impose a number of different penalties
or sanctions on the Company which, under certain circumstances,
would have a material adverse effect on the Companys
business, results of operations, cash flows or financial
condition.

Madison & Wall Worldwide,
Inc. On April 5,
2004, the Company was served with a complaint for breach of
contract, filed by Madison & Wall Worldwide, Inc.
(M&W), in the Superior Court of California,
County of Orange on April 1, 2004. M&W, a former
independent contractor to the Company, engaged to provide
investor relations services, was seeking damages in excess of
$700,000 in that lawsuit. On May 11, 2004, the Company
reached an agreement in principle with M&W to settle this
lawsuit by issuing the 200,000 shares of the Companys
common stock that were to have been earned and received by
M&W upon the Companys entering into the investor
relations services contract with them and by the Company making
an additional payment of $50,000 to M&W. The Company is in
the process, with M&W, of preparing the documentation for
this settlement.

F-21



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##### Table of Contents



REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS

To the Stockholders and Board of Directors

CytRx Corporation


We have audited the accompanying consolidated
balance sheet of CytRx Corporation as of December 31, 2003
and the related consolidated statements of operations,
stockholders equity and cash flows for the year then
ended. We have also audited the schedule listed in the
accompanying index. These financial statements and schedule are
the responsibility of the Companys management. Our
responsibility is to express an opinion on the financial
statements based on our audit.

We conducted our audit in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of CytRx Corporation at
December 31, 2003 and the results of its operations and its
cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material
respects the information set forth therein.

Also, in our opinion, the schedule presents
fairly, in all material respects, the information set forth
therein.



| |                     
| | --------------------
| | /s/ BDO SEIDMAN, LLP

Los Angeles, California

May 10, 2004


F-22



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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders

CytRx Corporation


We have audited the accompanying consolidated
balance sheet of CytRx Corporation as of December 31, 2002,
and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the two
years in the period ended December 31, 2002. Our audits
also included the financial statement schedule listed in the
Index at Item 15(a). These financial statements and
schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of CytRx
Corporation at December 31, 2002 and the results of its
operations and its cash flows for each of the two years in the
period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the
information set forth therein.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

Atlanta, Georgia

March 25, 2003


F-23



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##### Table of Contents



CYTRX CORPORATION

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002
AND 2001


|                                                                              |                                   |                              |  |            |            |            |  |            |        |               |  |   |           |  |  |   |        |  |  |   |            | 
|----------------------------------------------------------------------------- | --------------------------------- | ---------------------------- |  | ---------- | ---------- | ---------- |  | ---------- | ------ | ------------- |  | - | --------- |  |  | - | ------ |  |  | - | ---------- | 
|                                                                              |                                   |                              |  |            |            |            |  |           
|                                                                              |                                   |                              |  | Additions  |            |            |  |           
|                                                                              |                                   |                              |  |            |            |            |  |           
|                                                                              |                                   | Balance at                   |  | Charged to |            | Charged to |  |            |        |              
|                                                                              |                                   | Beginning of                 |  | Costs and  |            | Other      |  |            |        | Balance at   
|Description                                                                   |                                   | Period                       |  | Expenses   |            | Accounts   |  | Deductions |        | End of Period
|                                                                              |                                   |                              |  |            |            |            |  |            |        |              
|Reserve Deducted in the Balance Sheet from the
    Asset to Which it Applies: |                                   |                              |  |            |            |            |  |            |        |               |  |   |           |  |  |   |        |  |  |  
|                                                                              | Allowance for Bad Debts           |                              |  |            |            |            |  |            |        |               |  |   |           |  |  |   |        |  |  |   |           
|                                                                              |                                   | Year ended December 31, 2003 |  | $          |           |            |  | $          | 4,939  |               |  | $ | 16,640    |  |  | $ | 21,579 |  |  | $ |           | 
|                                                                              |                                   | Year ended December 31, 2002 |  |            | 39,050     |            |  |            |       |               |  |   |          |  |  |   | 39,050 |  |  |   |           | 
|                                                                              |                                   | Year ended December 31, 2001 |  | $          | 11,900     |            |  | $          | 27,150 |               |  | $ |          |  |  | $ |       |  |  | $ | 39,050     | 
|                                                                              | Allowance for Deferred Tax Assets |                              |  |            |            |            |  |            |        |               |  |   |           |  |  |   |        |  |  |   |           
|                                                                              |                                   | Year ended December 31, 2003 |  | $          | 29,064,000 |            |  | $          |       |               |  | $ | 7,414,000 |  |  | $ |       |  |  | $ | 36,478,000 | 
|                                                                              |                                   | Year ended December 31, 2002 |  |            | 27,088,000 |            |  |            |       |               |  |   | 1,976,000 |  |  |   |       |  |  |   | 29,064,000 | 
|                                                                              |                                   | Year ended December 31, 2001 |  | $          | 27,182,000 |            |  | $          |       |               |  | $ |          |  |  | $ | 94,000 |  |  | $ | 27,088,000 | 

F-24



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##### Table of Contents



BLIZZARD GENOMICS, INC.

(A Development-stage Company)


BALANCE SHEETS

|                                            |                                                                                                |              |            |            |   |   |          |            |  
|------------------------------------------- | ---------------------------------------------------------------------------------------------- | ------------ | ---------- | ---------- | - | - | -------- | ---------- | -
|                                            |                                                                                                |             
|                                            |                                                                                                | December 31,
|                                            |                                                                                                |             
|                                            |                                                                                                | 2003         |            | 2002      
|                                            |                                                                                                |              |            |           
|ASSETS                                     
|Current assets:                             |                                                                                                |              |            |            |   |   |          |           
|                                            | Cash                                                                                           |              | $          | 337        |   |   | $        | 28,264     |  
|                                            | Prepaid expense                                                                                |              |            | 542        |   |   |          | 810        |  
|                                            |                                                                                                |              |            |            |   |   |          |           
|Total current assets                        |                                                                                                |              | 879        |            |   |   | 29,074   |           
|Property and equipment, net                 |                                                                                                |              | 1,582      |            |   |   | 13,274   |           
|Lease deposit                               |                                                                                                |              |           |            |   |   | 1,920    |           
|                                            |                                                                                                |              |            |            |   |   |          |           
|Total assets                                |                                                                                                | $            | 2,461      |            |   | $ | 44,268   |           
|                                            |                                                                                                |              |            |            |   |   |          |           
|LIABILITIES AND SHAREHOLDERS
    DEFICIT  
|Current liabilities:                        |                                                                                                |              |            |            |   |   |          |           
|                                            | Accounts payable                                                                               |              | $          | 308,285    |   |   | $        | 288,527    |  
|                                            | Accounts payable  shareholder                                                                 |              |            | 174,902    |   |   |          | 134,725    |  
|                                            | Notes payable                                                                                  |              |            | 25,000     |   |   |          |           |  
|                                            | Accrued liabilities                                                                            |              |            | 560,460    |   |   |          | 167,137    |  
|                                            |                                                                                                |              |            |            |   |   |          |           
|Total current liabilities                   |                                                                                                |              | 1,068,647  |            |   |   | 590,389  |           
|                                            |                                                                                                |              |            |            |   |   |          |           
|Long-term convertible notes payable, net    |                                                                                                |              | 191,040    |            |   |   | 129,708  |           
|                                            |                                                                                                |              |            |            |   |   |          |           
|Commitments and contingencies               |                                                                                                |              |            |            |   |   |          |           
|Shareholders deficit:                      |                                                                                                |              |            |            |   |   |          |           
|                                            | Common stock, no par value; 10,000,000 shares
    authorized; 3,251,109 issued and outstanding |              |            | 2,359,303  |   |   |          | 2,350,803  |  
|                                            | Deficit accumulated during the development stage                                               |              |            | (3,616,529 | ) |   |          | (3,026,632 | )
|                                            |                                                                                                |              |            |            |   |   |          |           
|Total shareholders deficit                 |                                                                                                |              | (1,257,226 | )          |   |   | (675,829 | )         
|                                            |                                                                                                |              |            |            |   |   |          |           
|Total liabilities and shareholders deficit |                                                                                                | $            | 2,461      |            |   | $ | 44,268   |           
|                                            |                                                                                                |              |            |            |   |   |          |           

The accompanying notes are an integral part of
these balance sheets.

F-25



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##### Table of Contents



BLIZZARD GENOMICS, INC.

(A Development-stage Company)


STATEMENTS OF OPERATIONS

|                                     |                            |                          |          |                |  |      |            |             |  |   |          |         |  |   |            |           | 
|------------------------------------ | -------------------------- | ------------------------ | -------- | -------------- |  | ---- | ---------- | ----------- |  | - | -------- | ------- |  | - | ---------- | --------- | 
|                                     |                            |                          |          |                |  |      |            | December 1,
|                                     |                            |                          |          | 1999          
|                                     |                            | Years Ended December 31, |          | (Inception) to
|                                     |                            |                          |          | December 31,  
|                                     |                            | 2003                     |          | 2002           |  | 2001 |            | 2003       
|                                     |                            |                          |          |                |  |      |            |            
|Revenues                             |                            | $                        |         |                |  | $    |           |             |  | $ |         |         |  | $ |           |          
|Expenses:                            |                            |                          |          |                |  |      |            |             |  |   |          |         |  |   |            |          
|                                     | Research and development   |                          |          | 139,992        |  |      |            | 970,268     |  |   |          | 493,590 |  |   |            | 2,003,850 | 
|                                     | Marketing                  |                          |          | 29,600         |  |      |            | 55,557      |  |   |          | 29,053  |  |   |            | 114,210   | 
|                                     | General and administrative |                          |          | 378,712        |  |      |            | 755,724     |  |   |          | 269,737 |  |   |            | 1,516,662 | 
|                                     |                            |                          |          |                |  |      |            |             |  |   |          |         |  |   |            |          
|Total expenses                       |                            |                          | 548,304  |                |  |      | 1,781,549  |             |  |   | 792,380  |         |  |   | 3,634,722  |          
|                                     |                            |                          |          |                |  |      |            |             |  |   |          |         |  |   |            |          
|Loss before other income and expense |                            |                          | (548,304 | )              |  |      | (1,781,549 | )           |  |   | (792,380 | )       |  |   | (3,634,722 | )        
|Interest expense                     |                            |                          | (34,663  | )              |  |      | (10,220    | )           |  |   |         |         |  |   | (44,883    | )        
|Interest income                      |                            |                          |         |                |  |      | 5,116      |             |  |   | 56,125   |         |  |   | 70,006     |          
|Loss on disposal of equipment        |                            |                          | (6,930   | )              |  |      |           |             |  |   |         |         |  |   | (6,930     | )        
|                                     |                            |                          |          |                |  |      |            |             |  |   |          |         |  |   |            |          
|Net loss                             |                            | $                        | (589,897 | )              |  | $    | (1,786,653 | )           |  | $ | (736,255 | )       |  | $ | (3,616,529 | )        
|                                     |                            |                          |          |                |  |      |            |             |  |   |          |         |  |   |            |          

The accompanying notes are an integral part of
these financial statements.

F-26



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##### Table of Contents



BLIZZARD GENOMICS, INC.

(A Development-stage Company)


STATEMENTS OF SHAREHOLDERS EQUITY
(DEFICIT)

|                                                                                                 |  |              |           |             |  |         |           |       |  |   |            |   |  |   |            |  
|------------------------------------------------------------------------------------------------ |  | ------------ | --------- | ----------- |  | ------- | --------- | ----- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                                 |  |              |           |             |  | Deficit |           |      
|                                                                                                 |  |              |           | Accumulated |  |        
|                                                                                                 |  | Common Stock |           | During the  |  |        
|                                                                                                 |  |              |           | Development |  |        
|                                                                                                 |  | Shares       |           | Amount      |  | Stage   |           | Total
|                                                                                                 |  |              |           |             |  |         |           |      
|Initial capitalization                                                                           |  |              | 1,010,000 |             |  | $       | 1,112     |       |  | $ |           |   |  | $ | 1,112      |  
|Common stock issued in connection with December
    1999 sublicense agreement                    |  |              | 673,332   |             |  |         | 200,000   |       |  |   |           |   |  |   | 200,000    |  
|Net loss  1999                                                                                  |  |              |          |             |  |         |          |       |  |   | (200,000   | ) |  |   | (200,000   | )
|                                                                                                 |  |              |           |             |  |         |           |       |  |   |            |   |  |   |            |  
|Balance at December 31, 1999                                                                     |  |              | 1,683,332 |             |  |         | 201,112   |       |  |   | (200,000   | ) |  |   | 1,112      |  
|Common stock issued in November 2000 upon the
    exercise of stock warrants at $0.20 per share  |  |              | 67,333    |             |  |         | 13,467    |       |  |   |           |   |  |   | 13,467     |  
|Common stock issued in connection with December
    2000 sublicense agreement at $1.00 per share |  |              | 200,000   |             |  |         | 200,000   |       |  |   |           |   |  |   | 200,000    |  
|Common stock issued for cash during 2000 at
    $1.254 per share                                 |  |              | 1,300,444 |             |  |         | 1,630,577 |       |  |   |           |   |  |   | 1,630,577  |  
|Net loss  2000                                                                                  |  |              |          |             |  |         |          |       |  |   | (303,724   | ) |  |   | (303,724   | )
|                                                                                                 |  |              |           |             |  |         |           |       |  |   |            |   |  |   |            |  
|Balance at December 31, 2000                                                                     |  |              | 3,251,109 |             |  |         | 2,045,156 |       |  |   | (503,724   | ) |  |   | 1,541,432  |  
|Issuance of compensatory stock options                                                           |  |              |          |             |  |         | 25,936    |       |  |   |           |   |  |   | 25,936     |  
|Net loss  2001                                                                                  |  |              |          |             |  |         |          |       |  |   | (736,255   | ) |  |   | (736,255   | )
|                                                                                                 |  |              |           |             |  |         |           |       |  |   |            |   |  |   |            |  
|Balance at December 31, 2001                                                                     |  |              | 3,251,109 |             |  |         | 2,071,092 |       |  |   | (1,239,979 | ) |  |   | 831,113    |  
|Issuance of compensatory stock options and
    warrants                                          |  |              |          |             |  |         | 254,211   |       |  |   |           |   |  |   | 254,211    |  
|Issuance of warrants with convertible debt                                                       |  |              |          |             |  |         | 25,500    |       |  |   |           |   |  |   | 25,500     |  
|Net loss  2002                                                                                  |  |              |          |             |  |         |          |       |  |   | (1,786,653 | ) |  |   | (1,786,653 | )
|                                                                                                 |  |              |           |             |  |         |           |       |  |   |            |   |  |   |            |  
|Balance at December 31, 2002                                                                     |  |              | 3,251,109 |             |  |         | 2,350,803 |       |  |   | (3,026,632 | ) |  |   | (675,829   | )
|Issuance of warrants with convertible debt                                                       |  |              |          |             |  |         | 8,500     |       |  |   |           |   |  |   | 8,500      |  
|Net loss  2003                                                                                  |  |              |          |             |  |         |          |       |  |   | (589,897   | ) |  |   | (589,897   | )
|                                                                                                 |  |              |           |             |  |         |           |       |  |   |            |   |  |   |            |  
|Balance at December 31, 2003                                                                     |  |              | 3,251,109 |             |  | $       | 2,359,303 |       |  | $ | (3,616,529 | ) |  | $ | (1,257,226 | )
|                                                                                                 |  |              |           |             |  |         |           |       |  |   |            |   |  |   |            |  

The accompanying notes are an integral part of
these financial statements.

F-27



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##### Table of Contents



BLIZZARD GENOMICS, INC.

(A Development-stage Company)


STATEMENTS OF CASH FLOWS

|                                                                                |                                          |                                                              |                                |                |        |         |            |             |         |         |           |   |        |        |            |        |         |         |  
|------------------------------------------------------------------------------- | ---------------------------------------- | ------------------------------------------------------------ | ------------------------------ | -------------- | ------ | ------- | ---------- | ----------- | ------- | ------- | --------- | - | ------ | ------ | ---------- | ------ | ------- | ------- | -
|                                                                                |                                          |                                                              |                                |                |        |         |            | December 1,
|                                                                                |                                          |                                                              |                                | 1999          
|                                                                                |                                          | Years Ended December 31,                                     |                                | (Inception) to
|                                                                                |                                          |                                                              |                                | December 31,  
|                                                                                |                                          | 2003                                                         |                                | 2002           |        | 2001    |            | 2003       
|                                                                                |                                          |                                                              |                                |                |        |         |            |            
|Cash flows from operating
    activities:                                       |                                          |                                                              |                                |                |        |         |            |             |         |         |           |   |        |        |            |       
|Net loss                                                                        |                                          | $                                                            | (589,897                       | )              |        | $       | (1,786,653 | )           |         | $       | (736,255  | ) |        | $      | (3,616,529 | )     
|Adjustments to reconcile net loss to net cash
    used in operating activities: |                                          |                                                              |                                |                |        |         |            |             |         |         |           |   |        |        |            |       
|                                                                                |                                          | Depreciation and amortization                                |                                |                | 4,449  |         |            |             | 4,229   |         |           |   | 2,085  |        |            |        | 12,411  |        
|                                                                                |                                          | Loss on sale of assets                                       |                                |                | 6,930  |         |            |             |        |         |           |   |       |        |            |        | 6,930   |        
|                                                                                |                                          | Research and development from issuance of common
    stock   |                                |                |       |         |            |             |        |         |           |   |       |        |            |        | 400,000 |        
|                                                                                |                                          | Write-off of sublicense agreement and
    organization costs |                                |                |       |         |            |             | 61,769  |         |           |   | 31,880 |        |            |        | 93,649  |        
|                                                                                |                                          | Accretion of interest on debt discount                       |                                |                | 19,832 |         |            |             | 5,208   |         |           |   |       |        |            |        | 25,040  |        
|                                                                                |                                          | Compensation from issuance of options                        |                                |                |       |         |            |             | 254,211 |         |           |   | 25,936 |        |            |        | 280,147 |        
|                                                                                |                                          | Changes in assets and liabilities:                           |                                |                |        |         |            |             |         |         |           |   |        |        |            |        |         |        
|                                                                                |                                          |                                                              | Prepaid expense                |                |        | 268     |            |             |         | (810    | )         |   |        | 1,206  |            |        |         | (542    | )
|                                                                                |                                          |                                                              | Lease deposit                  |                |        | 1,920   |            |             |         |        |           |   |        | (1,920 | )          |        |         |        |  
|                                                                                |                                          |                                                              | Accounts payable               |                |        | 19,758  |            |             |         | 189,093 |           |   |        | 92,403 |            |        |         | 306,144 |  
|                                                                                |                                          |                                                              | Accounts payable  shareholder |                |        | 40,177  |            |             |         | 43,862  |           |   |        | (7,500 | )          |        |         | 84,039  |  
|                                                                                |                                          |                                                              | Other liabilities              |                |        | 393,323 |            |             |         | 164,637 |           |   |        | 2,500  |            |        |         | 560,460 |  
|                                                                                |                                          |                                                              |                                |                |        |         |            |             |         |         |           |   |        |        |            |       
|Net cash used in operating activities                                           |                                          |                                                              | (103,240                       | )              |        |         | (1,064,454 | )           |         |         | (589,665  | ) |        |        | (1,848,251 | )     
|                                                                                |                                          |                                                              |                                |                |        |         |            |             |         |         |           |   |        |        |            |       
|Cash flows from investing
    activities:                                       |                                          |                                                              |                                |                |        |         |            |             |         |         |           |   |        |        |            |       
|Purchase of property and equipment                                              |                                          |                                                              |                               |                |        |         | (4,904     | )           |         |         | (10,877   | ) |        |        | (17,110    | )     
|Proceeds received from the sale of assets                                       |                                          |                                                              | 313                            |                |        |         |           |             |         |         |          |   |        |        | 313        |       
|Payment for other assets                                                        |                                          |                                                              |                               |                |        |         |           |             |         |         |          |   |        |        | (2,000     | )     
|                                                                                |                                          |                                                              |                                |                |        |         |            |             |         |         |           |   |        |        |            |       
|Net cash provided by (used in) investing
    activities                         |                                          |                                                              | 313                            |                |        |         | (4,904     | )           |         |         | (10,877   | ) |        |        | (18,797    | )     
|                                                                                |                                          |                                                              |                                |                |        |         |            |             |         |         |           |   |        |        |            |       
|Cash flows from financing
    activities:                                       |                                          |                                                              |                                |                |        |         |            |             |         |         |           |   |        |        |            |       
|Proceeds from issuance of common stock                                          |                                          |                                                              |                               |                |        |         |           |             |         |         |          |   |        |        | 1,645,044  |       
|Payment due to shareholder                                                      |                                          |                                                              |                               |                |        |         |           |             |         |         |          |   |        |        | (2,659     | )     
|Proceeds from issuance of notes payable                                         |                                          |                                                              | 25,000                         |                |        |         |           |             |         |         |          |   |        |        | 25,000     |       
|Proceeds from issuance of convertible notes and
    warrants                    |                                          |                                                              | 50,000                         |                |        |         | 150,000    |             |         |         |          |   |        |        | 200,000    |       
|                                                                                |                                          |                                                              |                                |                |        |         |            |             |         |         |           |   |        |        |            |       
|Net cash provided by financing activities                                       |                                          |                                                              | 75,000                         |                |        |         | 150,000    |             |         |         |          |   |        |        | 1,867,385  |       
|                                                                                |                                          |                                                              |                                |                |        |         |            |             |         |         |           |   |        |        |            |       
|(Decrease) increase in cash                                                     |                                          |                                                              | (27,927                        | )              |        |         | (919,358   | )           |         |         | (600,542  | ) |        |        | 337        |       
|Cash at beginning of period                                                     |                                          |                                                              | 28,264                         |                |        |         | 947,622    |             |         |         | 1,548,164 |   |        |        |           |       
|                                                                                |                                          |                                                              |                                |                |        |         |            |             |         |         |           |   |        |        |            |       
|Cash at end of period                                                           |                                          | $                                                            | 337                            |                |        | $       | 28,264     |             |         | $       | 947,622   |   |        | $      | 337        |       
|                                                                                |                                          |                                                              |                                |                |        |         |            |             |         |         |           |   |        |        |            |       
|Supplemental disclosure of cash flow information:                               |                                          |                                                              |                                |                |        |         |            |             |         |         |           |   |        |        |            |       
|                                                                                | Cash paid during the period for interest |                                                              | $                              | 14,831         |        |         | $          | 5,012       |         |         | $         |  |        |        | $          | 19,843 |        
|                                                                                | Cash paid during the period for taxes    |                                                              | $                              |               |        |         | $          |            |         |         | $         |  |        |        | $          |       |        

The accompanying notes are an integral part of
these financial statements.

F-28



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##### Table of Contents



BLIZZARD GENOMICS, INC.

(A Development-stage Company)


NOTES TO FINANCIAL STATEMENTS

Years Ended December 31, 2003, 2002 and
2001 and the Period From

December 1, 1999 (Date of Inception) to
December 31, 2003




|   |                                                            
|-- | -----------------------------------------------------------
|1. | Nature of Organization and Development Stage
    Operations

Blizzard Genomics, Inc. (the Company or Blizzard)
is a Minnesota Corporation incorporated and capitalized on
December 1, 1999. The Company is a development-stage
company that, pursuant to an exclusive worldwide sublicense
agreement, participates in the design, development and eventual
marketing and selling of instrumentation used in genomics
research.

To date, the Company has relied primarily upon
selling equity securities and borrowings to generate the funds
needed to finance its operations. Currently, the Company
doesnt have enough cash on hand to sustain operations and
is trying to find additional investors to invest capital. As of
December 31, 2003, current liabilities exceed current
assets by $1,067,768. Unless the Company raises significant
amounts of cash in the near future, the Company will not be able
to continue as a going concern.



|   |                                               
|-- | ----------------------------------------------
|2. | Summary of Significant Accounting
    Policies

Property and
Equipment Property and
equipment are stated at cost and depreciated using the
straight-line methods based on the estimated useful lives
(generally three to five years) of the related assets. Whenever
there is a triggering event that might suggest an impairment,
management evaluates the realizability of recorded long-lived
assets to determine whether their carrying values have been
impaired. The Company records impairment losses on long-lived
assets used in operations when events and circumstances indicate
that the assets might be impaired and the nondiscounted cash
flows estimated to be generated by those assets are less than
the carrying amount of those assets. Any impairment loss is
measured by comparing the fair value of the asset to its
carrying amount.

Patent
Costs Through 2001, costs
incurred to reimburse the University of Minnesota (UofM) for
patent related costs, as provided for in the sublicense
agreement (Note 4), were capitalized. As the genomics products
were still in development, no amortization was recognized during
the period from December 1, 1999 (date of inception) to
December 31, 2001.

During 2002, all previously capitalized patent
costs of $58,983 were written-off due to the continued
uncertainty that Blizzard will develop viable genomics products
and the substantial doubt about Blizzards ability to
continue as a going concern. Costs to reimburse UofM for
patent-related costs will continue to be expensed as incurred
until the Company has developed viable genomics products. The
write-off of previously capitalized costs is classified in
general and administrative expense in the accompanying statement
of operations.

Research and Development
Costs Research and
development expenses consist of costs incurred for direct
research and are expensed as incurred.

Stock Based
Compensation Statements of
Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation(SFAS 123),
establishes a fair value method of accounting for stock-based
compensation plans and for transactions in which a company
acquires goods or services from non-employees in exchange for
equity instruments. These transactions must be accounted for
based on the fair value of the consideration received or the
fair value of the equity instrument issued, whichever is more
reliably measurable. The Company has accounted for the
transactions based on the fair values of the equity instruments
issued and has used the guidance in the Emerging Issues Task
Force Abstract (EITF) No. 96-18, Accounting for Equity
Instruments that are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services,to measure and record the compensation expense.

F-29



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##### Table of Contents



BLIZZARD GENOMICS, INC.


(A Development-stage Company)


NOTES TO FINANCIAL
STATEMENTS  (Continued)

One of the Companys non-employee
related-party consultants who received warrants became an
employee in 2002. The Company accounted for these warrants in
accordance with Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to
Employees, and related interpretations once the individual
became an employee. No stock-based employee compensation cost is
reflected in the accompanying statement of operations from the
time the individual became an employee, as the warrants had an
exercise price equal to or greater than the market value of the
underlying common stock on the date of the individual became an
employee.

In December 2002, the Financial Accounting
Standards Board (FASB) issued SFAS No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure,
an amendment of FASB Statement No. 123(SFAS 148).
SFAS 148 amends SFAS 123, Accounting for
Stock-Based Compensation, to provide alternative methods of
transition for companies that voluntarily change to the fair
value based method of accounting for stock-based compensation.
It also amends the disclosure requirements of SFAS No. 123
to require prominent disclosures in both annual and quarterly
financial statements regarding the method of accounting for
stock-based employee compensation and the effect of the method
used on reported results. The Company will continue to account
for employee-based stock compensation in accordance with APB
No. 25 and related interpretations.

The following table illustrates the effect on net
loss if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee
compensation:

|                                                                                                   |  |                          |          |                     |  |      |            |      |  |   |          |   |  |   |            |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------ | -------- | ------------------- |  | ---- | ---------- | ---- |  | - | -------- | - |  | - | ---------- | -
|                                                                                                   |  |                          |          | December 1,        
|                                                                                                   |  | Years Ended December 31, |          | 1999 (Inception) to
|                                                                                                   |  |                          |          | to December 31,    
|                                                                                                   |  | 2003                     |          | 2002                |  | 2001 |            | 2003
|                                                                                                   |  |                          |          |                     |  |      |            |     
|Net loss as reported                                                                               |  | $                        | (589,897 | )                   |  | $    | (1,786,653 | )    |  | $ | (736,255 | ) |  | $ | (3,616,529 | )
|Deduct: Total employee stock-based compensation
    expense determined under the fair value method |  |                          |         |                     |  |      | (40,906    | )    |  |   |         |   |  |   | (40,906    | )
|                                                                                                   |  |                          |          |                     |  |      |            |      |  |   |          |   |  |   |            |  
|Pro forma net loss                                                                                 |  | $                        | (589,897 | )                   |  | $    | (1,827,559 | )    |  | $ | (736,255 | ) |  | $ | (3,657,435 | )
|                                                                                                   |  |                          |          |                     |  |      |            |      |  |   |          |   |  |   |            |  

Income Taxes
Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes
currently due plus deferred taxes, if any. Deferred taxes
represent the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.

Fair Value of Financial
Instruments The carrying amounts
reported in the balance sheets for cash, accounts payable,
accounts payable  shareholder, and notes payable
approximate their fair values.

Use of
Estimates The preparation of
financial statements in conformity with accounting principles
generally accepted in the United States requires management to
make certain estimates and assumptions about the future outcome
of current transactions which may affect the reporting and
disclosure of these transactions. Accordingly, actual results
could differ from those estimates used in the preparation of
these financial statements.

Recently Issued Accounting
Standards In May 2003, the FASB
issued Statement of Financial Accounting Standards No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity
(SFAS 150). This statement changes the
classification of certain financial instruments from equities to
liabilities. The three types of financial instruments requiring
the change in classification are: (1) mandatorily
redeemable shares, which the issuing company is obligated to buy
back in exchange for cash or other assets; (2) put options
and forward purchase contracts; and (3) obligations that
can be settled with shares, the monetary value of which is
fixed, tied solely or predominantly to a variable such

F-30



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##### Table of Contents



BLIZZARD GENOMICS, INC.


(A Development-stage Company)


NOTES TO FINANCIAL
STATEMENTS  (Continued)

as a market index, or varies inversely with the
value of the issuers shares. This statement is effective
for all financial instruments entered into or modified after
May 31, 2003, and is otherwise effective at the beginning
of the first interim period beginning after June 15, 2003.
The Company adopted SFAS 150 as of July 1, 2003, which
did not have a material impact on its financial statements.

In April 2003, the FASB issued Statement of
Financial Accounting Standards No. 149, Amendment
of Statement 133 on Derivative Instruments and Hedging
Activities (SFAS 149). This statement amends and
clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded
in other contracts (collectively referred to as derivatives) and
for hedging activities under FASB Statement No. 133,
Accounting for Derivative Instruments and Hedging
Activities. This Statement is generally effective for
contracts entered into or modified after June 30, 2003 and
hedging relationships designated after June 30, 2003. The
Company will apply the provisions of SFAS 149 for any
derivative instruments or hedging activities entered into after
June 30, 2003. As the Company has not entered into
derivative instruments or hedging activities, adoption of this
statement does not have a material impact on the Companys
financial statements.



|   |                       
|-- | ----------------------
|3. | Property and Equipment

Property and equipment as of December 31,
2003 and 2002, consist of the following:

|                               |  |      |        |      |  |   |        |  
|------------------------------ |  | ---- | ------ | ---- |  | - | ------ | -
|                               |  | 2003 |        | 2002
|                               |  |      |        |     
|Computer and office equipment  |  | $    | 3,163  |      |  | $ | 13,096 |  
|Furniture and fixtures         |  |      |       |      |  |   | 6,284  |  
|                               |  |      |        |      |  |   |        |  
|                               |  |      | 3,163  |      |  |   | 19,380 |  
|Less: accumulated depreciation |  |      | (1,581 | )    |  |   | (6,106 | )
|                               |  |      |        |      |  |   |        |  
|Property and equipment, net    |  | $    | 1,582  |      |  | $ | 13,274 |  
|                               |  |      |        |      |  |   |        |  

Depreciation expense was $4,449, $4,229, and
$1,157 in 2003, 2002, and 2001, respectively, and $10,555 for
the period from December 1999 (date of inception) to
December 31, 2003.



|   |                                                 
|-- | ------------------------------------------------
|4. | License and Sublicense Agreements and
    Rights

In December 1999, two of the Companys
shareholders, SOTA TEC Fund (STF) and the U of M
entered into a license agreement whereby STF was granted the
exclusive worldwide right to sublicense the right to help
develop, use, sell, lease or otherwise dispose of genomics
products, services, and technology being developed by
U of M (specified R&D activities). In exchange for
the license, STF is required to share with U of M
one-half of any income generated by sublicensing the products,
services and technology resulting from the specified R&D
activities. In addition, STF granted $200,000 to
U of M to fund the on-going specified R&D
activities. U of M retains sole title to any patent
and patent applications filed on the products, services and
technology.

In December 1999, STF and the Company entered
into a sublicense agreement whereby the Company was granted the
worldwide right under U of M s and STFs
license to help develop, use, sell, lease or otherwise dispose
of products, services, and technology being developed by the
specified R&D activities. Pursuant to this sublicense
agreement, the Company issued 673,332 shares of common stock
valued at $200,000. This cost was expensed in 1999 as research
and development. In addition, Blizzard issued warrants to
purchase 67,333 shares of its common stock at $.20 per common
share. These warrants were exercised during the year ended
December 31, 2000.

F-31



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##### Table of Contents



BLIZZARD GENOMICS, INC.


(A Development-stage Company)


NOTES TO FINANCIAL
STATEMENTS  (Continued)

In November 2000, STF and U of M renegotiated the
license agreement under substantially similar terms with STF
granting an additional $200,000 to U of M to fund the
specified R&D activities. The agreement will expire on the
later of the last expiration date of any patent ultimately
issued as a result of the specified R&D activities (or
should no patent be issued, on November 2015) or upon the
termination of the last effective sublicense granted by STF.

In December 2000, STF and the Company
renegotiated their sublicense agreement under substantially
similar terms as the previous sublicense agreement. Pursuant to
the renegotiated sublicense agreement, the Company issued an
additional 200,000 shares of common stock valued at $200,000.
This cost was expensed in 2000 as research and development. The
agreement will expire the later of the last expiration date of
any patent subject to the agreement or December 2015, but in any
case, no later than the termination of the STF and
U of M license agreement.

Pursuant to both sublicense agreements, the
Company agreed to reimburse U of M for all reasonable
out-of-pocket expenses incurred by U of M for STF or
the Companys requested filing, maintenance, and
prosecution of U.S. and foreign patents and patent applications.
Beginning in 2002, all such costs are expensed as incurred.
Prior to 2002, the Company capitalized these costs and reflected
them as an asset in the balance sheet. In 2002, all previously
capitalized costs were written-off (Note 2).



|   |                           
|-- | --------------------------
|5. | Related-Party Transactions



| |                      
| | ---------------------
| | Consulting Agreements

During 2003, 2002 and 2001, the Company entered
into consulting agreements with various parties, including
several related-parties, including officers, directors and
minority shareholders. These transactions are more fully
discussed in Notes 6 and 7.



| |                                                             
| | ------------------------------------------------------------
| | Officer, Director and Minority Shareholder
    Stock Options

The Company had outstanding the following stock
options that were granted to officers, directors and minority
shareholders as additional compensation under the terms of the
related party consulting contracts as of December 31, 2003:

|              |         |  |  |                |  |                 |      |  |  |  |               | 
|------------- | ------- |  |  | -------------- |  | --------------- | ---- |  |  |  | ------------- | 
|Common Shares |         |  |  | Exercise Price |  |                
|Under Option  |         |  |  | Per Share      |  | Expiration Date
|              |         |  |  |                |  |                
|              | 195,000 |  |  |                |  | $               | 1.30 |  |  |  | December 2004 | 
|              | 45,000  |  |  |                |  | $               | 1.30 |  |  |  | May 2005      | 
|              |         |  |  |                |  |                 |      |  |  |  |               | 
|              | 240,000 |  |  |                |  |                 |      |  |  |  |               | 
|              |         |  |  |                |  |                 |      |  |  |  |               | 

Of the total outstanding options granted under
these consulting contracts as discussed above, options to
acquire up to an aggregate of 240,000 shares of common stock are
exercisable at December 31, 2003.

The Company also issued 620,000 warrants to
related parties during 2002. One of these individuals who were
granted warrants as a non-employee consultant became an employee
during the year. The warrants have an exercise price of $1.30, a
contractual life of five years, and will be fully vest by March
2004 (Note 6).

Patent
Costs

At December 31, 2003, and 2002, the Company
was indebted to a shareholder for patent development costs
incurred per the sublicense agreement totaling $174,902 and
$134,725, respectively (Note 4), which is included in accounts
payable  shareholder on the accompanying balance
sheets.

F-32



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##### Table of Contents



BLIZZARD GENOMICS, INC.


(A Development-stage Company)


NOTES TO FINANCIAL
STATEMENTS  (Continued)

Other
Liabilities

At December 31, 2003 and 2002, the Company
was indebted to a shareholder for $17,475, which is included in
other liabilities.

The Company agreed to issue common stock with a
value of $2,500 to a shareholder when the Company next issues
shares of stock in exchange for cash. The Company received
$2,500 of services from the shareholder in exchange for the
promise to issue common stock. The $2,500 commitment is recorded
in other liabilities.

Rent

During 2000 through October 2001, the Company
rented office space on a month-to-month basis from an officer,
who was also a director and shareholder. Rent expense to this
related party was $4,000 and $3,500 for 2001 and 2000,
respectively. Rent expense to this related party for the period
from December 1, 1999 (date of inception) to December 31,
2003 aggregated $7,500.

6.     Shareholders
Deficit

Stock
Options

In November 2000, the Company adopted a stock
option plan. Pursuant to the plan, a committee appointed by the
Board of Directors may grant, at its discretion, qualified or
nonqualified stock options to key individuals, including
employees, non-employee directors and independent contractors.
Option prices for qualified incentive stock options (which may
only be granted to employees) issued under the plan may not be
less than 100% of the fair market value of the common stock on
the date the option is granted (unless the option is granted to
an employee who, at the time of grant, owns more than 10% of the
total combined voting power of all classes of stock of the
Company; in which case the option price may not be less than
110% of the fair market value of the common stock on the date
the option is granted). Option prices for nonqualified stock
options issued under the plan are at the discretion of the
committee and may be equal to, greater or less than fair market
value of the common stock on the date the option is granted. The
options vest over periods determined by the Board of Directors
and are exercisable no later than ten years from date of grant
(unless they are qualified incentive stock options granted to an
employee owning more than 10% of the total combined voting power
of all classes of stock of the Company, in which case the
options are exercisable no later than five years from date of
grant). As of December 31, 2003, the Company has reserved
800,000 shares of common

F-33



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##### Table of Contents



BLIZZARD GENOMICS, INC.


(A Development-stage Company)


NOTES TO FINANCIAL
STATEMENTS  (Continued)

stock for issuance under the plan and has granted
nonqualified options for up to 412,500 shares. A summary of
stock options granted is as follows:

|                             |          |             |         |                |   |   |      |      | 
|---------------------------- | -------- | ----------- | ------- | -------------- | - | - | ---- | ---- | 
|                             |          |             |         | Weighted      
|                             |          |             |         | Average       
|                             |          | Options     |         | Exercise Price
|                             |          | Outstanding |         | Per Share     
|                             |          |             |         |               
|Balance at November 30, 2000 |          |             |        |                |   | $ |     |     
|                             | Granted  |             |         | 339,000        |   |   |      | 1.30 | 
|                             |          |             |         |                |   |   |      |     
|Balance at December 31, 2000 |          |             | 339,000 |                |   |   | 1.30 |     
|                             | Granted  |             |         | 405,500        |   |   |      | 1.30 | 
|                             | Canceled |             |         | (6,000         | ) |   |      | 1.30 | 
|                             |          |             |         |                |   |   |      |     
|Balance at December 31, 2001 |          |             | 738,500 |                |   |   | 1.30 |     
|                             | Granted  |             |         | 186,250        |   |   |      | 1.30 | 
|                             | Canceled |             |         | (363,000       | ) |   |      | 1.30 | 
|                             |          |             |         |                |   |   |      |     
|Balance at December 31, 2002 |          |             | 561,750 |                |   |   | 1.30 |     
|                             | Granted  |             |         | 135,000        |   |   |      | 1.30 | 
|                             | Canceled |             |         | (284,250       | ) |   |      | 1.30 | 
|                             |          |             |         |                |   |   |      |     
|Balance at December 31, 2003 |          |             | 412,500 |                |   |   | 1.30 |     
|                             |          |             |         |                |   |   |      |     

The nonqualified stock options granted to
purchase 412,500 shares of the Companys common stock were
all issued to non-employee consultants, with the exception of an
option granted in 2003 to an employee to purchase 15,000 shares,
including certain related parties (Note 5). The Company has
accounted for these options in accordance with SFAS No. 123
and the guidance provided by EITF 96-18. As a result, the
Company recognized consulting expense when services are received
equal to the fair market value of the stock options issued as
determined at the measurement dates prescribed in EITF 96-18.
The Company estimates fair value of each stock option at the
measurement date by using the Black-Scholes option-pricing model
with the following weighted-average assumptions:

|                                         |  |              |      |      |  |      |       |   |  |  |      |  
|---------------------------------------- |  | ------------ | ---- | ---- |  | ---- | ----- | - |  |  | ---- | -
|                                         |  |             
|                                         |  | December 31,
|                                         |  |             
|                                         |  | 2003         |      | 2002 |  | 2001
|                                         |  |              |      |      |  |     
|Weighted-average estimated option life   |  |              | 1.3  |      |  |      | 2-3.5 |   |  |  | 4    |  
|Expected volatility                      |  |              |     |      |  |      | .4    |   |  |  |     |  
|Weighted-average risk-free interest rate |  |              | 1.45 | %    |  |      | 3.10  | % |  |  | 3.59 | %
|Dividend yield                           |  |              |     |      |  |      |      |   |  |  |     |  

As a result, the Company has recorded $0,
$71,655, and $25,936 of consulting expense relating to these
options for the years ended December 31, 2003, 2002, and
2001, respectively. Consulting expense for the period from
December 1, 1999 (date of inception) to December 31,
2003 aggregated $197,591.

The following table summarizes information about
stock options outstanding at December 31, 2003:

|                    |       |                     |  |             |         |                |  |                |           |          |  |   |      |  |  |  |         |  |  |   |      | 
|------------------- | ----- | ------------------- |  | ----------- | ------- | -------------- |  | -------------- | --------- | -------- |  | - | ---- |  |  |  | ------- |  |  | - | ---- | 
|                    |       |                    
|Options Outstanding |       | Options Exercisable
|                    |       |                    
|                    |       | Weighted-           |  |             |         |               
|                    |       | Average             |  |             |         |                |  | Weighted-     
|                    |       | Number              |  | Remaining   |         | Weighted-      |  | Number         |           | Average 
|Exercise            |       | Outstanding         |  | Contractual |         | Average        |  | Outstanding at |           | Exercise
|Price               |       | at 12/31/03         |  | Life        |         | Exercise Price |  | 12/31/03       |           | Price   
|                    |       |                     |  |             |         |                |  |                |           |         
|                    | $1.30 |                     |  |             | 412,500 |                |  |                | 1.3 years |          |  | $ | 1.30 |  |  |  | 367,500 |  |  | $ | 1.30 | 

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##### Table of Contents



BLIZZARD GENOMICS, INC.


(A Development-stage Company)


NOTES TO FINANCIAL
STATEMENTS  (Continued)

Of the 367,500 options which are exercisable at
December 31, 2003, 240,000 relate to options granted to
related parties (Note 5).

Warrants

On February 1, 2002, the Company granted
300,000 warrants each to two related-party non-employee
consultants. The warrants vest over a two-year period, have an
exercise price of $1.30, and a contractual life of 5 years.

The Company has accounted for these warrants in
accordance with SFAS No. 123 and EITF 96-18. As a result,
the Company has recognized consulting expense equal to the fair
market value of the warrants issued as determined at the
measurement dates prescribed in EITF 96-18. The Company
estimates fair value of each warrant at the measurement date by
using the Black-Scholes option-pricing model with the following
assumptions as of December 31, 2003: no dividend yield,
expected volatility of 0%, contractual option life of
1.3 years, and risk-free interest rate of 1.45%. As of
December 31, 2003, the Companys warrants were
estimated to have no material value. The Company has recorded $0
and $172,825 of consulting expense relating to these warrants in
2003 and 2002, respectively.

During 2002, one of the individuals who was
granted warrants as a non-employee became an employee of the
Company. The Company has elected to account for equity
instruments issued to employees under APB No. 25.
Accordingly, the Company measured the intrinsic value of the
warrants on the date the individual became an employee. No
intrinsic value existed on this date, and thus, no expense
related to these warrants has been recognized since the
individual became an employee (Note 2). Had the warrants
been accounted for in accordance with SFAS No. 123 during
the time the individual was an employee, the Company would have
recognized additional expense of $40,906. The assumptions used
to measure this pro forma expense were the same as those
described in the preceding paragraph.

The Company also granted 20,000 warrants to a
related party during 2002. The warrants vest in April 2003. The
Company has estimated the fair value of these warrants using the
Black-Scholes option-pricing model, with similar assumptions to
those described above. The expense is being recognized ratably
over the 12-month period from the date of grant through the
vesting date in April 2003. As a result, the Company has
recorded $0 and $7,081 of expense relating to these warrants, in
2003 and 2002, respectively.

The Company also issued 5,000 warrants to other
non-employees during the 2002. Total consulting expense
recognized in 2002 related to these warrants was $2,650.

7.     Commitments
and Contingencies

Consulting
Agreements

During 2003, 2002, 2001 and 2000, the Company
entered into consulting agreements with various individuals,
including independent third parties (third parties) and several
officers, directors and minority shareholders (related parties).
Pursuant to the consulting agreements, the individuals provide
the Company guidance and direction with the research and
development and marketing plans for the genomics instrumentation
and/or the overall business strategy and growth of the Company.
The consulting agreements are for various terms expiring through
March, 2004 (or, if applicable, until such time the individual
is no longer employed by U of M) with the exception of one
related party and one third-party consulting agreement, both of
which have month-to-month terms. As of December 31, 2003,
all remaining consulting agreements are based upon an hourly
rate for services rendered on an on-going basis.

In addition to the cash compensation paid to
these individuals, stock options to purchase a total of 412,500
shares (240,000 and 172,500 shares to related parties and third
parties, respectively) of common stock

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##### Table of Contents



BLIZZARD GENOMICS, INC.


(A Development-stage Company)


NOTES TO FINANCIAL
STATEMENTS  (Continued)

at $1.30 per share were also issued to the
consultants (Note 6). Along with the above future minimum cash
consulting payments, the Company will recognize compensation
expense on an annual basis over the consulting contracts
terms for the fair value of such options as determined at that
time.

During 2003, 2002, and 2001, consulting expense
incurred, including expense recognized for the fair value of the
portion of the stock options and warrants relating to the lapsed
period of the contracts, was as follows:

|                  |  |         |        |         |  |       |         |  |  |   |         | 
|----------------- |  | ------- | ------ | ------- |  | ----- | ------- |  |  | - | ------- | 
|                  |  |        
|                  |  | 2003   
|                  |  |        
|                  |  | Third   |        | Related |  |      
|                  |  | Parties |        | Parties |  | Total
|                  |  |         |        |         |  |      
|Cash compensation |  | $       | 80,075 |         |  | $     | 207,001 |  |  | $ | 287,076 | 
|                  |  |         |        |         |  |       |         |  |  |   |         | 

|                         |  |         |        |         |  |       |         |  |  |   |         | 
|------------------------ |  | ------- | ------ | ------- |  | ----- | ------- |  |  | - | ------- | 
|                         |  |        
|                         |  | 2002   
|                         |  |        
|                         |  | Third   |        | Related |  |      
|                         |  | Parties |        | Parties |  | Total
|                         |  |         |        |         |  |      
|Cash compensation        |  | $       | 70,605 |         |  | $     | 277,400 |  |  | $ | 348,005 | 
|Stock-based compensation |  |         | 21,356 |         |  |       | 232,855 |  |  |   | 254,211 | 
|                         |  |         |        |         |  |       |         |  |  |   |         | 
|                         |  | $       | 91,961 |         |  | $     | 510,255 |  |  | $ | 602,216 | 
|                         |  |         |        |         |  |       |         |  |  |   |         | 

|                         |  |         |        |         |  |       |         |  |  |   |         | 
|------------------------ |  | ------- | ------ | ------- |  | ----- | ------- |  |  | - | ------- | 
|                         |  |        
|                         |  | 2001   
|                         |  |        
|                         |  | Third   |        | Related |  |      
|                         |  | Parties |        | Parties |  | Total
|                         |  |         |        |         |  |      
|Cash compensation        |  | $       | 33,850 |         |  | $     | 255,754 |  |  | $ | 289,604 | 
|Stock-based compensation |  |         | 4,811  |         |  |       | 21,125  |  |  |   | 25,936  | 
|                         |  |         |        |         |  |       |         |  |  |   |         | 
|                         |  | $       | 38,661 |         |  | $     | 276,879 |  |  | $ | 315,540 | 
|                         |  |         |        |         |  |       |         |  |  |   |         | 

Total related-party and third-party consulting
expense for the period December 1, 1999 (date of inception) to
December 31, 2003 aggregated $1,031,135 and $210,697,
respectively.

At December 31, 2003 and 2002, $252,515 and
$93,250, respectively, were due to related-party consultants and
included in accounts payable on the accompanying balance sheets.

At December 31, 2003 and 2002, $131,925 and
$19,550, respectively, were due to independent third-party
consultants and included in accounts payable on the accompanying
balance sheets.



| |                
| | ---------------
| | Operating Lease

The Company currently is utilizing a portion of
the office space of a related party at no cost. In 2003, the
Company leased office space under an operating lease agreement
that commenced in November 2001 and expired in October 2003.
Monthly rent under that agreement included a base rent of
approximately $1,100, plus operating expenses.

During 2000 through October 2001, the Company
rented office space from an officer, who was also a director and
shareholder, on a month-to-month basis (Note 5.)

Total rent expense aggregated $12,980, $23,411,
and $9,759 for 2003, 2002, and 2001, respectively. Total rent
expense for the period from December 1, 1999 (date of
inception) to December 31, 2003 aggregated $49,650.

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##### Table of Contents



BLIZZARD GENOMICS, INC.


(A Development-stage Company)


NOTES TO FINANCIAL
STATEMENTS  (Continued)

8.     Income
Taxes

Deferred taxes represent the net tax effects of
the temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and tax
reporting purposes. Temporary differences result primarily from
the recording of tax benefits of net operating loss
carryforwards and start-up costs, of which start-up costs will
be amortized for tax purposes once the Company begins doing
business as defined by tax code.

As of December 31, 2003, the Company has an
insufficient history to support the likelihood of ultimate
realization of the benefit associated with the deferred tax
asset. Accordingly, a valuation allowance has been established
for the full amount of the net deferred tax asset.

Deferred taxes consisted of the following at
December 31:

|                                                  |  |      |            |      |  |   |          |  
|------------------------------------------------- |  | ---- | ---------- | ---- |  | - | -------- | -
|                                                  |  | 2003 |            | 2002
|                                                  |  |      |            |     
|Net operating loss carryforwards and other assets |  | $    | 1,136,000  |      |  | $ | 935,000  |  
|Less valuation allowance                          |  |      | (1,136,000 | )    |  |   | (935,000 | )
|                                                  |  |      |            |      |  |   |          |  
|Net deferred tax asset                            |  | $    |           |      |  | $ |         |  
|                                                  |  |      |            |      |  |   |          |  

At December 31, 2003, the Company had net
operating loss carryforwards aggregating approximately
$2.0 million, which expire through 2023. The utilization of
the carryforwards is dependent upon the Companys ability
to generate sufficient taxable income during the carryforward
period.

9.     Convertible
Notes

The Company issued convertible debentures with
detachable warrants during 2003 and 2002 in the amounts of
$50,000 and $150,000, respectively, to related-party investors.
The face amounts of the debentures aggregate $200,000. The
debentures issued in 2003 and 2002 mature in October 2004 and
March 2004, and bear an annual interest rate of 8%. In the event
that the Company completes, during the term of the debentures, a
sale of common and/or preferred stock for an amount equal to or
in excess of $500,000, the principal and accrued interest due
under the debenture will be automatically converted into the
same class of shares sold in the sale of common and/or preferred
stock at a price per-share equal to 90% of the per share price
for which such shares were sold. In the event the debentures
have not been converted prior to their maturity date, the
holders have the right to convert all, but not less than all, of
the principal and accrued interest due at maturity into shares
of common stock at a conversion price per share equal to 80% of
the fair-value price per-share of common stock at the time of
conversion. Fair value of the common stock will be the price
per-share paid by the last independent outside investor who
purchased shares of common stock of the Company after the date
the debentures were issued having a value of the least $100,000
in a single investment. If no such purchase has been made, fair
value will be defined as the greater of two times per share
revenue (on a fully diluted basis) of the Company for the last
calendar year or $1.30. Through March 30, 2004, the Company
has not sold any shares of common or preferred stock since the
issuance of the debentures.

The convertible debentures include detachable
warrants. The warrants are exercisable into 66,667 shares of the
Companys common stock at an exercise price of $1.30. The
warrants were immediately vested upon issuance of the debentures
and can be exercised at any time through their expiration date
in 2007. The Company accounted for the issuance of the
convertible debentures with detachable warrants under APB
No. 14, Accounting for Convertible Debt and Debt Issued
With Stock Purchase Warrants(APB 14). APB 14 requires the
issuer to allocate fair value to each of the instruments
issued  the warrants and the debentures. The value
allocated to the warrants is a discount of the debentures
face amount and is amortized to interest expense over the life
of the debentures using the effective interest rate method. The
fair value of the warrants

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##### Table of Contents



BLIZZARD GENOMICS, INC.


(A Development-stage Company)


NOTES TO FINANCIAL
STATEMENTS  (Continued)

was determined using the Black-Scholes
option-pricing model with the following assumptions: no dividend
yield; weighted average life of five years; expected volatility
of .4; and weighted average risk-free interest rate of 3.82%. As
a result, the Company allocated $34,000 of fair value to the
warrants, which was initially recorded as a debt discount and
issuance of common stock. During 2003 and 2002, $19,832 and
$5,208, respectively, of the discount was amortized to interest
expense.

10.     Supplemental
Disclosures of Non-Cash Flow Transactions

During the years ended December 31, 2003 and
2002, the Company recorded a reduction in its convertible notes
payable for the value of the stock warrants issued in connection
with such notes in the amount of $8,500 and $25,500,
respectively.

During the year ended December 31, 2001,
$48,166 of patent costs were capitalized and incurred through
issuance of accounts payable  shareholder.

In December 2000, the Company incurred $200,000
of research and development expense pursuant to the sublicense
agreement by issuing 200,000 shares of common stock (Note 4).

In January 2000, in connection with the initial
capitalization, the Company recorded certain assets received and
liabilities assumed as follows and recorded common stock as
follows:

|                               |  |   |         |  
|------------------------------ |  | - | ------- | -
|Property and equipment         |  | $ | 2,270   |  
|Sublicense costs               |  |   | 42,697  |  
|Other assets                   |  |   | 2,642   |  
|Accounts payable               |  |   | (2,141  | )
|Accounts payable  shareholder |  |   | (42,697 | )
|Other liabilities              |  |   | (2,659  | )
|Common stock                   |  |   | (112    | )
|                               |  |   |         |  
|                               |  | $ |        |  
|                               |  |   |         |  

In December 1999, the Company incurred $200,000
of research and development expense pursuant to the sublicense
agreement by issuing 673,332 shares of common stock
(Note 4).

11.     Subsequent
Event

Sale of Certain
Assets On
February 11, 2004, the Company entered into an agreement
with Lokoya Advisors, LLC (LA), whereby LA was
engaged to assist the Company in the sale of some, or all, of
the Companys assets.

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##### Table of Contents



REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS

Board of Directors

Blizzard Genomics, Inc.


We have audited the accompanying balance sheet of
Blizzard Genomics, Inc. as of December 31, 2003 and the
related statements of operations, stockholders deficit,
and cash flows for the year then ended. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial
position of Blizzard Genomics, Inc. at December 31, 2003,
and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles
generally accepted in the United States of America.

The accompanying financial statements have been
prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the financial
statements, the Company has suffered recurring losses from
operations and has a net capital deficiency that raises
substantial doubt about its ability to continue as a going
concern. In addition, as discussed in Note 11 to the financial
statements, on February 11, 2004, the Company entered into
an agreement to sell some or all of the Companys assets.
The financial statements do not include any adjustments that
might result from these uncertainties and potential liquidation.



| |                     
| | --------------------
| | /s/ BDO SEIDMAN, LLP

May 10, 2004

F-39



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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Shareholders

Blizzard Genomics, Inc.


We have audited the accompanying balance sheet of
Blizzard Genomics, Inc. (a development-stage company) as of
December 31, 2002, and the related statements of
operations, shareholders equity (deficit), and cash flows
for the year then ended and for the period December 1, 1999
(date of inception) through December 31, 2002. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit. The
financial statements for the period December 1, 1999 (date
of inception) through December 31, 2001, were audited by
other auditors whose report dated March 26, 2002 expressed
an unqualified opinion on those statements. The financial
statements for the period December 1, 1999 (date of
inception) through December 31, 2001 include a net loss of
$1,239,979. Our opinion on the statements of operations,
shareholders equity (deficit), and cash flows for the
period December 1, 1999 (date of inception) through
December 31, 2002, insofar as it relates to amounts for
prior periods through December 31, 2001, is based solely on
the report of other auditors.

We conducted our audit in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit and
the report of other auditors provide a reasonable basis for our
opinion.

In our opinion, based on our audit and the report
of other auditors, the financial statements referred to above
present fairly, in all material respects, the financial position
of Blizzard Genomics, Inc. at December 31, 2002, and the
results of its operations and cash flows for the year then ended
and for the period from December 1, 1999 (date of
inception) through December 31, 2002, in conformity with
accounting principles generally accepted in the United States.

As discussed in Note 1 to the financial
statements, the Companys recurring losses and net capital
deficiency raise substantial doubt about its ability to continue
as a going concern. The 2002 financial statements do not include
any adjustments that might result from the outcome of this
uncertainty.



| |                      
| | ---------------------
| | /s/ ERNST & YOUNG LLP

Atlanta, Georgia

March 5, 2003


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##### Table of Contents



REPORT OF INDEPENDENT AUDITORS

Board of Directors and Shareholders

Blizzard Genomics, Inc.


St. Paul, Minnesota


We have audited the accompanying statements of
operations, shareholders equity and cash flows for the
year ended December 31, 2001 and the period from
December 1, 1999 (date of inception) to December 31,
2001 of Blizzard Genomics, Inc. (a development-stage company).
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the results
of operations and cash flows for the year then ended and the
period December 1, 1999 (date of inception) to
December 31, 2001 of Blizzard Genomics, Inc. (a
development-stage company), in conformity with accounting
principles generally accepted in the United States of America.



| |     |                                                  
| | --- | -------------------------------------------------
| | /s/ | SILVERMAN OLSON THORVILSON 
       & KAUFMANN LTD



| |                                                  
| | -------------------------------------------------
| | SILVERMAN OLSON THORVILSON & 
       KAUFMANN LTD
| | CERTIFIED PUBLIC ACCOUNTANTS                     

Minneapolis, Minnesota

March 26, 2002


F-41