UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, DC 20549

FORM 10-KSB/A

|ý                                                             | Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934.    
|------------------------------------------------------------- | -----------------------------------------------------------------------------------
|For the Fiscal Year Ended December 31, 2003                  
|Or                                                           
|o                                                             | Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934.
|For the Transition Period
From                             To

Commission File Number: 001-31925

VASO ACTIVE PHARMACEUTICALS, INC.(Name of small business issuer as specified in its charter)

|Delaware(State or other jurisdiction of
incorporation or organization)                      |  | 02-0670926(I.R.S. Employer Identification No.)
|------------------------------------------------------------------------------------------- |  | ----------------------------------------------
|99 Rosewood Drive, Suite 260
Danvers, Massachusetts(Address of principal executive offices) |  | 01923(Zip Code)                               

Issuer's telephone number: (978) 750-1991

---

Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Class A Common Stock, $0.0001 par value

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes o    No ý

Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and will not be contained, to
the best of the registrant's knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this
Form 10-KSB. o

The revenues of the Registrant for the most recent fiscal year were: $53,270

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant as of July 19, 2004 was $3,437,022 based on
5,728,371 shares of Class A common stock held by non-affiliates at an average bid of $.60, as quoted by the OTC Pink Sheets.

The
number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date, was:

|Common stock, Class A, $0.0001 par value |  | 5,828,604 shares outstanding on July 19, 2004
|---------------------------------------- |  | ---------------------------------------------
|Common stock, Class B, $0.0001 par value |  | 4,500,000 shares outstanding on July 19, 2004



---



REASONS FOR AN AMENDED REPORT

This Amended Annual Report on Form 10-KSB/A amends and replaces in its entirety the Company's Annual Report on Form 10-KSB,
filed on March 26, 2004. This Annual Report has been revised, among other things, to address recent events relating to certain Securities and Exchange Commission, or SEC, and United States Food
and Drug Administration, or FDA, regulatory matters, including the SEC's temporary suspension of trading of the Company's securities, a settlement that the Company has reached with the staff of the
SEC pursuant to which the Company will be permanently enjoined from violating the antifraud provision of the Securities Act of 1933, as amended, and the antifraud and reporting provisions of the
Securities Exchange Act of 1934, as amended; the status of the Company's products and product candidates under applicable FDA regulations; the status of the Company's disclosure controls; the recent
commencement of certain litigation against the Company; and the recent unwind of a private placement.

---





VASO ACTIVE PHARMACEUTICALS, INC.  INDEX TO FORM 10-KSB/A

|           |  |                                                                                                                 |  | Page
|---------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|           |  | PART I                                                                                                          |  |     
|Item 1.    |  | Recent Events; Description of Business                                                                          |  | 3   
|Item 2.    |  | Description of Property                                                                                         |  | 27  
|Item 3.    |  | Legal Proceedings                                                                                               |  | 27  
|Item 4.    |  | Submission of Matters to a Vote of the Security Holders                                                         |  | 30  
|           |  | PART II                                                                                                         |  |     
|Item 5.    |  | Market for Common Equity and Related Stockholder Matters                                                        |  | 31  
|Item 6.    |  | Management's Discussion and Analysis                                                                            |  | 34  
|Item 7.    |  | Financial Statements                                                                                            |  | 42  
|Item 8.    |  | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure                            |  | 42  
|Item 8A.   |  | Controls and Procedures                                                                                         |  | 43  
|           |  | PART III                                                                                                        |  |     
|Item 9.    |  | Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act |  | 44  
|Item 10.   |  | Executive Compensation                                                                                          |  | 47  
|Item 11.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                  |  | 49  
|Item 12.   |  | Certain Relationships and Related Transactions                                                                  |  | 52  
|Item 13.   |  | Exhibits and Reports on Form 8-K                                                                                |  | 56  
|Item 14.   |  | Principal Accountant Fees and Services                                                                          |  | 57  
|Signatures |  | 58                                                                                                             

Unless the context requires otherwise, references in this Annual Report to "Vaso Active," "the Company," "we," "our" and "us" refer to Vaso Active
Pharmaceuticals, Inc. "Vaso Active" and our logo are trademarks of the Company. Osteon® and PENtoCORE® are registered trademarks of BioChemics. This Amended Annual
Report also contains trademarks and tradenames of other parties.

FACTORS THAT MAY AFFECT FUTURE RESULTS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These forward-looking statements include, but are not limited to, statements concerning our plans to continue the marketing, commercialization and sale of
our products and product candidates; address certain markets; engage third-party manufacturers; evaluate additional product candidates for subsequent





commercial development; and the potential liability from pending regulatory and litigation matters. In some cases, these statements may be identified by terminology such as "may," "will," "should,"
"expect," " plan," "anticipate," "believe," " estimate," "predict," "potential, " or "continue," or the negative of such terms and other comparable terminology. Although we believe that the
expectations reflected in the forward-looking statements contained herein are reasonable, we cannot guarantee future results, the outcome of pending regulatory and litigation matters, levels of
activity, performance or achievements. These statements involve known and unknown risks and uncertainties that may cause our or our industry's results, levels of activity, performance or achievements
to be materially different from those expressed or implied by forward-looking statements. Factors that may cause or contribute to such differences include, among other things, those discussed under
the captions "Description of Business," "Risk Factors" and "Management's Discussion and Analysis" Forward looking statements not specifically described above also may be found in these and other
sections of this report.

2

---





PART I

ITEM 1. RECENT EVENTS; DESCRIPTION OF BUSINESS

(A) RECENT EVENTS

1.SEC and FDA Regulatory Matters.On April 1, 2004, the SEC temporarily suspended trading of the
Company's securities. The suspension, by its terms, terminated at 11:59 p.m. on April 15, 2004. In the SEC announcement of the trading suspension, the SEC stated that it temporarily
suspended trading in the securities of the Company because of questions regarding the accuracy of assertions by the Company, and by others, in press releases, the Company's annual report, its
registration statement and public statements to investors concerning, among other things: "(1) the FDA approval of certain key products; and (2) the regulatory consequences of the future
application of [its] primary product."

On April 5, 2004, representatives of the Company, together with newly retained special securities counsel and newly retained FDA counsel, met with the staff of the SEC, or Staff,
for the purpose of discussing the concerns that led to the suspension of trading in the Company's securities. During that meeting, the Company stated its intention to review its public disclosure,
press releases and other public statements and to take whatever remedial action might be appropriate. It also represented to the Staff that it would (i) diligently seek to clarify the status of
its products under current FDA regulations, (ii) issue disclosure regarding the FDA regulation of its activities and products and the results of its dialogue with the FDA, and
(iii) endeavor to resolve on a timely basis any concerns communicated by the Staff. The Staff stated that it had been authorized by the SEC to seek injunctive relief against the Company,
articulated the concerns that gave rise to the suspension of trading, and informally requested



that the Company provide certain information to the Staff. The Company agreed to cooperate with the Staff, committed to review its disclosure promptly and committed to take any remedial action that
might be required.

The Company has agreed to a settlement with the Staff pursuant to which the Company will be permanently enjoined from violating certain of the anti-fraud provisions of the
Securities Act and the Exchange Act. The settlement must first be approved by the SEC itself and then by a court. In addition, John J. Masiz, the Company's President and Chief Executive Officer, has
agreed with the Staff to a proposed action by the SEC against him that would prevent him from serving as an officer or director of any public company, including the Company, for a period of five
years. If Mr. Masiz is barred from serving as an officer and director of the Company for this five year period, he will be permitted and intends to continue to be an active employee of the
Company. Please see "Changes in Management" below for additional information on Mr. Masiz's resignation as well as "Risk Factors""If we fail to attract, train and retain additional
highly qualified senior executives and technical and managerial personnel in the near future, our business will suffer." The Company is not aware that the FDA is contemplating any action against the
Company. The Company, through counsel, has engaged in and will continue to maintain a dialogue with the FDA to address any concerns. The Company has submitted new labels for its previously marketed
products to the FDA and has requested FDA comments on any concerns or issues pertaining to these revised labels. As of the date of this report, the FDA has not provided any comment to the Company
based on the agency's review of the labels submitted to the FDA. There is, however, no regulatory requirement that FDA review or provide comment on such materials. The Company is reasonably sure that
these labels are consistent with all FDA regulations and policies.

Due to the ongoing nature of these matters, the Company is unable to definitively assess their impact. However, the Company has committed not to market or sell its products until all
outstanding matters have been addressed to the satisfaction of the SEC and until the Company is reasonably sure that the marketing and sale of its products is consistent with the FDA's requirements
and policies. This commitment may have a material adverse impact on the Company. The Company anticipates that the marketing and sale of Athlete's Relief, Osteon and Termin8 will resume by
the end of 2004, although

3

---



there is no guarantee of this. When appropriate, the Company will make additional public announcements and will file public reports with the SEC regarding the status of its products under applicable
FDA regulations.

2.Nasdaq Stock Market Matters.By letter dated April 2, 2004, the Nasdaq Listing Investigations
department of The Nasdaq Stock Market, Inc., or Nasdaq, notified the Company that it had commenced an inquiry to ensure the Company's ongoing compliance with Nasdaq's inclusion requirements and
requested certain information from the Company. The letter further disclosed that after review of the information provided by the Company, Nasdaq could take any action that might be appropriate under
its Marketplace Rules including removal of the Company's securities from Nasdaq. In view of the substantial administrative and cash burdens being borne by the Company at that time and the substantial
legal costs anticipated with respect to the SEC and FDA matters, the Company determined



that it was in the best interest of shareholders to voluntarily cause its shares to be removed from Nasdaq and focus its attention and resources on addressing the SEC and FDA concerns. The Company's
securities were voluntarily delisted, effective the opening of the markets on Thursday, April 8, 2004. At an appropriate time, the Company will seek to cause its securities to be quoted on an
exchange, Nasdaq or other automated quotation system. There can be no assurance that the Company will be successful or that an organized market for the Company's securities will develop. If the
Company is unable to list its securities on a national exchange or on an automated securities quotation system in the future, it could have a material adverse impact on our ability to raise future
capital (See "Management's Discussion and Analysis""Liquidity and Capital Resources").

3.Litigation.In April, May, and June 2004, the Company and certain of its officers were sued in
several
purported securities class action lawsuits filed in the United States District Court for the District of Massachusetts. The complaints, which seek equitable and monetary relief, an unspecified amount
of damages, with interest, attorneys fees and costs, allegedly were filed on behalf of purchasers of the Company's Class A common stock during the period December 11, 2003 to
March 31, 2004 and allege that during that period, the defendants violated the federal securities laws by allegedly failing to make accurate and complete disclosures concerning the Company, its
financial condition, its business operations and future prospects, the clinical trial and endorsement of the Company's Termin8 anti-fungal product (previously known as "deFEET") and the
institutional demand for the Company's securities. These complaints are captioned as follows:Dennis E. Smith v. Vaso Active Pharmaceuticals, Inc., et
al., Civ. No. 04-10708 (RCL) (D. Mass.);Richard Shapiro v. Vaso Active Pharmaceuticals, Inc., et
al., Civ. No. 04-10720 (RCL) (D. Mass.);Christopher Pepin v. Vaso Active Pharmaceuticals, Inc., et
al., Civ. No. 04-10763 (RCL) (D. Mass.);Modhi Gude, et al. v. Vaso Active Pharmaceuticals, Inc., et
al., Civ. No. 04-10789 (RCL) (D. Mass.);Kim Benedetto, et al. v. Vaso Active Pharmaceuticals, Inc., et
al., Civ. No. 04-10808 (RCL) (D. Mass.);Dean Dummer v. Vaso Active Pharmaceuticals, Inc., et al.,
Civ. No. 04-10819 (RCL) (D. Mass.);Edward Tovrea v. Vaso Active Pharmaceuticals, Inc., et al., Civ.
No. 04-10851 (RCL);Kourosh Alipor v. Vaso Active Pharmaceuticals, Inc., et al., Civ. No. 04-10877 (RCL); Paul E. Bostrom v. Vaso Active Pharmaceuticals, Inc.,
et al., Civ. No. 04-10948 (RCL);Ira A. Turret
Sep-Ira Dated 01/24/02 v. Vaso Active Pharmaceuticals, Inc., et al., Civ. No. 04-10980 (RCL);Richard Pagona v.
Vaso Active Pharmaceuticals, Inc., et al., Civ. No. 04-11100 (RCL);James Karanfilian v. Vaso Active
Pharmaceuticals, Inc., et al., Civ. No. 04-11101 (RCL); andCharles Robinson v. Vaso Active Pharmaceuticals, Inc., et
al., Civ. No. 04-11221 (RCL). The Court has consolidated the above-referenced cases, other than theTovreaandKaranfiliancomplaints, under the captionIn Re Vaso Active Pharmaceuticals Securities Litigation,
Civ. No. 04-10708 (RCL). Although the Company intends to vigorously defend against these cases, the litigation process is inherently uncertain and there can be no guarantee as to
the ultimate outcome of these matters. There is also no guarantee that these will be the only lawsuits brought against the Company with respect to these matters.

4

---



The Company has also been named as a nominal defendant in two shareholder derivative actions filed in the United States District Court for the District of Massachusetts, the first filed
in April 2004 against its directors and certain of its officers and against BioChemics, Inc. entitledJoseph Rosenkrantz v. BioChemics, Inc., et
al., Civ. No. 04-10792 (RCL) (D. Mass.) and the second filed in




June 2004, also against the Company's directors and certain of its officers and against BioChemics, Inc. entitledWilliam Pomeroy v. BioChemics Inc., et
al., Civ. No. 04-11399 (RCL) (D. Mass.).

The complaints allege, among other things, that the alleged conduct challenged in the securities cases pending against the Company in Massachusetts (described above) constitutes a breach
of the defendants' fiduciary duties to the Company. The complaints seek equitable and monetary relief, an unspecified amount of damages, and attorneys and other fees, costs and expenses, ostensibly on
behalf of the Company.

An unfavorable outcome in one or more of these related cases could have a material adverse effect on the Company's financial position, liquidity and results of operations. In addition to
the costs of defending these cases, the Company may provide indemnification for expenses and losses that may be incurred by its directors and officers as parties to one or more of these cases.
Although the Company will seek coverage under its director and officer liability insurance policy, there can be no assurance that the Company can obtain reimbursement of all of its
out-of-pocket defense costs and any amounts paid in settlement or pursuant to judgments in the event of unfavorable outcomes in one or more of these cases.

Accordingly, the costs of defending these cases and providing indemnification to our directors and officers may be substantial. However, because of the uncertainty of estimating the
potential financial statement impact of any of these actions with any reasonable degree of accuracy, at this time the Company has not reserved for any potential liability or costs that may arise as a
result of this litigation except for the $200,000 insurance deductible that we reserved as of March 31, 2004. While the cases are in very preliminary stages and the outcomes are not
predictable, if a substantial amount is payable by the Company and is not reimbursed through its director and officer liability policy, this will have a material adverse effect on the Company's
financial position and liquidity. There can be no assurance that the Company's insurer will admit liability to reimburse the Company with respect to any of the claims asserted in any of the litigation
against the Company or its officers or directors or that coverage limits will be sufficient.

4.Unwinding of March 16, 2004 Private Investment in Public Equity.On March 16, 2004, the Company
entered into a private placement transaction in the amount of $7,500,000 with an institutional investor. The investment was in the form of an 18 month 2% Convertible Note, or Note, convertible
into shares of the Company's Class A common stock at a conversion rate of $9 per share, at the option of the investor. In addition, the Company issued to the investor warrants to purchase
166,667 shares of Class A common stock at an exercise price of $8.75 per share.

Given that the initiation and continuation of the April 1, 2004 trading suspension by the SEC constituted a breach under the Note, the Company and the investor agreed, pursuant to
the terms of a settlement agreement entered into on April 8, 2004, that the Company would immediately repay the investor the sum of $7,500,000 in cash without penalty, interest, redemption
premium or any other premium or penalty, plus an expense reimbursement in connection with the settlement agreement in the amount of $15,000 in cash. In consideration of this repayment, the investor
surrendered the Note



and warrants and the parties mutually terminated all other agreements entered into in connection with the transaction.

In connection with this transaction, we paid approximately $600,000 in fees to various third parties. These fees were not refunded when we repaid the investor. These fees were recorded
as an expense in the first quarter ended March 31, 2004.

5

---



5.Changes in Management.John J. Masiz, the Company's President and Chief Executive Officer, has agreed with
the Staff to settle a proposed action by the SEC against him that would prevent him from serving as an officer or director of any public company, including the Company, for a period of five years. If
Mr. Masiz is barred from serving as an officer and director of the Company for this five year period, he will be permitted and intends to continue to be an active employee of the Company. If
the offer to settle is accepted by the SEC itself, Mr. Masiz would resign as the President and Chief Executive Officer of the Company, as well as the Chairman of the Board of Directors of the
Company. The Company is in the process of conducting a search for a new Chief Executive Officer to replace Mr. Masiz when he resigns. There is no assurance that we will be able to attract or
retain a suitable Chief Executive Officer now or in the future, and this could have a material adverse effect on our business, financial condition and results of operations. Please see "Risk
Factors""If we fail to attract, train and retain additional highly qualified senior executives and technical and managerial personnel in the near future, our business will suffer".

Effective June 18, 2004, Kevin J. Seifert resigned as the Chief Operating Officer of the Company and as a director of the Company. The Company is not currently conducting a search
for a new Chief Operating Officer. We anticipate that our new Chief Executive Officer will assume Mr. Seifert's former responsibilities.

(B) BUSINESS DEVELOPMENT

We are an early-stage company established for the purpose of commercializing, marketing and selling over-the-counter, or OTC,
pharmaceutical products that incorporate topical and transdermal formulation platforms. In the instance where a product is formulated to have a topical effect, we will refer to the technology as
PENtoCORE or the PENtoCORE technology. In the instance where a product candidate is formulated to have a transdermal effect, we will refer to it as VALE or VALE technology. There are patents covering
the VALE technology. These patents are held by BioChemics, Inc., a privately-owned biopharmaceutical company. While we consider the PENtoCORE technology proprietary, it is not covered by
patents. In February 2003, BioChemics, Inc. granted us an exclusive, irrevocable, worldwide license to use and practice the VALE patents and PENtoCORE technology in order to
commercialize, market and sell OTC pharmaceutical products. On





December 31, 2003, BioChemics owned approximately 45% of our combined classes of issued and outstanding common stock and 71% of the voting power of our combined classes of common stock.

We began our operations in January 2001, as a division of BioChemics, a biopharmaceutical company engaged in the development of transdermal and topical drug delivery systems. In
January 2003, we incorporated in Delaware and became an independent subsidiary of BioChemics, focused on the further commercialization of our existing OTC products and the development of new
OTC product candidates. We continue to rely on BioChemics to provide us with administrative support services, manufacturing and product development services and VALE and PENtoCORE technology licenses.

On December 15, 2003, we completed an initial public offering of 1,667,500 shares of our Class A common stock at a price of $5.00 per share, raising approximately
$6.4 million, net of issuance costs. Effective March 5, 2004, we effected a 3 for 1 stock split through the issuance of a 200% stock dividend to holders of record of both our
Class A and B common stock as of February 23, 2004. Except where noted, all share and per share information contained in this Annual Report on Form 10-KSB/A has been
adjusted to reflect the effects of this dividend.

BioChemics is based in Danvers, Massachusetts. BioChemics was founded in 1989 by John J. Masiz and was incorporated in Delaware in 1991. Mr. Masiz controls both BioChemics and
Vaso Active. BioChemics began developing the VALE technology in 1989 and has subsequently been issued four U.S. patents in connection with this technology. In addition, patents have been issued to
BioChemics in

6

---



17 foreign countries and are pending in seven others. The expiration date of three of these patents is 2013. The expiration date of the other patent is 2020. Please see "Risk Factors""If
we or BioChemics fail to adequately protect or enforce our intellectual property rights, we may be unable to operate effectively" for a further description of the patents.

(C) BUSINESS OF THE ISSUER

OVERVIEW OF THE TECHNOLOGY

Traditional Transdermal Drug Delivery Technology

Transdermal drug delivery is generally considered to be any process of delivering drugs through the skin and into the bloodstream without the use of an invasive
instrument such as a needle. Transdermal drug delivery offers potential advantages over other commonly accepted modes of drug delivery for the treatment of certain diseases and medical conditions. We
believe that these potential advantages include:





Traditional Transdermal Drug Delivery Technologies

There are many different technologies used to deliver drugs transdermally. The most common technologies employed are: (i) patches that adhere to the skin,
holding a drug in place while it is administered over time; (ii) liposomes, or artificially prepared cell-like structures, which are applied topically and absorbed; or
(iii) an outside energy source producing electricity, otherwise known as iontophoresis, or sound, otherwise known as sonophoresis, to help move the drug through the various skin layers. We
believe all three of these technologies have certain drawbacks that may limit their utility.

The VALE and PENtoCORE Technologies

Our products and product candidates utilize formulation technologies that we believe can be applied to a significant array of currently off-patent
drugs for commercialization in the OTC marketplace. The VALE technology is a transdermal formulation that we believe may have the potential to introduce drugs through the skin and into the bloodstream
in an efficient and effective manner. The PENtoCORE technology is a topical formulation that we believe allows for the formation of OTC products with certain "use advantages" over competitors. "Use
advantages" include characteristics such as odor, residue, and feel.

The VALE Technology

The goal behind the development of the VALE technology system is to create an active transdermal drug system that efficiently and effectively delivers drugs
through the skin and into the

7

---



blood supply without the need of a patch. In order to accomplish this, a delivery system must be able to overcome three skin barriers:





The VALE system is intended to be a patchless, lipid-based delivery system which uses an active process to deliver drugs through the skin and into the bloodstream. It is being developed
around the unique concept of incorporating chemical vasodilators into the drug delivery vehicle. These chemical compounds are intended to act on the network of blood vessels located near the surface
of the skin to



elicit the physiologic response of dilating or relaxing the blood vessels in the immediate area. This, in turn, is designed to have the effect of increasing the blood flow to the area. The theory
behind the VALE system is that as blood flow increases and the blood vessels dilate, the active drug molecules incorporated into the delivery system are transported actively and efficiently into the
bloodstream.

We believe that the VALE technology has the potential to eliminate the need for a patch and to allow for the effective delivery of many active ingredients that may not otherwise be
effectively delivered using existing drug delivery technologies.

The PENtoCORE Technology

The PENtoCORE technology is a topical formulation, as opposed to the VALE transdermal technology. Although the PENtoCORE technology does not achieve its effect by
delivering the drug through the skin and into the bloodstream, we believe that this technology may enable the formulation of topical products that are pleasant to use because they do not have the
odor, greasy feel or residue often associated with other topically-applied drug products. In addition, it may be possible to use the PENtoCORE technology with certain active ingredients to develop
topical formulations that facilitate a longer-lasting effect.

GENERAL STRATEGY

Our general strategy is to commercialize, market and sell transdermal and topical OTC drugs that we believe can be delivered in an efficient,
user-friendly, and reliable manner by utilizing both the VALE and PENtoCORE technologies.

CURRENT PRODUCTS

The development and test marketing of our three primary products has been completed. Each of these products use PENtoCORE topical formulations. These products
are:



We license the Osteon and PENtoCORE trademarks under our amended license agreement with BioChemics. In addition, we have applied for U.S. trademark protection for the mark "Termin8."

8

---



In mid to late 2003, we decided to rebrand and distribute our deFEET line of products under the name Termin8. We decided to rebrand deFEET because we needed more flexibility than was
afforded to us under our April 20, 2002 settlement and license agreement with DeFeet International Inc. DeFeet International Inc., an independent company, claimed early in 2002
that it had started to use the "deFeet" name before our trademark date. As a condition of our settlement with DeFeet International, we transferred our registered trademark "deFEET" to DeFeet
International. The formulation of Termin8 is identical to that of deFEET.

We have suspended the marketing and sale of Athlete's Relief, Osteon and Termin8 until we are reasonably sure that the marketing of these products is consistent with the FDA's
requirements and policies. We anticipate that our marketing and sale of these products, under revised labeling, will resume by the end of 2004, although there is no guarantee of this. The Company has
submitted new labels for its previously marketed products to the FDA and has requested FDA comments on any concerns or issues pertaining to these revised labels. As of the date of this report, the FDA
has not provided any comment to the Company based on the agency's review of the labels submitted to the FDA. There is, however, no regulatory requirement that the FDA review or provide comment on such
materials. The Company is reasonably sure that these labels are consistent with all FDA regulations and policies.

We will market each of our three current products under the OTC Review Program, which is discussed in more detail under "Government Regulation."

PRODUCT CANDIDATES

In addition to and separate from our Athlete's Relief, Osteon and Termin8 products, we have identified and are currently developing, in collaboration with
BioChemics, six additional OTC product candidates that will utilize either the VALE transdermal or PENtoCORE topical technology. Each of these product candidates are in various stages of development
and are not yet available for sale. These product candidates are as follows:



In instances where the active ingredient (e.g., ibuprofen), dosage form (e.g., VALE transdermal technology), strength, route of administration, directions for use or indication (e.g.,
toenail fungus) of the product candidate is not covered by the OTC Review Program or where the inactive ingredients used in the product candidate are not recognized as safe and suitable for their
intended OTC use, the product candidate cannot be marketed without obtaining pre-market approval in the form of an approved new drug application, or NDA or an abbreviated new drug
application, or ANDA. Conversely, where the active ingredient, dosage form, strength, route of administration, directions for use, and indication of the product candidate are covered by the OTC Review
Program and the inactive ingredients used in the product candidate are safe and suitable for their intended OTC use, the product candidate could be marketed without obtaining NDA or ANDA clearance,
provided it



conforms to the applicable OTC Monograph and is not otherwise adulterated or misbranded. Please review the "Government Regulation" section for a detailed discussion of the regulatory process.

9

---



MARKETING AND SALES

Except in the limited situations outlined in our license agreement with BioChemics, we have the exclusive, worldwide license to commercialize, market and sell OTC
products that utilize the VALE and PENtoCORE technologies. We intend to reintroduce to the United States market Athlete's Relief, Osteon and Termin8. We anticipate that the third parties we enter into
agreements with will have the ability to sell our products both domestically and internationally.

The SEC's temporary suspension in the trading of our securities has affected our marketing. Immediately upon the initiation of the trading suspension, we ceased marketing and selling
Athlete's Relief, Osteon and Termin8. In accordance with our commitment not to sell or market our products until such time as all outstanding matters have been addressed to the satisfaction of the SEC
and until the Company is reasonably sure that the marketing and sale of its products is consistent with the FDA's requirements and policies, the marketing and sale of these products has not yet
resumed. We anticipate that our marketing and sales of these products will resume by the end of 2004, although there is no guarantee of this.

At various times, we and BioChemics have marketed Osteon, Athlete's Relief and deFEET on a "test basis" to experiment with consumer packaging and product performance receptivity,
packaging size, label design along with other criteria. We consider this information important to deciding on an eventual roll out strategy for the products. We call these programs "test marketing"
because neither the Company nor its parent, BioChemics, were sufficiently capitalized to engage in advertising campaigns. In some cases, we terminated test marketing programs and in other cases, the
retailer terminated test marketing programs. In connection with the test marketing program with Walgreens to sell deFEET in mid-2003, we could not provide sufficient funding for an
advertising program that would be acceptable to Walgreens. Our efforts were complicated by our need to change the product name from deFEET to Termin8. Because of our inability to undertake an
acceptable advertising campaign, we and Walgreens terminated this test marketing program. Although management believes that our products, supported by sufficient advertising, will earn retailers
acceptance, there can be no assurance that this will happen, or if it does, that it will continue.

If and when we resume marketing, we anticipate executing our marketing and sales strategy in two phases. We believe this two-phase approach is the most efficient and cost
effective manner to quickly bring our products to the market place.

In the first phase of our rollout strategy, we believe the most efficient and economical means of obtaining market penetration is through strategic alliances. Accordingly, this is where
we have placed our immediate focus. Typically under these alliances, our prospective partners will control and assume all the costs of marketing and distribution. We will assume all the costs of
manufacturing. This model eliminates many prohibitive costs such as mass-media advertising and the development of large sales and distribution channels. We will attempt to leverage the
already established market visibility, presence and experience of our prospective partners as well as their distribution networks. We believe that these factors and our decision to outsource all our
product manufacturing allows us to operate with minimal direct labor and other business costs.

In January 2004, we executed our first strategic alliance with Ortho Distribution Inc., or ODI, a wholly owned subsidiary of OrthoRehab, Inc. of Tempe, Arizona. OrthoRehab
has an extensive distribution network across the United States and in approximately 50 other countries. We and ODI expect to launch product through ODI's distribution network by the end of 2004.
However, there can be no assurance that this alliance will continue, or if continued, that it will be successful.

In March 2004, in furtherance of the first phase of our rollout strategy, we entered into an exclusive, direct to consumer media based, strategic alliance with M2G Media of Irvine,
California, a marketing and distribution company that utilizes direct to consumer media and television as its primary

10

---



forms of marketing medium. M2G Media will market privately labeled versions of our current products, specifically targeting the OTC topical analgesic arthritis and pain relief markets. We expect M2G
Media to commence infomercial filming by the end of 2004 and we and M2G Media expect to launch product through its channels of distribution in the first quarter of 2005. However, there can be no
assurance that this alliance will continue, or if continued, that it will be successful.

In addition to our focus on the strategic alliance model as the first stage of our rollout strategy, we also intend to pursue opportunities to launch our products into retail market
chains, but not before 2005. We believe that because retail sales efforts typically require large cash outlays and long sales cycles, they result in a more immediate, negative impact on operations
than strategic alliances. Therefore, we have categorized this as part of the second phase of our rollout strategy. In January 2004, we appointed Commotion LLC of Golden, Colorado, a strategic product
marketing company, to assist us in establishing direct brand recognition and strategic retail rollout for our products. Our plan is focused on the systematic rollout of our current products into major
retail and drug store chains, select independent pharmacies and nontraditional channels, including multilevel marketing, direct marketing, web-sites and catalogues. However, as a result of
the cessation of the marketing and sale of our products following the initiation of the SEC trading suspension on April 1, 2004, and changes in the timing for the retail rollout of our
products, we do not anticipate using any of our initial public offering proceeds to fund our advertising, direct mail programs and related promotional activities before 2005. There can be no assurance
that any of the initial public offering proceeds will be used for this purpose. Please review the "Recent Sales of Unregistered Securities" section for a full discussion of our marketing plan.

In accordance with our plan to rebrand deFEET as Termin8 during its test marketing phase, as well as our inability to adequately support an advertising campaign at that time, we removed
all deFEET units from the Walgreens' drug store shelves in mid to late 2003. Given that the product rebranding process was at that time in transition, we continued to pay for Walgreens' Coop marketing
and advertising through the end of 2003. Termin8 is presently not distributed through Walgreens or any other retail chain. Because immediate opportunities have presented themselves through the
strategic alliances discussed previously, securing an arrangement with Walgreens and other major retailers is not an immediate priority at the present time.

We believe that the systematic and multi-phased launch for each of our three current products as described above will allow us to both maintain control over the required costs associated
with these launches and maximize the return on investment for the advertising and marketing expenditures.

The success of our marketing and sales activities will be dependent, among other things, on our ability to retain and attract qualified marketing and sales personnel, attract additional
capital enter into qualified strategic partnerships, place our products into major retail drug stores, as well as in the overall market and on the consumer perception of our products.

COMPETITION

We are engaged in a rapidly evolving field. Once our marketing and sales efforts resume, if in fact they do, we will be competing primarily with established
pharmaceutical companies like Pfizer, Bristol-Myers Squibb and Schering-Plough, emerging biotechnology companies like Alza, Cygnus and Elan, as well as research and academic institutions, amongst
others. Competition is intense and expected to increase.

The large and rapidly growing market for transdermal and topical drug delivery systems is likely to attract new entrants. Numerous biotechnology and biopharmaceutical companies are
focused on developing new drug delivery systems and most, if not all, of these companies have greater financial and other resources and development capabilities than we do. They also have greater
collective experience in undertaking pre-clinical and clinical testing of products, obtaining regulatory approvals

11

---



and manufacturing and marketing OTC and prescription pharmaceutical products. Accordingly, certain of these competitors may succeed in obtaining approval for products more rapidly than us. In addition
to competing with universities and other research institutions in the development of products, technologies and processes, we may compete with other companies in acquiring rights to products or
technologies from universities. There can be no assurance that our products or product candidates will be more effective or achieve greater market acceptance than competitive products, or that these
companies will not succeed in developing products and technologies that are more effective than those being developed by us or that would render our products and technologies less competitive or
obsolete.

Although we consider the PENtoCORE technology proprietary, the PENtoCORE products, which represent all our current products, do not enjoy any patent protection. This may allow our
competitors to imitate or reverse engineer our current products and use their greater manufacturing and marketing resources to rapidly promulgate competing versions. It is our opinion that competing
topical and transdermal delivery technologies using patches, liposomes, and equipment-assisted deliveries such as iontophoresis and sonophoresis have some utility with a small group of select drugs.
It is our opinion, however, in general, that these drug delivery systems are not useful for most drugs. Our success will depend on our ability to leverage the PENtoCORE and VALE technologies to
achieve market share at the expense of our existing and future competitors who we believe cannot offer products utilizing a delivery system of comparable performance characteristics.

In addition to competing with newly developed drug delivery systems, we will compete with existing products which address the same medical conditions as our products and product
candidates. For instance, Tinactin® and Lotrimin® would compete with our Termin8 athlete's foot product, while Advil® and Tylenol® would compete with
our pain relief products and product candidates. These and other brands are already offering different delivery systems. For instance, Pfizer's Ben Gay® is now offered in a patch as well
as a cream. These products are manufactured, distributed and marketed by companies with vastly greater resources than our own. There is no guarantee we will be able to achieve widespread market
acceptance for our products, or that our marketing efforts will be successful in distinguishing our products from these established market participants.

TEST MARKETING AND CONCENTRATIONS OF SALES

In 2003 and 2002, substantially all of our gross revenue was generated from a test marketing program with a small number of customers, the largest being
Walgreens. During the years ended 2003 and 2002, sales to Walgreens accounted for approximately 86% and 66%, respectively, of our gross revenues. Walgreens and Eckerd drug stores collectively,
accounted for approximately 98% of our 2001 gross revenue. Accounts receivable from these customers were $0, $53,437 and $0 as of December 31, 2003, 2002 and 2001 respectively. Presently,
Termin8 is not sold through any retail chains and securing such an arrangement is not presently an immediate priority. Therefore, we do not anticipate that retail sales will account for a substantial
portion, if any, of our 2004 revenues.

We have, as discussed previously, established two strategic alliances that could possibly account for substantially all of our near term gross revenue if any. If these two strategic
alliances are not successful and if other strategic alliances or retail distribution agreements are not established, this could result in a material adverse impact to our revenues.

MANUFACTURING

Through BioChemics we use a single contract manufacturer to manufacture all our products. There is no agreement between BioChemics and the contract manufacturer.
We believe that the relationship between BioChemics and this contract manufacturer is good. However, if this manufacturer is unable or unwilling to meet our demands because of production limitations,
or fails to adhere to requirements under the Federal Food, Drug and Cosmetic Act, or FFDCA, relating to current good

12

---



manufacturing practices, or cGMPs, this could cause an interruption or halt in the availability of our products with a concomitant material adverse impact on our business. Through our relationship
with BioChemics, we are attempting to secure other contract manufacturing facilities which have present capabilities to manufacture our products in accordance with our specifications and the FDA's
cGMP requirements. In the event that BioChemics is unwilling or unable to meet our manufacturing needs in accordance with the terms of its manufacturing and development agreement with us, we have the
right to retain outside third parties to manufacture our products.

INTELLECTUAL PROPERTY

The Company has a formulation platform that can be structured as either a topical system or as a transdermal system. As a topical system, we refer to this
technology as PENtoCORE. In its transdermal or "through the skin" mode, we refer to the technology as VALE. While only the VALE technology is covered by patents, that are owned by BioChemics and
licensed to us, we consider the PENtoCORE technology to be proprietary.

BioChemics has been issued four U.S. patents relating to the VALE technology. In addition, foreign patents have been issued to BioChemics in 17 foreign countries and are pending in 7
others. The first of the U.S. patents expires in 2013 and the last in 2020. BioChemics has filed, and will continue to file as required, for second-generation patents on a number of its products.
BioChemics also owns 15 registered trademarks, including Osteon and PENtoCORE. We have applied for U.S. trademark protection for the name "Termin8".

Our licensing agreement with BioChemics allows us to commercialize, market and sell our products and product candidates using BioChemics' patents, proprietary information and trademarks
in the OTC pharmaceutical market. The term of this licensing agreement extends through the date of the last BioChemics' patent to expire. With respect to the portions of the licensing agreement that
do not apply to a BioChemics patent or patent application, this agreement extends though February 2013. The licensing agreement is automatically renewed for successive two-year
terms for the non-patent technology unless otherwise terminated by us pursuant to the license agreement. We have the right to terminate the license agreement for any reason and without
cause upon 90 days written notice of termination to BioChemics. BioChemics has no equivalent right of termination.

GOVERNMENT REGULATION



The development, testing, manufacture, labeling, marketing, and promotion of OTC drugs are subject to extensive regulation by the FDA under the FFDCA, and by the
Federal Trade Commission, or FTC, under the Federal Trade Commission Act, or FTC Act.

The degree of regulation under the FFDCA is dependent, in part, upon whether the OTC drug, as formulated, labeled, and promoted, is considered by qualified experts, based on publicly
available scientific data and information, to be generally recognized as safe and effective, or GRASE, for its recommended conditions of use. If an OTC drug as formulated, labeled, and promoted is not
considered GRASE for its recommended conditions of use or, if so considered, if it has not been used to a material extent or for material time, the drug is regulated under the FFDCA as a "new drug"
which requires pre-market approval in the form of a NDA, before it can be commercially marketed.

To determine which OTC drugs are GRASE, the FDA has undertaken a rulemaking initiative in which it seeks to define by regulation which OTC drugs can be considered to be GRASE and thus
can be marketed without first obtaining an approved NDA. This rulemaking initiative, referred to as the "OTC Review Program," was initiated on May 11, 1972, and is ongoing. The OTC Review
Program sets forth in the form of an OTC Drug Monograph for specific categories of OTC drugs (e.g., Topical

13

---



Anti-Fungal OTC drugs) the conditions under which recognized OTC active ingredients can be considered GRASE and not misbranded. These conditions include the strength of the active
ingredient, acceptable dosage forms, the use of safe and suitable inactive ingredients, and the recommended conditions of use, including indications, warnings, precautions, and directions for use.

If the active ingredient used in an OTC drug is not covered by the OTC Review Program, or even if it is covered, if the conditions of use (e.g., strength, dosage form, indications)
deviate from that eligible for GRASE status under the OTC Review Program, the product is considered by the FDA to be a "new drug" subject to the NDA pre-market approval requirements. For a
full discussion of these requirements see the discussion below in "NDA Review Process".

Pending the issuance of a final and effective OTC Drug Monograph for the category of OTC drug involved (e.g., External Analgesic), the FDA has adopted an enforcement policy of not
proceeding against the continued marketing of OTC drugs subject to the OTC Review Program. This enforcement discretion does not, however, apply if: (a) the FDA considers the drug product
involved as falling outside of the scope of the OTC Review Program in that the active ingredient or conditions of use deviate from those eligible for GRASE status under the OTC Review Program;
(b) the product presents a health hazard; or (c) the active ingredient at the dosage level involved was not available OTC prior to December 4, 1975. The FDA's willingness to defer
enforcement action generally terminates upon the effective date of the final OTC Drug Monograph covering the applicable drug product.

Other requirements or limitations for OTC drugs imposed under the FFDCA include: (a) a requirement that the drug be manufactured in conformity with cGMPs; (b) a requirement
that the labeling for the product contain adequate directions for use and warnings; (c) a requirement that the manufacturer of the drug product register with the FDA; (d) a requirement
that all drugs manufactured for commercial distribution be listed with the FDA; and (e) a prohibition against making any false or misleading



misrepresentations in any particular in any labeling for the product. As noted above, OTC products marketed in accordance with OTC Drug Monographs do not require FDA premarket approval prior to
marketing. If an OTC product deviates from an OTC Drug Monograph requirement in active ingredient(s), intended use, method of administration, dosage form, or labeling, among other things, then the
manufacturer or distributor must obtain pre-market approval in the form of an NDA before commercial marketing.

The failure to adhere to the requirements of the FFDCA can result in: (a) seizure of violative products; (b) injunctions against continued violations of the FFDCA,
including active FDA supervision in instituting appropriate corrective action and prohibition against continued marketing of the violative products pending an affirmative determination by the FDA and
the courts that the violations have been adequately rectified; (c) civil penalties in the form of liquidated damages and/or recovery of profits from illegal activities; and (d) the
imposition of criminal sanctions and penalties against responsible persons.

The FTC, under the FTC Act, regulates print and broadcast media advertisements for OTC drugs. The FTC Act requires that advertisements be neither false nor misleading and that claims for
products purportedly based on scientific data be supported by adequate and well controlled studies and that a reasonable basis exists in support of all other claims. Claims consistent with the terms
of an OTC Drug Monograph are usually accepted by the FTC as having been adequately substantiated. The penalties for the failure of an advertised claim to have adequate substantiation, or for claims
that are false and misleading, include: (a) the FTC initiating administrative action for consumer redress; (b) FTC seeking a court injunction to prevent further false and misleading
advertising; (c) the imposition by a court of liquidated damages and equitable relief to recover profits and provide consumer redress from illegal activity; and (d) the placing of the
company in receivership to assure that the assets of the company are not dissipated pending resolution of FTC claims.

14

---





The FDA has taken the position that insofar as our products or product candidates use a transdermal technology, the products fall outside that eligible for GRASE
status under the OTC Review Program and thus the Company must obtain NDA approval of the products before they can be commercially marketed. Under the FDA's procedures it is generally less burdensome
to obtain NDA approval of a drug product which contains active ingredient(s): (a) considered GRASE in a final OTC Drug Monograph, or (b) contained in a drug product eligible for ANDA
approval, but which differs in certain conditions of use (e.g., dosage form) from that covered by a final OTC Drug Monograph or eligible for ANDA approval. However, once a product becomes subject to
the NDA requirements, the general provisions of which are set forth below, there can be no assurance that a company can generate the additional data and information necessary to support NDA approval
of the proposed variant product or that approval can be obtained without substantial expenditures and delays.

The steps ordinarily required before a new drug that is subject to NDA approval may be marketed in the United States include preclinical laboratory tests, animal tests and formulation
studies, the submission to the FDA of an investigational new drug application, or IND, which must become effective before clinical testing may commence, and adequate and well-controlled
clinical trials on human subjects to establish the safety and effectiveness of the drug for each indication for which FDA approval is sought. Satisfaction of FDA pre-market approval
requirements typically takes several years and the actual time required may vary substantially based upon the type, complexity and novelty of the product or the disease or condition for which the new
drug is indicated. Government regulation may delay or prevent marketing of potential products for a considerable period of time and impose costly procedures upon a manufacturer's activities. Success
in early-stage clinical trials does not assure success in later stage clinical trials. Data obtained from clinical activities is not always conclusive and may be susceptible to varying interpretations
that could delay, limit, or prevent regulatory approval. Even if a product receives regulatory approval, later discovery of previously unknown problems with a product may result in restrictions on the
product or even complete withdrawal of the product from the market.

Preclinical
tests include laboratory evaluation of product chemistry and formulation, as well as animal trials to assess the potential safety and efficacy of the product. The conduct of
the preclinical tests and formulation of compounds for testing must comply with Federal regulations and requirements. The results of preclinical testing are submitted to the FDA as part of an IND.

A
30-day waiting period after the filing of each IND is required prior to the commencement of clinical testing in humans. If the FDA has not commented on or questioned the
IND within this 30-day period, clinical trials may begin. If the FDA has comments or questions, the questions must be answered to the satisfaction of the FDA before initial clinical
testing can begin. In addition, the FDA may, at any time, impose a clinical hold on ongoing clinical trials. If the FDA imposes a clinical hold, clinical trials cannot commence or recommence without
FDA authorization and then only under terms authorized by the FDA. In some instances, the IND process can result in substantial delay and expense.

Clinical trials typically involve the administration of the investigational new drug to volunteers or patients under the supervision of a qualified investigator. Clinical trials must be
conducted in compliance with Federal regulations and requirements, under protocols detailing the objectives of the trial, the parameters to be used in monitoring safety and the effectiveness criteria
to be evaluated. Each protocol involving testing on U.S. subjects must be submitted to the FDA as part of the IND. The study protocol and informed consent information for patients in clinical trials
must also be approved by the institutional review board at each institution where the trials will be conducted.

Clinical trials to support NDAs for marketing approval are typically conducted in three sequential phases, but the phases may overlap. In Phase I, the initial introduction of the drug
into healthy human subjects or patients, the drug is tested to assess metabolism, pharmacokinetics and pharmacological actions and safety, including side effects associated with increasing doses.
Phase II usually involves trials

15

---



in limited patient populations, to determine dosage tolerance and optimum dosage, identify possible adverse effects and safety risks, and provide preliminary support for the efficacy of the drug in
the indication being studied.

If a compound demonstrates evidence of effectiveness and an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to further evaluate clinical efficacy and
to further test for safety within an expanded patient population, typically at geographically dispersed clinical trial sites it is possible that Phase I, Phase II, or Phase III testing of product
candidates may not be completed successfully within any specified time period, if at all.

After
successful completion of the required clinical testing, generally an NDA is prepared and submitted to the FDA. FDA approval of the NDA is required before marketing of the product
may begin in the United States. The NDA must include the results of extensive clinical and other testing and a compilation of data relating to the product's pharmacology, chemistry, manufacture, and
controls. The cost of preparing and submitting an NDA is substantial. Under Federal law, the submission of NDAs are additionally subject to substantial applications user fees, currently exceeding
$500,000, and the manufacturer and/or sponsor under an approved NDA are also subject to annual product and establishment user fees, currently exceeding $30,000 per product and $200,000 per
establishment. These fees are typically increased annually.

The FDA has 60 days from its receipt of an NDA to determine whether the application will be accepted for filing based on the agency's threshold determination that the NDA is
sufficiently complete to permit substantive review. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA. Under Federal law, the FDA has agreed to
certain performance goals in the review of NDAs. Most applications for non-priority drug products are reviewed within ten months. The review process is often significantly extended by FDA
requests for additional information or clarification of information already provided in the submission. The FDA may also refer applications for novel drug products or drug products which present
difficult questions of safety or efficacy to an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation, and a recommendation as to whether the
application should be approved. The FDA is not bound by the recommendation of an advisory committee.

If FDA evaluations of the NDA and the manufacturing facilities and procedures, which typically involves an FDA on-site inspection, are favorable, the FDA may issue an
approval letter, or, in some cases, an approvable letter followed by an approval letter. An approvable letter generally contains a statement of specific conditions that must be met in order to secure
final approval of the



NDA. If and when those conditions have been met to the FDA's satisfaction the FDA will typically issue an approval letter. An approval letter authorizes commercial marketing of the drug with specific
prescribing information for specific indications. If the FDA's evaluation of the NDA submission or manufacturing facilities is not favorable, the FDA may refuse to approve the NDA or issue a not
approvable letter. The not approvable letter outlines the deficiencies in the submission and often requires additional testing or information in order for the FDA to reconsider the application. Even
with submission of this additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval. With limited exceptions, FDA may withhold
approval of an NDA regardless of prior advice it may have provided or commitments it may have made to the sponsor. As a condition of NDA approval, the FDA may require post-approval testing
and surveillance to monitor the drug's safety or efficacy and may impose other conditions, including labeling restrictions. Such labeling restrictions can materially impact the potential market and
profitability of the drug. Once granted, product approvals can still be withdrawn if compliance with regulatory standards is not maintained or problems are identified following initial marketing.

Once the NDA is approved, a product will be subject to certain post-approval requirements, including requirements for adverse event reporting and submission of periodic
reports. Persons

16

---



responsible for manufacture or distribution are subject to FDA inspections to assess compliance with applicable statutory and regulatory requirements.

Additionally, the FDA also strictly regulates the promotional claims that may be made about drug products. The FDA requires substantiation of any claims of superiority of one product
over another including, in many cases, requirements that such claims be proven by adequate and well controlled head-to-head clinical trials. The FTC Substantiation Standards
are very similar for the advertising of OTC products. To the extent that market acceptance of the Company's products may depend on their superiority over existing therapies, any restriction on the
Company's ability to advertise or otherwise promote claims of superiority, or requirements to conduct additional expensive clinical trials to provide proof of such claims, could negatively affect the
sales of the Company's products and/or the Company's costs.



We believe that the active ingredients dosage forms and strengths of our Athlete's Relief, Osteon and Termin8 products are covered by the OTC Review Program and
therefore these products as currently formulated and labeled are potentially eligible for marketing under the OTC Review Program. Accordingly, we intend to reintroduce them to the United States market
once we are reasonably sure that the marketing of these products is consistent with the FDA's requirements and policies. We anticipate that our marketing and sales of these products under revised
labeling will resume by the end





of 2004, although there is no guarantee of this. With regard to product candidates that use the VALE transdermal technology or otherwise require new drug approval, we will not engage in the
development of those products until we have secured a partnership with a larger marketing partner specifically for those products. Further, it is expected that the actual development work will be done
by BioChemics which will be required to follow the more extensive regulations imposed by the FDA, including the NDA requirements, and other regulatory authorities in the United States and other
countries regarding research and development, pre-clinical studies and clinical trials and ultimately manufacturing of drug products subject to "new drug" status.

All of our OTC products and product candidates, whether subject to the OTC Review Program or NDA requirements, are required to be labeled, promoted, and manufactured to avoid the
misbranding and adulteration provisions of the FFDCA, including the prohibition against false and misleading representations and manufacturing in violation of cGMPs.

RESEARCH AND DEVELOPMENT

In February 2003, we entered into a development and manufacturing agreement with BioChemics with respect to the ongoing manufacturing and development of
our products and product candidates. Under this agreement, BioChemics will research, develop and manufacture products for us pursuant to specific purchase orders submitted by us from time to time.
BioChemics will charge us a development and manufacturing fee at a rate of cost plus 10%. The development and manufacturing agreement permits BioChemics to use third party contractors to manufacture
the products that BioChemics provides to us. Currently, BioChemics uses a privately owned third party company as its sole contract manufacturer. We do not currently, nor do we intend to, engage in the
manufacturing of, nor conduct any research and development with respect to, any of our products or product candidates. However, in the event that BioChemics is unwilling or unable to meet our
manufacturing needs in accordance with the terms of its manufacturing and development agreement with us, we have the right to retain outside third parties to manufacture our products.However, in the
event that BioChemics is unwilling or unable to meet our manufacturing needs in accordance with the terms of its manufacturing and development agreement with us, we have the right to retain outside
third parties to manufacture our products.

EMPLOYEES

At December 31, 2003, we employed eight full-time persons. Two of our officers divided their time between us and BioChemics. Our President and
Chief Executive Officer devotes approximately 70% of his time to us and 30% to BioChemics. Our Vice President and Chief Scientific Officer devotes approximately 30% of his time to us and 70% to
BioChemics. In addition, we employed one administrative person on a part-time basis.

17

---



RISK FACTORS

We are an early-stage company with a brief history of losses and may never achieve or sustain profitability.

We do not have any continuing revenues and we have never been profitable and we may not achieve profitability in the foreseeable future, if at all. Our ability to
generate profits in the future will depend on a number of factors, including:



At December 31, 2003, we had an accumulated deficit of approximately $1.7 million. At March 31, 2004 our accumulated deficit had grown to approximately
$3.5 million. We expect to incur additional operating losses as we expand our marketing and sales efforts. If we are unable to generate sufficient revenue from our operations to pay expenses or
we are unable to obtain additional financing on commercially reasonable terms, our business, financial condition and results of operations may be materially and adversely affected.

We are an early-stage company that has a limited operating history.

We are an early-stage company focused on commercializing, marketing and selling over-the-counter, or OTC, pharmaceutical products. We
began our operations as a division of BioChemics, Inc. in January 2001. We have only operated as an entity independent of BioChemics since January 2003. Our operating history is
therefore limited. Our Termin8, Athlete's Relief and Osteon products are in the early stages of commercialization. Our product candidates are only in the early stages of development. With the
exception of the introduction of deFEET to the marketplace by BioChemics while we were still a division of BioChemics, we have not yet commercialized, marketed or sold any products or recognized
significant revenue from product sales. You should evaluate the likelihood of financial and operational success in light of the uncertainties and complexities present in an early-stage company, many
of which are beyond our control, including:



Our
operations have been limited to organizing and staffing our company, acquiring our license, developing and testing our revenue distribution models and test marketing our products.
These operations provide a limited basis for you to assess our ability to commercialize our products and product candidates and the advisability of investing in us.

18

---



Our failure to comply with extensive governmental regulation may significantly affect our operating results.

The worldwide marketing of our products and our product candidates are subject to extensive requirements by foreign, national, state and local governments. These
regulations potentially impact many aspects of our operations, including testing, research and development, manufacturing, pre-market labeling, storage, quality control, adverse event
reporting, record keeping, advertising and promotion. Failure to comply with applicable regulatory requirements could, among other things, result in:





The discovery of previously unknown problems with our initial and future products may result in the interruption of marketing, including withdrawal from the market. In addition, the FDA
may revisit and change its prior determinations with regard to the safety or efficacy of our products. If the FDA's position changes, we may be required to change our labeling or cease to market or
have manufactured the product or products at issue. Even prior to any formal regulatory action, we could voluntarily decide to cease the distribution and sale or recall any of our future products if
concerns about their safety or efficacy develop.

In their regulation of all our promotional materials, the FDA and the FTC may take issue with some advertising or promotional practices as being false, misleading or deceptive. The FDA
or the FTC may impose a wide array of sanctions on companies for such advertising practices, which could result in any of the following:





If we become subject to any of the above requirements, it could be damaging to our reputation, and our business condition could be adversely affected.

We cannot market our products unless they have been listed with the FDA, are covered by the FDA's OTC Review Program, and are marketed in conformity with the applicable OTC
Drug Monograph or have attained NDA approval.

If our topical Athlete's Relief, Osteon and Termin8 products are formulated and promoted in accordance with the OTC Drug Monographs pursuant to the FDA's OTC
Review Program, FDA pre-market approval is not required prior to marketing. If these or any of our product candidates deviate from an OTC Drug Monograph requirement in active ingredients,
intended use, method of

19

---



administration, dosage form, or labeling, among other things, then we or our marketing partners must obtain an NDA pre-market approval from the FDA before beginning commercial marketing.
In regard to our products and product candidates, the FDA has taken the position that insofar as our product candidates may use the VALE transdermal technology, they fall outside of those eligible for
GRASE status under the OTC Review Program and thus we must obtain, or our marketing partners must obtain, NDA approval of these product candidates before they can be commercially marketed.

Under FDA's procedures it is generally less burdensome to obtain NDA approval of a drug product which contains the same active ingredient(s) as those: (a) considered GRASE in a
final OTC Drug Monograph, or (b) contained in a drug product eligible for ANDA, approval, but which differs in certain conditions of use (e.g., dosage form) from that covered by a final OTC
Drug Monograph or eligible for ANDA approval. However, once a product becomes subject to the NDA requirements, the general provisions of which are discussed above under the Government Regulation
section, there can be no assurance that a company can generate the additional data and information necessary to support NDA approval of the proposed variant product or that approval can be obtained
without substantial expenditures and delays.

Additional aspects of the FDA regulatory process are set forth in more detail under the "Government Regulation" section.

Clinical trials may fail to demonstrate the safety and efficacy of our product candidates and could prevent or significantly delay regulatory approval.

Prior to receiving approval to commercialize any of our product candidates, we must demonstrate with substantial evidence from well-controlled
clinical trials, and to the satisfaction of the FDA and other regulatory authorities in the United States and abroad, that the product candidate is both safe and effective. If these trials or future
clinical trials are unsuccessful, our business and reputation would be harmed and our stock price would be adversely affected.

All of our product candidates are prone to the risks of failure. The results of early-stage clinical trials of our product candidates will not necessarily predict the results of
later-stage clinical trials. Product candidates in later-stage clinical trials may fail to show desired safety and efficacy traits despite having progressed through initial clinical testing. Even if
we believe the data collected from clinical trials of our product candidates are promising, these data may not be sufficient to support approval by the FDA or any other U.S. or foreign regulatory
approval. Preclinical and clinical data can be interpreted in different ways. Accordingly, FDA officials could interpret such data in different ways than we do, which could delay, limit or prevent
regulatory approval. The FDA, other regulatory authorities, or we may suspend or terminate clinical trials at any time. Any failure or significant delay in completing clinical trials for our product
candidates, or in receiving regulatory approval for the sale of any products resulting from our product candidates, may severely harm our business and reputation.

Because
of these risks, the research and development efforts of our collaborative partners may not result in any commercially viable products. If a significant portion of these
development efforts is not successfully completed, required regulatory approvals are not obtained by our partners, or any approved products are not commercially successful, we are not likely to
generate significant revenues or become profitable.

There is no organized market for our stock; our stock price has been volatile and could experience substantial declines.

The market price of our common stock has experienced, and may continue to experience, significant volatility. During 2003 and the first quarter of 2004, the per
share closing price of our common stock ranged from $1.73 to $14.11. As a result of the temporary suspension of trading in our securities on April 1, 2004, our press release dated
April 7, 2004 advising investors not to trade in our

20

---



securities until further disclosure was made by us, and our voluntary delisting of our securities from The Nasdaq Stock Market on April 8, 2004, there is not currently an organized market in
our securities, and there can be no assurance that such a market will develop. On July 19, 2004 the average bid for a share of our Class A Common Stock as quoted by the OTC Pink Sheets
was $.60. The value of our Class A Common Stock may decline regardless of our operating performance or prospects. Factors affecting our market price include:





In addition, in recent years, the stock market in general, and the market for pharmaceutical companies in particular, have experienced significant price and volume fluctuations. This
volatility has affected the market prices of securities issued by many companies, often for reasons unrelated to their operating performance, and it may adversely affect the price of our common stock.
In the past, securities class action litigation has often been instituted following periods of volatility in the market price of a company's securities. A number of securities class action have been
filed against the Company. See "Legal Proceedings" for more information.

We are defendants in a number of class action lawsuits which may adversely affect our business.

As discussed in greater detail under "Legal Proceedings", we and certain of our officers are the defendants in a number of class action lawsuits filed on behalf
of purchasers of the Company's Class A common stock during the period December 11, 2003 to March 31, 2004 which allege that the defendants violated the federal securities laws by
allegedly failing to make accurate and complete disclosures concerning the Company, its financial condition, its business operations and future prospects, the clinical trial and endorsement of the
Company's Termin8 anti-fungal product (previously known as "deFEET") and the institutional demand for the Company's securities. The complaints seek equitable and monetary relief, an
unspecified amount of damages, with interest, attorneys fees and costs.

BioChemics, our directors and certain of our officers are also party to two shareholder derivative actions alleging a breach of the defendants' fiduciary duties to the Company. The
complaints seek equitable and monetary relief, an unspecified amount of damages, and attorneys and other fees, costs and expenses, ostensibly on behalf of the Company.

Regardless of whether we win or lose, these securities class action lawsuits, and others which may be filed, could result in:





If there are adverse developments in the lawsuits against us, or resolution of our regulatory matters with the SEC and the FDA takes longer than we expect, our capital resources could be
adversely affected.

21

---



Provisions in our bylaws provide for indemnification of officers and directors, which could require us to direct funds away from our business operations.

Our bylaws provide for the indemnification of our officers and directors. We may be required to advance costs incurred by an officer or director and to pay
judgments, fines and expenses incurred by an officer or director, including reasonable attorneys' fees, as a result of actions or proceedings in which our officers and directors are involved by reason
of being or having been an officer or director of the Company. Funds paid in satisfaction of judgments, fines and expenses may be funds we need for the operation of our business, commercialization of
our current products and the development of our product candidates, thereby affecting our ability to attain profitability.

We have depended on a small number of customers for the majority of our gross revenue. As of the date of this report, we are not generating any revenue. We may not be able to
generate future revenue.

At various times, we and BioChemics have marketed Osteon, Athlete's Relief and deFEET on a "test basis" to experiment with consumer packaging and product
performance receptivity, packaging size, label design along with other criteria. We consider this information important to deciding on an eventual roll out strategy for the products. We call these
programs "test marketing" because neither the Company nor its parent, BioChemics, were sufficiently capitalized to engage in advertising campaigns. In some cases, we terminated test marketing programs
and in other cases, the retailer terminated test marketing programs. In connection with the test marketing program with Walgreens to sell deFEET in mid-2003, we could not provide
sufficient funding for an advertising program that would be acceptable to Walgreens. Our efforts were complicated by our need to change the product name from deFEET to Termin8. Because of our
inability to undertake an acceptable advertising campaign, we and Walgreens terminated this test marketing program. Although management believes that our products, supported by sufficient advertising,
will earn retailers acceptance, there can be no assurance that this will happen, or if it does, that it will continue.

We have, as discussed previously, established two strategic marketing and distribution alliances. If these two strategic alliances are not successful and if other strategic alliances or
retail distribution agreements are not established, this could result in a material adverse impact on our revenues.

We have suspended the sale and marketing of our products.

After the initiation of the trading suspension, we ceased marketing and selling Athlete's Relief, Osteon and Termin8. Marketing and sale of these products has not
yet resumed. We anticipate that our marketing and sales of these products will resume by the end of 2004, although there is no guarantee of this. We expect that our sales and marketing efforts will
resume if and when all outstanding issues between the SEC, FDA and the Company have been addressed.

Failure to resolve the concerns of the SEC or the FDA will have a material adverse effect on our ability to market and sell our products or raise capital.

We depend on BioChemics and third parties to develop and manufacture our products and product candidates and our commercialization of our products could be stopped, delayed or
made less profitable if BioChemics or those third parties fail to provide us with sufficient quantities at acceptable prices.

We do not possess product development capability. As a result, we depend on collaborations with third parties, such as BioChemics, for development of our product
candidates. In addition, we have no manufacturing capability. As a result, we will depend on BioChemics, which in turn will rely upon third parties to manufacture our products. Although our strategy
is based on leveraging BioChemics' ability to develop and manufacture our products for commercialization in the OTC marketplace, we will be dependent on BioChemics' collaborations with drug
development and manufacturing collaborators. If

22

---



we and BioChemics are not able to maintain existing collaborative arrangements or establish new arrangements on commercially acceptable terms, we would be required to undertake product manufacturing
and development activities at our own expense. This would increase our capital requirements or require us to limit the scope of our development activities. Moreover, we have limited or no experience
in conducting full scale bioequivalence studies, preparing and submitting regulatory applications and manufacturing and marketing drug products. There can be no assurance that we will be successful in
performing these activities and any failure to perform such activities could have a material adverse effect on our business, financial condition and results of our operations.

If
any of our developmental collaborators, especially BioChemics, breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities in a timely
manner, the preclinical and/or clinical development and/or commercialization of our product candidates will be delayed, and we would be required to devote additional resources to product development
and commercialization or
terminate certain development programs. Also, these relationships generally may be terminated at the discretion of our collaborators, in some cases with only limited notice to us. The termination of
collaborative arrangements could have a material adverse effect on our business, financial condition and results of operations. There also can be no assurance that disputes will not arise with respect
to the ownership of rights to any technology developed with third parties. These and other possible disagreements with collaborators could lead to delays in the development or commercialization of our
product candidates or could result in litigation or arbitration, which could be time consuming and expensive and could have a material adverse effect on our business, financial condition and results
of operations.

Additionally, the failure of any of our contract manufacturers to manufacture our products in conformity with cGMPs could result in interruption or halt of the availability of our
products, pending demonstration to the FDA or a court of compliance with cGMPs. Any such interruption could have a material adverse impact upon our financial position and results of operations.

If we or BioChemics fail to adequately protect or enforce our intellectual property rights, we may be unable to operate effectively.

BioChemics owns proprietary technology developed in connection with its four U.S. patents. These are: Patent No. 5,460,821, issued on October 24,
1995 and expiring June 23, 2013; Patent No. 5,645,854, issued on July 8, 1997 and expiring June 23, 2013; Patent No. 5,853,751, issued on December 29, 1998
and expiring June 23, 2013; and Patent No.6,635,274, issued on October 21, 2003 and expiring October 27, 2020. BioChemics has licensed these patents to us. In addition, foreign
patents have been issued to BioChemics in 17 foreign countries and are pending in seven others. The PENtoCORE technology is not covered by patents but it we do consider it to be proprietary.
BioChemics also owns fifteen registered trademarks, including Osteon and PENtoCORE. We have applied for U.S. Trademark protection for the mark "Termin8". Our license agreement, as amended, with
BioChemics permits us to commercialize, market and sell our products and product candidates using these patents, proprietary formulations and the Osteon and PENtoCORE trademarks. Our success and
ability to compete are substantially dependent on these patents, proprietary formulations and trademarks. Although both we and BioChemics believe that the patents and associated trademarks and
licenses are valid, there can be no assurance that they will not be challenged and subsequently invalidated and/or canceled. The invalidation or cancellation of any one or all of the patents or
trademarks would significantly damage our commercial prospects. Further, BioChemics may find it necessary to legally challenge parties infringing its patents or trademarks or licensed trademarks to
enforce its rights thereto. There can be no assurance that any of the patents would ultimately be held valid or that efforts to defend any of the patents, trade secrets, know-how or other
intellectual property rights would be successful.

23

---



If we infringe on the intellectual property rights of others, our business and profitability may be adversely affected.

Our commercial success will also depend, in part, on us and BioChemics not infringing on the patents or proprietary rights of others. There can be no assurance
that the technologies and products used or developed by BioChemics and marketed and sold by Vaso Active will not infringe such rights. If such infringement occurs and neither we nor BioChemics is able
to obtain a license from the relevant third party, we will not be able to continue the development, manufacture, use, or sale of any such infringing technology or product. There can be no assurance
that necessary licenses to third-party technology will be available at all, or on commercially reasonable terms. In some cases, litigation or other proceedings may be necessary to defend against or
assert claims of infringement or to determine the scope and validity of the proprietary rights of third parties. Any potential litigation could result in substantial costs to, and diversion of, our
resources and could have a material and adverse impact on us. An adverse outcome in any such litigation or proceeding could subject us and/or BioChemics to significant liabilities, require us to cease
using the subject technology or require us and/or BioChemics to license the subject technology from the third party, all of which could have a material adverse effect on our business.

We operate in a competitive environment and there can be no assurances that competing technologies would not harm our business development.

We are engaged in a rapidly evolving field. Competition from numerous pharmaceutical companies including Pfizer, Bristol-Myers Squibb, Schering-Plough, and
biotechnology companies including, Alza, Cygnus and Elan, as well as research and academic institutions, is intense and expected to increase. The market for transdermal and topical drug delivery
systems is large and growing rapidly and is likely to attract new entrants. Numerous biotechnology and biopharmaceutical companies have focused on developing new drug delivery systems and most, if not
all of these companies, have greater financial and other resources and development capabilities than we do. They also have greater collective experience in undertaking pre-clinical and the
clinical testing of products; obtaining regulatory approvals; and manufacturing and marketing OTC and prescription pharmaceutical products. Accordingly, certain of our competitors may succeed in
obtaining approval for products more rapidly than us. In addition to competing with universities and other research institutions in the development of products, technologies and processes, we may
compete with other companies in acquiring rights to products or technologies from universities. There can be no assurance that our products, existing or to be developed, will be more effective or
achieve greater market acceptance than competitive products, or that our competitors will not succeed in developing products and technologies that are more effective than those being developed by us
or that would render our products and technologies less competitive or obsolete.

Technological advancement by our competitors could result in the obsolescence of some or all of our products and may harm business development.

The areas in which we are commercializing, distributing, and/or selling products involve rapidly developing technology. There can be no assurance that we will be
able to establish ourselves in such fields, or, if established, that we will be able to maintain our position. There can be no assurance that the development by others of new or improved products will
not make our products and product candidates, if any, superfluous or our products and product candidates obsolete.

24

---





Should product liability claims be brought successfully against us exceeding the product liability coverage we currently have in place there can be no assurances that such
events would not materially impact our performance and viability.

The sale of our products may expose us to potential liability resulting from the sale and use of such products. Liability might result from claims made directly
by consumers or by pharmaceutical companies or by others selling such items. We currently maintain $5 million of product liability insurance. There can be no assurance that we will be able to
renew our current insurance, renew it at a rate comparable to what we now pay, or that the coverage will be adequate to protect us against liability. If we were held liable for a claim or claims
exceeding the limits of our current or future insurance coverage, or if coverage was discontinued for any reason, it could have a materially adverse effect on our business and our financial condition.

Our limited sales and marketing experience may adversely impact our ability to successfully commercialize and sell our products.

We have limited sales and marketing experience, particularly with respect to marketing and selling products in commercial quantities. If we are unable to expand
our sales and marketing capabilities we may not be able to effectively commercialize our products and product candidates.

If we are unable to effectively promote our brand and establish a leading position in the marketplace, our business may fail.

Our brand names are new and unproven. If we are unable to effectively promote our brands and establish a prominent position in the marketplace, our operations
will suffer. We believe that the importance of brand recognition will increase over time. In order to gain brand recognition, we may increase our marketing and advertising budgets to create and
maintain brand loyalty. We do not know whether these efforts will lead to greater recognition.

We depend on BioChemics to provide us with certain support and services. The loss of such support and services would have a material adverse effect on our business.

We were originally formed as a division of BioChemics and the viability and financial strength of BioChemics is critical to our success. Throughout our
development, we have relied on services and financing provided to us by BioChemics. When we became an independent operating entity, we entered into a license agreement and, prior to the consummation
of our initial public offering, we entered into a manufacturing and development agreement, with BioChemics. We presently maintain our executive offices on premises that we share with BioChemics. We do
not have a lease agreement with BioChemics. We believe that we can obtain suitable alternative space without any material disruption of our business and that such space will be available to us in the
future on commercially reasonable terms. In addition, BioChemics provides us with back office support and management services. Allocations of BioChemics' expenses for centralized accounting, data
processing, utilities, office space rental, supplies, telephone and other corporate services and infrastructure are charged back to us as a management fee. These amounts approximated $122,073,
$135,600 and $114,150 for the years ended December 31, 2003, 2002 and 2001, respectively. The loss of the services provided by BioChemics or the loss of the license of the VALE patents or the
PENtoCORE technology under the license agreement would have a material adverse effect on our business, financial condition and results of operations.

In this regard, investors should be aware that BioChemics has never been profitable and most likely will not achieve profitability in the near future, if ever. Although BioChemics was
founded in 1989, and incorporated in 1991, it is still a development stage company. It has generated significant losses through December 31, 2003, has limited revenue, and is likely to sustain
operating losses in the foreseeable future. BioChemics' operations are subject to all of the risks inherent in the establishment

25

---



of a business enterprise. Through December 31, 2003, BioChemics had an unaudited, consolidated accumulated deficit of approximately $12.8 million, which includes the operations of Vaso
Active. In addition, as of December 31, 2003, BioChemics was in default under debt obligations in the approximate amount of $8 million, which includes accrued interest, that it has
issued to private investors, of which approximately $5.35 million, inclusive of accrued interest, is held by Mr. Masiz, members of his family and a director of the Company. Although
BioChemics is attempting to restructure or refinance these obligations, there can be no assurance that it will be able to do so on acceptable terms. If BioChemics is not successful in maintaining its
financial viability, our business, financial condition and results of operations may be materially and adversely affected. BioChemics anticipates that it will continue to incur net losses and be
unprofitable for the foreseeable future. There can be no assurance that BioChemics will ever operate at a profit even if its or our products are commercialized.

In addition, it is expected that BioChemics will encounter significant marketing difficulties and will also face significant regulatory hurdles. The likelihood of success of BioChemics
must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with any non-profitable business enterprise, including
but not limited to the identification and development of new products, difficulties with corporate partners, vendors, and a



very competitive environment. Additionally, BioChemics itself requires additional capital and/or revenues to continue its operations and there is no guarantee that it will be able to fund its own
operations or those of Vaso Active.

If we fail to attract, train and retain additional highly qualified senior executives and technical and managerial personnel in the near future, our business will suffer.

John J. Masiz, the Company's President and Chief Executive Officer, has agreed with the Staff to settle a proposed action by the SEC against him that would
prevent him from serving as an officer or director of any public company, including the Company, for a period of five years. If Mr. Masiz is barred from serving as an officer and director of
the Company for this five year period, he will be permitted and intends to continue to be an active employee of the Company. If the offer to settle is accepted by the SEC itself, Mr. Masiz
would resign as the President and Chief Executive Officer of the Company, as well as the Chairman of the Board of Directors of the Company. The Company is in the process of conducting a search for a
new Chief Executive Officer to replace Mr. Masiz when he resigns. There is no assurance that we will be able to attract or retain a suitable Chief Executive Officer now or in the future, and
this could have a material adverse effect on our business, financial condition and results of operations. There is, however, a high demand for highly trained executives and managerial personnel in our
industry. We do not know whether we will be able to attract or retain a suitable Chief Executive Officer either now or in the future and this could have a material adverse effect on our business,
financial condition and results of operations.

Effective June 18, 2004, Kevin J. Seifert resigned as the Chief Operating Officer of the Company and as a director of the Company. The Company is not currently conducting a search
for a new Chief Operating Officer. We anticipate that our new Chief Executive Officer will assume Mr. Seifert's former responsibilities.

Furthermore, several of our other senior officers are devoting less than all their time to the Company. For example, our chief scientific officer, Dr. Stephen Carter, will devote
approximately 30% of his business time to our affairs. For us to pursue our product development, marketing and commercialization plans, we will need to hire personnel with experience in clinical
testing, government regulation, manufacturing, marketing and finance. We may not be able to attract and retain personnel on acceptable terms given the intense competition for such personnel among high
technology enterprises, including biotechnology, pharmaceutical and healthcare companies, universities and non-profit research institutions. If we lose any of these persons, or are unable
to attract and retain

26

---



qualified personnel, our business, financial condition and results of operations may be materially and adversely affected.

Mr. Masiz is also the principal stockholder of BioChemics which is our principal stockholder and he will have substantial control over our affairs, possibly to the
detriment of other holders of our Class A common stock.

Our principal stockholder, BioChemics, owns 4,500,000 shares of our Class B common stock, which at December 31, 2003 represented approximately 71%
of the combined voting power of our common stock. Mr. Masiz, as President, Chief Executive Officer and Chairman of BioChemics and, as the principal stockholder in BioChemics, will be able to
control the outcome of stockholder votes, including votes concerning the election of our directors, the adoption or amendment to provisions in our certificate of incorporation or by-laws,
the approval of mergers and/or acquisitions, decisions affecting our capital structure and other significant corporate transactions. This concentration of ownership may delay, deter or prevent
transactions that would result in a change of control, which in turn could reduce the value of our common stock.

In the event of a conflict of interest between BioChemics and us, our stockholders could be negatively affected.

There are likely to be situations where our best interests and those of BioChemics will be in conflict. For example, we are a party to a license agreement, a
manufacturing and development agreement and an administrative services agreement with BioChemics, each of which is critical to our business operations (see certain "Relationships and Related
Transactions" for more details). To the extent that decisions are made by Mr. Masiz that could enhance the value of BioChemics versus the value to us, our stockholders interests could be
negatively affected. Investors should be aware of these potential conflicts.

ITEM 2. DESCRIPTION OF PROPERTY

Currently, we share our principal corporate office space with BioChemics in Danvers, Massachusetts. Our principal corporate offices accommodate our operational,
selling, marketing and administrative needs. The lease for this office space is held by BioChemics. Although we do not have a formal lease agreement with BioChemics, we pay approximately $1,800 per
month in rent to BioChemics for our office space. We anticipate that this arrangement will continue at least through the end of 2004.

ITEM 3. LEGAL PROCEEDINGS

(A) RECENT EVENTS

1.SEC and FDA Regulatory Matters.On April 1, 2004, the SEC temporarily suspended trading of the
Company's securities. The suspension, by its terms, terminated at 11:59 p.m. on April 15, 2004. In the SEC announcement of the trading suspension, the SEC stated that it temporarily
suspended trading in the securities of the Company because of questions regarding the accuracy of assertions by the Company, and by others, in press releases, the Company's annual report, its
registration statement and public statements to investors concerning, among other things: "(1) the FDA approval of certain key products; and (2) the regulatory consequences of the future
application of [its] primary product."

On April 5, 2004, representatives of the Company, together with newly retained special securities counsel and newly retained FDA counsel, met with the staff of the SEC, or Staff,
for the purpose of discussing the concerns that led to the suspension of trading in the Company's securities. During that meeting, the Company stated its intention to review its public disclosure,
press releases and other public statements and to take whatever remedial action might be appropriate. It also represented to the

27

---



Staff that it would (i) diligently seek to clarify the status of its products under current FDA regulations, (ii) issue disclosure regarding the FDA regulation of its activities and
products and the results of its dialogue with the FDA, and (iii) endeavor to resolve on a timely basis any concerns communicated by the Staff. The Staff stated that it had been authorized by
the SEC to seek injunctive relief against the Company, articulated the concerns that gave rise to the suspension of trading, and informally requested that the Company provide certain information to
the Staff. The Company agreed to cooperate with the Staff, committed to review its disclosure promptly and committed to take any remedial action that might be required.

The Company has agreed to a settlement with the Staff pursuant to which the Company will be permanently enjoined from violating certain of the anti-fraud provisions of the
Securities Act and the Exchange Act. The settlement must first be approved by the SEC itself and then by a



court. In addition, John J. Masiz, the Company's President and Chief Executive Officer, has agreed with the Staff to a proposed action by the SEC against him that would similarly enjoin him and
prevent him from serving as an officer or director of any public company, including the Company, for a period of five years. If Mr. Masiz is barred from serving as an officer and director of
the Company for this five year period, he will be permitted and intends to continue to be an active employee of the Company. Please see "Changes in Management" below for additional information on
Mr. Masiz's resignation as well as "Risk Factors""If we fail to attract, train and retain additional highly qualified senior executives and technical and managerial personnel in
the near future, our business will suffer." The Company is not aware that the FDA is contemplating any action against the Company. The Company, through counsel, has engaged in and will continue to
maintain a dialogue with the FDA to address any concerns. The Company has submitted new labels for its previously marketed products to the FDA and has requested FDA comments on any concerns or issues
pertaining to these revised labels. As of the date of this report, the FDA has not provided any comment to the Company based on the agency's review of the labels submitted to the FDA. There is,
however, no regulatory requirement that FDA review or provide comment on such materials. The Company is reasonably sure that these labels are consistent with all FDA regulations and policies.

Due to the ongoing nature of these matters, the Company is unable to definitively assess their impact. However, the Company has committed not to market or sell its products until all
outstanding matters have been addressed to the satisfaction of the SEC and until the Company is reasonably sure that the marketing and sale of its products is consistent with the FDA's requirements
and policies. This commitment may have a material adverse impact on the Company. The Company anticipates that the marketing and sale of Athlete's Relief, Osteon and Termin8 will resume by
the end of 2004, although there is no guarantee of this. When appropriate, the Company will make additional public announcements and will file public reports with the SEC regarding the status of its
products under applicable FDA regulations.

2.Nasdaq Stock Market Matters.By letter dated April 2, 2004, the Nasdaq Listing Investigations
department of The Nasdaq Stock Market, Inc., or Nasdaq, notified the Company that it had commenced an inquiry to ensure the Company's ongoing compliance with Nasdaq's inclusion requirements and
requested certain information from the Company. The letter further disclosed that after review of the information provided by the Company, Nasdaq could take any action that might be appropriate under
its Marketplace Rules including removal of the Company's securities from Nasdaq. In view of the substantial administrative and cash burdens being borne by the Company at that time and the substantial
legal costs anticipated with respect to the SEC and FDA matters, the Company determined that it was in the best interest of shareholders to voluntarily cause its shares to be removed from Nasdaq and
focus its attention and resources on addressing the SEC and FDA concerns. The Company's securities were voluntarily delisted, effective the opening of the markets on Thursday, April 8, 2004. At
an appropriate time, the Company will seek to cause its securities to be quoted on an exchange, Nasdaq or other automated quotation system. There can be no assurance that the Company

28

---



will be successful or that an organized market for the Company's securities will develop. If the Company is unable to list its securities on a national exchange or on an automated securities quotation
system in the future, it could have a material adverse impact on our ability to raise future capital (See "Management's Discussion and Analysis""Liquidity and Capital Resources").

3.Litigation.In April, May, and June 2004, the Company and certain of its officers were sued in
several
purported securities class action lawsuits filed in the United States District Court for the District of Massachusetts. The complaints, which seek equitable and monetary relief, an unspecified amount
of damages, with interest, attorneys fees and costs, allegedly were filed on behalf of purchasers of the Company's Class A common stock during the period December 11, 2003 to
March 31, 2004 and allege that during that period, the defendants violated the federal securities laws by allegedly failing to make accurate and complete disclosures concerning the Company, its
financial condition, its business operations and future prospects, the clinical trial and endorsement of the Company's Termin8 anti-fungal product (previously known as "deFEET") and the
institutional demand for the Company's securities. These complaints are captioned as follows:Dennis E. Smith v. Vaso Active Pharmaceuticals, Inc., et
al., Civ. No. 04-10708 (RCL) (D. Mass.);Richard Shapiro v. Vaso Active Pharmaceuticals, Inc., et
al., Civ. No. 04-10720 (RCL) (D. Mass.);Christopher Pepin v. Vaso Active Pharmaceuticals, Inc., et
al., Civ. No. 04-10763 (RCL) (D. Mass.);Modhi Gude, et al. v. Vaso Active Pharmaceuticals, Inc., et
al., Civ. No. 04-10789 (RCL) (D. Mass.);Kim Benedetto, et al. v. Vaso Active Pharmaceuticals, Inc., et
al., Civ. No. 04-10808 (RCL) (D. Mass.);Dean Dummer v. Vaso Active Pharmaceuticals, Inc., et al.,
Civ. No. 04-10819 (RCL) (D. Mass.);Edward Tovrea v. Vaso Active Pharmaceuticals, Inc., et al., Civ.
No. 04-10851 (RCL);Kourosh Alipor v. Vaso Active Pharmaceuticals, Inc., et al., Civ. No. 04-10877 (RCL); Paul E. Bostrom v. Vaso Active Pharmaceuticals, Inc.,
et al., Civ. No. 04-10948 (RCL);Ira A. Turret
Sep-Ira Dated 01/24/02 v. Vaso Active Pharmaceuticals, Inc., et al., Civ. No. 04-10980 (RCL);Richard Pagona v.
Vaso Active Pharmaceuticals, Inc., et al., Civ. No. 04-11100 (RCL);James Karanfilian v. Vaso Active
Pharmaceuticals, Inc., et al., Civ. No. 04-11101 (RCL); andCharles Robinson v. Vaso Active Pharmaceuticals, Inc., et
al., Civ. No. 04-11221 (RCL). The Court has consolidated the above-referenced cases, other than theTovreaandKaranfiliancomplaints, under the captionIn Re Vaso Active Pharmaceuticals Securities Litigation,
Civ. No. 04-10708 (RCL). Although the Company intends to vigorously defend against these cases, the litigation process is inherently uncertain and there can be no guarantee as to
the ultimate outcome of these matters. There is also no guarantee that these will be the only lawsuits brought against the Company with respect to these matters..

The Company has also been named as a nominal defendant in two shareholder derivative actions filed in the United States District Court for the District of Massachusetts, the first filed
in April 2004 against its directors and certain of its officers and against BioChemics, Inc. entitledJoseph Rosenkrantz v. BioChemics, Inc., et
al., Civ. No. 04-10792 (RCL) (D. Mass.) and the second filed in June 2004, also against the Company's directors and certain of its officers and
against BioChemics, Inc. entitledWilliam Pomeroy v. BioChemics Inc., et al., Civ. No. 04-11399 (RCL) (D. Mass.).

The complaints allege, among other things, that the alleged conduct challenged in the securities cases pending against the Company in Massachusetts (described above) constitutes a breach
of the defendants' fiduciary duties to the Company. The complaints seek equitable and monetary relief, an unspecified amount of damages, and attorneys and other fees, costs and expenses, ostensibly on
behalf of the Company.

An unfavorable outcome in one or more of these related cases could have a material adverse effect on the Company's financial position, liquidity and results of operations. In addition to
the costs of defending these cases, the Company may provide indemnification for expenses and losses that may be incurred by its directors and officers as parties to one or more of these cases.
Although the Company will seek coverage under its director and officer liability insurance policy, there can be no assurance that the Company can obtain reimbursement of all of its
out-of-pocket defense costs and any

29

---



amounts paid in settlement or pursuant to judgments in the event of unfavorable outcomes in one or more of these cases.

Accordingly, the costs of defending these cases and providing indemnification to our directors and officers may be substantial. However, because of the uncertainty of estimating the
potential financial statement impact of any of these actions with any reasonable degree of accuracy, at this time the Company has not reserved for any potential liability or costs that may arise as a
result of this litigation except for the $200,000 insurance deductible that we reserved as of March 31, 2004. While the cases are in very preliminary stages and the outcomes are not
predictable, if a substantial amount is payable by the Company and is not reimbursed through its director and officer liability policy, this will have a material adverse effect on the Company's
financial position and liquidity. There can be no assurance that the Company's insurer will admit liability to reimburse the Company with respect to any of the claims asserted in any of the litigation
against the Company or its officers or directors or that coverage limits will be sufficient.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF THE SECURITY HOLDERS

There were no matters submitted to a vote of the security holders in the quarter ended December 31, 2003.

30

---





PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

(A) MARKET INFORMATION

Our Class A common stock, $0.0001 par value, began trading on December 10, 2003 on the Nasdaq Small Cap Market under the symbol "VAPH." The
following sets forth the high and low bid price quotations (split adjusted) for each calendar quarter in which trading occurred during the last two fiscal years. Such quotations reflect inter-dealer
prices, without retail markup, markdown or commission, and may not represent actual transactions:

2003

High

LowFourth Quarter

$
2.14

$
1.73


On March 31, 2004, the last reported sale price of our common stock on the Nasdaq Small Cap Market was $7.59 per share. On April 7, 2004, the Company voluntarily requested
that its shares be removed from the Nasdaq Small Cap Market. The Company was informed that its securities were delisted, effective the opening of the market on April 8, 2004. At the present
time, none of the Company's securities are quoted on an exchange, Nasdaq or an automated quotation system. At the appropriate time in the future, the Company will seek to cause its securities to be
quoted on an exchange, Nasdaq or an automated quotation system. However, there can be no assurance that the Company will be successful in doing so. As of the date of this report, no organized market
for the Company's securities exists, although the Company's stock has been quoted in the OTC "Pink Sheets", and there can be no assurance than such a market will develop. On July 19, 2004 the
average bid for a share of our Class A Common Stock as quoted by the OTC Pink Sheets was $.60.

(B) HOLDERS

As of April 19, 2004, there were 30 holders of record of our Class A common stock. Approximately 3,100 holders held shares in a "nominee" or "street
name." There is one holder, BioChemics, of our Class B common stock.

(C) DIVIDENDS

We have not previously paid any cash dividends on either class of our common stock and do not anticipate or contemplate paying cash dividends on our
Class A common stock in the foreseeable future. It is the present intention of management to utilize all available funds for future operations.

The
only restrictions that limit the ability to pay dividends on the common stock are those imposed by corporate law. Under Delaware corporate law, no dividends or other distributions
may be made which would render us insolvent or reduce assets to less than the sum of our liabilities plus the amount needed to satisfy any liquidation preference.

31

---



(D) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following sets forth information surrounding compensation plans in which we have authorized the future issuance of our common stock:

|                                                        |  | Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights |  | Weighted-average
exercise price of
outstanding options,
warrants and rights |      | Number of securities
remaining available for
future issuance
|------------------------------------------------------- |  | ------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ---- | ------------------------------------------------------------
|Stock options granted under approved stock option plans |  | 1,140,000                                                                                   |  | $                                                                           | 1.71 |                                                             
|                                                        |  |                                                                                             |  |                                                                             |      |                                                             
|Total                                                   |  | 1,140,000                                                                                   |  | $                                                                           | 1.71 |                                                             
|                                                        |  |                                                                                             |  |                                                                             |      |                                                             

(E) RECENT SALES OF UNREGISTERED AND REGISTERED SECURITIES

In April 2003, we completed the private placement of $500,000, 10% convertible subordinated pay-in-kind promissory notes. This
amount was subsequently reduced to $465,000 in December 2003 as we repurchased $35,000 from an unrelated third party investor. Offering costs of approximately $98,000 were incurred in
connection with this private placement and netted against the gross proceeds. The notes were sold to accredited investors under one or more of the exemptions from registration provided for in
Section 3(b), 4(2), 4(6) and Regulation D of the Securities Act of 1933, as amended. The notes and any accrued interest were convertible into Class A common stock either
voluntarily on or before the maturity date of the notes (March 31, 2005) or mandatorily upon the consummation of a qualified public offering. The notes were to convert at the lesser of 50% of
the qualified public offering price or $2.50, up to a maximum of 220,000 shares. On December 15,





2003, the Company completed an initial public offering of 1,667,500 shares of its Class A common stock, which caused the automatic conversion of the notes. The notes and their accrued interest
converted into 200,371 shares of Class A common stock (601,113 shares on a post-split basis).

On December 10, 2003, our Registration Statement on Form SB-2 (registration no. 333-106785) for the sale of 1,667,500 shares of our Class A
common stock (5,002,500 on a post-split basis) which included 217,500 shares of Class A common stock (652,500 on a post-split basis) to cover underwriter
over-allotments, at a price of $5.00 per share ($1.67 on a post-split basis), became effective. We completed this initial public offering on December 15, 2003. All of
the shares sold in this offering were from our authorized pool of Class A common stock. Kashner Davidson Securities Corp. functioned as the representative of the underwriters for this public
offering. Net of offering costs of approximately $1.9 million, we received approximately $6.4 million in proceeds, which we estimated would be allocated as follows:



32

---





During
the period subsequent to the date we received the net proceeds from our initial public offering through December 31, 2003 we repaid BioChemics $428,700 of the aggregate
$518,200 paid by it to third parties on our behalf and used approximately $300,000 for general corporate purposes.

On March 16, 2004 we entered into a private placement transaction with an institutional investor in the amount of $7.5 million. The investment was in the form of an
18 month 2% Convertible Note, or Note, convertible into shares of Class A common stock at a conversion rate of $9 per share, at the option of the investor. In addition, we issued to the
investor warrants to purchase 166,667 shares of our Class A common stock at an exercise price of $8.75 per share. On April 8, 2004, we entered into a settlement agreement and release
with the investor pursuant to which we repaid the investor the sum of $7.5 million without penalty, interest, redemption premium or any other premium or penalty, plus an expense reimbursement
in the amount of $15,000. In consideration of this repayment, the investor surrendered the Note and warrants and terminated all other agreements entered into in connection with the private placement
transaction.

In connection with the this transaction, we paid approximately $600,000 in fees to various third parties. These fees were not refunded when we repaid the investor. See "Recent
Events""Unwinding of March 16, 2004 Private Investment In Public Equity" for further information. These fees were recorded as an expense in the first quarter ended March 31,
2004.

If there are adverse developments in the lawsuits against us, or resolution of our regulatory matters with the SEC and the FDA takes longer than we expect, our capital resources could be
adversely affected. Moreover, we may need to change the amount of net proceeds from our initial public offering that will be used for any particular purpose to the extent that management determines
that such change is advisable. If that becomes necessary, the Company may require additional capital to finance the business plan underlying or related to that particular purpose. However, there can
be no assurance that additional capital, if needed, will be available on terms acceptable to the Company, or at all. Furthermore, any additional equity financing may be dilutive to stockholders, and
debt financing, if available, will likely include restrictive covenants and provide for security interests in the Company's assets. The failure of the Company to raise capital on acceptable terms when
needed could have a material adverse effect on the Company.

33

---



ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS

Management's Discussion and Analysis of Financial Condition and Results of Operations should be read together with our financial statements and related notes
included elsewhere in this Annual Report on Form 10-KSB/A. This Annual Report on Form 10-KSB/A, including the following discussion, contains trend analysis and
other forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements in this Annual Report on Form 10-KSB/A
that are not statements of historical facts are forward-looking statements. These forward-looking statements are based on a number of assumptions and involve risks and uncertainties. Actual results
may differ materially from those set forth in such forward-looking statements as a result of factors set forth elsewhere in this Annual Report on Form 10-KSB/A, including under
"Risk Factors."

Overview

We began our operations in January, 2001, as a division of BioChemics, a biopharmaceutical company engaged in the development of transdermal and topical drug
delivery systems. In January 2003, we incorporated in Delaware and became an independent subsidiary of BioChemics, focused on the further commercialization of our existing OTC products and the
development of new OTC product candidates. We continue to rely on BioChemics to provide us with administrative support services, manufacturing and product development services and VALE and PENtoCORE
technology licenses.

On December 15, 2003, we completed an initial public offering of 1,667,500 shares of our Class A common stock (5,002,500 on a post-split basis) at a price of
$5.00 per share ($1.67 on a



post-split basis), raising approximately $6.4 million, net of issuance costs. Effective March 5, 2004, we completed a 200% stock dividend to holders of record of both our
Class A and B common stock on February 23, 2004. Except where noted, all share and per share information contained in this Annual Report on Form 10-KSB/A have been
adjusted to reflect the effects of this dividend.

The development and test marketing of our three primary products has been completed. Each of these products use PENtoCORE topical formulations. These products are:



We license the Osteon and PENtoCORE trademarks under our amended license agreement with BioChemics. In addition, we have applied for U.S. trademark protection for the mark "Termin8."

In mid to late 2003, we decided to rebrand and distribute our deFEET line of products under the name Termin8. We decided to rebrand deFEET because we needed more flexibility than was
afforded to us under our April 20, 2002 settlement and license agreement with DeFeet International Inc. DeFeet International Inc., an independent company, claimed early in 2002
that it had started to use the "deFeet" name before our trademark date. As a condition of our settlement with DeFeet International, we transferred our registered trademark "deFEET" to DeFeet
International. The formulation of Termin8 is identical to that of deFEET

In 2003 and 2002, substantially all of our gross revenue was generated from a test marketing program with a small number of customers, the largest being Walgreens. During the years ended
2003 and 2002, sales to Walgreens accounted for approximately 86% and 66%, respectively, of our gross

34

---



revenues. Walgreens and Eckerd drug stores collectively, accounted for approximately 98% of our 2001 gross revenue.

We have suspended the marketing and sale of Athlete's Relief, Osteon and Termin8 until we are reasonably sure that the marketing of these products is consistent with the FDA's
requirements and policies. We anticipate that our marketing and sale of these products under revised labeling will resume by the end of 2004, although there is no guarantee of this.

Our financial statements up to and including the year ended December 31, 2002 are based on the operations of the OTC pharmaceutical division of BioChemics. The financial
statements for 2002 and 2001 have been prepared using BioChemics' historical book value in the assets and liabilities and historical results of operations of this division. BioChemics' net investment
to us during these periods is reflected as additional paid-in capital. Transactions were processed through an inter-company account whose balance represented the net obligation by us to
BioChemics. Additionally, these historical financial statements are included in BioChemics' consolidated financial statements.

Since BioChemics provides us with administrative and managerial support, our results of operations include allocations of certain BioChemics expenses, such as centralized accounting,
data processing, utilities, office space rental, supplies, telephone and other BioChemics corporate services and infrastructure costs. These expenses have been charged back to us as a management fee.
We recorded approximately $122,073, $135,600 and $114,150 in these related-party fees in 2003, 2002 and 2001, respectively. In addition, in 2003, other operational charges of approximately $518,200
were paid by BioChemics to third parties on our behalf. Approximately $428,700 of this amount was reimbursed to BioChemics upon the closing of our initial public offering. The remaining balance of
approximately $89,500 was outstanding at December 31, 2003. The expense allocations have been determined on the basis that we and BioChemics consider to be reasonable reflections of the
utilization of services provided for the benefit received by us. The financial information included herein for 2002 and 2001 may not reflect our financial position, operating results, changes in
stockholder's equity and cash flows in the future or what they would have been had we been a separate stand-alone entity during those years presented. However, we believe that these results would not
be significantly different.

Critical Accounting Policies

Revenue RecognitionThe Company recognizes revenue from product sales in accordance with generally accepted accounting
principles in the United States, including the guidance in Staff Accounting Bulletin, or SAB, No. 104 "Revenue Recognition" which supercedes SAB No. 101 "Revenue Recognition in Financial
Statements" and Statement of Financial Accounting Standards, or SFAS, No. 48, "Revenue Recognition When Right of Return Exists."

Revenue
from product sales is recognized when there is persuasive evidence of an arrangement, delivery has occurred, the price is fixed and determinable, and collectibility is reasonably
assured. However, because our products are sold with limited rights of return, revenue is recognized when the price to the buyer is fixed, the buyer is obligated to pay us and the obligation to pay is
not contingent on resale of the product, the buyer has economic substance apart from the us, we have no obligation to bring about the sale of the product and the amount of returns can be reasonably
estimated.

We
record allowances for product returns, rebates and discounts, and report revenue net of such allowances. We must make judgments and estimates in preparing the allowances that could
require adjustments in the future. For instance, our customers have the right to return any product that is held past the labeled expiration date. We base our estimates on historic patterns of returns
and on the expiration dates of product currently being shipped, or as a result of an actual event that may give rise to a significant return amount such as the discontinuance of a product.

35

---



We
do not recognize revenue unless collectibility is reasonably assured. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers
to make required payments. If the financial condition of our customers were to deteriorate and result in an impairment of their ability to make payments, additional allowances may be required.

Expense AllocationsBioChemics provides us with certain administrative, marketing and management services, as well as our
facilities and general corporate infrastructure. Our statement of operations includes allocations of these costs that BioChemics and we considered to be reasonable.

Deferred Income TaxesPrior to 2003, we were a division of BioChemics and were not subject to federal or state income tax
reporting requirements. Effective 2003, we began preparing our income taxes on a stand-alone basis. We account for income taxes and deferred tax assets and liabilities in accordance with SFAS
No. 109, "Accounting for Income Taxes." Because we project future operating losses in the near term, we have provided a full valuation allowance against the deferred tax assets created by these
losses.

Stock-based CompensationAs part of our compensation programs offered to our employees, we grant stock options. We grant stock
options to employees based on the fair value of the Class A common stock at the grant date. As allowed under SFAS No. 123, "Accounting for Stock-Based Compensation," and SFAS
No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure," we have adopted the disclosure-only requirements of these accounting standards.
Accordingly, we do not recognize stock-based compensation expense for stock options granted to employees at their fair value. See Notes 2 and 6 to our financial statements for the impact on earnings
had we fully adopted SFAS 123 and 148.

Off-Balance Sheet ArrangementsWe do not have off-balance sheet arrangements, financings or other
relationships with unconsolidated entities known as "special purpose entities."

Cost of SalesOur costs of sales primarily consist of manufacturing costs charged by outside contractors including BioChemics
which, pursuant to our development and manufacturing agreement charges us the cost of such development and manufacturing plus 10%. We expect to continue to use outside contract manufacturers for the
production of our products. As a result, all of our inventory balances are in the form of finished goods and direct labor initiatives are minimal.

Marketing, Advertising and Promotion ExpensesOur marketing, advertising and promotion expenses include such costs of print,
Internet and radio advertising, costs associated with our attendance and presentation at industry tradeshows and other marketing and sales programs.

Outlook for 2004

In December 2003, we received approximately $6.4 million, net of issuance costs, in proceeds from our initial public offering. Please see "Recent
sales of Unregistered and Registered Securities" for further information on the allocation of these proceeds.

On March 16, 2004 we entered into a private placement transaction with an institutional investor in the amount of $7.5 million. The investment was in the form of an
18 month 2% Convertible Note, or Note, convertible into shares of Class A common stock at a conversion rate of $9 per share, at the option of the investor. In addition, we issued to the
investor warrants to purchase 166,667 shares of our Class A common stock at an exercise price of $8.75 per share. On April 8, 2004, we entered into a settlement agreement and release
with the investor pursuant to which we repaid the investor the sum of $7.5 million without penalty, interest, redemption premium or any other premium or penalty, plus an expense reimbursement
in the amount of $15,000. In consideration of this repayment, the investor surrendered the Note and warrants and terminated all other agreements entered into in connection with the private placement
transaction.

36

---



In connection with this transaction, we paid approximately $600,000 in fees to various third parties. These fees were not refunded when we repaid the investor. See "Recent
Events""Unwinding of March 16, 2004 Private Investment In Public Equity" for further information. These fees were recorded as an expense in the first quarter ended March 31,
2004.

We anticipate, based on our current plans and assumptions relating to our operations, that our current working capital together with our expected cash flows from resumed marketing of our
products and related operations should be sufficient to satisfy our cash requirements for at least the balance of 2004. We have no current plans, agreements or commitments with respect to any
acquisitions.

The SEC's temporary suspension in the trading of our securities has affected our marketing. Immediately upon the initiation of the trading suspension, we ceased marketing and selling our
Athlete's Relief, Osteon and Termin8. Marketing and sale of these products has not yet resumed. We anticipate that our marketing and sale of these products will resume by the end of 2004, although
there is no guarantee of this. Please review the "Legal Proceedings" section for more detail regarding the trading suspension.

As discussed in greater detail under "Legal Proceedings", we, and certain of our officers are the defendants in a number of class action lawsuits filed on behalf of purchasers of the
Company's Class A common stock during the period December 11, 2003 to March 31, 2004 which allege that the defendants violated the federal securities laws by allegedly failing to
make accurate and complete disclosures concerning the Company, its financial condition, its business operations and future prospects, the clinical trial and endorsement of the Company's Termin8
anti-fungal product (previously known as "deFEET") and the institutional demand for the Company's securities. Accordingly, the costs of defending these cases and providing indemnification
to our directors and officers may be substantial. However, because of the uncertainty of estimating the potential financial statement impact of any of these actions with any reasonable degree of
accuracy, at this time the Company has not reserved for any potential liability or costs that may arise as a result of this litigation except for the $200,000 insurance deductible that we reserved as
of March 31, 2004. While the cases are in very preliminary stages and the outcomes are not predictable, if a substantial amount is payable by the Company and is



not reimbursed through applicable insurance policies, this will have material adverse effect on the Company's financial position and liquidity. There can be no assurance that the Company's insurer
will admit liability to reimburse the Company with respect to any of the claims asserted in any of the litigation against the Company.

In light of the discussion set forth under "Recent Events", we have suspended the sale and marketing of our products until all outstanding matters have been addressed to the satisfaction
of the SEC and until we are reasonably sure that the marketing and sale of our products is consistent with the FDA's requirements and policies. Accordingly, we are no longer able to provide meaningful
guidance on what our 2004 or 2005 revenues will be. Therefore, our projections of March 26, 2004 should not be relied on for any purpose.

If and when we resume marketing, we anticipate executing our marketing and sales strategy in two phases. We believe that this two-phase approach is the most efficient and
cost-effective manner to quickly bring our products to the marketplace.

In the first phase of our rollout strategy, we believe the most efficient and economical means of obtaining market penetration is through strategic alliances. Accordingly, this is where
we have placed our immediate focus. Typically under these alliances, our prospective partners will control and assume all the costs of marketing and distribution. We will assume all the costs of
manufacturing. This model eliminates many prohibitive costs such as mass-media advertising and the development of large sales and distribution channels. We will attempt to leverage the
already established market visibility, presence and experience of our prospective partners as well as their distribution networks. We believe that these

37

---



factors and our decision to outsource all our product manufacturing allows us to operate with minimal direct labor and other business costs.

In January 2004, we executed our first strategic alliance with Ortho Distribution Inc., or ODI, a wholly owned subsidiary of OrthoRehab, Inc. of Tempe, Arizona.
OrthoRehab has an extensive distribution network, across the United States and in approximately 50 other countries. We and ODI expect to launch product through ODI's distribution network by the end of
2004. However, there can be no assurance that this alliance will continue, or if continued, that it will be successful.

In March 2004, in furtherance of the first phase of our rollout strategy, we entered into an exclusive, direct to consumer media based, strategic alliance with M2G Media of
Irvine, California, a marketing and distribution company that utilizes direct to consumer media and television as its primary forms of marketing medium. M2G Media will market privately labeled
versions of our current products specifically targeting the over the counter topical and analgesic arthritis and pain relief markets. We expect M2G Media to commence infomercial filming by the end of
2004 and we and M2G Media



expect to launch product through its channels of distribution in the first quarter of 2005. However, there can be no assurance that this alliance will continue, or if continued, that it will be
successful.

In addition to our focus on the strategic alliance model as the first stage of our rollout strategy, we also intend to pursue opportunities to launch our products into retail market
chains, but not before 2005. We believe that because retail sales efforts typically require large economic outlays and long sales cycles, they produce less of an immediate impact on operations than
strategic alliances. Therefore, we have categorized this as part of the second phase of our rollout strategy. In January 2004, we appointed Commotion LLC of Golden, Colorado, a strategic
product marketing company, to assist us in establishing direct brand recognition and strategic retail rollout for our products. Our plan is focused on the systematic rollout of our current products
into major retail and drug store chains, select independent pharmacies and nontraditional channels, including multilevel marketing, direct marketing, web-sites and catalogues. However, a
result of the cessation of the marketing and sale of our products following the initiation of the SEC trading suspension on April 1, 2004, and changes in the timing for the retail rollout of
our products, we do not anticipate using any of our initial public offering proceeds to fund our advertising, direct mail programs and related promotional activities before 2005. There can be no
assurance that any of the initial public offering proceeds will be used for this purpose. Please review the "Recent Sales of Unregistered Securities" section for a full discussion of our marketing
plan.

In accordance with our plan to rebrand deFEET as Termin8 during its test marketing phase, as well as our inability to adequately support an advertising campaign at that time, we removed
all deFEET units from the Walgreens' drug store shelves in mid to late 2003. Given that the product rebranding process was at that time in transition, we continued to pay for Walgreens' Coop marketing
and advertising through the end of 2003. Termin8 is presently not distributed through Walgreens or any other retail chain. Because immediate opportunities have presented themselves through the
strategic alliances discussed previously, securing an arrangement with Walgreens and other major retailers is not an immediate priority at the present time.

We believe that the systematic and multi-phased launch for each of our three current products as described above will allow us to maintain control over the required costs associated with
these launches and will maximize the return on investment for the advertising and marketing expenditures.

The success of our marketing and sales activities will be dependent, among other things, on our ability to retain and attract qualified marketing and sales personnel, enter into
qualified strategic partnerships, place our products into the market and on the consumer perception of our products.

38

---





Years Ended December 31, 2003 and 2002

Net RevenuesNet revenues decreased approximately 42% to $53,270 for the year ended December 31, 2003 from $91,957 for
the year ended December 31, 2002. This decrease was a direct result of our decision to rebrand our athlete's foot product deFEET to Termin8. In response to this decision, in
September 2003, Walgreens returned most of the deFEET product that it had in its possession. We recorded approximately $33,000 against our net revenues for 2003 as a result of Walgreens' return
of its deFEET products to us. Sales of deFEET to Walgreens represented approximately 86% of our total 2003 net revenues.

Cost of SalesWe outsource all manufacturing costs. As a result, cost of sales is limited to those costs incurred and billed
by outside contract manufacturers. Cost of sales decreased approximately 23% to $31,622 in 2003 from $40,811 in 2002. This decrease was primarily due to the decrease in overall net revenue.

Gross ProfitGross profit as a percentage of net revenues decreased from approximately 56% in 2002 to 41% in 2003. This
decrease was due primarily to our decision to discount deFEET to Walgreens by 33% in connection with its test marketing in 2003.

Marketing, Advertising and Promotion ExpensesMarketing, advertising and promotion expenses increased $77,680 to $116,642 in
2003 from $38,962 in 2002. This increase was primarily due to increased advertising, marketing and the promotion of our products in 2003.

Other Operating ExpensesOther operating expenses increased $583,086 to $1,047,918 in 2003 from $464,832 in 2002. The increase
was primarily due to increased personnel related costs associated with the expansion of our company. In addition, we incurred certain professional costs associated with our initial public offering
that could not be netted against the gross proceeds we received from this offering.

Other Expenses, NetOther expenses increased $542,346 to $536,560 in 2003 from a benefit of $5,786 in 2002. This increase was
primarily due to a $500,926 charge associated with the beneficial conversion of $465,000 10% convertible subordinated pay-in-kind promissory notes in addition to the interest
that accrued on these notes from their inception to their conversion into Class A shares of our common stock on December 15, 2003, the date we completed our initial public offering.

Years Ended December 31, 2002 and 2001

Net RevenuesWe generated no net revenues during the years ended December 31, 2002 and 2001 other than those derived
from sales of our pain relief product and athlete's foot product made to retailers and end users through test markets.

Net revenues decreased approximately 8% to $91,957 in the year ended December 31, 2002 from $100,209 during the year ended December 31, 2001. The decrease in revenue was
primarily due to a shift in focus with respect to our revenue distribution model. More specifically, during the year ending December 31, 2002, we actively pursued private label strategic
alliances for our pain relief products. A private label strategic alliance is a licensing arrangement in which a third party is given all the rights to package, market and distribute a company's
products under the third party's own name label in return for a distributor's fee or royalty fee payable to the licensing company on a per unit basis. During the year ended December 31, 2002,
we were engaged in ongoing negotiations with a large pharmaceutical company regarding a proposed private label strategic alliance that would permit that company to distribute and market our pain
relief products under its private label. As part of its negotiations with us, that company advised us that it would be seeking exclusive rights with respect to distribution and marketing. No formal
agreement was executed, but we reduced our efforts to market, distribute or replenish our retail supply of our pain relief products during the negotiation period so as to prevent

39

---



the excessive cost of recalling these products in the event that the exclusivity rights that company was seeking were granted. Near the end of 2002, we determined that we did not wish to grant
exclusivity rights to that company with respect to our pain relief products and the negotiations with that company ended. Our marketing and distribution of these products resumed in
January 2003. No product recalls occurred as a result of our efforts to pursue these strategic alliances because no private label strategic alliances were consummated during this period.

Cost of SalesAll manufacturing costs are outsourced. As a result, cost of sales is limited to those costs incurred and billed
by the outside contractor. Cost of sales increased less than one percent to $40,811 for the year ended December 31, 2002 from $40,791 for the year ended December 31, 2001.

Gross ProfitGross profit as a percentage of net revenues decreased approximately 3% to 56% for the year ended
December 31, 2002 from a gross profit of 59% for the year ended December 31, 2001. The decline in gross profit was due to a larger portion of the net revenue being made up of the
athlete's foot product, which only carried a per unit gross profit of 35.5% during the year ended December 31, 2002. This gross profit reduction resulted from a promotional price discount of
33% to Walgreens pharmacy retail chain that was test marketing this product.

Marketing, Advertising and Promotion ExpensesMarketing, advertising and promotion expenses decreased approximately 93% to
$38,962 for the year ended December 31, 2002 from $556,614 for the year ended December 31, 2001. The decrease was due to a shift in focus with respect to our revenue distribution model
as we pursued private label strategic alliances.

Other Operating ExpensesOther operating expenses decreased approximately 15% to $464,832 for the year ended
December 31, 2002 from $545,748 for the year ended December 31, 2001. This decrease was due to reductions in travel, meals, sales-commission and outside sales contractors. We also
shifted our focus with respect to our revenue distribution model, which allowed us to reduce these expenses as we pursued private label strategic alliances.

Liquidity and Capital Resources

Historically, while we were a division of BioChemics, cash was managed on a centralized basis. Cash receipts associated with our business were transferred to
BioChemics directly upon receipt and in turn BioChemics has provided funds to cover our disbursements. Accordingly, we had reported no cash or cash equivalents at December 31, 2002 or
December 31, 2001. During 2001 and 2002, BioChemics funded most of our working capital needs. Accordingly, BioChemics made cash contributions to our capital in 2001 and 2002 to cover our
deficits incurred during those years and period. These contributions totaled approximately $1.0 million in 2001, $0.4 million in 2002.

In
2003, other operational charges of approximately $518,200 were paid by BioChemics to third parties on our behalf. Approximately $428,700 of this amount was reimbursed to BioChemics
upon the closing of our initial public offering. The remaining balance of approximately $89,500 was outstanding at December 31, 2003.

In accordance with our plan to obtain independent financing as a stand-alone entity, we initiated a private placement of our 10% convertible subordinated
pay-in-kind promissory notes in the aggregate principal amount of $500,000. The proceeds from the sale of these notes were used to fund certain expenses related to our initial
public offering, as well as for general administrative and operating expenses, which is discussed further below. In December 2003, we



repurchased $35,000 principal amount of these notes at cost, without interest, from an unrelated third party investor.

We
have no off balance sheet financing or financing that is not disclosed in our financial statements included in this Annual Report.

40

---



On December 15, 2003, we completed an initial public offering of 1,667,500 shares of our Class A common stock (5,002,500 on a post-split basis) at a price of
$5.00 per share ($1.67 on a post-split basis), raising approximately $6.4 million, net of issuance costs. At December 31, 2003, we had approximately $6.1 million
remaining from these proceeds for our working capital needs. Concurrently with the completion of our initial public offering, we converted our 10% convertible subordinated
pay-in-kind promissory notes into an aggregate of 200,371 shares of Class A common stock (601,113 shares on a post-split basis).

We received an aggregate of $450,000 in the period between February, 2004 and March, 2004 related to the exercise of warrants during that period by the founder of Commotion LLC, a
marketing company that we have closed a marketing agreement with on January 1, 2004. The warrants were issued on January 16, 2004.

On March 16, 2004 we entered into a private placement transaction with an institutional investor in the amount of $7.5 million. The investment was in the form of an
18 month 2% Convertible Note, or Note, convertible into shares of Class A common stock at a conversion rate of $9 per share, at the option of the investor. In addition, we issued to the
investor warrants to purchase 166,667 shares of our Class A common stock at an exercise price of $8.75 per share. On April 8, 2004, we entered into a settlement agreement and release
with the investor pursuant to which we repaid the investor the sum of $7.5 million without penalty, interest, redemption premium or any other premium or penalty, plus an expense reimbursement
in the amount of $15,000. In consideration of this repayment, the investor surrendered the Note and warrants and terminated all other agreements entered into in connection with the private placement
transaction.

In connection with this transaction, we paid approximately $600,000 in fees to various third parties. These fees were not refunded when we repaid the investor. See "Recent
Events""Unwinding of March 16, 2004 Private Investment In Public Equity Transaction" for further information. These fees were recorded as an expense in the first quarter ended
March 31, 2004.

We do not expect our marketing efforts with M2G Media and Ortho Distribution, Inc. to provide us with significant revenues or cash flow in 2004.

In addition, our financial condition has been affected by the administrative costs and legal fees associated with both the SEC and FDA regulatory matters, as well as the preliminary
aspects of our pending litigation. Please see "Legal Proceedings" and "Recent Events" for more information on the underlying claims in the lawsuits against us and the SEC's trading suspension. We
expect to use our working capital, in part, to defray those costs for the foreseeable future. Nevertheless, we believe we have sufficient cash to execute our business plan through the end of the 2004
fiscal year. However, if there are adverse developments in the lawsuits against us, or resolution of our regulatory matters with the SEC and the FDA take longer than we expect, our capital resources
could be adversely affected.

Quantitative and Qualitative Disclosures Regarding Market Risk



As of December 31, 2003, we had cash and cash equivalents of $6,109,775 that consisted of highly liquid money market instruments with maturities less than
90 days. Because of the short maturities of these instruments, a sudden change in market interest rates would not have a material impact on the fair value of the portfolio. Accordingly we do
not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our portfolio.

41

---





We do not own any equity investments. Therefore, we do not currently have any direct equity price risk.



We are exposed to market risk in the normal course of business operations. We face competition and must offer our products and services at prices the market will
bear. We believe we are well positioned with our products such that price risk will not affect our operating results to any significant degree. However, should the prices of our products decline, this
may adversely affect our future profitability and competitiveness.

Recently Issued Accounting Pronouncements

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity."
SFAS 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in
statements of financial position. Previously, many of those financial instruments were classified as equity. SFAS 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of the provisions of SFAS 150 did not have a
material effect on our financial statements.

In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies accounting
for derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS 149 is effective for contracts entered into or modified after June 30,
2003, and for hedging relationships designated after June 30, 2003. The adoption of the provisions of SFAS 149 did not have a material effect on our financial statements.

In January 2003, the FASB issued Interpretation (FIN) No. 46, "Consolidation of Variable Interest Entities." As amended, this interpretation clarifies the consolidation
principles for companies that have interests in entities that are Variable Interest Entities (VIE) as defined under FIN 46. According to this interpretation, if a company has an interest in a VIE and
is at risk for a majority of the VIE's expected losses or receives a majority of the VIE's expected gains, it shall consolidate the VIE. For entities acquired or created before February 1,
2003, this interpretation is effective no later than the end of the first interim or reporting period ending after March 15, 2004, except for those VIE's that are considered to be special
purpose entities, for which the effective date is no later than the end of the first interim or annual reporting period ending after December 15, 2003. For all entities that were acquired
subsequent to January 31, 2003, this interpretation is effective as of the first interim or annual period ending after December 31, 2003. The adoption of the provisions of this
interpretation did not have a material effect on our financial statements.

ITEM 7. FINANCIAL STATEMENTS

Our consolidated financial statements and related notes, which are attached to this Annual Report on Form 10-KSB beginning on page 59,
are incorporated by reference.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

42

---



ITEM 8A. CONTROLS AND PROCEDURES

In connection with the preparation and filing of this amended and restated annual report on Form 10-KSB/A, our management, including our chief
executive officer and chief financial officer, carried out a new evaluation of the effectiveness of our "disclosure controls and procedures" (as defined under Rules 13a-15(e) and
15d-15(e) promulgated under the Exchange Act) as those controls existed as of December 31, 2003. Based on this evaluation, our principal executive and principal financial officers
have concluded that our disclosure controls and procedures were not effective to ensure that material information is recorded, processed, summarized and reported properly by our management on a timely
basis in order to comply with our disclosure obligations.

Based on our evaluation, we concluded that our disclosure controls and procedures were not effective because we lacked the specialized managerial resources to enable us to determine
whether the regulatory requirements applicable to our products and product candidates were fully disclosed.

As a result of these findings, we determined to take the following steps to improve our disclosure controls and procedures:



We have hired outside counsel expert in FDA regulation and outside counsel expert in SEC regulation. We believe the involvement of these counsel in our reporting process, including the
preparation of this 10-KSB/A, is a significant improvement to our disclosure controls and procedures.

We anticipate completing our search for a chief executive officer with appropriate experience by the end of the third quarter 2004. We believe with the completion of that step we will be
able conclude that our disclosure controls and procedures are effective to ensure that material information is recorded, processed, summarized and reported by our management on a timely basis in order
to comply with our disclosure obligations under the Exchange Act.

43

---





PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Set forth below is the name, age, position and a brief account of the business experience of each of our executive officers and directors:

|Name                         |  | Age |  | Position                                                    
|---------------------------- |  | --- |  | ------------------------------------------------------------
|John J. Masiz                |  | 45  |  | President, Chief Executive Officer and Chairman of the Board
|Kevin J. Seifert(1)          |  | 43  |  | Vice President, Chief Operating Officer, Director           
|Stephen G. Carter, Ph.D.     |  | 51  |  | Vice President, Chief Scientific Officer, Director          
|Joseph Frattaroli            |  | 42  |  | Vice President, Chief Financial Officer                     
|Bruce A. Shear(2)(3)         |  | 48  |  | Director                                                    
|Brian J. Strasnick, Ph.D.(2) |  | 50  |  | Director                                                    
|Robert E. Anderson(4)        |  | 48  |  | Director                                                    
|Gary Fromm, Ph.D.            |  | 69  |  | Director                                                    
|William P. Adams, M.D.(4)    |  | 57  |  | Director                                                    

---

John J. MasizMr. Masiz has served as our Chief Executive Officer, President and Chairman of our Board of Directors
since our inception. In addition, Mr. Masiz has served as the Chief Executive Officer and Chairman of BioChemics since 1989. From 1987 to 1989, Mr. Masiz managed
day-to-day operations of Linsco Financial Group (now named LPL Financial), currently one of the largest private brokerage firms in the United States. From 1985 to 1987,
Mr. Masiz was with Coopers & Lybrand. Before joining Coopers & Lybrand, Mr. Masiz served as a financial analyst with Hannaford Bros., Inc., including its
Shop & Save and Welby Drug groups. Mr. Masiz is a cum laude graduate of Colby College, with distinction in two majors. He received a Juris Doctorate degree from Suffolk University Law
School and is a member of the Massachusetts Bar Association. Mr. Masiz has agreed with the Staff to settle a proposed action by the SEC against him





that would prevent him from serving as an officer or director of any public company, including the Company, for a period of five years. If Mr. Masiz is barred from serving as an officer and
director of the Company for this five year period, he will be permitted and intends to continue to be an active employee of the Company. If the offer to settle is accepted by the SEC itself,
Mr. Masiz would resign as the President and Chief Executive Officer of the Company, as well as the Chairman of the Board of Directors of the Company. Please see "Risk Factors""If
we fail to attract, train and retain additional highly qualified senior executives and technical and managerial personnel in the near future, our business will suffer".

Kevin J. SeifertMr. Seifert served as our Vice President and Chief Operating Officer from December 2003 until
June 18, 2004. Mr. Seifert also served as a member to our Board of Directors from February 2004 until June 18, 2004. Mr. Seifert held various management positions
with Becton, Dickinson and Company, a medical technology and manufacturing company, from 1997 to October 31, 2003. From July 2000 until his resignation, Mr. Seifert served as
President of Becton, Dickinson's Consumer Healthcare division. In this capacity, Mr. Seifert oversaw global consumer product production and sales for Becton, Dickinson's core business including
the diabetes product line. From

44

---



1996 to 1997, Mr. Seifert served as Founder and Executive Vice President of Telergy, Inc., a broadband telecommunications service provider. From 1990 to 1996, Mr. Seifert was the
Vice President of Marketing and Sales and Investor Relations for Bio-Plexus, Inc., a medical device manufacturer. From 1989 to 1990 Mr. Seifert acted as Vice President of
Advanced Pulmonary Technology, Inc., a manufacturer of life support ventilators. From 1985 to 1989, Mr. Seifert was a Product Development Manager for Sage Products, Inc., a
manufacturer and developer of medical and healthcare products. Mr. Seifert holds 4 medical device patents. He received his Bachelors of Science degree in Marketing from New Hampshire College in
May 1984.

Stephen G. Carter, Ph.D.Dr. Carter has served as our Chief Scientific Officer since June 2003. He has served as
a member of our Board of Directors since June 2003. From September 1999 to the present, Dr. Carter has also served as Chief Scientific Officer of BioChemics. From
April 1998 to September 1999, Dr. Carter was a self-employed consultant in the pharmaceuticals industry. From January 1996 to April 1999,
Dr. Carter held the appointment as the Administrative Dean for Research at Harvard Medical School, or HMS, with responsibilities for the funding of all HMS research activities and for
initiation and implementation of several new Harvard-wide research programs. From 1988 to 1996, Dr. Carter served in various executive positions with Glaxo/Glaxo Wellcome, including
head of U.S. virology research and responsibility for biotechnology and academic alliances in drug delivery and gene therapy/genetics/genomics. From 1986 to 1988, Dr. Carter led a group of
scientists and conducted research at the National Cancer InstituteFrederick Cancer Research Facility. From 1985 to 1986, Dr. Carter held an appointment as a research faculty member
at the Yale University School of Medicine in the Department of Molecular Biophysics and Biochemistry and as a NIH postdoctoral fellow in Molecular Virology with the Department of Human Genetics at
Yale University from 1983 to 1986. Dr. Carter received his Ph.D. from Iowa State University, Department of Biochemistry & Biophysics.

Joseph FrattaroliMr. Frattaroli has served as our Chief Financial Officer since June 2003. From
January 2002 through April 2003, Mr. Frattaroli served as an accounting and financial consultant to BioChemics. From April 2000 through December 2001,
Mr. Frattaroli was chief financial officer of Getov Machine Incorporated, a machined products manufacturer. From January 1998 through April 2000, Mr. Frattaroli served as
managing principal for the EPI group, a consulting firm that provided per diem chief financial officer services as well as tax preparation and compliance services. From March 1993 through
January 1998, Mr. Frattaroli served as both an audit manager and tax director for Tucci and Roselli, Certified Public Accountants. From May 1989 through March 1993,
Mr. Frattaroli served as tax department manager for Lockheed Martin Corporation. From July 1987 through May 1989, Mr. Frattaroli served as tax compliance specialist for
Ernst and Young, certified public accountants. From October 1985 through July 1987, Mr. Frattaroli served as a general program field Revenue Agent for the Internal Revenue
Service. Mr. Frattaroli holds a Bachelor of Science Degree in Business Administration from Salem State College and is a certified public accountant licensed in New Hampshire.

Bruce A. ShearMr. Shear has served as a member of our Board of Directors since June 2003, and as the Audit
Committee independent financial expert since August 2003. Mr. Shear is the co-founder, President and Chief Executive Officer of PHC, Inc., a publicly traded nationally
recognized behavioral health company. Mr. Shear has served PHC since 1979. Prior to his current position, Mr. Shear served as vice president of financial affairs. Mr. Shear has
served on the Board of Governors of the Federation of American Health Systems for over 15 years. In addition, Mr. Shear previously served on the Board of Trustees for the National
Association of Psychiatric Health Systems, which represents the nation's behavioral health hospitals and organizations. Mr. Shear received an MBA from Suffolk University in 1980 and a B.S. in
Accounting and Finance from Marquette University in 1976.

45

---



Brian J. Strasnick, Ph.D.Dr. Strasnick has served as a member of our Board of Directors since June 2003.
Dr. Strasnick is the founder, Chairman, President and Chief Executive Officer of Willow Laboratories, one of New England's leading drug testing facilities. Dr. Strasnick has served that
company since September 1995. Dr. Strasnick has provided behavioral healthcare and pharmacological services as a practitioner for over 18 years. His educational background is in
pharmacology and psychology with an emphasis in substance abuse treatment. A nationally recognized expert, Dr. Strasnick has lectured throughout the country as a former national visiting
professor for a large pharmaceutical company. He has extensive experience in pharmacology and metabolism of prescription medications and their effects on drug testing. Dr. Strasnick is a
diplomat of the American College of Forensic Examiners as well as a fellow of the College of Pharmacological and Apothecary Sciences. Dr. Strasnick also serves on the Board for the Drug and
Alcohol Testing Industry Association, or DATIA.

Robert E. AndersonMr. Anderson has served as a member of our Board of Directors since June 2003. From
January 1998 to the present, Mr. Anderson has been a self-employed consultant and investor. From January 1995 to December 1997, he served as a senior managing
director at Furman Selz LLC a financial services firm. From March 1989 to





November 1994, Mr. Anderson was a senior vice president with Lehman Brothers. From September 1982 to March 1989, he was a vice president with Goldman Sachs.
Mr. Anderson received his A.B. in Economics from Brown University in 1978 and an MBA with Distinction from Harvard Business School in 1982.

Gary Fromm, Ph.D.Dr. Fromm has been a member of our Board of Directors since June 2003. Dr. Fromm now
serves as Chairman and has served as a Director of IDC Financial Publishing, a leading analyst of government reporting financial institutions, since 1983. He has served as a Director to Sky Capital
Enterprises, Inc. and Sky Capital Holdings Limited, financial services firms since April 2003. He has served as Chairman of the Board of Sky Capital UK Limited a financial services firm
since July 2003. Dr. Fromm has also served as a Director of Global Secure Holdings, Inc. since February of 2003 and as a director of Neoterik Health Technologies, Inc.
since 1984. Dr. Fromm is also founder and president of Investment Intelligence Systems Corporation and its successor, Unisheet Limited, computer software companies, and co-founder
of Data Resources, a market data distribution company. Dr. Fromm holds an A.M. and a Ph.D. in Economics from Harvard University, an M.S. in Industrial Management from M.I.T. and a B.M.E.
in Mechanical Engineering from Cornell University.

William P. Adams, M.D., F.A.C.S.Dr. Adams has been a member of our Board of Directors since June 2003.
Dr. Adams has served as the president and a director of the Adams Center for Aesthetic Surgery, in Boston, Massachusetts for more than five years. Dr. Adams is a Diplomate of the
American Board of Plastic Surgery and a Fellow of the American College of Surgeons. He is also a member of the American Society of Plastic and Reconstructive Surgeons, the American Society for
Aesthetic Plastic Surgery and serves as a Clinical Associate Instructor in Surgery at Massachusetts General Hospital and Harvard Medical School. Dr. Adams is a graduate of Dartmouth College and
Harvard Medical School.

John J. Masiz and Dr. Stephen G. Carter are also directors and executive officers of BioChemics and Robert E. Anderson is a director of BioChemics. BioChemics has no other
directors. Kevin J. Seifert served as a director of BioChemics from February 2004 until April 8, 2004. Currently, Dr. Carter spends approximately 30% of his business time on
behalf of Vaso Active. We expect that he will spend the balance of his respective business time on behalf of BioChemics. Mr. Masiz currently spends approximately 70% of his business time on
behalf of Vaso Active and the remainder of his time with BioChemics. When Mr. Masiz resigns as an officer and director of BioChemics, he will be permitted, and intends, to continue to be an
active employee of the Company and we expect that Mr. Masiz will continue to spend approximately 70% of his business time on behalf of Vaso Active, with the remainder of his business time spent
with BioChemics.

46

---



Code of Ethics

We have adopted a code of ethics in accordance with Section 406 of the Sarbanes-Oxley Act of 2002 and related rules established by the SEC. The code of
ethics establishes guidelines to be followed by our principal executive officer, who is our Chief Executive Officer, and our senior financial officers. Currently our Chief Financial Officer is our
only senior financial officer under the code of ethics. In the event that we appoint a treasurer, controller, or other officer who is principally responsible for our accounting, such employees will
automatically be deemed senior financial officers. In addition, our audit committee may, from time to time, change the officers designated as senior financial officers. Compliance is mandatory for
those employees subject to our code of ethics. Waivers or amendments to this code will be disclosed to the public, and filed with the SEC, on Form 8-K. We filed as an exhibit to our
Annual Report on Form 10-KSB a copy of our code of ethics on March 26, 2004.

Section 16(a) Beneficial Ownership Reporting Compliance

The Securities Exchange Act of 1934, as amended, requires the Company's executive officers and Directors, and any persons owning more than 10% of a class of the
Company's stock, to file certain reports of ownership and changes in ownership with the SEC.

To the best of our knowledge, all reports required by Section 16(a) of the Exchange Act to be filed by our Directors, officers and 10% or greater stockholders during the year
ended December 31, 2003 were filed on time with six exceptions. Dr. Brian J Strasnick, a Director, and Mr. John J. Masiz, Chairman and Chief Executive Officer, inadvertently filed
their initial Form 3s a day late. Mr. Masiz, Mr. Joseph Frattaroli, Chief Financial Officer, Mr. Kevin J. Seifert, former Vice President and Chief Operating Officer and
Dr. Stephen G. Carter, Chief Scientific Officer all inadvertently filed their Form 4s, regarding beneficial ownership created through the issuance of employee stock options, late.

The above information is to our knowledge based on a review of copies of the reports furnished to us and representations of our officers, Directors and stockholders owning more than 10%
of the Company's Class A common stock.

ITEM 10. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table shows the annual and long-term compensation paid by the Company for the fiscal year ended December 31, 2003 to our Chief
Executive Officer and other executive officers. We refer to these individuals collectively as the Named Officers.

Summary Compensation Table

|Name and
Principal Position                                    |  | Fiscal
Year |  | Salary |        | Bonus |   | Other Annual
Compensation |  | Restricted Stock
Awards(3) |  | Securities
Under Option
|-------------------------------------------------------------- |  | ----------- |  | ------ | ------ | ----- | - | ------------------------- |  | -------------------------- |  | -----------------------
|John J. Masiz(1)
Chief Executive Officer and President         |  | 2003        |  | $      | 94,792 |       |   |                          |  |                           |  |                       
|Kevin J. Seifert(2)
Vice President and Chief Operating Officer |  | 2003        |  | $      |       |       | $ | 150,000                   |  |                           |  |                       
|Dr. Stephen G. Carter(1)
Chief Scientific Officer              |  | 2003        |  | $      | 75,833 |       |   |                          |  |                           |  |                       

---

47

---





Stock Option Grants

The following table provides information about (i) the stock options granted to Named Officers during the fiscal year ended December 31, 2003 and
(ii) the aggregated number and value of options exercisable and unexercisable by the Named Officers as of December 31, 2003.

|NAME                  |  | NUMBER OF
SECURITIES
UNDERLYING
OPTIONS
GRANTED(1) |  | PERCENT OF
TOTAL OPTIONS
GRANTED TO
EMPLOYEES IN
FISCAL YEAR |   | EXERCISE
PRICE ($/SH) |      | EXPIRATION
DATE
|--------------------- |  | -------------------------------------------------- |  | ------------------------------------------------------------ | - | --------------------- | ---- | ---------------
|John J. Masiz         |  | 300,000                                            |  | 35.7                                                         | % | $                     | 1.83 |                
|Kevin J. Seifert(2)   |  | 225,000                                            |  | 26.8                                                         | % | $                     | 1.67 |                
|Dr. Stephen G. Carter |  | 225,000                                            |  | 26.8                                                         | % | $                     | 1.67 |                
|Joseph Frattaroli     |  | 90,000                                             |  | 10.7                                                         | % | $                     | 1.67 |                

---

48

---



EMPLOYMENT AGREEMENTS

We entered into an employment agreement with Mr. Masiz, effective as of June 16, 2003, which provides for his employment as President and Chief
Executive Officer, and nomination to the Board, through June 30, 2008. The agreement is automatically renewed for successive two year terms thereafter unless terminated earlier by either party
in accordance with the terms and conditions of the employment agreement. The agreement provides for an annual salary of $175,000 per year, subject to yearly merit and performance-based bonuses to be
granted in such amounts as may be determined by the Compensation Committee in its discretion. If we terminate Mr. Masiz without cause, he is entitled to his base salary for 12 months
following the time of termination. If we terminate Mr. Masiz following a change of control, we are obligated to pay him a lump sum equal to 200% of his salary as in effect at the time of such
termination plus a pro-rata portion of any performance-based bonus, assuming that all 100% of the applicable performance targets for the relevant fiscal year had been achieved. For the
purposes of his agreement, a change of control occurs if one person or entity acquires control of 30% or more of our voting common stock, there is a change of control in the Board, we sell all, or
substantially all, of our assets, or we are the non-surviving party in a merger.

If, as discussed under Item 9, Mr. Masiz is prevented from serving as an officer or director of our Company, we expect to amend his employment agreement in certain respects, to
comply with the terms of any resolution that he may conclude with the SEC, but without any reduction in his annual salary as a continuing active employee of the Company.

We entered into an employment agreement with Dr. Carter, effective as of June 16, 2003, which provides for his employment as Chief Scientific Officer, and nomination to the
Board, through June 30, 2008. The agreement is automatically renewed for successive two year terms thereafter unless terminated earlier by either party in accordance with the terms and
conditions of the employment agreement. The agreement provides for an annual salary of $140,000 per year, subject to yearly merit and performance-based bonuses to be granted in such amounts as may be
determined by the Compensation Committee in its discretion. If we terminate Dr. Carter without cause, he is entitled to his base salary for 12 months following the time of termination.
If we terminate Dr. Carter following a change of control, we are obligated to pay him a lump sum equal to 200% of his salary as in effect at the time of such



termination plus a pro-rata portion of any performance-based bonus, assuming that all 100% of the applicable performance targets for the relevant fiscal year had been achieved. For the
purposes of his agreement, a change of control occurs if one person or entity acquires control of 30% or more of our voting common stock, there is a change of control in the Board, we sell all, or
substantially all, of our assets, or we are the non-surviving party in a merger.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information on the beneficial ownership of the Company's Class A and Class B common stock as of July 19, 2004,
for each person or group of affiliated persons, whom management knows to beneficially own more than 5% of either class of our common stock or control more than 5% of the votes eligible to be cast at
our Annual Meeting. The table also lists the same information for the Company's Directors and those executive officers named in "Executive Compensation", individually and as a group.

49

---





Beneficial ownership is determined in accordance with SEC rules. To the Company's knowledge, except as indicated by footnote, the persons named in the table have sole voting and
investment power with respect to all shares of common stock shown as beneficially owned by them. Options to purchase shares of common stock that are exercisable within 60 days of
July 19, 2004 are deemed to be beneficially owned by the person holding such options for the purpose of computing their ownership, but are not treated as outstanding for the purpose of
computing the ownership of any other person. Applicable percentage of beneficial ownership is based on 5,828,604 shares of Class A common stock and 4,500,000 shares of Class B common
stock outstanding as of July 19, 2004. Unless otherwise indicated in the footnotes, the address of each listed stockholder is: c/o Vaso Active Pharmaceuticals, Inc., 99 Rosewood Drive,
Suite 260, Danvers, MA 01923.

Class A common stock

Name of Beneficial Owner(1)

Number of Shares
Beneficially Owned(1)

Percent of ClassJohn Masiz(2)

4,650,000

44.4
%BioChemics(3)

4,500,000

43.6
%Kevin J. Seifert(4)

56,250

1.0
%Stephen G. Carter, Ph.D.(5)

112,500

1.9
%Brian Strasnick, Ph.D.(6)

79,233

1.4
%Robert Anderson(7)

51,000

*Bruce A. Shear(8)

15,000

*Gary Fromm, Ph.D.(9)

15,000

*William P. Adams, M.D.(10)

15,000

*All directors and executive officers as a group (nine persons)(11)

4,993,983

*


Class B common stock

Name of Beneficial Owner(1)

Number of Shares
Beneficially Owned(1)

Percent of Class OutstandingJohn Masiz(12)

4,500,000

100
%BioChemics(13)

4,500,000

100
%All directors and executive officers as a group (nine persons)

4,500,000

100
%


---

50

---





51

---





The following table sets forth information we know with respect to the beneficial ownership of the common stock of BioChemics as of July 19, 2004, by our Directors and executive
officers, individually and as a group. Options to purchase shares of BioChemics common stock that are exercisable within sixty days of July 19, 2004, are deemed to be beneficially owned by the
person holding such options for the purpose of computing ownership of such person, but are not treated as outstanding for the purpose of computing the ownership of any other person. None of our
Directors or executive officers is the beneficial owner of any other class of equity securities of BioChemics.

BioChemics Common Stock

Name of Beneficial Owner(1)

Number of Shares
Beneficially Owned(1)

Percent of Class OutstandingJohn J. Masiz(2)

5,263,749

85.7
%Stephen G. Carter, Ph.D.(3)

275,000

4.7
%Joseph Frattaroli(4)

405,000

7.3
%Bruce A. Shear



Brian J. Strasnick, Ph.D.



Robert E. Anderson(5)

198,082

3.4
%Gary Fromm, Ph.D.



William P. Adams, M.D.



All directors and executive officers as a group (eight persons)

6,141,831

91.1
%


---

Please see footnote 6 to our financial statements for information regarding our equity compensation plans.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Relationship with BioChemics

BioChemics, Inc. owns all the Company's Class B common stock. Because our Class B common stock has three votes per share, BioChemics controls
70% of the total votes outstanding. Our President, Chairman and Chief Executive Officer John Masiz is also the Chief Executive Officer, President and controlling stockholder of BioChemics.

52

---



Policy on Related Party Transactions

The Company has a policy to the effect that any transactions between it and its officers, Directors, principal stockholders and affiliates be on terms no less
favorable to the Company than could reasonably be obtained in arms' length transactions with independent third parties, and that any such transaction also be approved by a majority of our outside
independent Directors disinterested in the transaction. In addition, under our Code of Ethics for the Principal Executive Officer and Senior Financial Officers, all related-party transactions must be
reviewed and approved by the Audit Committee of our Board of Directors.

Private Placement of Securities

Through a private placement transaction which closed in April 2003, we issued subordinated 10% convertible pay-in-kind promissory
notes in the aggregate principal amount of $500,000 to accredited investors. These notes converted into our Class A common stock on the consummation of our initial public offering at $2.50 per
share (before giving effect to the 200% stock dividend issued on March 5, 2004). At consummation of our initial public offering, we issued approximately 200,371 shares of our Class A
common stock to the holders of these notes.

In this private placement transaction, we issued notes in the principal amount of $50,000 to Dr. Brian J. Strasnick, one of our directors. As a result, we issued approximately
21,400 shares of our Class A common stock to Dr. Strasnick upon conversion of his notes in December 2003. Because of the March 5th stock dividend,
Dr. Strasnick now holds 63,233 shares as a result of the his note's conversion. Please see Ownership of Certain Beneficial Owners and Management for more details.

License Agreement

We have entered into a license agreement with BioChemics under which we have a worldwide, irrevocable, exclusive right to use and practice its VALE patents and
the PENtoCORE technology to sell, market and commercialize all products that (i) utilize and incorporate the BioChemics' patents and know-how; (ii) are classified by the FDA
as "over-the-counter products", and (iii) require less than $1 million of clinical development. Specifically excluded from the license are certain diabetic
neuropathy products developed by BioChemics, which were the subject of a clinical study, conducted at the Beth Israel DeaconessJoslin Foot Center Center in Boston. We believe this license
covers all our current products and product candidates.

In exchange for the granting of the license, we issued 1,500,000 shares of our Class B common stock to BioChemics as a license fee with a deemed value equal to the par value of
such shares or $150. These shares were issued in 2003, before our March 5, 2004 stock dividend. After the stock dividend, BioChemics holds 4,500,000 shares of our Class B common stock.
This was a one-time license fee and there are no royalties payable to BioChemics under the license agreement.

Pursuant to the terms of the license agreement, BioChemics retains all rights to use and practice the patents for all purposes with respect to non-OTC products, including
prescription pharmaceuticals and pet products. Any improvements to the patents remain the property of BioChemics, but to the extent that any such improvements relate to products and product
candidates, the improvements are licensed to us on the same terms as the initial license under the license agreement. Maintenance of the patent filings remains the responsibility of BioChemics,
although we maintain the right under the license agreement to make any required filings at BioChemics' expense in the event that such filings are not made on a timely basis by BioChemics.

BioChemics is also party to a settlement agreement and license with De Feet International, Inc., dated April 20, 2002, whereby De Feet International, Inc. granted a
non-exclusive, non-transferable and non-assignable license to BioChemics to use the "deFEET" trademark throughout the United States in

53

---



connection with the manufacture, advertisement, promotion, distribution and sale of athlete's foot preparations. Pursuant to the settlement agreement and license with De Feet
International, Inc., BioChemics is required to remit to De Feet International, Inc. a royalty equal to 5% of all gross sales by BioChemics of products using the deFEET trademark. The
royalty is capped at an annual maximum amount of $50,000. Effective January 1, 2003, all sales of deFEET-branded product have been made by BioChemics. BioChemics makes these royalty payments to
De Feet International, Inc. in connection with such sales, and in accordance with the settlement agreement and license. As a result of the rebranding of the deFEET product, we expect royalties
payable under this settlement agreement to be insignificant in 2004 and beyond.

Pursuant to an amendment to the license agreement, dated July 2, 2003, the trademarks Osteon and PENtoCORE, together with the goodwill associated with each mark, were licensed to
us by BioChemics. In addition, BioChemics assigned to us its ownership of any and all revenue associated with the sale, commercialization and marketing of deFEET by BioChemics and we agreed to be
responsible for all expenses related to these revenues, including the royalty payments payable by BioChemics to DeFeet International, Inc. Pursuant to the terms of the amendment to license
agreement, the nature and quality of all services rendered in connection with the Osteon and PENtoCORE marks remain under the control of BioChemics.

The term of the licensing agreement extends through the date of the last BioChemics' patent to expire. With respect to the portions of the licensing agreement that do not apply to a
BioChemics patent or



patent application, this agreement extends though February 2013. The licensing agreement can be automatically renewed for successive two-year terms for the non-patent
technology unless otherwise terminated by us pursuant to the license agreement. We have the right to terminate the license agreement for any reason and without cause upon 90 days written notice
of termination to BioChemics.

Manufacturing and Development Agreement

In August 2003, we entered into a manufacturing and development agreement with BioChemics with respect to the ongoing research, manufacturing and
development of our products and product candidates. Under this agreement, BioChemics will research, develop and manufacture products for us pursuant to specific purchase orders submitted by us from
time to time. BioChemics will charge us a development and manufacturing fee at a rate of cost plus 10%. In the event that (i) BioChemics materially fails to meet our product orders for a period
of more than three consecutive months; (ii) BioChemics commits an anticipatory breach of the manufacturing and development agreement; (iii) a force majeure event occurs which we
reasonably believes will affect BioChemics' ability to supply and meet our products requirements for a period of at least three months; or (iv) any of BioChemics' manufacturers are
non-compliant with the regulations required to manufacture the products are unable to cure such non-compliance, we may qualify and engage at our discretion, other suppliers and
manufacturers as we deem necessary to ensure uninterrupted supply of our products.

The manufacturing and development agreement has an initial term of five years. It is automatically renewable for an additional period of 12 months unless earlier terminated.
Either party may terminate the agreement upon a material breach by the other party by giving the breaching party three months to cure the breach. In event of termination, transition will be conducted
in such a manner as to not cause inconvenience to either party. Termination by BioChemics for any reason, except for non-payment, shall not be effective until the Company has located and
arranged for continuation of the manufacturing of its products with another supplier on terms commercially reasonable to the Company, provided however, that the Company shall have no longer than two
years from the date of the notice of termination from BioChemics to make such arrangements.

54

---



Office Space, Administrative Services and Financial Support

Currently, we share our principal corporate office space with BioChemics in Danvers, Massachusetts. Our principal corporate offices accommodate our operational,
selling, marketing and administrative needs. The lease for this office space is held by BioChemics. Although we do not have a formal lease





agreement with BioChemics, we pay approximately $1,800 per month in rent to BioChemics for our office space. We anticipate that this arrangement will continue at least through the end of 2004. In
addition, BioChemics provides us with back office support and corporate management services. Allocations of BioChemic's expenses for centralized accounting, data processing, utilities, office space
rental, supplies, telephone and other corporate services and infrastructure are charged back to us as a management fee. These amounts were approximately $122,073, $135,600 and $114,150 for the years
ended December 31, 2003, 2002 and 2001 respectively.

Effective of September 1, 2003, we entered into an administrative services agreement with BioChemics. Under this agreement, BioChemics provides to us, at our request,
administrative support services including secretarial support, accounting and tax services, data processing services, utilities, designated office space, designated warehouse and storage space, office
supplies, telephone and computer services and equipment and such other office and corporate support services as we may reasonably require from time to time. BioChemics will charge us an administrative
services fee at a rate of cost plus 10%. This agreement is in effect for an initial term of 5 years and will be automatically renewable on each anniversary date for an additional period of
12 months unless sooner terminated (i) for a material breach by us, not cured within three months, and upon written notice (ii) upon 30 days written notice by us,
(iii) upon 45 days written notice by either party if BioChemics ceases to own beneficially shares of our capital stock to which are attached at least 49% of the votes that may be cast to
elect our Directors, or (iv) upon written notice by either party in the event that we shall have disposed of all or substantially all of our assets.

Registration Rights Agreement

We have entered into a registration rights agreement with BioChemics under which we have granted to BioChemics, or its permitted transferees, as holders of shares
of Class A common stock issuable upon conversion of the Class B common stock held by BioChemics, rights with respect to registration of these shares under the Securities Act of 1933.
Subject to limitations set forth in the registration rights agreement, holders of the securities may require us, at our expense, to file one registration statement under the Securities Act with
respect to the public resale of the securities. With the exception of this offering, if we propose to register any of our securities under the Securities Act, either for our own account or for the
account of other security holders, BioChemics or its permitted transferees are entitled to notice of the registration and are entitled, subject to certain conditions and limitations, to include, at
our expense, their shares in the registration. Notwithstanding the foregoing, BioChemics has agreed with Kashner Davidson Securities Corp., on behalf of the underwriters of our initial public
offering, not to exercise its registration rights for a period of two years from the date of this prospectus without the consent of Kashner Davidson Securities Corp. All registration expenses, as
specified in the registration rights agreement, must be borne by us and all expenses relating to the sale of the securities registered must be borne by BioChemics or the other holder of the securities
being registered.

Other Transactions with BioChemics

BioChemics made cash contributions to our capital in 2001, 2002 and 2003 to cover our deficits incurred during those years. These contributions totaled $1,040,395
in 2001, $446,862 in 2002, and $518,200 in 2003. We do not anticipate receiving further financing from BioChemics.

55

---



In the fiscal year ended December 31, 2003, we incurred management fees payable to BioChemics of approximately $122,073 and also incurred operational charges of approximately
$518,200 that had been paid by BioChemics to third parties on our behalf. Of these amounts, $89,500 of the operational charges remained outstanding at December 31, 2003.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

|Exhibit
Number |  | Description of Exhibit                                                                                                                                                 
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1            |  | Amended and Restated Certificate of Incorporation(2)                                                                                                                   
|3.2            |  | Amended and Restated By-laws(2)                                                                                                                                        
|4.1            |  | Specimen Certificate for Class A common stock(2)                                                                                                                       
|10.1           |  | Employment Agreement, effective June 16, 2003, between Vaso Active Pharmaceuticals, Inc. and John J. Masiz(2)                                                          
|10.2           |  | Employment Agreement, effective June 16, 2003, between Vaso Active Pharmaceuticals, Inc. and Stephen G. Carter(2)                                                      
|10.3           |  | 2003 Stock Incentive Plan(1)                                                                                                                                           
|10.4           |  | Form of 2003 Non-Employee Director Compensation Plan(2)                                                                                                                
|10.5           |  | Registration Rights Agreement by and between Vaso Active Pharmaceuticals, Inc. and BioChemics, Inc.(2)                                                                 
|10.6           |  | License Agreement, dated February 1, 2003, between BioChemics, Inc. and Vaso Active Pharmaceuticals, Inc., as amended by an amendment agreement, dated July 2, 2003.(2)
|10.7           |  | Manufacturing and Development Agreement, dated February 1, 2003, between Vaso Active Pharmaceuticals, Inc. and BioChemics, Inc.(2)                                     
|10.8           |  | Administrative Services Agreement, dated September 1, 2003, between BioChemics, Inc. and Vaso Active Pharmaceuticals, Inc.(3)                                          
|14             |  | Code of Ethics(3)                                                                                                                                                      
|23.1           |  | Consent of Stowe & Degon(4)                                                                                                                                            
|31.1           |  | Certification of John J. Masiz, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(4)                                                  
|31.2           |  | Certification of Joseph Frattaroli, Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(4)                                              
|32.1           |  | Certification of John J. Masiz, Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(4)                                                  
|32.2           |  | Certification of Joseph Frattaroli, Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(4)                                              

---

(b) Reports on Form 8-K:

There were no reports on Form 8-K filed during the three-month period ended December 31, 2003.

56

---



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees

Audit fees include the aggregate fees billed for the audit of the Company's annual financial statements, the financial statements included in our
Form SB-2, as amended, and





Form S-8. The aggregate audit fees billed to the Company by Stowe & Degon for the fiscal year ended December 31, 2002 were $12,300, and for the fiscal year ended
December 31, 2003, were approximately $25,000. The Company came into existence in January 2003.

Audit-Related Fees

There have been were no audit-related fees since the Company came into existence in January 2003.

Tax Fees

There have been no tax related fees since the Company came into existence in January 2003.

All Other Fees

Fees paid to Stowe & Degon in connection with services rendered on our registration statement on Form SB-2 effective December 10,
2003 were $64,500. No other fees were paid to Stowe & Degon for other services.

As set forth in its charter, our Audit Committee has the sole authority to pre-approve all audit and non-audit services provided by its independent auditor. Our
Audit Committee has considered whether the provision of Stowe & Degon's services other than for the annual audit and quarterly reviews is compatible with their independence and has concluded
that it is.

***********

57

---





SIGNATURES

In accordance with Section 13 and 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, on July 20, 2004.

| |  | VASO ACTIVE PHARMACEUTICALS, INC.
| |  | ---------------------------------
| |  | By:                              

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities as of July 20, 2004.

|Name                                                  |  | Title                                                                     |  | Date         
|----------------------------------------------------- |  | ------------------------------------------------------------------------- |  | -------------
|                                                      |  |                                                                           |  |              
|/s/JOHN J. MASIZJohn J. Masiz                         |  | President, Chief Executive Officer and Chairman of the Board of Directors |  | July 20, 2004
|/s/STEPHEN G. CARTER, PH.D.Stephen G. Carter, Ph.D.   |  | Vice President and Chief Scientific Officer and Director                  |  | July 20, 2004
|/s/JOSEPH FRATTAROLIJoseph Frattaroli                 |  | Vice President and Chief Financial Officer                                |  | July 20, 2004
|/s/BRUCE A. SHEARBruce A. Shear                       |  | Director                                                                  |  | July 20, 2004
|/s/GARY FROMM, PH.D.Gary Fromm, Ph.D.                 |  | Director                                                                  |  | July 20, 2004
|/s/ROBERT E. ANDERSONRobert E. Anderson               |  | Director                                                                  |  | July 20, 2004
|/s/BRIAN J. STRASNICK, PH.D.Brian J. Strasnick, Ph.D. |  | Director                                                                  |  | July 20, 2004
|/s/WILLIAM P. ADAMS, M.D.William P. Adams, M.D.       |  | Director                                                                  |  | July 20, 2004

58

---





VASO ACTIVE PHARMACEUTICALS, INC.        INDEX TO FINANCIAL STATEMENTS

|                                                                                        |  | Page
|--------------------------------------------------------------------------------------- |  | ----
|Report of Independent Registered Public Accounting Firm                                 |  | 60  
|Balance Sheets as of December 31, 2003 and 2002                                         |  | 61  
|Statements of Operations For The Years Ended December 31, 2003, 2002, and 2001          |  | 62  
|Statements of Stockholders' Equity For The Years Ended December 31, 2003, 2002 and 2001 |  | 63  
|Statements of Cash Flows For The Years Ended December 31, 2003, 2002 and 2001           |  | 64  
|Notes to Financial Statements                                                           |  | 65  

59

---





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Directors and Shareholders of Vaso Active Pharmaceuticals, Inc.:

We have audited the accompanying balance sheets of Vaso Active Pharmaceuticals, Inc. (the "Company") as of December 31, 2003 and 2002, and the related statements of operations,
stockholders' equity, and cash flows for each of the three years ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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, such financial statements present fairly, in all material respects, the financial position of Vaso Active Pharmaceuticals, Inc. as of December 31, 2003 and 2002, and the
results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with the U.S. generally accepted accounting principles.

As discussed in Note 8 to the financial statements, the Company is a defendant in several purported securities class action lawsuits alleging that the Company and certain of its officers made
false and misleading statements and failed to disclose material information concerning the Company, its financial condition, its business operations and future prospects, the clinical trial and
endorsement of its Termin8 anti-fungal product (previously known as "deFEET") and the institutional demand for its securities. The Company is also a nominal defendant in two purported
derivative complaints filed against BioChemics, Inc. and the Company's directors and certain of its officers, alleging that the individual defendants breached fiduciary duties owed to the
Company and its shareholders by issuing misleading statements to (and concealing material facts from) the market, "concerning certain of the




Company's key and primary products under review by the Food and Drug Administration ("FDA"), between December 11, 2003 and March 31, 2004." The complaints purport to assert derivative
claims against all defendants for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. The plaintiffs in the purported securities class
action lawsuits seek equitable and monetary relief, an unspecified amount of damages, with interest, attorneys fees and costs. The plaintiffs in the derivative actions seek equitable and monetary
relief, an unspecified amount of damages, and attorneys and other fees, costs and expenses. The Company has not yet responded to any of these complaints. The ultimate outcome of the lawsuits cannot
presently be determined. Accordingly, no provision for any liability that may result upon the final resolution of these actions has been made in the accompanying financial statements.

/s/
Stowe & Degon

Worcester, MA
February 25, 2004 (Except July 7, 2004 as to Notes 1, 8 and 11)

60

---





VASO ACTIVE PHARMACEUTICALS, INC.        BALANCE SHEETS

|                                       |                                                                                                                                                 | December 31,               |      
|-------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | -----
|
|ASSETS                                 |                                                                                                                                                 |                            |      
|Current Assets:                        |                                                                                                                                                 |                            |      
|                                       | Cash and cash equivalents                                                                                                                       |                            | $    
|                                       | Accounts receivable                                                                                                                             |                            |      
|                                       | Inventory                                                                                                                                       |                            |      
|                                       | Prepaid expenses and other current assets                                                                                                       |                            |      
|                                       |                                                                                                                                                 |                            |      
|                                       |                                                                                                                                                 | Total current assets       |      
|                                       |                                                                                                                                                 |                            |      
|                                       |                                                                                                                                                 |                            | Total
|                                       |                                                                                                                                                 |                            |      
|LIABILITIES AND STOCKHOLDERS' EQUITY   |                                                                                                                                                 |                            |      
|Current Liabilities:                   |                                                                                                                                                 |                            |      
|                                       | Accounts payable                                                                                                                                |                            | $    
|                                       | Accrued compensation                                                                                                                            |                            |      
|                                       | Other accrued expenses                                                                                                                          |                            |      
|                                       | Due to parent company                                                                                                                           |                            |      
|                                       |                                                                                                                                                 |                            |      
|                                       |                                                                                                                                                 | Total current liabilities  |      
|                                       |                                                                                                                                                 |                            |      
|Commitments and Contingencies (Note 8) |                                                                                                                                                 |                            |      
|Stockholders' Equity:                  |                                                                                                                                                 |                            |      
|                                       | Preferred stock$0.0001 par value; authorized, 10,000,000 Shares issued and outstanding, none (Note 5)                                          |                            |      
|                                       | Common stock$0.0001 par value; authorized, 30,000,000 Shares; issued and outstanding, 10,103,613 shares in 2003 and no shares in 2002 (Note 5) |                            |      
|                                       | Additional paid-in-capital                                                                                                                      |                            |      
|                                       | Accumulated deficit                                                                                                                             |                            |      
|                                       |                                                                                                                                                 |                            |      
|                                       |                                                                                                                                                 | Total stockholders' equity |      
|                                       |                                                                                                                                                 |                            |      
|                                       |                                                                                                                                                 |                            | Total
|                                       |                                                                                                                                                 |                            |      

See
notes to financial statements.

61

---





VASO ACTIVE PHARMACEUTICALS, INC.        STATEMENTS OF OPERATIONS

|                                                      |                                      | Year Ended December 31, |           
|----------------------------------------------------- | ------------------------------------ | ----------------------- | ----------
|
|Net revenues                                          |                                      | $                       | 53,270    
|Cost of revenues                                      |                                      |                         | 31,622    
|                                                      |                                      |                         |           
|                                                      | Gross profit                         |                         |           
|Costs and expenses:                                   |                                      |                         |           
|                                                      | Marketing, advertising and promotion |                         |           
|                                                      | Management fee                       |                         |           
|                                                      | Selling, general and administrative  |                         |           
|                                                      |                                      |                         |           
|                                                      |                                      | Loss from operations    |           
|Other income (expense), net                           |                                      |                         | (536,560  
|                                                      |                                      |                         |           
|Net loss                                              |                                      | $                       | (1,679,472
|                                                      |                                      |                         |           
|Net loss per sharebasic and diluted                  |                                      | $                       | (0.62     
|Weighted average shares outstandingbasic and diluted |                                      |                         | 2,714,180 

See
notes to financial statements.

62

---





VASO ACTIVE PHARMACEUTICALS, INC.        STATEMENTS OF STOCKHOLDERS' EQUITY

|                           |                                                                                          | Common Stock |           |   |       |     |   |           |           
|-------------------------- | ---------------------------------------------------------------------------------------- | ------------ | --------- | - | ----- | --- | - | --------- | ----------
|
|
|Balance, January 1, 2001   |                                                                                          |             |           | $ |      |     | $ |          |           
|                           | Contributions by parent                                                                  |              |          |   |       |    |   |           | 1,040,395 
|                           | Net loss                                                                                 |              |          |   |       |    |   |           |          
|                           |                                                                                          |              |           |   |       |     |   |           |           
|Balance, December 31, 2001 |                                                                                          |             |           |   |      |     |   | 1,040,395 |           
|                           | Contributions by parent                                                                  |              |          |   |       |    |   |           | 446,862   
|                           | Net loss                                                                                 |              |          |   |       |    |   |           |          
|                           |                                                                                          |              |           |   |       |     |   |           |           
|Balance, December 31, 2002 |                                                                                          |             |           |   |      |     |   | 1,487,257 |           
|                           | Effect of incorporation                                                                  |              |          |   |       |    |   |           | (1,487,257
|                           | Issuance of Class B common stock to parent                                               |              | 4,500,000 |   |       | 450 |   |           |          
|                           | Issuance of Class A common stock at $1.67 per share, net of $1,935,305 in issuance costs |              | 5,002,500 |   |       | 501 |   |           | 6,401,694 
|                           | Conversion of 10% convertible Promissory notes and accrued interest                      |              | 601,113   |   |       | 60  |   |           | 903,871   
|                           | Net loss                                                                                 |              |          |   |       |    |   |           |          
|                           |                                                                                          |              |           |   |       |     |   |           |           
|Balance, December 31, 2003 |                                                                                          | 10,103,613   |           | $ | 1,011 |     | $ | 7,305,565 |           
|                           |                                                                                          |              |           |   |       |     |   |           |           

See notes to financial statements.

63

---





VASO ACTIVE PHARMACEUTICALS, INC.        STATEMENTS OF CASH FLOWS

|                                                                            |                                                                          | Year Ended December 31,                   |                                          
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ----------------------------------------- | -----------------------------------------
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                       |                                                                          |                                           |                                          
|Net loss                                                                    |                                                                          | $                                         | (1,679,472                               
|Adjustments to reconcile net loss to net cash used in operating activities: |                                                                          |                                           |                                          
|Beneficial conversion feature of 10% convertible promissory notes           |                                                                          |                                           | 500,926                                  
|Accrued interest converted to Class A common stock                          |                                                                          |                                           | 35,907                                   
|                                                                            | Increase (decrease) in cash from the change in:                          |                                           |                                          
|                                                                            |                                                                          | Accounts receivable                       |                                          
|                                                                            |                                                                          | Inventory                                 |                                          
|                                                                            |                                                                          | Prepaid expenses and other current assets |                                          
|                                                                            |                                                                          | Accounts payable                          |                                          
|                                                                            |                                                                          | Accrued compensation                      |                                          
|                                                                            |                                                                          | Other accrued expenses                    |                                          
|                                                                            |                                                                          |                                           |                                          
|                                                                            |                                                                          |                                           | Net cash used in operating activities    
|                                                                            |                                                                          |                                           |                                          
|CASH FLOWS FROM FINANCING ACTIVITIES:                                       |                                                                          |                                           |                                          
|Investment from parent                                                      |                                                                          |                                           | 450                                      
|Contributions from parent                                                   |                                                                          |                                           |                                         
|Payments from parent company, net                                           |                                                                          |                                           | 67,168                                   
|Net proceeds from the issuance of 10% convertible promissory notes          |                                                                          |                                           | 367,098                                  
|Net proceeds from the issuance of common shares                             |                                                                          |                                           | 6,402,195                                
|                                                                            |                                                                          |                                           |                                          
|                                                                            |                                                                          |                                           | Net cash provided by financing activities
|                                                                            |                                                                          |                                           |                                          
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                   |                                                                          |                                           | 6,109,775                                
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                |                                                                          |                                           |                                         
|                                                                            |                                                                          |                                           |                                          
|CASH AND CASH EQUIVALENTS, END OF YEAR                                      |                                                                          | $                                         | 6,109,775                                
|                                                                            |                                                                          |                                           |                                          
|SUPPLEMENTAL CASH FLOW INFORMATION:                                         |                                                                          |                                           |                                          
|Interest paid                                                               |                                                                          | $                                         |                                         
|Income taxes paid                                                           |                                                                          |                                           |                                         
|Non-cash financing activities:                                              |                                                                          |                                           |                                          
|                                                                            | Fair value of warrants issued in connection with initial public offering |                                           |                                          

See notes to financial statements.

64

---





VASO ACTIVE PHARMACEUTICALS, INC.        NOTES TO FINANCIAL STATEMENTS

1. Nature of Business and Operations



Vaso Active Pharmaceuticals, Inc. (the "Company") is an early-stage company focused on commercializing, marketing and selling
over-the-counter ("OTC") pharmaceutical products that incorporate the vaso active lipid encapsulated ("VALE") technology and the proprietary PENtoCORE technology. The Company
is engaged in a single operating segment of the OTC pharmaceutical industry.

The Company licenses the VALE patents and PENtoCORE technology from BioChemics, Inc. ("BioChemics"), a privately owned biopharmaceutical company. As discussed at Notes 5 and 7,
the Company issued 4,500,000 shares of its Class B common stock to BioChemics in consideration for the exclusive worldwide rights to commercialize, market and sell the VALE technology for OTC
pharmaceutical products. These shares were issued pursuant to authorization from the Company's Board of Directors on June 20, 2003.

The Company has a limited operating history and has incurred net losses since its inception. The Company's principal risks are: the possibility of a material adverse effect from the
actions as discussed in Notes 8 and 11, its ability to successfully have its products and product candidates developed and to successfully market its products and product candidates in the
highly regulated environment within



which the Company operates, competition from comparable products and larger companies, dependence on key personnel and continued dependence on BioChemics for manufacturing and product development.



On December 15, 2003, the Company completed an initial public offering of 5,002,500 shares of Class A common stock (1,667,500 on a
pre-split basis) at a price of $1.67 per share ($5.00 on a pre-split basis) raising approximately $6.4 million, net of issuance costs. See Note 5.



On February 20, 2004, the Company announced a three-for-one stock split on all classes of common equity in the form of a 200% stock
dividend paid on March 5, 2004 to stockholders of record on February 23, 2004. All share and per share information have been restated to give retroactive effect to this stock split.



The Company commenced operations in January 2001 as the OTC division of BioChemics. In January 2003, the Company incorporated in the state of
Delaware and became a wholly-owned subsidiary of BioChemics. The 2002 and 2001 financial statements of the Company reflect the historical results of operations and cash flows of the OTC division of
BioChemics during each of these respective periods. The 2003 financial statements of the Company have been prepared on a stand-alone basis.

The 2002 and 2001 financial statements have been prepared using BioChemics' historical bases in the assets and liabilities and historical results of operations of this division.
BioChemics' net investment in the Company is reflected as additional paid-in capital. Transactions were processed through an inter-company account, of which the balance represented the net
obligation from the Company to

65

---



BioChemics. Additionally, the Company's financial statements are included in the consolidated financial statements of BioChemics.

BioChemics provides the Company with certain management and administrative services including accounting, corporate services, data processing, telephone, office space and other occupancy
and infrastructure related costs. The financial statements of the Company include expense allocations on bases that the Company and BioChemics consider to be reasonable reflections of the utilization
of services provided for the benefit received by the Company. In addition, the Company's marketing, advertising and promotion expenses include expenses related to the commercialization, marketing and
distribution of the BioChemics athlete's foot preparation product, the revenues of which are realized by the Company through an assignment of BioChemics' ownership interests in such revenues. The
financial information included herein for the 2002 and 2001 may not reflect the financial position, operating results, changes in stockholder's equity and cash flows of the Company in the future or
what they would have been had the Company been a separate stand-alone entity during 2002 and 2001. However, it is probable that the actual historic results would not be significantly different from
those presented.

In
accordance with generally accepted accounting principles with respect to the allocation of corporate management services, the financial statements of a carved out public registrant
should appropriately reflect these expenses to fairly present its operating results with an offset to additional paid-in capital. In addition, it is required that upon incorporation of a
carved out division into a stand-alone entity, the accumulated deficiency balance should be eliminated against additional paid-in capital. Upon incorporation of the Company in
January 2003, the existing accumulated deficiency of $1,487,257 was eliminated using such treatment.

2. Summary of Significant Accounting Policies

This summary of significant accounting policies is presented to assist in understanding the financial statements of the Company. The financial statements and
notes are representations of the Company's management, who are responsible for their fair presentation, integrity and objectivity. The accounting policies conform with accounting principles generally
accepted in the United States of America.

Use of EstimatesThe preparation of 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 reported amounts of assets and liabilities, disclosure of contingent assets and liabilities and the
reported amounts of revenue and expenses. Actual results could differ from those estimates.

Cash and Cash EquivalentsCash and cash equivalents include cash on hand, cash deposited with banks and highly liquid debt
securities with remaining maturities of ninety days or less when purchased. In 2002 and 2001, BioChemics managed the Company's cash and cash equivalents. Cash receipts associated with the Company's
business were transferred to BioChemics on a periodic basis and BioChemics funded the Company's disbursements. Beginning in 2003, the Company managed its own cash.

Accounts ReceivableAccounts receivable consist primarily of trade receivables from the sale of OTC pharmaceutical products.
The allowance for doubtful accounts is based on the Company's assessment of the collectibility of specific customer accounts and an assessment of economic risk as well

66

---



as the aging of the accounts receivable. The Company's policy is to write-off uncollectible trade receivables after significant measures have failed to result in their collection. An
allowance for doubtful accounts is established to represent the estimated uncollectible trade receivables. The Company held little outstanding trade receivables at December 31, 2003 and
therefore no allowance for doubtful accounts provision has been established.

InventoryInventory is valued at the lower of cost or market on a first-in, first-out basis. The
Company uses outside contract manufacturers for the production of its products. Therefore, all inventory is in the form of finished goods.

Due to ParentPursuant to a license agreement, a manufacturing agreement, a registration rights agreement and as well as the
allocation of overhead and other administrative services, the Company's transactions are processed through an inter-company account, due to/from parent, the balance of which represents the net
obligation from the Company to BioChemics, or vice-versa. BioChemics funded the Company during the period of time in which the Company was a division. BioChemics contributed
non-reimbursed amounts of $1,040,395, and $446,862 during the years ended December 31, 2002 and 2001 respectively.

In
January 2003, the Company incorporated and became a stand-alone entity. During 2003, BioChemics paid $518,197 on behalf of the Company to third parties. As of
December 31, 2003, $428,690 of this amount was repaid to BioChemics. The remaining balance of $89,507 remains due and outstanding.

Fair ValuesUnless otherwise noted, deposits, prepaid expenses, accounts payable, accrued expenses and other liabilities have
all been stated at values that approximate fair value.

Revenue RecognitionThe Company recognizes revenue from product sales in accordance with generally accepted accounting
principles in the United States, including the guidance in Staff Accounting Bulletin, or SAB, Bulletin No. 104 "Revenue Recognition," which supercedes SAB No. 101 "Revenue Recognition in
Financial Statements" and Statement of Financial Accounting Standards, or SFAS, No. 48, "Revenue Recognition When Right of Return Exists."

Revenue from product sales is recognized when there is persuasive evidence of an arrangement, delivery has occurred, the price is fixed and determinable, and collectibility is reasonably
assured. However, because the Company's products are sold with limited rights of return, revenue is recognized when the price to the buyer is fixed, the buyer is obligated to pay, the obligation to
pay is not contingent on resale of the product, the buyer has economic substance on its own, the Company has no obligation to bring about the sale of the product and the amount of returns can be
reasonably estimated.

The
Company records allowances for product returns, rebates and discounts, and reports revenue net of such allowances. The Company makes judgments and estimates in preparing the
allowances, which could require adjustments in the future. For instance, customers have the right to return any product that is held past the labeled expiration date. The Company bases its estimates
on historic patterns of returns and on the expiration dates of product currently being shipped.

Revenue is not recognized unless collectibility is reasonably assured. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of
customers to make

67

---



required payments. If a customer's financial condition were to deteriorate and result in an impairment of their ability to make payments, additional allowances may be required.

Stock-Based CompensationThe Company accounts for stock-based employee compensation arrangements using the intrinsic value
method in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation."

The Company has employee stock benefit plans, which are described more fully in Note 6. As the exercise price of all options granted under these stock option plans was equal to
the market price of



the underlying common stock on the grant date, no stock-based compensation is recognized in the Company's financial statements. The following table illustrates the effect on net loss and net loss per
share if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended, to options granted under the stock option plans and rights to acquire stock granted under the
Company's 2003 Stock Incentive Plan and 2003 Non-Employee Director Compensation Plan. For purposes of this pro-forma disclosure, the value of the options is estimated using a
Black-Scholes option pricing model and amortized ratably to expense over the options' vesting periods. Because the estimated value is determined as of the date of grant, the actual value ultimately
realized by the employee may be significantly different.

2003Net loss, as reported

$
(1,679,472
)Less: Stock-based compensation had all options been recorded at fair value


(114,356
)Adjusted net loss

$
(1,793,828
)Weighted average shares outstanding, basic and diluted


2,714,180Net loss per share, basic and diluted, as reported

$
(0.62
)Adjusted net loss per share, basic and diluted

$
(0.66
)


The Black-Scholes option pricing model requires the Company to input highly subjective assumptions, including the option's expected life and the price volatility of the underlying stock.
See Note 6 for a discussion of the assumptions used in the option pricing model and estimated fair value of employee stock options. The Company did not issue any stock options in 2002 or 2001.

Income TaxesPrior to 2003, the Company was a division of BioChemics and was not subject to federal or state income tax
reporting requirements. In January 2003, the Company incorporated and became a stand-alone entity. The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for
Income Taxes." Deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of existing assets and liabilities, using
enacted tax rates. Valuation allowances are established when necessary to reduce the deferred tax assets to those amounts expected to be realized.

Advertising CostsCosts incurred to advertise and promote the Company are expensed as incurred. Advertising costs were
approximately $74,000, $39,000 and $557,000 in 2003, 2002 and 2001, respectively.

68

---



Sales IncentivesSales incentives are netted against revenues when incurred. Sales incentives are primarily comprised of
slotting fees, coupons and rebates. Sales incentives of approximately $5,000, $5,000 and $24,000 were netted against revenues in 2003, 2002 and 2001, respectively.

Research and DevelopmentThere were no research and development costs incurred for any of the periods presented in the
Company's financial statements.

Management FeesBioChemics provides the Company with certain administrative, marketing and management services, as well as the
Company's facilities and general corporate infrastructure. Management fees were approximately $122,000, $136,000 and $114,000 in 2003, 2002 and 2001, respectively.

Comprehensive IncomeComprehensive income (loss) was equal to net loss for each year presented.

Net Loss Per Common ShareBasic net loss per common share is computed by dividing net loss applicable to common stockholders
by the weighted average number of common shares outstanding during the period. Diluted net loss per common share reflects, in addition to the weighted average number of common shares, the potential
dilution if common stock options were exercised into common stock, unless the effects of such exercises would have been antidilutive.

Basic
and diluted loss per common share are the same for 2003 as potentially dilutive stock options and warrants totaling 1,575,000 in 2003 have not been included in calculations of
diluted net loss per common share available to common stockholders, as their inclusion would have been antidilutive.

Historical Net Loss Per Common ShareThe historical capital structure of the Company is not representative of the future
capital structure. Accordingly, the historical net loss per share and weighted average number of common shares outstanding are not shown for any periods presented prior to January 1, 2003. See
Note 10 for required pro-forma calculations. Shares used in the
computation of basic and diluted loss per share represent the weighted average shares outstanding during the years presented.

ReclassificationsCertain reclassifications have been made to the 2002 and 2001 amounts to conform to the 2003 presentation.

Recently Issued Accounting Pronouncements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 clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those financial instruments
were classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of the provisions of SFAS 150 did not have a material effect on the Company's financial statements.

In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 amends and clarifies accounting
for derivative

69

---



instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS 149 is effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. The adoption of the provisions of SFAS 149 did not have a material effect on the Company's financial statements.

In January 2003, the FASB issued Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities." As amended, this interpretation clarifies the consolidation
principles for companies that have interests in entities that are Variable Interest Entities ("VIE") as defined under FIN 46. According to this interpretation, if a company has an interest in a VIE
and is at risk for a majority of the VIE's expected losses or receives a majority of the VIE's expected gains, it shall consolidate the VIE. For entities acquired or created before February 1,
2003, this interpretation is effective no later than the end of the first interim or reporting period ending after March 15, 2004, except for those VIE's that are considered to be special
purpose entities, for which the effective date is no later than the end of the first interim or annual reporting period ending after December 15, 2003. For all entities that were acquired
subsequent to January 31, 2003, this interpretation is effective as of the first interim or annual period ending after December 31, 2003. The adoption of the provisions of this
interpretation did not have a material effect on the Company's financial statements.

3. Private Placement

In April 2003, the Company completed the private placement of $500,000, 10% convertible subordinated pay-in-kind promissory notes
(the "notes") to accredited investors. This amount was subsequently reduced to $465,000 in December 2003 as the Company repurchased $35,000 from an unrelated third party investor.

The
notes and any accrued interest were convertible into Class A common stock either voluntarily on or before the maturity date of the notes (March 31, 2005) or mandatorily
upon the consummation of a qualified public offering. The notes were to convert at the lesser of 50% of the qualified public offering price or $0.83, up to a maximum of 660,000 shares. On
December 15, 2003, the Company completed an initial public offering of 5,002,500 shares of its Class A common stock, which caused the automatic conversion of the notes. The notes and
their accrued interest converted into 601,113 shares of Class A common stock.

The Company accounted for this transaction in accordance with Emerging Issues Task Force Abstract No, 98-5, "Accounting for Convertible Securities with Beneficial Conversion
Features or Contingently Adjustable Conversion Ratios." Because the fair value of the common stock sold by the Company in its initial public offering was in excess of the conversion price of the notes
and as the notes were immediately converted into shares of Class A common stock, a $500,926 charge was recorded in connection with this beneficial conversion feature and recorded in other
expenses, net in 2003.

A director of the Company purchased $50,000 in these notes in April 2003. These notes and accrued interest converted into approximately 64,233 shares of Class A common
stock in December 2003.

70

---





4. Income Taxes

The Company has federal and state tax net operating loss carry forwards available for future periods of approximately $1,021,000. The federal and state tax net
operating loss carry forwards expire beginning in 2024. As a result of the changes in the ownership of the Company, there may be limitations on the amounts of net operating loss carry forwards that
may be utilized in any one year.

The
tax effect of significant items comprising the Company's net deferred tax assets at December 31, 2003 and 2002 are as follows:

2003

2002(pro forma)Deferred tax assets:Net operating loss carry forwards

$
451,000

$
595,000Accrued compensation


(43,000
)

408,000


595,000Valuation allowance


(408,000
)

(595,000
)Net deferred tax assets

$


$



The Company operated as a division of BioChemics from inception through January 2003. Accordingly, during that period, the Company was not subject to federal or state income
taxes. Therefore, the components of the Company's deferred tax asset at December 31, 2002 is presented on a pro forma basis as if the Company had been a legal stand-alone entity for the period
presented.

The
Company believes that uncertainty exists with respect to future realization of the deferred tax assets and has established a valuation allowance for the full amount as of
December 31, 2003 and 2002.

A
reconciliation between the amount of income tax determined by applying the applicable U.S. statutory tax rate to the pre-tax loss is as follows:

2003

2002

2001(pro forma)

(pro forma)Federal statutory rate

34
%
34
%
34
%State tax, net of federal impact

6

6

6Provision for valuation allowance on deferred tax assets

(40
)
(40
)
(40
)Effective tax rate


%

%

%


5. Stockholders' Equity

Initial CapitalizationThe Company operated as a division of BioChemics from its inception in January 2001 through
January 2003 and maintained no classes of common or preferred stock. In January 2003, the Company incorporated and, in accordance with its Certificate of Incorporation, established two
classes of stockcommon stock and preferred stock. Upon incorporation, no shares of either class were issued or outstanding.

On
June 20, 2003, the Board of Directors of the Company authorized the issuance of 4,500,000 shares of Class B common stock to BioChemics pursuance to the license agreement
between the Company and BioChemics (see Note 7).

71

---



Preferred StockAt December 31, 2003, the Company had 10,000,000 authorized shares of preferred stock, $0.0001 par
value per share, of which no shares were issued and outstanding.

Common StockThe Company maintains two classes of common stock. The Company has 20,000,000 authorized shares of Class A
common stock and 10,000,000 authorized shares of Class B common stock. The par value for each of these classes of common stock is $0.0001. Holders of Class A common stock are entitled to
one vote per share, while holders of Class B common stock are entitled to three votes per share. At December 31, 2003, there were 5,603,613 shares of Class A common stock issued
and outstanding. At December 31, 2003, there were 4,500,000 shares of Class B common stock issued and outstanding, all of which are held by BioChemics.

On December 15, 2003, the Company completed an initial public offering of 5,002,500 shares of Class A common stock at a price of $1.67 per share pursuant to a registration
statement filed with the SEC. Concurrently with the completion of the initial public offering, the 10% convertible subordinated



pay-in-kind promissory notes converted into 601,113 shares of Class A common stock. Net of underwriting discount and other expenses of the offering, the Company received
$6,402,195 for the Class A common shares it issued and sold. Warrants with a fair value of approximately $185,000 were issued to the underwriters of this initial public offering and have been
netted against the gross proceeds of this offering. The fair value of the warrants was calculated using the Black-Scholes option pricing model. The Company used the following assumptions in this
modela risk-free interest rate of 3.3%, an expected life of one year, no dividends and a volatility of 98%.

6. Stock Option Plans

In 2003, the Company established two stock option plans. The 2003 Stock Incentive Plan provides to the issuance of up to 1,350,000 shares of Class A common
stock to employees, officers and consultants in the form of nonqualified and incentive stock options, restricted stock grants or other stock-based awards, including stock appreciation rights. The 2003
Non-Employee Director Compensation Plan provides for the issuance of up to 900,000 shares of Class A common stock to non-employee directors in the form of nonqualified
and incentive stock options, restricted stock grants or other stock-based awards, including stock appreciation rights. The Company's shareholders approved each of the stock option plans on
August 26, 2003. As of December 31, 2003, there were 510,000 and 600,000 remaining options available under the 2003 Stock Incentive Plan and the 2003 Non-Employee Director
Compensation Plan, respectively.

72

---



Stock
option activity was as follows in 2003:

Weighted-AverageNumber of
Options

Exercise Price

Fair ValueOutstanding at January 1, 2003

Granted

1,140,000

$
1.71

$
1.15Exercised

Forfeited

Outstanding at December 31, 2003

1,140,000

$
1.71Exercisable at December 31, 2003

75,000


|Options Outstanding |  | Options Exercisable
|------------------- |  | -------------------
|
|840,000             |  | $                  
|300,000             |  | $                  
|                    |  |                    
|1,140,000           |  |                    
|                    |  |                    

As
discussed in Note 2, the Company accounts for stock options granted to employees in accordance with APB No. 25. The Company did not grant any stock options to
non-employees in 2003. However, the 2003 Stock Incentive Plan allows the Company to grant stock options to non-employees. The Company is required to record stock-based
compensation when it
grants options to purchase its common stock to non-employees under SFAS 123. In general, the value of these options would be calculated using the Black-Scholes option-pricing model.

Pro Forma DisclosureSFAS No. 123 requires the disclosure of pro forma information as if the Company adopted the fair
value method for grants or awards made to employees. For purposes of the pro forma disclosures, the fair value of options on their grant date was measured using the Black-Scholes option pricing model
and only apply to 2003 as there were no stock options issued or outstanding in 2002 or 2001. Forfeitures are recognized as they occur.

Had compensation expense been determined based on the fair values at the grant dates for awards in accordance with SFAS No. 123, the Company's 2003 net loss and net loss per
common share would have been as follows:

2003Net loss, as reported

$
(1,679,472
)Pro forma net loss


(1,793,828
)Diluted net loss per common share as reported


(0.62
)Pro forma diluted net loss per common share


(0.66
)


73

---



The
fair value of options on their grant date was measured using the Black-Scholes option-pricing model. Key assumptions used to apply this pricing model are as follows:

2003Risk-free interest rate

3.3%Expected life of option grants

4 yearsExpected dividend yield

0.0%Expected volatility of underlying stock

98%


7. Related Party Agreements

On February 1, 2003, the Company executed a license agreement with BioChemics that allows it to commercialize, market and sell OTC pharmaceutical products
using BioChemics' patented VALE system and the PENtoCORE technology and BioChemics-owned trademarks in the OTC pharmaceutical market. In consideration, BioChemics was issued 4,500,000 shares of the
Company's Class B common stock. The term of this licensing agreement extends through the date of the last BioChemics' patent to expire. With respect to the portions of the licensing agreement
that do not apply to a BioChemics patent or patent application, this agreement extends though February 2013. The licensing agreement can be automatically renewed for successive
two-year terms for the non-patent technology.

On February 1, 2003, the Company executed a five-year agreement with BioChemics with respect to ongoing manufacturing and development of the Company's products and
product candidates. In accordance with the terms and conditions of this agreement, BioChemics will research, develop and manufacture the Company's products on its behalf. In consideration, BioChemics
will charge the Company a development and manufacturing fee at a rate of cost plus 10%. This agreement is automatically renewed for successive one-year terms. In the event that
(i) BioChemics materially fails to meet the Company's product orders for a period of more than three (3) consecutive months; (ii) BioChemics commits an anticipatory breach of the
manufacturing and development agreement; (iii) a force majeure event occurs which the Company reasonably believes will affect BioChemics' ability to supply and meet its product requirements for
a period of at least three (3) months; or (iv) any of BioChemics' Manufacturers are non-compliant with the regulations required to manufacture the products are unable to cure
such non-compliance, the Company may qualify and engage at its discretion, other suppliers and manufacturers as it deems necessary to ensure uninterrupted supply of the Company's products.

The manufacturing and development agreement has an initial term of 5 years. It is automatically renewable for an additional period of 12 months unless earlier terminated.
Either party may terminate the agreement upon a material breach by the other party by giving the breaching party three months to cure the breach. In event of termination, transition will be conducted
in such a manner as to not cause inconvenience to either party. Termination by BioChemics for any reason, except for non-payment, shall not be effective until the Company has located and
arranged for continuation of the manufacturing of its products with another supplier on terms commercially reasonable to the Company, provided however, that the Company shall have no longer than two
years from the date of the notice of termination from BioChemics to make such arrangements.

74

---



Effective of September 1, 2003, the Company entered into an administrative services agreement with BioChemics. Under this agreement, BioChemics provides to the Company, at the
Company's request, administrative support services including secretarial support, accounting and tax services, data processing services, utilities, designated office space, designated warehouse and
storage space, office supplies, telephone and computer services and equipment and such other office and corporate support services as the Company reasonably requires from time to time. BioChemics
charges the Company an administrative services fee at a rate of cost plus 10%.

8. Commitments and Contingencies



The Company has non-cancelable employment agreements with two officers to secure their employment through June 30, 2008. The remaining payments
due under these employment contracts are as follows$315,000 for 2004, 2005, 2006 and 2007 and $157,500 for 2008.



The Company subleases its office space from BioChemics, however, it does not have a formal lease agreement with BioChemics. Total rent expense for this office
space was approximately $20,000, $15,000 and $9,000 in 2003, 2002 and 2001, respectively. The Company is not obligated to any significant long-term lease commitments or other
off-balance sheet financing arrangements.



In April, May and June 2004, the Company and certain of its officers were named as defendants in a securities class action lawsuits filed in the United
States District Court of Massachusetts. The court has consolidated a number of these actions under the caption In Re Vaso Active Pharmaceuticals Securities Litigation, Civil Action
No. 04-10708-RCL. The complaints allege securities fraud during the period from December 11, 2003 through March 31, 2004. The complaints allege that the
Company and its officers made false and misleading statements and failed to disclose material information concerning the Company, its financial condition, its business operations and future prospects,
the clinical trial and endorsement of its Termin8 anti-fungal product (previously known as "deFEET") and the institutional demand for its securities. On June 7, 2004, various
plaintiffs filed motions to consolidate, to appoint lead plaintiff and to approve plaintiff's selections of lead plaintiffs' counsel. The class has not been certified and the Company has not responded
to the complaints. The plaintiffs seek equitable and monetary relief, an unspecified amount of damages, with interest, attorneys fees and costs.

On April 20, 2004, BioChemics, the Company (as a nominal defendant), its directors and certain of its officers were named as defendants in a purported derivative complaint in the
United States District Court of Massachusetts, Civil Action No. 04-107920-RCL. On June 18, 2004, BioChemics, the Company (as a nominal defendant), its directors
and certain of its officers were named as defendants in a second purported derivative complaint in the United States District Court of Massachusetts, Civil Action
No. 04-11399-RCL. The complaints allege that the individual defendants breached fiduciary duties owed to the Company and its shareholders by issuing misleading
statements to (and concealing material facts from) the market, "concerning certain of the Company's key and primary products under review by the Food and Drug Administration ("FDA"), between
December 11, 2003 and March 31, 2004." The complaints purport to assert derivative claims against all defendants for breach of fiduciary

75

---



duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. The complaints seek equitable and monetary relief, an unspecified amount of damages, and attorneys and
other fees, costs and expenses. The defendants have not yet responded to the complaints.

Because of the uncertainty of estimating the potential financial statement impact of any of these actions with any reasonable degree of accuracy, at this time the Company has not
reserved for any potential liability or costs that may arise as a result of this litigation except for the $200,000 insurance deductible that we reserved as of March 31, 2004. While the cases
are in very preliminary stages and the outcomes are not predictable, if a substantial amount is payable by the Company and is not reimbursed through its director and officer liability insurance
policy, this will have a material adverse effect on the Company's financial position and liquidity. There can be no assurance that the Company's insurer will admit liability to reimburse the Company
with respect to any of the claims asserted in any of the litigation against the Company or its officers or directors or that coverage limits will be sufficient.

9. Geographic Sales Information and Major Customers

The Company is an early-stage company. To date all revenues are from the sale of its products in North America. One customer accounted for approximately 86% and
66% of the Company's 2003 and 2002 net revenues. Two customers accounted for approximately 98% of the Company's 2001 net revenues.

10. Required Pro Forma Information (unaudited)

Required pro forma information is identical in content to that information presented on the financial statements with the exception of required net loss per share
data. As discussed in Note 5, the Company was not capitalized until June 20, 2003. The pro forma loss per share calculations are presented as if
(i) the 4,500,000 shares of Class B common stock had been issued to BioChemics on January 1, 2001, and (ii) the 10% convertible promissory notes had been converted into
601,113 shares of Class A common stock on January 1, 2001.

Pro Forma

As Reported2003 net loss per sharebasic and diluted

$
(0.31
)
$
(0.62
)2002 net loss per sharebasic and diluted


(0.09
)

2001 net loss per sharebasic and diluted


(0.20
)




11. Subsequent Events



On April 1, 2004, the United States Securities and Exchange commission (the "SEC") temporarily suspended trading of the Company's securities. The
suspension terminated on April 15, 2004. In the SEC announcement of the trading suspension, the SEC stated that it temporarily suspended trading in the securities of the Company because of
questions regarding the accuracy of assertions by the Company, and by others, in press releases, the Company's annual report, its registration statement and public statements to investors concerning,
among other things: "(1) the FDA approval of certain key products; and (2) the regulatory consequences of the future application of [its] primary product."

76

---



On April 5, 2004, representatives of the Company, together with newly retained special securities counsel and newly retained FDA counsel met with the staff of the SEC (the
"Staff"), for the purpose of discussing the concerns that led to the suspension of trading in the Company's securities. During that meeting, the Company stated its intention to review its public
disclosure, press releases and other public statements and to take whatever remedial action might be appropriate. The Company also represented to the Staff that it would (i) diligently seek to
clarify the status of its products under current FDA regulations, (ii) issue disclosure regarding the FDA regulation of its activities and products and the results of its dialogue with the FDA,
and (iii) endeavor to resolve on a timely basis any concerns communicated by the Staff. The Staff stated that it had been authorized by the SEC to seek injunctive relief against the Company,
articulated the concerns that gave rise to the suspension of trading, and informally requested that the Company provide certain information to the Staff. The Company agreed to cooperate with the
Staff, committed to review its disclosure promptly and committed to take any remedial action that might be required.

The Company has agreed to a settlement with the Staff pursuant to which the Company will be permanently enjoined from violating certain of the anti-fraud provisions of the
Securities Act and the Exchange Act. The settlement must first be approved by the SEC itself and then by a court. In addition, the Company's President and Chief Executive Officer, has agreed with the
Staff to settle a proposed action by the SEC against him that would similarly enjoin him and prevent him from serving as an officer or director of any public company, including the Company for a
period of five years. The Company is not aware that the FDA is contemplating any action against the Company.

Due to the ongoing nature of these matters, the Company is unable to definitively assess their impact. However, the Company has committed not to market or sell its products until all
outstanding matters have been addressed to the satisfaction of the SEC and until the Company is reasonably sure that the marketing and sale of its products is consistent with the FDA's requirements
and policies. This commitment may have a material adverse impact on the Company. When appropriate, the Company



will make additional public announcements and will file public reports with the SEC regarding the status of its products under applicable FDA regulations.



By letter dated April 2, 2004, the Nasdaq Listing Investigations department of The Nasdaq Stock Market, Inc. ("Nasdaq") notified the Company that it
had commenced an inquiry to ensure the Company's ongoing compliance with Nasdaq's inclusion requirements and requested certain information from the Company. The letter further disclosed that after
review of the information provided by the Company, Nasdaq could take any action that might be appropriate under its Marketplace Rules including removal of the Company's securities from Nasdaq. In view
of the substantial administrative and cash burdens being borne by the Company at that time and the substantial legal costs anticipated with respect to the SEC and FDA matters, the Company determined
that it was in the best interest of shareholders to voluntarily cause its shares to be removed from Nasdaq and focus its attention and resources on addressing the SEC and FDA concerns. The Company's
securities were voluntarily delisted, effective the opening of the markets on Thursday, April 8, 2004. At an appropriate time, the Company will seek to cause its securities to be quoted on an
exchange, Nasdaq or other automated quotation system. No estimate can be given as to the date when the Company's Securities will resume trading on a national exchange or automated securities quotation
system, if ever.

77

---





On March 16, 2004, the Company entered into a private placement transaction in the amount of $7,500,000 with an institutional investor. The investment was
in the form of an 18 month 2% Convertible Note (the "Note") convertible into shares of the Company's Class A common stock at a conversion rate of $9 per share, at the option of the
investor. In addition, the Company issued to the investor warrants to purchase 166,667 shares of Class A common stock at an exercise price of $8.75 per share.

Given that the initiation and continuation of the April 1, 2004 trading suspension by the SEC constituted a breach under the Note, the Company and the investor agreed, pursuant to
the terms of a settlement agreement entered into on April 8, 2004, that the Company would immediately repay the investor the sum of $7,500,000 in cash without penalty, interest, redemption
premium or any other premium or penalty, plus an expense reimbursement in connection with the settlement agreement in the amount of $15,000 in cash. In consideration of this repayment, the investor
surrendered the Note



and warrants and the parties mutually terminated all other agreements entered into in connection with the transaction.

In connection with this transaction, the Company paid approximately $600,000 in fees to various third parties. These fees were not refunded when the Company repaid the investor. These
fees were recorded as an expense in the first quarter ended March 31, 2004.

78

---



QuickLinks