**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**




**FORM
      10-KSB**




**[X]**  **ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934.**




**For
      the fiscal year ended December 31, 2005**




**or**




**[
      ]**  **TRANSITION
      REPORT PURSUANT TO 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 in Its Charter)




**Delaware**
            **02-0670926**(State
                or other jurisdiction
            (IRS
                Employer Identification No.)of
                incorporation or organization)**99
                Rosewood Drive, Suite 260****Danvers,
                Massachusetts**
            **01923**(Address
                of principal executive offices)
            (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 is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act | |




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 |X| No |_|




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will 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. |_|




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes | | No |X|




The
      issuer’s revenues for its most recent fiscal year were $25,221.




The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates of the issuer as of April 6, 2006 was $3,580,232, based on
      5,728,371 shares of Class A Common Stock held by non-affiliates at $0.625 per
      share, based on the average of the bid and asked prices as of the same date
      as
      quoted in the OTC Bulletin Board.




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




Class
                A Common Stock, $0.0001 par value
            5,828,604
                shares outstanding on April 6, 2006Class
                B Common Stock, $0.0001 par value
            4,500,000
                shares outstanding on April 6, 2006





Transitional
      Small Business Disclosure Format   Yes
      |__|
      No |X|
















**VASO
      ACTIVE PHARMACEUTICALS, INC.**


**Table
      of Contents**






**PART
      I**




**Page**Item
                1.
            Description
                of Business.
            2Item
                2.
            Description
                of Property.
            22Item
                3.
            Legal
                Proceedings.
            22Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders.
            23**PART
                II**Item
                5.
            Market
                for Common Equity, Related Stockholder Matters and
                Small Business IssuerPurchases
                of Equity Securities.
            25Item
                6.
            Management's
                Discussion and Analysis.
            28Item
                7.
            Financial
                Statements.
            33Item
                8.
            Changes
                In and Disagreements With Accountants on
                Accounting and Financial Disclosure.
            33Item
                8A.
            Controls
                and Procedures.
            33**PART
                III**Item
                9.
            Directors,
                Executive Officers, Promoters and Control
                Persons; Compliance WithSection
                16(a) of the Exchange Act.
            33Item
                10.
            Executive
                Compensation.
            38Item
                11.
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters.
            42Item
                12.
            Certain
                Relationships and Related Transactions.
            44Item
                13.
            Exhibits.
            47Item
                14.
            Principal
                Accountant Fees and Services.
            48


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, A-R Extreme Ò ,
      Termin8 Ò ,
      and our
      logo are trademarks of the Company. Osteon Ò ,
      RepiDerm Ò and
      PENtoCORE Ò are
      registered trademarks of BioChemics, Inc. This Annual Report also contains
      trademarks and tradenames of other parties.


















**PART
      I**




**Cautionary
      Note Regarding Forward-Looking Statements**




This
      report contains both historical and forward-looking statements. The
      forward-looking statements in this annual report are not based on historical
      facts, but rather reflect the current expectations of our management concerning
      future results and events. 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 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 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.




Management's
      Discussion and Analysis (“MD&A”) should be read together with our financial
      statements and related notes included elsewhere in this annual report. This
      annual report, including the MD&A, contains trend analysis and other
      forward-looking statements. Any statements in this annual report that are not
      statements of historical facts are forward-looking statements. These
      forward-looking statements made herein are based on our current expectations,
      involve a number of risks and uncertainties and should not be considered as
      guarantees of future performance.




Factors
      that could cause actual results to differ materially include without
      limitation:




·
            an
                inability to arrange additional debt or equity
                financing;


·
            our
                ability to finance our business;


·
            the
                timing, impact and other uncertainties related to pending and future
                acquisitions by us;


·
            the
                impact of new technologies;


·
            changes
                in laws or rules or regulations of governmental
                agencies;


·
            outcome
                in pending litigation matters;


·
            interruptions
                or cancellation of existing
                contracts;


·
            impact
                of competitive products and
                pricing;


·
            product
                demand and market acceptance and
                risks;


·
            the
                presence of competitors with greater financial
                resources;


·
            product
                development and commercialization
                risks;


·
            our
                ability to maintain our current pricing model and/or decrease our
                cost of
                sales;


·
            continued
                availability of supplies or materials used in manufacturing at the
                current
                prices;


·
            adverse
                regulatory developments in the United
                States;


·
            entrance
                of competitive products in our
                markets;


·
            the
                ability of management to execute plans and motivate personnel in
                the
                execution of those plans;


·
            adverse
                publicity related to our products or the company
                itself;


·
            adverse
                claims relating to our intellectual
                property;


·
            the
                adoption of new, or changes in, accounting principles;


·
            legal
                proceedings;


·
            the
                costs inherent with complying with new statutes and regulations applicable
                to public reporting companies, such as the Sarbanes-Oxley Act of
                2002;


·
            other
                new lines of business that the Company may enter in the future;
                and


·
            our
                ability to repay our indebtedness, including repayment of the notes
                issued
                recently.




These
      factors are not necessarily all of the important factors that could cause actual
      results to differ materially from those expressed in the forward-looking
      statements in this annual report. Other unknown or unpredictable factors also
      could have material adverse effects on our future results. The forward-looking
      statements in this annual report are made only as of the date of this annual
      report, and we do not have any obligation to publicly update any forward-looking
      statements to reflect subsequent events or circumstances. See also Item 1,
      “Description of Business - Risk Factors.”






1




**ITEM
      1. DESCRIPTION OF BUSINESS**




We
      are an
      early stage company focused on commercializing, marketing and selling
      over-the-counter (“OTC”) pharmaceutical products that we believe incorporate a
      proprietary PENtoCORE technology. We are also focused on pre-clinical testing
      and research on a patented vaso active lipid encapsulated ("VALE") technology.
      The unique VALE technology is intended to be a patchless, lipid-based delivery
      system that BioChemics, Inc., our majority stockholder, is formulating into
      various applications that the Company hopes to market in the future, subject
      to
      receipt of appropriate Food and Drug Administration, or “FDA,” approvals. The
      technology uses an active process incorporating chemical vasodilators to deliver
      drugs through the skin and into the bloodstream. The PENtoCORE technology is
      a
      topical formulation, in contrast to the VALE transdermal technology. The Company
      is currently marketing three products that incorporate the proprietary PENtoCORE
      technology:




·
            *Osteon*-
                an OTC external analgesic designed to provide temporary relief from
                the
                muscular-skeletal pain associated with
                arthritis;




·
            *A-R
                Extreme*-
                an OTC external analgesic designed to provide temporary relief from
                the
                muscle and joint pain associated with athletic activity;
                and




·
            *Termin8*-
                an OTC antifungal lotion designed to treat athlete's
                foot.




The
      Company has a product candidate, RepiDerm, for the treatment of acne. The
      formulation of the product has been completed and we are currently working
      on
      labeling, package design and branding for the product. We have five additional
      product candidates at various stages of formulation and development.




We
      began
      our operations in January 2001, as a division of BioChemics, a pharmaceutical
      company engaged in the development of transdermal and topical drug delivery
      systems. BioChemics is based in Danvers, Massachusetts. BioChemics was founded
      in 1989 by John J. Masiz, our former President and Chief Executive Officer,
      and
      was incorporated in Delaware in 1991. BioChemics began developing the VALE
      technology in 1989 and has subsequently been issued four U.S. patents in
      connection with this technology. BioChemics granted us an exclusive,
      irrevocable, worldwide license to use and practice the VALE patents and the
      PENtoCORE technology in order to commercialize, market and sell OTC
      pharmaceutical products. In January 2003, we incorporated in Delaware and became
      a subsidiary of BioChemics. In December 2003, we completed our initial public
      offering.




**Business
      Strategy**




Our
      general business strategy is to commercialize, market and sell transdermal
      and
      topical OTC drugs that we believe can be delivered, by utilizing either the
      VALE
      or PENtoCore technologies, in a manner which is efficient, reliable and easy
      to
      use by consumers.




As
      an
      early stage company, we are subject to a number of risks that are characteristic
      of early stage companies including, but not limited to, our need to obtain
      additional financing and generate profitability and cash flows from operations.
      As a company engaged in the pharmaceutical industry, we are subject to a number
      of risks typical of pharmaceutical companies including, but not limited to,
      our
      need to adhere to strict governmental regulations, our ability to withstand
      intense competition from larger companies with greater financial resources
      and
      our ability to defend both the technology and intellectual property which we
      have licensed from BioChemics and to protect our own intellectual
      property.




The
      implementation of our business strategy was adversely affected by regulatory
      and
      private securities actions taken against us and our management beginning in
      April 2004. At the same time, we suspended the marketing and sale of our
      products until we were reasonably sure that our product marketing was consistent
      with the FDA's requirements and policies. As a result of our voluntary delisting
      and continued delisting of our common stock from the Nasdaq stock market, the
      action taken against us by the SEC, the issues raised by the SEC regarding
      the regulatory status of our products, and the significant decline in market
      value of our securities subsequent to these matters, several shareholder actions
      were filed against Vaso Active and certain of its officers and directors. See
      Item 3, “Legal Proceedings.”




In
      August
      and September 2004, Vaso Active and its former Chief Executive Officer, John
      Masiz, settled all SEC matters regarding our alleged federal securities laws
      violations stemming from allegedly misleading disclosures in our initial







2





public
      offering registration statement, our 2003 annual report and a statement on
      our
      website concerning the FDA's approval or qualification of our products. Both
      Vaso Active and Mr. Masiz agreed with the SEC to settlement terms without
      admitting or denying the allegations of their civil complaint, pursuant to
      which
      both parties are permanently enjoined from violating the anti-fraud provisions
      of the federal securities law. Mr. Masiz was also prohibited from serving as
      an
      officer or director of any public company, including Vaso Active, for a period
      of five years. He is however, permitted to remain an employee/consultant of
      Vaso
      Active. Since August 2004, Mr. Masiz has been employed by Vaso Active to provide
      consulting services pursuant to the terms of his employment agreement with
      the
      Company.




During
      2004, together with newly engaged outside FDA counsel, we revised our product
      labels and in September 2004, began shipping our products on a limited basis.
      In
      July 2005, we entered into a product brokerage agreement with Ferolie
      Corporation, d/b/a Eastern Sales & Marketing, or ESM, a marketing and
      merchandising agency, to sell our products to retailers. See Item 1,
“Description of Business - Distribution” for further discussion regarding the
      Ferolie agreement.




In
      September 2005, Vaso Active and certain of its officers and directors entered
      into agreements to settle all shareholder actions (the “Class Actions”) and
      derivative shareholder actions filed against Vaso Active and certain named
      officers and directors (the “Derivative Actions”). See Item 3, “Legal
      Proceedings."




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, including through relationships with
                third
                parties such as ESM;




·
            consumer
                perception of our products; and




·
            securing
                of additional financing.




Although
      we believe 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.




**Technology
      Overview**




We
      believe that Vaso Active's formulation technologies 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 formulation of OTC products
      with certain "use advantages" over similar products marketed by our competitors.
      "Use advantages" include characteristics such as lack of odor, less residue
      and
      a more pleasant texture. We license the VALE and PENtoCORE technologies from
      BioChemics.




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. We believe that 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:




·
            REDUCTION
                OF ROUTE-OF-ADMINISTRATION RELATED SIDE EFFECTS. Because they are
                absorbed
                through the stomach, some orally administered medicines can cause
                significant gastrointestinal side effects, sometimes leading to
                discontinuation of the medication. There also may be side effects
                associated with the delivery of some drugs through the nasal lining,
                the
                lungs, and the skin using traditional methods. The goal of the VALE
                transdermal delivery system is to provide effective therapy while
                minimizing side effects.




·
            IMPROVED
                DRUG PERFORMANCE. Transdermal formulations may have the potential
                to
                improve the effectiveness of a drug by avoiding the stomach and the
                first-pass metabolism associated with oral delivery of drugs. Transdermal
                drug delivery also may have the potential to create a higher
                bioavailability index for certain drugs, allowing for the desired
                concentration of the drug molecule to reach the bloodstream from
                a smaller
                dose of drug applied to the patient. Bioavailability index is defined
                as
                the fraction of the drug amount administered that reaches the central
                circulation system. By definition, bioavailability for a drug administered
                intravenously is 100%, and drugs administered by other methods will
                typically have bioavailability indices of less than 100%, depending
                on the
                efficiency of drug transfer into the
                blood.






3




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) liposome, or artificially
      prepared cell-like structures, which are applied topically and absorbed; or
      (iii) an outside energy source producing electricity (iontophoresis), or sound
      (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 Technology*** - The
      goal behind the development of the VALE technology is to create an active
      transdermal drug system that efficiently and effectively delivers drugs through
      the skin and into the 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
      outer
      layers, or the stratum corneum and the epidermis;




·  the
      second layer, or the dermis; and




·  the
      walls
      of individual capillaries.




The
      VALE
      technology 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.
      The technology is based upon 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 should result in increased blood
      flow to the area. The theory behind the VALE technology 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.




***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 may facilitate a longer-lasting
      effect.




**Research
      and Development**




We
      do not
      currently, nor do we intend to directly, conduct any research and development
      on
      our own behalf with respect to any of our current products or product
      candidates. 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%.
      BioChemics does not manufacture our products itself, but rather uses two
      different privately owned third party companies as its contract manufacturers.
      However, in the event that BioChemics is unwilling or unable to meet our
      manufacturing needs in accordance with the terms of the agreement with us,
      we
      have the right to retain outside third parties to manufacture our products.




Until
      August 2005, BioChemics was engaged in developing a transdermal ibuprofen
      product on our behalf. From January 2004 to August
      2005, substantially all of our research and development costs related
      to the ibuprofen product candidate. During that period, we spent approximately
      $20,000 per month on this project, which proceeded into the animal testing
      stage. Prior to 2004, the Company did not make any research and development
      expenditures on the ibuprofen or any other product candidate; Biochemics paid
      for these costs.






4




In
      August
      2005, we instructed BioChemics to cease further development of the ibuprofen
      product candidate on our behalf because we determined that the total development
      cost would likely exceed $1,000,000. Under our license agreement with
      BioChemics, we do not have the right to market and sell OTC products for
      which development costs exceed $1,000,000. We are presently negotiating with
      BioChemics to amend the license agreement to permit us to have the right to
      market and sell the ibuprofen product despite the amount of the expected
      development costs. We cannot assure you that we will successfully negotiate
      an
      amendment to the license agreement with BioChemics or that, if we are
      successful, we would be able to fund the additional testing. See “Government
      Regulations — Product Candidate — Analgesic Utilizing Ibuprofen.”




**Intellectual
      Property**




BioChemics
      owns proprietary technology developed in connection with its four U.S.
      patents:




·
            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


·
            Patent
                No. 6,635,274, issued on October 21, 2003 and expiring October 27,
                2020




Under
      the
      terms of our licensing agreement with BioChemics, BioChemics 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 **.** In
      addition BioChemics has four other patents pending domestically.
      Internationally, BioChemics has been issued foreign patents in 17 countries
      and
      patents pending in seven others. BioChemics has filed, and will continue to
      file
      as required, for second-generation patents on a number of its
      products. **** BioChemics
      also owns 16 registered trademarks, including Osteon, RepiDerm and PENtoCORE.
      We
      own the U.S. trademark protection for the names “Termin8” and “A-R
      Extreme.”




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
      Regulations**




*General*




The
      development, testing, manufacture, labeling, marketing, and promotion of OTC
      drugs are subject to extensive regulation by the FDA under the Federal Food,
      Drug and Cosmetic Act (“FFDCA”) and by the Federal Trade Commission, or FTC,
      under the Federal Trade Commission Act ("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 ("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 new
      drug application, or 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 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.






5




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 "The 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 current good
      manufacturing practices, or cGMPs, a system of manufacturing that insures the
      quality, reproducibility, and traceability of drug products intended for human
      use; (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.




*The
      NDA Review Process*




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 an abbreviated
      new drug application, or 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






6




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 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






7




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 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 Vaso Active's products may depend on
      their superiority over existing therapies, any restriction on Vaso Active'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 Vaso Active's products and/or its
      costs.




*Regulation* *of
      Our Products and Product Candidates*




We
      believe that the active ingredients, dosage form and strengths of our A-R
      Extreme, Osteon, Termin8 and RepiDerm products, each licensed from BioChemics,
      are covered by the OTC Review Program and therefore are eligible for marketing
      under the OTC Review Program. In addition, we believe the current labeling
      of
      our A-R Extreme, Osteon, and Termin8 products is consistent with FDA laws and
      regulations. The labeling of our RepiDerm acne product candidate is not yet
      finalized however, we intend to design the labeling consistent with FDA laws
      and
      regulations. We will not market RepiDerm until we are reasonably certain that
      the final labeling is in accordance with FDA laws and regulations.




With
      regard to product candidates that use the VALE transdermal technology or
      otherwise require new drug approval, we will seek to secure a partnership with
      a
      larger marketing partner specifically for those products. 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.






8




*Environmental
      Regulation*




In
      addition to being subject to extensive regulation by the FDA, the Company must
      also comply with environmental regulation insofar as such regulation applies
      to
      the Company or its products. Our costs of compliance with environmental
      regulation as applied to similar pharmaceutical companies are minimal, since
      we
      do not currently, nor do we intend to, engage in the manufacturing of any of
      our
      products or product candidates. BioChemics uses unaffiliated manufacturers
      to
      manufacture all our products and receive final products from such manufacturer,
      without any involvement on our part in the manufacturing process at any stage
      of
      the process. Although we believe that our safety procedures for using, handling,
      storing and disposing of our products comply with the environmental standards
      required by state and federal laws and regulations, we cannot completely
      eliminate the risk of accidental contamination or injury from these materials.
      We do not carry a specific insurance policy to mitigate this risk to us or
      to
      the environment. The Company contracts with an independent laboratory pursuant
      to standard FDA protocol to test beginning, middle and end samples, during
      batch
      manufacturing, to determine product compliance with FDA
      regulations.




*Current
      Product Line*




We
      presently market three products. Each of these products uses the PENtoCORE
      technology. These products are:




·
            *Osteon*-
                an OTC external analgesic designed to provide temporary relief
                from muscular-skeletal pain associated with
                arthritis;




·
            *A-R
                Extreme*-
                an OTC external analgesic designed to provide temporary relief
                from muscle and joint pain associated with athletic activity;
                and




·
            *Termin8*-
                an OTC antifungal lotion designed to treat athlete's
                foot.




We
      license the Osteon and PENtoCORE trademarks under our license agreement with
      BioChemics. We market each of our three current products under the OTC Review
      Program, described above under “Government Regulation.”




Our
      strategy for Osteon is to create, through telemarketing, advertising and
      mailings a customer base of senior women and men suffering from osteoarthritis.
      We expect re-order sales of Osteon to carry higher gross profit margins than
      initial order sales of Osteon because re-order sales should not require the
      same
      direct media advertising expenditures as do the initial order sales. To achieve
      future growth, we plan to offer additional products, to be determined, that
      fit
      the demographic of this customer base. We have, however, suspended our
      direct-to-consumer television campaigns pending obtaining further financing
      or
      arranging a joint venture with a direct-to-consumer marketing company. There
      can
      be no assurance that we will be able to obtain further financing or enter into
      any joint venture that would allow us to resume this campaign. For further
      information regarding our marketing of Osteon, see “Distribution” in this
      section below.




Our
      strategy includes achieving market penetration through wholesale distribution
      to
      chain drug and grocery stores for AR-Extreme, Termin8 and, more recently,
      Osteon. We will also continue to pursue the strategy of achieving market
      penetration through sales to chiropractors, podiatrists, dermatologists,
      wellness and fitness centers. We are in the very early stages of this launch.
      We
      used a portion of the net proceeds from the sale of the notes to support the
      retail launch of our three existing products principally in the New York City
      metropolitan and New Jersey markets.




*Product
      Candidates*




As
      described above, 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 FTC under the FTC Act. All of our current products and product
      candidates are subject to these extensive regulations.




In
      addition to and separate from our products which we are presently marketing,
      i.e., our A-R Extreme, Osteon and Termin8 products, we have identified six
      additional OTC product candidates that will utilize either the VALE transdermal
      or PENtoCORE topical technology. Each of these product candidates is in various
      stages of development for us by BioChemics and they are not yet available for
      sale.




With
      regard to these six product candidates, 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






9




candidate
      are not recognized as safe and suitable for their intended OTC use, we cannot
      market the product candidate without obtaining pre-market approval in either
      a
      NDA or an ANDA. Conversely, where we believe 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 Drug Monograph
      and
      is not otherwise adulterated or misbranded. You should refer to the information
      described under the caption "Government Regulation" for further discussion
      surrounding NDA, ANDA, OTC Review Program and OTC Drug Monograph
      programs.




The
      table
      below describes our six product candidates and the status of each
      product:  The further development of our product candidates, and our
      ability ultimately to bring these candidates to market, will depend upon, among
      other factors, our ability to obtain additional working capital from third
      parties and the extent to which our efforts to market our existing products
      result in cash flow from sales.




**Product
                Candidate**
            **Technology**
            **Pre-market
                approval**
              **required? (a)**
            **Current
                Stage of**
              **Development****1)**Acne
                Treatment
            Proprietary
                PENtoCORE
              topical
            No
            Formula
                finalized.
              Undergoing
                package
              design
                and branding.**2)**Analgesic
                utilizing ibuprofen
            Patented
                VALE Transdermal
            Yes
            Pre-clinical
                testing and
              research
                (including
              formulation
                development)**3)**Other
                OTC Drug Monograph
              Product
                Candidates:****
              **3.1)**First
                aid treatments
              **3.2)**Hand and body lotions
              **3.3)**Psoriasis treatment
            Proprietary
                PENtoCORE
              topical
            No
            Formulation
                development**4)**Toenail
                fungus treatment
            Proprietary
                PENtoCORE
              topical
            Yes
            Formulation
                developmenta)
            This
                represents management’s belief based upon its current plans and
                assumptions and on its interpretation of government rules and regulations
                now in effect. Whether pre-market approval will actually be required
                is
                uncertain.




**1)**  **Acne
      Treatment**




We
      have
      finalized a formulation of our acne treatment candidate utilizing our PENtoCORE
      topical technology. The product would contain 10% benzoyl peroxide, or BPO,
      as
      an active ingredient. Although there is a final OTC Drug Monograph for acne
      drug
      products, it does not currently include BPO as an active ingredient. In a
      proposed rule, however, FDA has stated that topical acne products containing
      BPO
      at levels of 2.5 to 10 percent may be marketed pending publication of a final
      rule relating to BPO subject to certain conditions, described below.




In
      its
      proposed Monograph for OTC acne drug products, the FDA included BPO as an
      acceptable active ingredient. However, following this proposal, the agency
      became aware of a study that raised a safety concern regarding BPO. FDA
      evaluated this study and other data submitted by a drug manufacturer association
      and, in 1991, the agency concluded that it was unable to state that BPO is
      generally recognized as safe in topical acne products. Accordingly, FDA amended
      its proposed monograph for OTC topical acne drug products to reclassify BPO
      from
      Category I (generally recognized as safe and effective and not misbranded)
      to
      Category III (available data are insufficient to classify as safe and effective,
      and further testing is required).




Nevertheless,
      in 1995 FDA stated that the marketing under the OTC review program of BPO as
      an
      active ingredient in topical OTC acne drug products would be allowed to continue
      under the conditions set forth in the proposed monograph






10




(e.g.,
      BPO at levels of 2.5 to 10 percent) while additional studies are conducted
      to
      answer the unresolved safety questions. The agency also tentatively determined
      that consumers who choose to use products containing BPO need to be provided
      additional information about the safe use of such products. These required
      label
      statements include a warning advising consumers to avoid unnecessary sun
      exposure and to use a sunscreen when using a BPO product to treat acne. There
      are numerous OTC acne treatment products containing 10% BPO that are currently
      being marketed under the OTC Review Program.




We
      believe that the active ingredients, dosage form, route of administration,
      directions for use, and indications of our acne treatment candidate are covered
      by the OTC Review Program and, like similarly situated products on the market,
      can at this time be marketed under the OTC Review Program. Subject to the
      availability of additional working capital, we plan to begin to market our
      acne treatment product candidate during 2006.




**2)**  **Analgesic
      Utilizing Ibuprofen**




We
      are
      currently in the preclinical phase of development for our ibuprofen product
      candidate. This phase includes laboratory evaluation of product chemistry and
      formulation, as well as animal trials. We expect to submit to the FDA an
      investigational new drug application, or IND, during 2006, which must become
      effective before clinical testing may commence. Our ability to file an IND
      during 2006 for the ibuprofen product candidate is contingent upon (i) whether
      we successfully negotiate with BioChemics to amend our license agreement to
      include our ibuprofen candidate; and (ii) our obtaining additional capital
      in an
      amount sufficient to conduct clinical testing for our ibuprofen candidate.




The
      scope
      of our license agreement with BioChemics presently is limited to OTC products
      costing less than $1,000,000 to develop. We expect the ibuprofen product
      candidate to cost more than $1,000,000 to develop. Although we are hopeful
      that
      we will successfully conclude our negotiations with BioChemics in connection
      with our ibuprofen candidate, there is no guarantee that we will be successful.
      We have instructed BioChemics to suspend research and development of our
      ibuprofen product candidate pending the outcome of these negotiations and
      obtaining funds to pay for the cost of the clinical testing.




**3)**  **Other
      OTC Drug Monograph Product Candidates**




We
      have a
      number of formulas under development for us by BioChemics for each of these
      product candidates. None of the formulas have been finalized.  Subject to
      the availability of additional working capital, we plan to finalize three new
      product candidates in this category and to begin to market those three product
      candidates within their applicable OTC Drug Monograph by the end of 2007. 
However, in response to changing market demands, we may seek to have products
      developed for us which address conditions other than those indicated in the
      table above.  In any such instance, we intend that the product would
      be within the applicable OTC Drug Monograph.




**4)**  **Toenail
      Fungus**




We
      are in
      the formulation development stage of our toenail fungus product candidate.
      We
      expect this product candidate will require pre-market approval. Based upon
      our
      current plans, we do not expect to devote substantial resources during 2006
      for
      this product candidate




**Distribution**




In
      early
      2004, we suspended the marketing and sale of our products until we were
      reasonably sure that our product marketing was consistent with the FDA's
      requirements and policies. In May 2004, together with outside FDA counsel,
      we
      revised our product labels and in September 2004 began shipping our products
      on
      a limited basis. Although these products are now on the market, we have not
      made
      significant shipments to date.




We
      intend
      to begin distribution of our current products to major retail and drug store
      chains, select independent pharmacies and other channels, including multilevel
      marketing, direct marketing, and internet-based marketing during the first
      months six of 2006.




On
      July
      20, 2005, we entered into our exclusive brokerage agreement with ESM to sell
      all
      of Vaso Active's products across all classes of retail trade in the continental
      United States. ESM is a full-service sales, marketing and merchandising








11




agency
      that provides comprehensive services for consumer packaged goods manufacturers
      in various product categories, including food, drug, specialty and private
      label. In addition, under the agreement, ESM will be Vaso Active's non-exclusive
      agent to identify prospective licensees of its trademarks and trade names.
      As
      consideration for providing such brokerage services, the Company shall pay
      ESM a
      commission equal to 5% of the total “Net Invoiced Sales” of the Company’s
      products in all markets of the United States. As defined in the agreement,
“Net
      Invoiced Sales” refers to gross shipments, less any “off-invoice allowances” and
“standard returns,” as those terms are used within the brokerage industry. The
      agreement is effective August 1, 2005 for an initial period of one year.
      Excluded from the agreement are sales to Wal-Mart, direct response sales,
      medical and other professional sales, and internet sales.




In
      September 2005 we began a package re-design project for our three existing
      products. We have maintained the existing product names and general design
      concepts. The re-design was undertaken in connection with our planned retail
      launch in order to achieve a consistent branding image across the product line.
      That project was completed in November 2005. In November 2005 we ordered
      production of the three existing products with the new package design. There
      are
      no changes to the formulations of these products. We have begun shipping our
      newly-packaged products on a limited basis in the second quarter of 2006. We
      are
      also striving to gain additional retail distribution outlets and orders from
      those outlets over the next several months. There can be no assurance, however,
      that we will begin shipping any significant orders in this timeframe or at
      all.




Early
      in
      2005 we launched a nationwide direct-to-consumer marketing campaign for Osteon
      that consisted of two versions of 60-second television commercials. Due to
      lack
      of working capital we suspended purchasing television commercials. However,
      in
      August we entered into a pay-per-unit of sale arrangement to purchase television
      commercials. We used a portion of the proceeds raised from our August 2005
      private financing to purchase television commercials to be broadcast in New
      England to augment the Osteon pay-per-unit of sale program and to build general
      consumer awareness of the Company and its existing product line. The
      direct-to-consumer pay-per-unit of sale arrangement and the television
      commercials in New England have concluded. In the first quarter of 2006 we
      have
      shifted our marketing emphasis to the New York City metropolitan and New Jersey
      markets to support our anticipated initial retail product launch in those
      markets. We intend to resume the direct-to-consumer pay-per-unit of sale
      arrangement pending further financing or entering into a joint venture with
      a
      direct-to-consumer marketing agency. There can be no assurance that we will
      be
      able to obtain further financing or to enter into a joint venture
      arrangement.




**Competition**




We
      are
      engaged in a rapidly evolving field. We anticipate that once our product
      distribution and commercial marketing efforts take full effect, we expect to
      compete primarily with established pharmaceutical companies such as Pfizer
      Inc.,
      Bristol-Myers Squibb Company, Schering-Plough Corporation and Alza Corporation,
      and emerging biotechnology companies like Cygnus, Inc. and Elan Corporation
      plc,
      as well as research and academic institutions, among 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 pharmaceutical
      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. Our competitors also have greater
      collective experience in undertaking pre-clinical and clinical testing of
      products, obtaining regulatory approvals 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 through the development
      efforts of BioChemics on our behalf 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
      for
      us or that would render our products and technologies less competitive or
      obsolete.




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. We believe 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. 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.






12




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, our Termin8 athlete's foot product would compete with Tinactin(R)
      and
      Lotrimin(R), while our pain relief products and product candidates would compete
      with Advil(R) and Tylenol(R). These and other brands are already offering
      different delivery systems. For instance, Pfizer's Ben Gay(R) 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 those of established market participants.




**Employees**




At
      April
      6, 2006, we employed eight persons. Four of the eight persons are employed
      full
      time by us. One officer, our Vice President and Chief Scientific Officer,
      devotes substantially all of his time to us but is also employed by Biochemics.
      Our former Chief Executive Officer devotes approximately 70% of his time to
      us
      and 30% of his time to BioChemics. One other individual splits her time equally
      between our company and BioChemics. In addition, we employed one administrative
      person on a part-time basis. We do not have a collective bargaining agreement
      with our employees; nor are any of our employees members of any labor
      union.




**Risk
      Factors**




**Risks
      Related to Our Business**




**There
      are significant uncertainties about our ability to continue as a going
      concern.**




Our
      recurring operating losses, liquidity issues, and indebtedness raise substantial
      doubt about our ability to continue as a going concern. Our ability to continue
      as a going concern and the appropriateness of using the going concern basis
      of
      accounting depends upon, among other things, our ability to generate sufficient
      cash from operations and financing sources to meet obligations. There can be
      no
      assurance that we will be able to generate positive cash flows from operations.
      Further, there can be no assurance that we will be able to obtain additional
      financing or that, even if we do obtain additional financing, it will be on
      terms that allow us to meet our current obligations.




**We
      may have insufficient cash flow to** **fund
      our operations and to meet our debt obligations, which could negatively affect
      our ability to attract and retain customers.**




Our
      cash,
      cash equivalents, marketable securities and long-term investment totaled
      approximately $409,000 as of February 28, 2006, and we must generate cash to
      continue to conduct our business operations. We will need to raise additional
      funds through a financing or otherwise by May 31, 2006 in order to continue
      our
      operations as presently conducted beyond that date. We will also be required
      to
      generate sufficient cash to pay the principal amount due in the senior secured
      convertible notes issued in August 2005. The principal amount of the notes
      ($2,500,000 or up to $4,375,000 if the rights to purchase additional notes
      are
      exercised in full) is due on May 1, 2007. In addition, as noted above, we have
      incurred substantial indebtedness in connection with various litigation
      settlements. We have incurred net losses in the past, and we may not be able
      to
      cover our anticipated debt obligations. Thus, we may be unable to make principal
      payments on the notes. Concern about our ability to meet our debt obligations
      could negatively affect our ability to attract and retain customers. Our ability
      to meet our future debt obligations will be dependent upon our future
      performance, which will be subject to financial, business and other factors
      affecting our operations, many of which are beyond our control.




**We
      are an early stage company with a brief history consisting 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:




·
            start-up
                costs relating to the commercialization, sale and marketing of our
                products;




·
            market
                acceptance of our products and product
                candidates;








13




·
            costs
                of acquiring and developing new product
                candidates;




·
            ability
                to bring our products to market;




·
            general
                and administrative costs relating to our
                operations;




·
            increases
                in our research and development
                costs;




·
            charges
                related to purchases of technology or other assets;
                and




·
            our
                ability to raise additional capital.




At
      December 31, 2005, we had an accumulated deficit of approximately $10.6
      million.  We expect to incur additional operating losses as we expand our
      commercialization, 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. Therefore
      our
      business operations may never fully materialize and create value for
      investors.**




We
      are an
      early stage company focused on commercializing, marketing and selling OTC
      pharmaceutical products. We began our operations as a division of BioChemics
      in
      January 2001. We have only operated as a separate subsidiary of BioChemics
      since
      January 2003. Our Termin8, A-R Extreme and Osteon products are in the early
      stages of commercialization. One of our product candidates, RepiDerm, is
      currently undergoing package design; the remainder of our product candidates
      are
      only in the early stages of development. We have not yet 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
                potential inability to market, distribute and sell our products;
                and




·
            the
                significant investment of capital and other resources necessary to
                achieve
                our commercialization, marketing and sales
                objectives.




Our
      operations have been limited to organizing and staffing our company and
      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.




**Our
      indebtedness could have a negative effect on our financial
      condition**




In
      August
      2005, we completed a private placement of $2,500,000 in aggregate principal
      amount of Senior Secured Convertible Notes due May 1, 2007. Principal is to
      be
      paid in a single payment on May 1, 2007 (interest will be paid from proceeds
      of
      the private placement that were placed in escrow at closing). In addition,
      the
      purchasers of the notes received rights to purchase up to $1,875,000 in
      aggregate principal amount of additional notes at any time through the maturity
      date of the notes. We also have incurred substantial indebtedness (subordinated
      to the notes and all of our other indebtedness) as we are obligated to issue
      convertible notes in the aggregate principal amount of $860,000 in connection
      with the settlement of various class actions and derivative actions involving
      the Company. Of that amount, we have already issued settlement notes in the
      aggregate principal amount of $297,500 to date to plaintiffs’ class action and
      derivative counsel. We expect to issue the balance of the aggregate principal
      amount of these settlement notes to the class action claimants. Our substantial
      indebtedness could have important consequences for investors. For example,
      it
      could:




·
            require
                the dedication of a substantial portion of our cash flows from operations
                to the payment of principal of and interest on our indebtedness,
                thereby
                reducing the availability of capital to fund our operations, working
                capital, capital expenditures, acquisitions and other general corporate
                purposes;




·
            increase
                our vulnerability to general adverse economic and industry
                conditions;






14




·
            place
                us at a competitive disadvantage relative to our
                competitors;




·
            limit
                our ability to obtain additional
                financing;




·
            limit
                our flexibility in planning for, or reacting to, changes in our business
                and the industry; and




·
            decrease
                customer and potential customer confidence in dealing with
                us.




We
      may
      incur substantial additional debt in the future. While the terms of the notes
      issued in the August 2005 private financing impose certain limits on our ability
      to incur additional debt, we are permitted to incur additional debt subject
      to
      compliance with the terms and conditions set forth in the Securities Purchase
      Agreement for in the August 2005 financing. If a significant amount of new
      debt
      is added to our current levels, the related risks described above could
      intensify.




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




Our
      products are subject to extensive regulation by the FDA, as well as other
      federal, state, local and foreign government laws and regulations. These
      regulations may affect many aspects of our operations, including testing,
      research and development, manufacturing, pre-market labeling, storage, quality
      control, adverse event reporting, record keeping, product labeling, marketing,
      advertising and promotion. Failure to comply with applicable regulatory
      requirements could, among other things, result in:




·
            fines;




·
            changes
                to advertising;




·
            failure
                to obtain necessary marketing
                approvals;




·
            revocation
                or suspension of regulatory approvals of
                products;




·
            regulatory
                letters;




·
            adverse
                publicity;




·
            product
                seizures or recall;




·
            delay,
                interruption or suspension of product
                manufacturing;




·
            suspension
                of distribution, marketing and
                sale;




·
            mandated
                corrective action; and




·
            civil
                or criminal sanctions.




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 any prior determination
      relating to the safety or efficacy of our products. If circumstances change,
      we
      may be required to change our labeling or cease the marketing and manufacturing
      of 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
      addition to safety and efficacy regulatory concerns, the FDA or the FTC may
      impose a wide array of sanctions on companies for deceptive or
      misleading promotional practices in connection with pharmaceutical
      products, which could result in any of the following:






15




·
            incurring
                substantial expenses, including fines, penalties, legal fees and
                costs to
                comply with FDA or FTC
                requirements;




·
            changing
                the methods of marketing and selling
                products;




·
            taking
                mandated corrective action, which may include placing advertisements
                or
                sending letters to physicians and marketing partners rescinding previous
                advertisements or promotions;




·
            disrupting
                the distribution of products and causing the loss of sales until
                compliance with the FDA’s or FTC’s position
                occurs;




·
            The
                FTC’s initiating administrative action for consumer
                redress;




·
            The
                FTC’s seeking a court injunction to prevent further false and misleading
                advertising;




·
            the
                imposition by a court of liquidated damages and equitable relief
                to
                recover profits and provide consumer redress from illegal activity;
                and




·
            the
                placing of the Company in receivership to assure that the assets
                of the
                Company are not dissipated pending resolution of FTC
                claims.




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.




**In
      addition to listing our products with the** **FDA,
      we must market our products in accordance with FDA
      procedures.**




If
      our
      topical A-R Extreme, Osteon and Termin8 products are formulated, labeled and
      promoted in accordance with the applicable requirements of FDA's OTC Review
      Program (e.g., the applicable final or tentative final OTC Drug Monograph),
      FDA
      pre-market approval is not required prior to marketing. If these or any of
      our
      product candidates deviate from any applicable requirement of the OTC Review
      Program, including those relating to active ingredients, intended use, method
      of
      administration, dosage form, or labeling, among other things, then we or our
      marketing partners must obtain NDA pre-market approval from the FDA before
      beginning commercial marketing. The FDA has taken the position that insofar
      as
      our product candidates may use the VALE transdermal technology or make any
      transdermal claims, they fall outside of those eligible for marketing under
      the
      OTC Review Program. Thus, for these product candidates we must obtain, or
      our marketing partners must obtain, NDA approval before they can be commercially
      marketed. See “Governmental Regulation - The NDA Review Process.”




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




Before
      receiving NDA approval to commercialize a product candidate, we must demonstrate
      to the FDA, with substantial evidence from well-controlled clinical trials,
      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 most likely 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 obtain approval from the FDA or other
      regulators. Preclinical and clinical data can be interpreted in different ways.
      Accordingly, FDA or other regulatory 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 resulting products, may severely harm our business and
      reputation.






16




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.




**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.




**Because
      we depend on** **BioChemics
      and third parties to develop our product candidates and manufacture our
      products, we could be affected adversely if any of them fail to provide us
      with
      sufficient product 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. During the years ended December 31, 2005 and 2004, we incurred
      research and development costs of approximately $288,000 and $266,000,
      respectively, related primarily to the formulation of an analgesic utilizing
      the
      active ingredient ibuprofen as well as formulation of our RepiDerm acne product
      candidate. We incurred these costs pursuant to a February 2003 manufacturing
      and
      development agreement with BioChemics.




In
      addition, we have no manufacturing capability. As a result, we 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 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 or other clinical 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 required by the FDA and other regulatory authorities
      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 in the availability of our products could have a material adverse
      impact upon our financial position and results of operations.






17




**I** **f
      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.
      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 is considered proprietary. BioChemics also owns 16
      registered trademarks, including Osteon, RepiDerm and PENtoCORE. 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.




**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 an extremely 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 Alza
      and
      biotechnology companies such as Cygnus and Elan, as well as research and
      academic institutions, 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 pharmaceutical
      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. Our competitors also have greater
      collective experience in undertaking pre-clinical and clinical testing of
      products, obtaining regulatory approvals and manufacturing and marketing OTC
      and
      prescription pharmaceutical products. 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. See “Competition.”




**Technological
      advancements 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.




**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.**






18




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 B** **ioChemics
      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, 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. Since,
      pursuant to the administrative support agreement by and between the Company
      and
      BioChemics, 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, 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
      $46,000 in such fees during each of the years ended December 31, 2005 and 2004.
      These costs are included in selling, general and administrative expenses. 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 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.




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, 2005, 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 of a business enterprise.
      Through December 31, 2005, BioChemics had an unaudited, consolidated accumulated
      deficit of approximately $20.8 million, which includes the operations of Vaso
      Active. In addition, as of December 31, 2005, BioChemics was in default under
      debt obligations in the approximate amount of $11.4 million, which includes
      accrued interest, that it has issued to private investors. Approximately $8.6
      million of BioChemics’ debt, inclusive of accrued interest, is held by Mr.
      Masiz, members of his family, Robert E. Anderson (the Chairman of our Board
      of
      Directors who is also a member of the Board of Directors of BioChemics) and
      Dr.
      Brian J. Strasnick, who is a member of our Board of Directors. 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








19








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.**




Effective
      as of August 17, 2004 and in accordance with the terms of the SEC settlement,
      Mr. John J. Masiz resigned as President and Chief Executive Officer of Vaso
      Active. Vaso Active appointed its current Chief Financial Officer, Joseph
      Frattaroli, to serve as President and acting Chief Executive Officer.




Effective
      June 18, 2004, Kevin J. Seifert resigned as the Chief Operating Officer and
      director of Vaso Active. Vaso Active is not currently conducting a search for
      a
      new Chief Operating Officer.




Several
      of our other key employees are devoting less than all their time to the Company.
      For example, although our Chief Scientific Officer, Dr. Stephen Carter devotes
      substantially all his time to our activities, he is also devoting a portion
      of
      his time to Biochemics. 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 qualified personnel, our business, financial
      condition and results of operations may be materially and adversely
      affected.




**Because
      our President** **also serves as our acting Chief Executive Officer, Chief Financial Officer
      and
      principal accounting officer, we have limited senior management for strategic
      planning and growth.**




Our
      President, Joseph Frattaroli, also serves as our acting Chief Executive Officer,
      Chief Financial Officer and principal accounting officer. Though corporate
      executives often serve in multiple positions, these positions are typically
      the
      most senior positions in many companies. We may have difficulty executing our
      business plan and accommodating growth as a result of one individual’s holding
      these demanding positions.




**In
      the event of** **a
      conflict of interest between BioChemics and Vaso Active, 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. If Mr. Masiz
      decides to favor BioChemics in dealings between BioChemics and us or is not
      sensitive to conflicts of interest, our business could suffer.




**Risks
      Relating to our Common Stock**




**Mr.
      Masiz is the majority stockholder of** **BioChemics, which is our principal stockholder. He has substantial ultimate
      control over the Company, 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, 2005 represented approximately 70% 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 many types of stockholder
      votes, including votes concerning the election of our directors, the adoption
      or






20




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.




**Investors
      may experience substantial dilution of their investment.**




In
      the
      past and more recently, we have issued convertible notes, options and warrants
      to acquire Class A Common Stock.  These securities include the
      $2,500,000 aggregate principal amount of senior secured convertible notes that
      we issued in August 2005 and the warrants which we issued to the purchasers
      of
      the notes. We recently issued an additional 100,000 warrants to those investors
      for extending deadlines with respect to filing the registration statement for
      the shares of Class A Common Stock underlying their investment as well as
      possible additional investment. We will also be issuing convertible notes in
      connection with our recent litigation settlements.  To the extent these
      outstanding securities are ultimately exercised, there will be dilution to
      investors.  Investors may experience further dilution of their investment
      if we raise capital through the sale of additional equity securities or
      convertible debt securities, such as the rights to purchase additional notes
      and
      warrants granted to the August 2005 investors. Any sales in the public market
      of
      the Class A Common Stock issuable upon such conversion could adversely affect
      prevailing market prices for our common stock.




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




Our
      securities are currently quoted in the OTC Bulletin Board under the trading
      symbol “VAPH.OB.” The market price of our common stock has experienced, and may
      continue to experience, significant volatility. From January 1, 2005 to April
      6,
      2006, the per share closing price of our common stock has ranged from $0.20
      to
      $1.05. As a result of the following events, there is not currently an organized
      market in our securities, and there can be no assurance that such a market
      will
      develop:




·  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 securities
      until further disclosure; and




·  our
      voluntary delisting of our securities from The Nasdaq Stock Market on April
      8,
      2004.




On
      February 9, 2006 the average of the high and low prices of a share of our Class
      A Common Stock as quoted by the Pink Sheets was $0.405 **** per
      share. The value of our Class A Common Stock may decline regardless of our
      operating performance or prospects. Factors affecting our market price
      include:




·  the
      success or failure of our product development efforts, especially those related
      to obtaining regulatory approvals;




·  technological
      innovations developed by us or our competitors;




·  variations
      in our operating results and the extent to which we achieve our key business
      targets;




·  differences
      of our reported results from those expected by investors and securities
      analysts; and




·  market
      reaction to any acquisitions or joint ventures announced by us or our
      competitors.




In
      addition, in recent years, the stock market, and the market for pharmaceutical
      companies in particular, has generally 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. For
      example, we have recently settled, and received final court approval of, several
      securities class action lawsuits. See Item 3, “Legal Proceedings” for more
      information.






21






**"Penny
      stock" rules may make buying or selling our securities difficult which may
      make
      our stock less liquid and make it harder for investors to buy and sell our
      shares.**




Trading
      in our securities is subject to the SEC's "penny stock" rules and it is
      anticipated that trading in our securities will continue to be subject to the
      penny stock rules for the foreseeable future. The SEC has adopted regulations
      that generally define a penny stock to be any equity security that has a market
      price of less than $5.00 per share, subject to certain exceptions. These rules
      require that any broker-dealer who recommends our securities to persons other
      than prior customers and accredited investors must, prior to the sale, make
      a
      special written suitability determination for the purchaser and receive the
      purchaser's written agreement to execute the transaction. Unless an exception
      is
      available, the regulations require the delivery, prior to any transaction
      involving a penny stock, of a disclosure schedule explaining the penny stock
      market and the risks associated with trading in the penny stock market. In
      addition, broker-dealers must disclose commissions payable to both the
      broker-dealer and the registered representative and current quotations for
      the
      securities they offer. The additional burdens imposed upon broker-dealers by
      these requirements may discourage broker-dealers from recommending transactions
      in our securities, which could severely limit the liquidity of our securities
      and consequently adversely affect the market price for our
      securities.




**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 approximately
      2,500 square feet of office space is held by BioChemics and has recently been
      renewed and extended through March 2011. We do not have a lease agreement with
      BioChemics. Although we do not have a formal lease agreement with BioChemics,
      we
      pay approximately $3,700 per month in rent to BioChemics for our office and
      warehouse space. We do not own or lease any other real property. During each
      of
      2004 and 2005, we recorded approximately $44,000 in rent expense for this
      facility. We anticipate that this arrangement will continue at least through
      2011. We believe that our existing facilities are adequate to support our
      existing operations and that, if needed, we will be able to obtain suitable
      additional facilities on commercially reasonable terms.




**ITEM
      3.**  **LEGAL
      PROCEEDINGS**




**Lawsuit
      Against Robinson & Cole LLP**




As
      previously reported, on February 14, 2006, the Company and BioChemics filed
      a
      lawsuit in the Connecticut Superior Court, Judicial District of Hartford,
      against the law firm of Robinson & Cole LLP. The Company and BioChemics are
      seeking damages as a result of harm and losses that they believe they suffered
      as a result of advice provided by Robinson & Cole in connection with the
      Company’s initial public offering in 2003. The Company and BioChemics believe
      that as a direct result of Robinson & Cole’s actions, they have incurred
      over $100 million in damages due to lost market capitalization, out-of-pocket
      expenses, loss of market opportunities and related damages.




The
      lawsuit has been brought on a contingency fee basis, and the costs of the
      lawsuit are therefore not expected to be material to the Company’s current cash
      flow or resources. It is possible that Robinson & Cole may assert
      counterclaims against us in this matter, in particular, with respect to legal
      fees billed to us by Robinson & Cole that we have not paid. We believe that
      these unpaid legal fees are directly related to the legal work performed by
      Robinson & Cole that is the subject of this lawsuit. Consequently, we do not
      believe that Robinson & Cole is entitled to payment for such
      services.




**Settlement
      of Certain Stockholder Litigation**




In
      2004,
      the Company and certain of its officers and directors (the “Defendants”) were
      sued in several securities class action lawsuits filed in the United States
      District Court for the District of Massachusetts. The complaints, which were
      consolidated and sought equitable and monetary relief, an unspecified amount
      of
      damages, with interest, attorneys’ fees and costs, were filed on behalf of
      purchasers of Vaso Active Class A Common Stock during the period December 9,
      2003 to March 31, 2004.




The
      Company was also named as a nominal defendant in three shareholder derivative
      actions (the “Derivative Actions”). The actions were filed against certain of
      its officers and directors and against BioChemics, Inc. The complaints alleged,
      among other things, that the alleged conduct challenged in the securities class
      action case pending against the Company in Massachusetts (described above)
      constituted, among other things, a breach of the Defendants’ fiduciary duties to






22




Vaso
      Active. The complaints sought equitable and monetary relief, an unspecified
      amount of damages, and attorneys and other fees, costs and expenses, ostensibly
      on behalf of Vaso Active.




In
      September 2005, Vaso Active and certain of its named officers and directors
      entered into agreements to settle the class action and the Derivative Actions.
      The parties to the agreements obtained the final approval of the settlements
      by
      the United States District Court for the District of Massachusetts with respect
      to the class action and Massachusetts Derivative Action by entry of order on
      December 21, 2005, and dismissal by the Chancery Court of the State of Delaware
      for Newcastle County on January 4, 2006 with respect to the Delaware Derivative
      Action based upon approval of the Settlements by the Massachusetts District
      Court. The Massachusetts District Court also dismissed the actions. Under the
      terms of the Class Action Agreement, Vaso Active, disclaiming any liability,
      has
      caused to be paid into escrow for the benefit of the putative class $1,100,000
      in cash and is obligated to issue a total of $750,000 face amount of 2-year
      5%
      subordinated callable notes convertible at $1.75 per share (with full dilution
      protection). In February 2006, we issued a note in the aggregate principal
      amount of $187,500 to class action plaintiffs’ counsel in partial fulfillment of
      this obligation. We will be required to issue the balance of these notes to
      the
      class action plaintiffs themselves. Vaso Active’s insurance carrier agreed to
      pay and has paid the $1,100,000 cash payment in exchange for a release of its
      liability under its insurance policy with Vaso Active.




Under
      the
      terms of the Derivative Action Agreement, Vaso Active, disclaiming any
      liability, agreed to pay to plaintiffs’ counsel a total of $25,000 in cash and
      $110,000 face amount of 2-year 5% subordinated callable notes convertible at
      $1.75 per share. In February 2006, we paid the cash amount and issued these
      notes to the derivative plaintiffs’ counsel. In addition, the terms of the
      Derivative Action Agreement require Vaso Active to institute or maintain certain
      corporate governance measures. In consideration of these settlements, the
      parties agreed to fully and finally release and discharge all claims against
      each other.




Although
      these cases have been settled, there is no guarantee that these will be the
      only
      lawsuits brought against the Company with respect to these matters, and if
      any
      additional litigation is commenced against us, there can be no guarantee that
      these matters ultimately will be resolved in our favor. An unfavorable outcome
      of these matters would have a material adverse impact on our business, results
      of operations, financial position or liquidity.




For
      the
      years ended December 31, 2005 and 2004, the Company recorded approximately
      $998,000 and $1,114,000, respectively, in expenses to defend itself and settle
      in the SEC and private litigation matters discussed above, including legal,
      accounting and other consulting fees and the $885,000 charge in connection
      with
      the Company’s settlement of the consolidated securities class action lawsuit.




**FDA
      Matters**




We
      are
      not aware whether the FDA is contemplating any action against us. We believe
      that the active ingredients, dosage form and strengths of A-R Extreme, Osteon
      and Termin8 are covered by the FDA's OTC Review Program and therefore we believe
      these products are currently eligible for marketing under the same program.
      In
      early 2004, we intended to distribute these products under revised labeling
      once
      we were reasonably sure that the marketing of these products was consistent
      with
      the FDA's requirements and policies. We submitted new labels for our previously
      marketed products to the FDA in May 2004 and requested comments by the FDA
      on
      these labels. There is no regulatory requirement that the FDA review or comment
      on such materials and so far, the FDA has not provided any comment relating
      to
      the new labels. Although we were not provided any comment from the FDA, we
      are
      now reasonably sure that these new labels are consistent with all FDA
      regulations and policies and as a result, we resumed marketing and shipment
      of
      our products in September 2004.




**General**




Other
      than described above, we are not a party to any pending legal proceedings or
      are
      aware of any pending legal proceedings against us that, individually or in
      the
      aggregate, would have a material adverse affect on our business, results of
      operations or financial condition.




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




Our
      stockholders voted as indicated on the following proposals at the Company’s 2005
      Annual Meeting of Stockholders, which was held on December 6, 2005:




·
            The
                election of six Directors:






23




Director
                Nominee
            
            Class
                A Common Stock
              (#
                of votes cast)
            
            Class
                B Common Stock
              (#
                of votes cast)FOR
            
            AGAINST
            
            FOR
            
            AGAINSTRobert
                E. Anderson
            
            
            5,212,879
            
            
            52,588
            
            
            13,500,000
            
            
            0Dr.
                Stephen G. Carter
            
            
            5,211,879
            
            
            53,588
            
            
            13,500,000
            
            
            0Ronald
                Guerriero
            
            
            5,212,879
            
            
            52,588
            
            
            13,500,000
            
            
            0D’Anne
                Hurd
            
            
            5,212,479
            
            
            53,038
            
            
            13,500,000
            
            
            0Bruce
                A. Shear
            
            
            5,212,279
            
            
            53,188
            
            
            13,500,000
            
            
            0Dr.
                Brian J. Strasnick
            
            
            5,212,279
            
            
            53.188
            
            
            13,500,000
            
            
            0







·
            The
                amendment of the Company’s Amended and Restated Certificate of
                Incorporation, as amended (the “Certificate of Incorporation”), to
                increase the number of authorized shares of capital stock from 40,000,000
                shares to 60,000,000 shares, which increase shall be applied to increase
                the number of authorized shares of Class A Common Stock, by 20,000,000
                shares:




Class
                A Common Stock
              (#
                of votes cast)
            
            Class
                B Common Stock
              (#
                of votes cast)FOR
            
            AGAINST
            
            ABSTAIN
            
            FOR
            
            AGAINST
            
            ABSTAIN5,040,023
            
            
            219,844
            
            
            0
            
            
            13,500,000
            
            
            0
            
            
            0







·
            The
                amendment of the Certificate of Incorporation (i) to change the required
                stockholder vote to remove a director with or without cause from
                an
                affirmative vote of the holders of at least 75% of the outstanding
                shares
                of capital stock of the Company entitled to vote generally in the
                election
                of directors to an affirmative vote of the holders of greater than
                50% of
                the voting power of the shares of capital stock of the Company issued
                and
                outstanding and entitled to vote in the election of directors, and
                (ii) to
                eliminate the condition to stockholder removal of a director without
                cause
                that the Board of Directors recommend such action to the stockholders
                by a
                75% supermajority vote:




*Vote
      By Outstanding Shares*





Class
                A Common Stock
            
            Class
                B Common StockFOR
            
            AGAINST
            
            ABSTAIN
            
            FOR
            
            AGAINST
            
            ABSTAIN842,043
            
            
            822,325
            
            
            0
            
            
            4,500,000
            
            
            0
            
            
            0





*Vote
      by Outstanding Voting Power*





Class
                A Common Stock
            
            Class
                B Common StockFOR
            
            AGAINST
            
            ABSTAIN
            
            FOR
            
            AGAINST
            
            ABSTAIN842,043
            
            
            822,325
            
            
            0
            
            
            13,500,000
            
            
            0
            
            
            0







·
            The
                amendment of the Company’s 2003 Stock Incentive Plan (the “Plan”) to
                increase the number of shares of Class A Common Stock reserved for
                issuance under the Plan by 750,000 shares, from 1,350,000 shares
                to
                2,100,000 shares.




Class
                    A Common Stock
                  (#
                    of votes cast)
                
                Class
                    B Common Stock
                  (#
                    of votes cast)FOR
                
                AGAINST
                
                ABSTAIN
                
                FOR
                
                AGAINST
                
                ABSTAIN1,431,997
                
                
                232,201
                
                
                0
                
                
                13,500,000
                
                
                0
                
                
                0
 
  24


**PART
      II**




**ITEM
      5.**  **MARKET
      FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
      PURCHASES OF EQUITY SECURITIES**




Our
      Class
      A Common Stock, $0.0001 par value, began trading on December 10, 2003 on the
      Nasdaq SmallCap Market under the symbol "VAPH." In light of the substantial
      administrative and cash burdens of maintaining our Nasdaq listing , we
      determined that it was in the best interests of our shareholders for the company
      to cease voluntarily the listing of its securities on Nasdaq. Effective April
      8,
      2004, upon our request, our Class A Common Stock ceased to be listed on Nasdaq.
      Beginning April 15, 2004, our Class A Common Stock was quoted on the Pink
      Sheets. Since February 17, 2006, our Class A Common Stock has been quoted on
      the
      OTC Bulletin Board under the symbol “VAPH.ob”.




The
      following table sets forth the high and low sale 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.






Year
              
              Quarter
              
              High
                  Price
              
              Low
                  Price2005
              
              
              Fourth Quarter
              
              $
              0.65
              
              $
              0.42Third
                    Quarter
              
              
              0.82
              
              
              0.41Second
                    Quarter
              
              
              1.05
              
              
              0.20First
                  Quarter
              
              
              0.95
              
              
              0.532004
              
              
              Fourth Quarter
              
              $
              0.72
              
              $
              0.38Third
                  Quarter
              
              
              1.53
              
              
              0.55Second
                  Quarter
              
              
              7.59
              
              
              0.44First
                  Quarter
              
              
              14.11
              
              
              1.972003
              
              
              Fourth
                  Quarter
              
              $
              2.14
              
              $
              1.73






**Holders**




As
      of April 6, 2006, there were approximately 33 holders of record of shares
      of our Class A Common Stock. There is one holder, BioChemics, of our Class
      B
      Common Stock.




**Dividends**




On
      February 20, 2004, we 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. 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
      Securities Purchase Agreement that we entered into in connection with our August
      2005 private financing prohibits our paying dividends on either class of our
      common stock so long as 20% of the notes issued in that financing remian
      outstanding. However, we would be permitted to pay dividends if we could obtain
      the consent of the holders of a majority of the outstanding face amount of
      these
      notes.








25




In
      addition to the described Securities Purchase Agreement restrictions, we are
      subject to limitations on our ability to pay dividends on the common stock
      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. Even if we were not subject to the Securities Purchase
      Agreement restrictions, we would most likely retain any earnings to finance
      our
      future development and growth. We may reconsider this policy from time to time
      in light of conditions then existing, including our earnings performance,
      financial condition and capital requirements. Any future determination to pay
      cash dividends, if and when permitted under the Securities Purchase Agreement’s
      terms, will be at the discretion of our board of directors and will depend
      upon
      our financial condition, operating results, capital requirements, general
      business conditions and other factors that our board of directors deems
      relevant.




**Equity
      Compensation Plan Information**




The
      following table sets forth information as of December 31, 2005, concerning
      compensation plans for which the Company has authorized the future issuance
      of
      shares of its Class A 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 futureissuanceEquity
                compensation
              plans
                approved by
              security
                holders (1)
            
            
            1,425,000
                (1
            )
            $
            1.56
                (1
            )
            
            1,575,00
                (1
            )Equity
                compensation
              plans
                not approved by
              security
                holders
            
            
            --
            
            
            --
            
            
            --Total
            
            
            1,425,000
            
            
            1.56
            
            
            1,575,000







(1)
            Consists
                of: (a) 1,080,000 shares of Class A Common Stock issuable upon exercise
                of
                outstanding options under the Plan, having a weighted average exercise
                price of $1.68 per share, and (b) 330,000 shares of Class A Common
                Stock
                issuable upon exercise of outstanding options under the 2003 Non-Employee
                Director Compensation Plan, having a weighted average of $1.14 per
                share.
                As of December 31, 2005, a total of 1,020,000 shares of Class A Common
                Stock remained available for future issuance under the Plan, and
                570,000
                shares of Class A Common Stock remained available for future issuance
                under the Director Plan.







**Recent
      Sales of Unregistered Securities**




Set
      forth
      below in chronological order is information regarding securities issued by
      us
      that were not registered under the Securities Act of 1933:




*April
      2003 Private Placement*




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. The investors in this private placement had adequate access
      to information about us and represented to us their intention to acquire our
      securities for investment purposes only and not with a view to or for sale
      in
      connection with any distribution thereof. Appropriate legends were affixed
      to
      the certificates representing the securities issued. 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)








26




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.




*March
      2004 Private Placement*




In
      March
      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, convertible into shares of Class A Common Stock
      at a
      conversion rate of $9.00 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. Given the initiation
      and
      continuation of the April 1, 2004 trading suspension by the SEC constituted
      a
      breach under the Note, 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 the investor was repaid and, accordingly, have been recorded
      as
      expense as of March 16, 2004 and are included in the financial statements under
      the expense caption "selling, general and administrative."




*August
      2005 Private Placement*




On
      August
      16, 2005, the Company, pursuant to a Securities Purchase Agreement, sold
      $2,500,000 in aggregate principal amount of Senior Secured Convertible Notes
      due
      May 1, 2007, to four independent institutional investors in a privately
      negotiation transaction. The Company also issued to these investors (i) warrants
      (the “Warrants”) to purchase shares of the Class A Common Stock and (ii)
      additional investment rights to purchase additional notes (the “Additional
      Notes”) in the aggregate principal amount of $1,875,000 and additional warrants
      (the “Additional Warrants”). In addition, the Company issued warrants (the
“Placement Agent Warrants”) to a placement agent for services rendered in
      connection with the private financing, and would be required to issue additional
      warrants (the “Additional Placement Agent Warrants”) to the placement agent if
      the institutional investors elect to purchase Additional Notes and Additional
      Warrants. The Notes, Warrants, Additional Investment Rights and the Underlying
      Shares have not been registered for sale under the Securities Act in reliance
      on
      Section 4(2) of the Securities Act and Regulation D thereunder. The Securities
      Purchase Agreement imposes certain restrictions on the resale or other transfer
      of the securities necessary for the availability of the Section 4(2) exemption.
      No underwriter was involved in connection with the transaction. The Company
      utilized a registered broker-dealer to act as financial advisor and exclusive
      financing agent ("Financing Agent") in connection with the transaction. The
      Company paid to the Financing Agent a cash fee in an amount equal to 9% of
      the
      principal amount of the Notes issued by the Company on August 16, 2005, and
      a
      seven-year warrant to purchase a total of 64,935 shares of Class A Common Stock.
      The Financing Agent will be entitled to receive an additional 9% cash fee (based
      on the amount of the Additional Investment Rights exercised) and warrant to
      purchase up to an additional 48,701 shares of Class A Common Stock in connection
      with the exercise of the Additional Investment Rights, if and when such exercise
      shall occur.




*November
      2005 Warrant Issuance*




In
      November 2005, we issued five-year warrants to the August 2005 private financing
      investors to purchase a total of 100,000 shares of Class A Common Stock at
      an
      exercise price of $1.00 per share. These warrants have not been registered
      for
      sale under the Securities Act in reliance on Section 4(2) of the Securities
      Act.
      We issued these warrants in exchange for such investors’ agreement to extend the
      deadline for filing the required registration statement for the shares
      underlying their notes, warrants, additional notes and additional warrants
      from
      October 15, 2005 to December 15, 2005. The other terms of these warrants
      (including anti-dilution adjustments) are substantially the same as the warrants
      issued to these investors.




**Repurchases
      of Equity Securities of the Issuer**




None.






27


**ITEM
        6.**  **MANAGEMENT'S
        DISCUSSION AND ANALYSIS**
  **Business
        Overview**


Vaso
      Active is an early stage company, organized in January 2003, which focuses
      on
      commercializing, marketing and selling over-the-counter pharmaceutical products
      that we believe incorporate a proprietary PENtoCORE technology. Vaso Active
      is
      also focused on pre-clinical testing and research on a patented VALE
      technology.




The
      unique VALE technology is intended to be a patchless, lipid-based delivery
      system which the Company’s parent, Biochemics, is formulating into various
      applications which the Company hopes to market in the future, subject to
      receipt of appropriate FDA approvals. The technology uses an active process,
      incorporating chemical vasodilators, to deliver drugs through the skin and
      into
      the bloodstream.




The
      PENtoCORE technology is a topical formulation, in contrast to the VALE
      transdermal technology. The Company is currently marketing three products that
      incorporate the proprietary PENtoCORE technology; the Company has one additional
      product candidate currently undergoing package design and branding and multiple
      additional product candidates at various stages of formulation and development,
      none of which have yet been approved by or listed with the
      FDA.




We
      began our operations in January 2001, as a division of BioChemics, a
      privately-owned pharmaceutical company engaged in the development of transdermal
      and topical drug delivery systems. BioChemics is based in Danvers,
      Massachusetts. BioChemics was founded in 1989 by John J. Masiz and was
      incorporated in Delaware in 1991. BioChemics began developing the VALE
      technology in 1989 and has subsequently been issued four U.S. patents in
      connection with this technology. BioChemics has licensed the VALE patents and
      the PENtoCORE technology to us.




As
      an early stage company, we are subject to a number of risks typical of early
      stage companies including, but not limited to, our need to obtain additional
      financing and generate profitability and cash flows from operations. As a
      company engaged in the pharmaceutical industry, we are subject to a number
      of
      risks typical of pharmaceutical companies including, but not limited to, our
      need to adhere to strict governmental regulations, our ability to withstand
      intense competition from larger companies with greater financial resources
      and
      our ability to defend our intellectual property, as licensed from
      BioChemics.




Our
      general business strategy was adversely affected beginning in April 2004 by
      regulatory action taken against us and our former President, and by private
      securities actions taken against us and our management. At the same time, we
      suspended the marketing and sale of our products until we were reasonably sure
      that our product marketing was consistent with the FDA's requirements and
      policies. We also voluntarily delisted our common stock from trading on NASDAQ.
      As a result of our voluntary delisting and the continuation of the delisting
      of
      our securities, the action taken by the SEC against us, issues regarding the
      regulatory status of our products, and the significant decline in the market
      value of our securities concurrent with and subsequent to these matters, several
      shareholder actions were filed against Vaso Active and its officers and
      directors.




In
      September 2005, the Company and certain of its officers and directors entered
      into agreements to settle (i) a consolidated securities class action lawsuit
      that alleged that the Company and those individuals violated the federal
      securities laws with respect to certain disclosures concerning the Company;
      and
      (ii) derivative lawsuits based on the class action allegations. In October
      2005,
      the court granted preliminary approval to each of the litigation settlements,
      following which joint notices of the settlements and claim forms were sent
      to
      appropriate stockholders. The parties to the agreements obtained the court's
      final approval of the settlements on December 14, 2005. For further information,
      see Item 3, “Legal Proceedings."




**Critical
      Accounting Estimates**




Going
      Concern Assumption - The
      financial statements do not include any adjustments relating to the
      recoverability and classification of assets or the amounts and classification
      of
      liabilities that might be necessary should we be unable to continue as a going
      concern. If the financial statements were prepared on a liquidation basis,
      the
      carrying value of our assets and liabilities would be adjusted to net realizable
      amounts. In addition, the classification of the assets and liabilities would
      be
      adjusted to reflect the liquidation basis of accounting.




Revenue
      Recognition - We
      recognize 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 supersedes
      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."






28




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.




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 / Management Fees -
      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.




Income
      Taxes - 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
      historically have not recognized stock-based compensation expense for stock
      options granted to employees at their fair value. The fair value of options
      granted to non-employees are expensed in accordance with SFAS 123 using the
      Black-Scholes option-pricing model. See Note 2 to our financial statements
      for
      the impact on earnings had we fully adopted SFAS 123.




In
      December 2004, the FASB issued a revision to SFAS No. 123, "Share-Based
      Payment," requiring companies to recognize as compensation expense the fair
      value of stock options and other equity-based compensation issued to employees.
      This revised statement eliminates the intrinsic value method provided under
      Accounting Principles Board, or APB, No. 25, "Accounting for Stock Issued to
      Employees," which is the method we currently use to value stock options awarded
      to our employees. This revised standard is effective as of the beginning of
      the
      first annual reporting period beginning after December 15, 2005 and is expected
      to have a material impact on our results of operations.






**2005
      Compared to 2004**




Net
      Revenues - Net
      revenues for the year ended December 31, 2005 increased by approximately 96%
      to
      $25,221 from $12,888 in the comparable period in 2004. Shipments in both 2005
      and 2004 were not significant. Our operations continued to be negatively
      affected in 2005 due to capital resource constraints. As a result, our selling
      activities were limited principally to test marketing initiatives. In April
      2004, regulatory actions were taken against us by the FDA. As a result, we
      suspended all selling activities until we were reasonably sure that our product
      marketing was consistent with the FDA’s requirements and policies. In September
      2004, we revised our product labels and began shipping our products on a limited
      basis.




Cost
      of Sales - Cost
      of sales principally includes the cost of products, inventory adjustments,
      the
      disposal of expired products and other manufacturing costs. Through BioChemics,
      we outsource the manufacturing of our products to an independent third-party
      contract manufacturer. In 2005 and 2004, we recorded product disposal costs
      and
      one-time production set-up costs charged to us by our contract manufacturer
      of
      $35,912 and $64,099, respectively. These manufacturing costs represented
      approximately 84% and 86% of our cost of sales in 2005 and 2004, respectively.
      The remainder of our cost of sales, $6,975 in 2005 and $3,437 in 2004, was
      primarily the cost of our product sales.






29




Marketing,
      Advertising and Promotion -
      Marketing, advertising and promotion expenses for the year ended December 31,
      2005 decreased $29,577 to $318,964 from $348,541 in the comparable period.
      Included in the 2005 expense was approximately $139,000 in advertising fees
      we
      incurred in connection with our launch of a series of 60 and 120 second
      television commercials for Osteon throughout the United States. In addition,
      we
      incurred costs of $96,211 for samples that were distributed throughout the
      year,
      and $64,447 for various promotional expenses that included shows and
      conferences. In 2004, marketing, advertising and promotion expense included
      approximately $180,000 in professional fees associated with the Osteon product
      rollout strategy. In addition, 2004 marketing, advertising and promotion expense
      included $101,757 in compensation expense, which represented the fair value
      of
      warrants we issued to a marketing and promotion firm for marketing services
      we
      received.




Selling,
      General and Administrative -
      Selling, general and administrative expenses decreased by $1,163,122 to
      $2,633,229 during the year ended December 31, 2005 as compared to $3,796,351
      in
      the comparable period in 2004. The decrease in selling, general and
      administrative expense in 2005 was due primarily to the decrease in legal and
      professional fees we incurred to defend ourselves against several shareholder
      actions and regulatory actions taken against us by the SEC and the FDA in 2004.
      In addition, included in the 2004 selling, general and administrative expense
      was approximately $615,000 in fees we incurred in connection with the unwinding
      of our April 2004 private placement transaction.




Selling,
      general and administrative expenses in 2005 primarily consist of salaries,
      wages
      and related personnel costs, professional fees such as legal, audit and business
      advisory services typical of a publicly held corporation, commercial liability
      and directors and officers insurance costs and general overhead such as facility
      costs.




Research
      And Development -
      Research and development expenses increased by $23,470 to $342,482 for the
      year
      ended December 31, 2005 as compared to $319,012 in 2004. In both 2005 and 2004,
      our research and development activities have primarily surrounded the
      formulation of an analgesic utilizing the active ingredient ibuprofen. These
      activities have been performed under our direction by BioChemics under the
      terms
      and conditions of our August 2003 agreement. Also included in 2005 and 2004
      research and development expenses was $54,912 and $52,579 in stock-based
      compensation related to stock options we issued to non-employees.




Interest
      Expense - During
      the year ended December 31, 2005, the Company incurred $292,532 in interest
      expense. Of this total, $70,035 represented interest expense incurred under
      our
      Senior Secured Convertible Notes due May 1, 2007, $121,449 represented accretion
      of the debt discount associated with detachable warrants sold in conjunction
      with the Senior Secured Convertible Notes and $77,302 represented the non-cash
      amortization of debt issuance costs.




**2004
      Compared to 2003**




Net
      Revenues - Net
      revenues for the year ended December 31, 2004 decreased by approximately 76%
      to
      $12,888 from $53,270 in the comparable period in 2003. This decrease was
      primarily a result of the regulatory and private securities actions taken
      against us beginning in April 2004 and our decision to suspend the marketing
      and
      sale of our products until we were reasonably sure that our product marketing
      was consistent with the FDA's requirements and policies. In September 2004,
      we
      revised our product labels and began shipping our products on a limited basis.




Cost
      Of Sales - In
      general, our cost of sales is variable to our net revenues. However, certain
      manufacturing events such as inventory adjustments or product returns may
      significantly affect the consistency of our cost of sales, and therefore our
      gross profit, during any particular period. In 2004, we experienced several
      one-time manufacturing events including $54,662 in charges as a result of a
      write-off of expired inventory, $7,037 in one-time production costs and $2,400
      in disposal costs. Excluding these one-time items, cost of sales was $3,437,
      which is a decrease of $31,662, or 71%, from the comparable period in the prior
      year. This adjusted decrease is consistent with our overall decrease in revenues
      between the two periods.




Marketing,
      Advertising And Promotion -
      Marketing, advertising and promotion expenses increased approximately 198%
      to
      $348,541 for the year ended December 31, 2004 from $116,642 for the comparable
      period in 2003. This increase was primarily attributable to $180,000 in
      professional marketing and consulting fees we incurred as we initiated our
      product rollout strategy in late 2004. Also included in 2004 was stock-based
      compensation of $101,757 related to the award of options and warrants to
      purchase our common stock to a marketing and promotion firm that was providing
      us services.






30




Selling,
      General And Administrative -
      Selling, general and administrative expenses increased by $2,748,433 to
      $3,796,351 during the year ended December 31, 2004 as compared to $1,047,918
      in
      the comparable period in 2003. This increase is due primarily to our increased
      operations and significant legal and other professional expenses we incurred
      in
      connection with our recent SEC, Nasdaq, and FDA matters and shareholder class
      action lawsuits. In 2004, we incurred approximately $1,265,000 in legal and
      professional fees to amend our previously filed public filings and to defend
      ourselves and our officers and directors in the shareholder class action
      lawsuits. We recorded approximately $956,000 in salaries, wages, fringe benefits
      and other related compensation costs, approximately $392,000 in business,
      financial and other professional services and approximately $161,000 for various
      insurance premiums typical of a public company. In connection with the unwinding
      of our March 2004 private placement transaction, we incurred approximately
      $600,000 in professional fees and an additional $15,000 to unwind this
      transaction. The remaining selling, general and administrative costs pertain
      to
      our general operations.




Research
      And Development -
      Research and development expenses incurred for the year ended December 31,
      2004
      were $319,012. Beginning in January 2004, we engaged BioChemics to provide
      us
      with development services surrounding the formulation of an analgesic utilizing
      the active ingredient ibuprofen under the terms and conditions of our August
      2003 agreement. Included in the 2004 cost were pre-clinical studies performed
      on
      animals. We used the proceeds we raised from our December initial public
      offering to fund this development. Also included in the 2004 research and
      development expense was $52,578 in stock-based compensation related to stock
      options we issued to non-employees. We did not incur any research and
      development costs in 2003.




**Liquidity
      and Capital Resources**




The
      Company has incurred substantial operating losses and negative cash flows from
      operations since inception. In 2004 and 2005, until the completion of our
      private financing in August 2005, operations were financed primarily from the
      proceeds of our December 2003 initial public offering and from the exercise
      of
      warrants. Net of offering costs, we raised approximately $6.4 million and
      $450,000, respectively, through these transactions. Prior to our receipt of
      these proceeds, we relied on BioChemics, together with the proceeds from an
      offering of convertible notes in early 2003, as the source of our working
      capital. We have expended all of the funds raised from our initial public
      offering.




On
      August
      16, 2005, under a Securities Purchase Agreement (the "Purchase Agreement"),
      we
      issued a series of Senior Secured Convertible Notes (the "Notes") due May 1,
      2007 in the aggregate principal amount of $2,500,000. The Company received
      approximately $1,700,000 in net cash proceeds from financing after placement
      fees, legal expenses, other offering costs, and funding of an escrow for future
      interest payments on the Notes. Placement fees, legal expenses and other
      offering costs paid were approximately $360,000 and approximately $440,000
      was
      placed into escrow to fund substantially all of the Company's interest payments
      on the Notes (assuming that the Notes continue to accrue interest at the initial
      rate of 10% per annum).




*The
      Notes* .
      The
      Notes have a term of 21 months, and the principal of the Notes is due and
      payable in a single payment on May 1, 2007. The Notes bear interest at the
      six
      month LIBOR plus 6% with a floor of 10.0% and a ceiling of 12.0%. The Notes
      presently accrue interest at 10% per annum. Interest is payable quarterly,
      in
      arrears, beginning October 31, 2005, on each July 31, October 31, January 30
      and
      April 30, until the earlier of the Notes' maturity or conversion date.




Amounts
      scheduled to be paid by the Company under the Notes may be accelerated upon
      the
      occurrence of certain events, including any default in the payment of interest
      when due and payable; the default by the Company under other notes, mortgage,
      or
      credit facility; the failure of the Company to perform certain obligations
      to
      deliver certificates for Underlying Shares or to timely register the Underlying
      Shares for resale as required under the Purchase Agreement; and in the event
      of
      bankruptcy.




The
      Notes
      are secured by all of the assets of the Company. The Notes are convertible
      at
      any time into shares of the Company's Class A Common Stock at a price of $0.70
      per share (subject to adjustment under certain circumstances, e.g.,
      anti-dilution adjustments).




*The
      Warrants* .
      The
      investors also received five-year warrants ("Warrants"), which entitle the
      investors to purchase a total of 1,298,701 shares of the Company's Class A
      Common Stock at an exercise price of $0.77 per share. The number of shares
      which
      may be purchased upon exercise of the Warrants and the exercise price per share
      of the Warrants are subject to adjustment under certain circumstances, e.g.,
      anti-dilution adjustments.






31




Additional
      Investment Rights *(AIRs).* In
      addition, the investors received AIRs to purchase up to $1,875,000 in aggregate
      principal amount of additional Notes at any time through May 1, 2007, which
      is
      the maturity date of the notes, together with additional five-year Warrants
      to purchase a total of 974,026 shares of Class A Common Stock. Any additional
      Notes would be convertible and any additional Warrants would be exercisable
      at the same respective initial prices per share as the Notes and Warrants issued
      on August 16, 2005.




Under
      the
      Purchase Agreement, the Company is required to reserve for issuance a total
      of
      8,522,727 shares of Class A Common Stock, in connection with the possible
      conversion of Notes (including the additional Notes) and the possible exercise
      of the Warrants (including the additional Warrants).




At
      February 28, 2006, we had unrestricted cash of approximately $409,000 and
      working capital of approximately $187,000, excluding $322,000 of restricted
      cash
      held in escrow to fund future interest payments on the senior secured
      convertible notes we sold in 2005, and excluding approximately $237,000 of
      accounts payable related to legal fees that we intend to contest. Our financial
      condition has been materially and adversely affected by recent regulatory and
      shareholder actions taken against us. Having obtained final court approval
      of
      our recent litigation settlements, we expect our expenditures for legal and
      professional fees to decrease accordingly in the future.




We
      do not
      believe that we will receive cash flows from sales of our existing products
      at
      least until the middle of 2006.  We believe that our current working
      capital will be sufficient to satisfy our cash requirements only through May
      31,
      2006. The August 2005 private financing investors have informally indicated
      to
      us recently that they will not purchase the additional notes and warrants
      available to them under the AIRS unless we are willing to renegotiate the terms
      of this purchase. Therefore, we are actively pursuing alternative financing
      sources to replace this previously anticipated source of funds, but we are
      uncertain whether we will be successful in obtaining any such financing. If
      we
      do not raise additional capital from third parties prior to May 2006, we will
      explore ways to reduce further our operating expenses, such as by obtaining
      agreements from employees and BioChemics to defer payment of funds we owe them.
      Our ability to continue our business activities, including increasing our
      marketing support for our existing products, funding of the development of
      our
      product candidates through BioChemics and the commercialization of these product
      candidates, will depend upon, among other things, raising capital from third
      parties or receiving net cash flows from sales of our products. If we
      successfully generate cash through any of these methods, our priorities will
      be:
      (i) to contribute to support our existing products; (ii) to bring our acne
      product candidate to market; and (iii) to commence clinical trials for our
      ibuprofen candidate.




**Contractual
      Obligations and Commitments**




The
      following table sets forth our contractual obligations and commitments for
      the
      next five years, as of December 31, 2005.




**Total**
            
            **Less
                than**
              **1
                year**
            
            **1
                - 3**
              **Years**
            
            **3
                - 5**
              **Years**
            
            **5
                - 7**
              **Years**Long-term
                debt
            
            $
            2,500,000
            
            $
            -
            
            $
            2,500,000
            
            $
            -
            
            $
            -Capital
                lease obligations
            
            
            14,582
            
            
            2,351
            
            
            5,070
            
            
            7,161
            
            
            -Operating
                lease obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Unconditional
                purchase obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Employment
                agreements
            
            
            2,234,167
            
            
            344,167
            
            
            630,000
            
            
            630,000
            
            
            630,000Total
            
            $
            4,748,749
            
            $
            346,518
            
            $
            3,135,070
            
            $
            637,161
            
            $
            630,000




In
      February 2005, we appointed our Chief Financial Officer, Mr. Joseph Frattaroli,
      as our President. Mr. Frattaroli will continue to serve as Chief Financial
      Officer and Acting Chief Executive Officer. This table is presented reflecting
      the authorized annual salary to Mr. Frattaroli effective March 1, 2005 for
      one
      year. The written employment agreements with Mr. Masiz and Dr. Carter terminate
      their initial terms on June 30, 2008, but are deemed automatically extended
      for
      successive periods of two years under the terms of their respective written
      agreements through 2012. This table is presented to reflect the effect of
      occurance of the automatic extensions.






32




In
      September 2005, Vaso Active and certain of its officers and directors, entered
      into agreements to settle the previously reported consolidated securities class
      action and derivative lawsuits. As a result of these settlements, we recorded
      a
      charge of $885,000 payable $25,000 in cash and $860,000 in the form of 2 year
      5%
      convertible notes that is not reflected as an obligation in this table.




**Off-Balance
      Sheet Arrangements**




We
      have
      no material off-balance sheet financing such as a facility lease or other
      long-term commitments. We have employment agreements with three key employees.
      Please refer to “Contractual Obligations and Commitments” for a summary of our
      obligations under employment agreements.




**Ownership
      Structure**




Through
      our parent company, BioChemics, John J. Masiz controls approximately 70% of
      the
      combined voting power of all classes of stock of the Company and approximately
      44% of the combined equity interest of the Company. BioChemics owns 100% of
      the
      Class B Common Stock of the Company.




**Inflation**




To
      date,
      inflation has had no material impact on our operations.




**ITEM
      7.**  **FINANCIAL
      STATEMENTS**




Our
      audited financial statements and related notes, which are attached to this
      Annual Report on Form 10-KSB beginning on page F-1, are incorporated by
      reference.




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




None.




**ITEM
      8A.**  **CONTROLS
      AND PROCEDURES**




As
      of the
      end of the period covered by this annual report, our Acting Chief Executive
      Officer and Chief Financial Officer (the "Certifying Officer") conducted
      evaluations of our disclosure controls and procedures. As defined under Sections
      13a-15(e) and 15d-15(e) of the 1934 Act, the term "disclosure controls and
      procedures" means controls and other procedures of an issuer that are designed
      to ensure that information required to be disclosed by the issuer in the reports
      that it files or submits under the 1934 Act is recorded, processed, summarized
      and reported, within the time periods specified in the SEC's rules and forms.
      Disclosure controls and procedures include, without limitation, controls and
      procedures designed to ensure that information required to be disclosed by
      an
      issuer in the reports that it files or submits under the Exchange Act is
      accumulated and communicated to the issuer's management, including the
      Certifying Officer, to allow timely decisions regarding required disclosure.
      Based on this evaluation, the Certifying Officer has concluded 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
      1934
      Act, and the rules and regulations promulgated thereunder.




Further,
      there were no changes in our internal control over financial reporting during
      the fourth fiscal quarter that have materially affected, or are reasonably
      likely to materially affect, our internal control over financial
      reporting.




**PART
      III**




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




**Directors
      and Officers**






33




Set
      forth
      below is the name, age as of December 31, 2005, position and a brief account
      of
      the business experience of each of our executive officers and
      directors:




**Name**
            **Age**
            **Position**Joseph
                Frattaroli
            43
            President,
                Acting Chief Executive Officer andChief
                Financial OfficerStephen
                Carter, Ph.D.
            53
            Vice
                President, Chief Scientific Officer, DirectorRobert
                E. Anderson
            50
            Director,
                Chairman of the Board (2), (4)Ronald
                Guerriero
            62
            Director
                (1), (3), (4)D'Anne
                Hurd
            55
            Director
                (1), (2), (3), (4)Bruce
                A. Shear
            51
            Director
                (1), (4)Brian
                J. Strasnick, Ph.D.
            52
            Director
                (2), (3), (4)__________


(1)  Member
      of
      the Audit Committee of the Board of Directors


(2)  Member
      of
      the Nominating and Corporate Governance Committee of the Board of
      Directors


(3)  Member
      of
      the Compensation Committee of the Board of Directors


(4)  Independent
      Director




JOSEPH
      FRATTAROLI - Mr. Frattaroli has served as Acting Chief Executive Officer of
      the
      Company since August 2004, as President of the Company since February 2005,
      and as Chief Financial Officer of the Company since June 2003.  He served
      as Acting President of the Company from August 2004 until February 2005.
      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 maker
      of
      precision machine parts for the telecommunications industry. From January 1998
      through April 2000, Mr. Frattaroli served as managing principal for the EPI
      Consulting Group, a consulting firm that provided per diem chief financial
      officer services.




STEPHEN
      G. CARTER, Ph.D. - Dr. Carter has served as the Company’s Chief Scientific
      Officer since June 2003. He has served as a member of its Board of Directors
      since June 2003. From September 1999 to the present, Dr. Carter has also served
      as Chief Scientific Officer of BioChemics.




ROBERT
      E.
      ANDERSON - Mr. Anderson has served as a member of the Company’s Board of
      Directors since June 2003 and has been the Chairman of the Board since September
      17, 2004. From January 1998 to the present, Mr. Anderson has been a
      self-employed consultant and investor. Mr. Anderson has also served as a
      director of BioChemics since 2003.




RONALD
      GUERRIERO - Mr. Guerriero was appointed to the Company’s Board of Directors on
      September 17, 2004. From March 2004 to the present he has served as Executive
      Director of the Research Accelerator Program for Partners HealthCare System,
      a
      non-profit consortium of major hospitals in the Boston area. From 1998 to 2004,
      he served as President of Bridge Management Group, a company that specializes
      in
      management of medium sized technology companies, where he served as Chief
      Executive Officer for four companies. He also serves as an adjunct faculty
      member at the Carroll School of Management at Boston College.




D'ANNE
      HURD - Ms. Hurd was appointed to the Company’s Board of Directors on September
      17, 2004. From July 2005 to the present and from January 2004 to January 2005,
      Ms. Hurd has served as an independent business/legal consultant to several
      companies. Since January 2006, Ms. Hurd has been the Vice President of Business
      Development for Gateway Park and General Counsel for Worcester Polytechnic
      Institute. From January 2005 to March 2005, she served as a financial consultant
      and from March 2005 to June 2005 as Senior Vice President, Chief Financial
      Officer and Treasurer of NMS Communications, Inc., a publicly traded provider
      of
      technologies for mobile applications and infrastructure. From March 2001 to
      January 2004, Ms. Hurd was Chief Financial Officer and General Counsel of
      StarBak Communications Inc., a company specializing in video communications
      technology, and its predecessor company, Vividon, Inc. From July 1999 to March
      2001, Ms. Hurd was Chief Financial Officer and General Counsel of NaviPath,
      Inc., a former CMGI operating company providing internet access to internet
      service providers. From 1993 to the present, she has served as a director and
      chairman of the audit committee for Data Translation, Inc., a company
      specializing in the design of analog to digital technology.




BRUCE
      A.
      SHEAR - Mr. Shear has served as a member of the Company’s Board of Directors
      since June 2003. Since 1980, Mr. Shear has served as the President and Chief
      Executive Officer of PHC, Inc., a publicly traded behavioral health company,
      which he co-founded in 1979. Mr. Shear has served on the Board of Governors
      of
      the Federation of American Health Systems for over 15 years.






34




BRIAN
      J.
      STRASNICK, Ph.D. - Dr. Strasnick has served as a member of the Company’s Board
      of Directors since June 2003. Dr. Strasnick is the founder, Chairman, President
      and Chief Executive Officer of Willow Laboratories, which is engaged in the
      business of drug testing, serving in those positions since September 1995.
      Dr.
      Strasnick has provided behavioral healthcare and pharmacological services as
      a
      practitioner for over 18 years. Dr. Strasnick has also served on the Board
      for
      the Drug and Alcohol Testing Industry Association, or DATIA.




**Significant
      Employee**




JOHN
      MASIZ - Mr. Masiz, age 47, has served as the Chairman and Chief Executive
      Officer of BioChemics since 1989. From the inception of the Company in January
      2004 until August 2004, he served as the Chairman, Chief Executive Officer
      and
      President of the Company. Since August 2004, Mr. Masiz has devoted approximately
      70% of his time as an employee of the Company providing strategic consulting
      services regarding matters including sales, marketing and business development.
      Mr. Masiz may be deemed to be a “Significant Employee” of the Company within the
      meaning of the federal securities laws; he is not an executive officer of the
      Company.




On
      September 13, 2004, the United States District Court for the District of
      Columbia entered final judgments against the Company and Mr. Masiz pursuant
      to
      their settlements of a civil injunctive action commenced by the SEC. Under
      the
      terms of the settlement, without admitting or denying the allegations of the
      civil complaint, the Company and Mr. Masiz were enjoined from violating the
      antifraud and reporting provisions of the federal securities laws. He is also
      prohibited from serving as an officer or director of any public company,
      including the Company, for a period of five years. Effective as of August 17,
      2004, Mr. Masiz resigned as an executive officer and a director of the Company,
      and the Company and Mr. Masiz terminated his then-existing employment agreement.
      He is, however, permitted to, and does, serve as an active employee of and/or
      consultant to the Company.




**T** **he
      Board of Directors**




The
      Board
      of Directors oversees the business affairs of the Company and monitors the
      performance of management. The Board of Directors held eight meetings during
      the
      fiscal year ended December 31, 2005. During the 2005 fiscal year, all Board
      members attended 75% or more of the aggregate of (1) the total number of Board
      meetings held during the period he or she was a director and (2) the total
      number of meetings of the committee(s) of the Board on which the director
      serves. Currently, the Board consists of six members: Robert E. Anderson,
      Stephen G. Carter, Ronald Guerriero, D'Anne Hurd, Bruce A. Shear and Brian
      J.
      Strasnick. Robert Anderson is the Chairman of our Board of Directors. In
      addition, the Board has appointed Mr. Guerriero as the lead independent
      director.




**Committees
      of the Board**




The
      Board
      of Directors has designated three standing committees: the Audit Committee,
      the
      Compensation Committee and the Nominating and Corporate Governance Committee.




*Audit
      Committee.* The
      Audit
      Committee is responsible for making recommendations to the Board of Directors
      concerning the selection and engagement of independent accountants and for
      reviewing the scope of the annual audit, audit fees, results of the audit and
      auditor independence. The Audit Committee also reviews and discusses with
      management and the Board of Directors such matters as accounting policies,
      internal accounting controls and procedures for preparation of financial
      statements. Its membership is currently comprised of Ms. Hurd (Chairwoman),
      Mr.
      Guerriero and Mr. Shear. The Audit Committee held seven meetings during the
      year
      ended December 31, 2005. On January 19, 2005, the Board of Directors amended
      and
      revised our Audit Committee Charter in order to incorporate certain updates
      in
      light of the most recent regulatory developments, including the Sarbanes-Oxley
      Act of 2002. A copy of the current Audit Committee Charter, which we filed
      as an
      exhibit to the Company’s Current Report on Form 8-K, filed January 25, 2005 with
      the SEC (the “January 2005 Form 8-K”) is available on the Company’s website, www.vasoactive.us .
      The
      Audit Committee Charter is reviewed annually.




In
      October 2005, the Board of Directors determined that Ms. Hurd, the Chairwoman
      of
      the Audit Committee, is an “audit committee financial expert” within the meaning
      of applicable regulations adopted by the SEC.






35




Because
      the Company is not listed on a national securities exchange, the Company is
      required to adopt a standard for the independence of its Audit Committee members
      used by a national securities exchange of its choice. The Company has adopted
      the independence standards for Audit Committee members of the American Stock
      Exchange (“AMEX”). The Board of Directors has determined that all members of the
      Audit Committee are “independent” under the AMEX independence
      standards.




*Compensation
      Committee.* The
      Compensation Committee reviews and approves the compensation for executive
      employees. Its membership is currently comprised of Messrs. Guerriero (Chairman)
      and Strasnick and Ms. Hurd. The Compensation Committee held two meetings
      during the year ended December 31, 2005. A copy of the current Compensation
      Committee Charter is available on the Company’s website, www.vasoactive.us ,
      and was
      also filed as an exhibit to the January 2005 Form 8-K.




*Nominating
      and Corporate Governance Committee.* The
      Board
      of Directors established the Nominating and Corporate Governance Committee
      in
      December 2004 for the purposes of identifying individuals qualified to become
      Board members and to recommend that the Board select these individuals as
      nominees for election to the Board at the next annual meeting of the Company's
      stockholders, and developing and recommending to the Board a set of effective
      corporate governance policies and procedures applicable to the Company. The
      Nominating and Corporate Governance Committee met two times during the year
      ended December 31, 2005. Its membership is currently comprised of Ms. Hurd
      (Chairwoman) and Messrs. Guerriero and Strasnick. The charter of this Committee
      is available on the Company’s website, www.vasoactive.us ,
      and was
      also filed as an exhibit to the January 2005 Form 8-K.




Because
      the Company is not listed on a national securities exchange, the Company is
      required to adopt a standard for the independence of its Nominating and
      Governance Committee members used by a national securities exchange of its
      choice. The Company has adopted the independence standards for Nominating and
      Corporate Governance Committee members of AMEX. The Board of Directors has
      determined that all members of the Nominating and Corporate Governance Committee
      are “independent” under the AMEX independence standards.




Under
      its
      charter, the Nominating and Corporate Governance Committee from time to time
      may
      actively seek nominees for the Board as well as obtain recommendations from
      management and stockholders. In assessing potential nominees for the Board,
      the
      Committee generally considers business experience, administrative skills and
      the
      ability to interact effectively with the full board and management, among other
      attributes. The Committee will also consider other factors, such as diversity
      and specific needs of the Board at a particular time. This process includes
      identifying candidates with excellent decision-making ability, technological
      background, personal integrity and reputation, experience with businesses and
      other organizations of comparable size, experience as an executive with a
      publicly traded company, the interplay of the candidate's experience with the
      experience of other Board members, and the extent to which the candidate would
      be a desirable addition to committees of the Board. Candidates nominated by
      stockholders will be evaluated on the basis of the same criteria that all other
      director nominees are evaluated.




**Policy
      Regarding Director Nominations By Stockholders**




*Generally.* The
      Board
      of Directors will consider all director candidates recommended to the Nominating
      and Corporate Governance Committee (the “Nominating Committee”) by stockholders
      owning at least five percent (5%) of the Company’s outstanding shares of capital
      stock at all times during the year preceding the date on which the
      recommendation is made that meet the qualifications established by the Board.




*Director
      Minimum Qualifications* .
      Set
      forth below are the minimum qualifications that the Nominating Committee
      believes are needed to effectively serve as a Company director:




·
            Each
                director nominee is evaluated in the context of the full Board's
                qualifications as a whole, with the objective of establishing a Board
                that
                can best perpetuate the success of the Company's business and represent
                stockholder interests through the exercise of sound judgment. Each
                director nominee will be evaluated considering the relevance to the
                Company of the director nominee's respective skills and experience,
                which
                must be complimentary to the skills and experience of the other members
                of
                the Board.




·
            Director
                nominees must possess a general understanding of marketing, finance
                and
                other elements relevant to the success of a publicly-traded company
                in
                today's business environment, and an understanding of the Company's
                business on an operational level.






36




·
            Each
                director may be assigned committee responsibilities. A director nominee's
                educational and professional backgrounds must be consistent with
                the
                director nominee's committee assignment (e.g., director nominees
                who will
                be assigned to the Audit Committee must be financially literate as
                may be
                defined within the Audit Committee Charter).




·
            Director
                nominees must demonstrate a willingness to devote the appropriate
                time to
                fulfilling Board duties.




·
            Director
                nominees shall not represent a special interest or special interest
                group
                whose agenda is inconsistent with the Company's goals and objectives
                or
                whose approach and methods are inconsistent with what the Board believes
                is in the best interest of the Company's stockholders.




·
            Director
                nominees shall not be a distraction to the Board, nor shall a director
                nominee be disruptive to the achievement of the Company's business
                mission, goals and objectives.




*Procedures
      for Stockholder Nominations.* Set
      forth
      below are the procedures by which a stockholder may recommend a Board of
      Directors nominee to the Nominating Committee:




·
            Stockholder
                nominations must include all of the information described below and
                must
                be received by the 120thcalendar
                day before the date of the Company's proxy statement released to
                stockholders in connection with the previous year's annual meeting
                to be
                considered for the next scheduled annual meeting of stockholders.




·
            Stockholder
                nominations must be in writing and submitted via registered mail
                or
                overnight delivery service to the Committee Chairman at the Company's
                corporate headquarters address.




·
            Supporting
                documentation must be submitted that allows the Committee to verify
                ownership by the nominating stockholder of at least five percent
                (5%) of
                the Company's outstanding shares at all times during the immediately
                preceding year from the date of the recommendation.




·
            The
                stockholder must submit an affidavit from the director nominee stating
                that if elected, the director nominee is willing and able to serve
                on the
                Company's Board for the full term to which the director nominee would
                be
                elected. The affidavit must also acknowledge that the director nominee
                is
                aware of, has read and understands the Company's Code of Ethics and
                Board
                of Director Committee Charters (collectively, the "Corporate Governance
                Documents"), and further that the director nominee acknowledges that,
                if
                elected, the director nominee is subject to and will abide by the
                Corporate Governance Documents.




·
            The
                stockholder must submit documentation as to the director nominee's
                qualifications, which at a minimum must include:




1.
            A
                complete biography, including full employment
                history;




2.
            A
                signed consent form and waiver authorizing the Company to perform
                a full
                background check of the director nominee, including criminal and
                credit
                history, from a firm acceptable to the Company in its sole discretion;




3.
            Documentation
                of educational levels attained, complete with official transcripts
                issued
                directly by the educational institution and sent directly from the
                educational institution to the Company's Corporate Secretary;




4.
            Disclosure
                of all special interests and all political and organizational
                affiliations;




5.
            A
                signed, written statement from the director nominee indicating the
                reasons
                that the director nominee wants to serve on the Company's Board,
                and the
                reasons that the director nominee believes that he or she is qualified
                to
                serve; and




6.
            A
                description of all litigation to which he or she or any of his or
                her
                affiliates have been a party within the past seven years.






37




·
            The
                stockholder must submit any additional information required to be
                included
                in the Company's proxy statement for director nominees which determination
                will be made by the Company in its sole and absolute discretion
                (including, without limitation, information regarding business experience,
                involvement in legal proceedings, security ownership and transactions
                with
                the Company or management).




·
            The
                information submitted by the stockholder must include complete contact
                information for the submitting stockholder and the director nominee.




**Shareholder
      Communications with Directors**




Stockholders
      may communicate with the Board of Directors, including the non-management
      directors, by sending written communications to the Company, attention:
      Corporate Secretary. Any correspondence received by the Company that is
      generically addressed to the Board will be forwarded to the Chairman of the
      Board, and any correspondence addressed to a particular director or to a
      Chairman of a Board Committee will be forwarded to that person without screening
      and a copy will be forwarded to the Chairman of the Board. Any director
      receiving such correspondence may, but is not required to, share the
      correspondence with other directors, management and/or their advisers.




**Director
      Attendance at Annual Meetings**




The
      Company encourages all Board members to make every effort to attend annual
      meetings of stockholders. The Company, however, recognizes that unavoidable
      scheduling conflicts and special individual circumstances may prevent directors
      from attending these meetings.




**Code
      of Ethics**




On
      January 25, 2005, the Company adopted a Code of Ethics which applies to
      directors and executive officers, such as our principal executive officer,
      principal financial officer, controller, and persons performing similar
      functions. The Company filed a copy of the code as an exhibit to the January
      2005 Form 8-K. You may view and obtain a copy of the code by visiting the
      Company’s website, www.vasoactive.us .
      Alternatively, upon written request, the Company will mail to you a copy of
      the
      code at no charge. Please mail your request to the Company, Attention: Mr.
      Joseph Frattaroli.




**Compliance
      With Section 16(a) of the Exchange Act**




Section
      16(a) of the Exchange Act requires the Company’s officers and directors, and
      persons who own more than ten percent of a registered class of the Company’s
      equity securities, to file reports of ownership and changes in ownership of
      equity securities with the SEC. Officers, directors, and greater than ten
      percent stockholders are required by the SEC regulation to furnish the Company
      with copies of all Section 16(a) forms that they file.




Based
      solely upon a review of Forms 3 and Forms 4 furnished to the Company pursuant
      to
      Rule 16a-3 under the Exchange Act during the Company’s most recent fiscal year,
      and Forms 5 with respect to the Company’s most recent fiscal year, we believe
      that all such forms required to be filed pursuant to Section 16(a) were timely
      filed as necessary by the executive officers, directors and security holders
      required to file same during the fiscal year ended December 31, 2005, except
      that an option grant awarded on April 1, 2005 to Mr. Frattaroli to acquire
      150,000 shares of our Class A Common Stock was inadvertently not reported on
      Form 4; however, this transaction was later reported on a Form 5 filed with
      the
      SEC on February 14, 2006.




**ITEM
      10.**  **EXECUTIVE
      COMPENSATION**




The
      following table sets forth the aggregate cash compensation paid for services
      rendered during the last three years by each person serving as the Company’s
      Chief Executive Officer and each of its executive officers serving as such
      at
      the end of the year ended December 31, 2005, whose compensation was in excess
      of
      $100,000. Each person below is referred to as a "Named Executive
      Officer."






38




**Summary
      Compensation Table**




**Annual
                Compensation**
            
            **Long
                Term**
              **Compensation****Name
                and Principal Position**
            
            **Year**
            
            
            **Salary**
            
            **Bonus**
            
            **Shares**
              **Underlying**
              **Options(#)**Joseph
                Frattaroli
            
            2005
            
            $
            108,300
            (1)
            $
            50,000
            
            150,000President,
                Acting Chief Executive Officer
            
            2004
            
            $
            75,000
            (1)
            $
            35,000
            
            0and
                Chief Financial Officer
            
            2003
            
            $
            6,000
            (1)
            $
            0
            
            90,000Dr.
                Stephen G. Carter (2)
            
            2005
            
            $
            140,000
            
            $
            0
            
            0Chief
                Scientific Officer
            
            2004
            
            $
            140,000
            
            $
            0
            
            02003
            
            $
            75,833
            
            $
            0
            
            225,000__________________


(1)  Mr.
      Frattaroli began his employment with the Company in June 2003 as Chief Financial
      Officer. For 2003, Mr. Frattaroli received a payment of $6,000 upon completion
      of the Company’s initial public offering. In August 2004, Mr. Frattaroli was
      appointed Acting President and Acting Chief Executive Officer of the Company
      while continuing to serve as Chief Financial Officer. In February 2005, Mr.
      Frattaroli was appointed President while continuing to serve as Chief Financial
      Officer and Acting Chief Executive Officer.




(2)  Dr.
      Carter began his employment with the Company in June 2003 as Chief Scientific
      Officer. For 2003, Dr. Carter received a payment of $75,833 and was paid upon
      completion of the Company’s initial public offering. See "Employment Agreements
      and Arrangements" below for additional information.




**Employment
      Agreements and Arrangements**




*John
      Masiz* .
      The
      Company entered into an employment agreement with Mr. Masiz, effective as of
      August 12, 2004, under which agreement he serves on a part-time basis as a
      strategic consultant to the Company regarding sales, marketing, business
      development and strategic planning through June 30, 2008. The agreement will
      be
      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 base salary of
      $175,000 per year, which may be increased from time to time. He is also eligible
      to receive additional compensation in the form of performance bonuses as well
      as
      discretionary bonuses.




If
      the
      Board terminates Mr. Masiz without cause or if he terminates his employment
      for
      good reason (other than within 12 months of a change in control), he will be
      paid his then-current base salary through the end of the employment period
      plus
      a pro-rata portion of any incentive compensation award that would have been
      payable to him had he remained employed at the end of that fiscal year. If
      Mr.
      Masiz terminates his employment for good reason within 12 months of a change
      in
      control, the Company will pay him a lump sum equal to two times his then-current
      annual base salary plus a pro-rata portion of any performance bonus that would
      have been payable to him had he remained employed at the end of the fiscal
      year.
      Mr. Masiz’s obtaining new employment will not result in the reduction or
      cancellation of any payments or benefits owed to him by the
      Company.




A
“change
      of control” with respect to the Company occurs if: (i) an individual or entity
      (other than a BioChemics affiliate) acquires control of 30% or more of the
      voting power of the outstanding capital stock of the Company; (ii) BioChemics
      no
      longer has the right to designate at least 50% of the members of the Board;
      (iii) a majority of the Board members as of the date of the employment agreement
      change under certain circumstances; (iv) the Company sells all or substantially
      all of its assets; or (v) the Company is the non-surviving party in a merger.




The
      Company entered into this agreement with Mr. Masiz in anticipation of the final
      judgment by the United States District Court for the District of Columbia
      against the Company and Mr. Masiz, the Company's former President and Chief
      Executive Officer, which occurred on September 13, 2004, in connection with
      their settlements with the SEC filed with the court. The final judgment enjoined
      him from violating the antifraud and reporting provisions, and prevents him
      from
      serving as an officer or director of any public company, including the Company,
      for a period of five years. Effective as of August 17, 2004, Mr. Masiz resigned
      as an executive officer and a director of the Company. He is, however, permitted
      to remain an






39






active
      employee and/or consultant of the Company. Mr. Masiz and the Company terminated
      his previous employment agreement with the Company prior to entering into the
      employment agreement described above.




*Stephen
      Carter* .
      The
      Company entered into an employment agreement with Dr. Carter, effective as
      of
      June 16, 2003, which provides for his employment as Chief Scientific Officer
      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 base salary of $140,000 per year, which may be increased
      from time to time by the Board. He is also eligible to receive additional
      compensation in the form of performance bonuses as well as discretionary
      bonuses.




If
      the
      Board terminates Dr. Carter without cause or if he terminates his employment
      for
      good reason (other than within 12 months of a change in control, as described
      above), he will be paid his then-current base salary through the end of the
      employment period plus a pro-rata portion of any incentive compensation award
      that would have been payable to him had he remained employed at the end of
      that
      fiscal year. If Dr. Carter terminates his employment for good reason within
      12
      months of a change in control, the Company will pay him a lump sum equal to
      two
      times his then-current annual base salary plus a pro-rata portion of any
      performance bonus that would have been payable to him had he remained employed
      at the end of the fiscal year. The Company will not be required to continue
      to
      make or provide any post-termination payments or benefits to Dr. Carter if
      he
      obtains new employment.




*Joseph
      Frattaroli* .
      In
      February, 2005, the Board of Directors approved the appointment of Mr.
      Frattaroli as the Company's President and Acting Chief Executive Officer and
      Chief Financial Officer, at an annual base salary of $115,000, plus a guaranteed
      2005 bonus of $60,000, paid on a weekly basis, commencing March 1, 2005.




**Option/Stock
      Appreciation Right Grants in 2005**




The
      following tables set forth information regarding option grants under the Plan
      to
      the Named Executive Officers in 2005.




**Option
      Grants in 2005**


**(Individual
      Grants)**


**Number
                of**
              **Shares**
              **Underlying**
              **Options**
            
            **Percent
                of**
              **Total
                Options**
              **Granted
                To**
              **Employees
                In**
            
            **Exercise**
              **Price**
            
            **Market**
              **Value
                of**
              **Underlying**
            
            **Expiration****Granted**
            
            **2005**
            
            **Per
                Share(2)**
            
            **Shares**
            
            **Date**Jo
                Joseph Frattaroli
            
            150,000
            (1)
            
            100
            %
            
            
            $
            0.50
            
            
            
            $
            92,250(3)
            
            
            April
                1, 2015D
                Stephen G. Carter
            
            None
            
            
            --
            
            
            
            
            --
            
            
            
            
            --
            
            
            --


**______________**





(1)
            These
                options have vested or will vest and become exercisable to the extent
                of
                one-third of the number of shares of Class A Common Stock subject
                to the
                option grant on each of April 1, 2005, April 1, 2006 and April 1,
                2007.(2)
            The
                Company granted this option as of April 1, 2005. The Company determined
                that the fair market value on the grant date was $0.50 per share.
                For
                financial statement purposes, as required by generally accepted accounting
                principles, the Company has taken a charge against earnings for fiscal
                year 2005 in the amount of $17,250, which is equal to the difference
                between $0.615, which was the average of the high and low sale prices
                of
                our Class A Common Stock on April 1, 2005, and the exercise price,
                multiplied by the number of shares underlying the option.(3)
            Based
                on a per share market value of $0.615, the average of the high and
                low
                sale prices on the grant date.






40





**Aggregate
      Stock Option Exercises in 2005 and Year-End Stock Option
      Values**




The
      following table sets forth certain information with respect to options exercised
      during 2005 by the Named Executive Officers and with respect to unexercised
      options held by such persons at the end of 2005.




**Name**
            
            **Shares**
              **Acquired
                On**
              **Exercise
                (#)**
            
            **Value**
              **Realized**
              **($)**
            
            **Number
                of Securities**
              **Underlying
                Unexercised**
              **Options/SARs
                At**
              **FY-End
                (#)**
            
            **Value
                of Unexercised**
              **In
                The Money**
              **Options/SARs**
              **At
                FY-End**
              **($)
                *****Exercisable**
            
            **Unexercisable**
            
            **Exercisable**
            
            **Unexercisable**Joseph
                F. Frattaroli
            
            
            --
            
            
            --
            
            
            110,000
            
            
            130,000
            
            
            --
            
            
            --Dr.
                Stephen G. Carter
            
            
            --
            
            
            --
            
            
            225,000
            
            
            --
            
            
            --
            
            
            --






**2003
      Stock Incentive Plan**




The
      Plan was adopted in May 2003. The Plan has been established for present and
      future executives, and other key employees, directors and consultants of the
      Company, as may be selected by the Committee. The Plan is intended to advance
      the best interests of the Company and its stockholders by providing those
      persons who have a substantial responsibility for its management and growth
      with
      additional incentives by allowing them to acquire an ownership interest in
      the
      Company and thereby encouraging them to contribute to the success of the Company
      and to remain in its employ.




The
      Plan
      provides for the grant of any one or a combination of restricted stock grants,
      incentive stock options, nonqualified stock options and stock appreciation
      rights to purchase up to an aggregate of 1,350,000 shares of Class A Common
      Stock. No incentive shall be granted under the 2003 Stock Incentive Plan after
      July 2013, but the terms and exercise of incentives granted before the date
      may
      extend beyond this date.




As
      of
      December 31, 2005, none of the options granted under the Plan had been
      exercised. As of that date, options to purchase 1,080,000 shares of Class A
      Common Stock were outstanding under the Plan, and 1,020,000 **** additional
      shares of Class A Common Stock remained available for grants or awards under
      the
      Plan.Director Compensation




**Compensation
      of Directors**




*Generally*




At
      its meeting held on January 20, 2006, the Compensation Committee of the Board
      of
      Directors of the Company approved the following cash compensation arrangements
      for 2006 with respect to the non-employee directors of the Company:




1.
            Board
                of Directors





(a)
            Annual director fee: $7,500 (reduced from $15,000)(b)
            In-person board meeting fee: $1,000 (reduced from
                $1,500)





(c)
            Telephonic board meeting fee: $500 (reduced from
                $750)





2.
            Committees
                of the Board





-
      Annual
      committee membership fee: $2,500





No
      fees
      will be paid for attendance at meetings of Board committees.





The
      Company pays the annual director stipend and annual committee membership stipend
      in quarterly installments at the beginning of each calendar quarter. Each Board
      member is reimbursed for all reasonable expenses related to attendance at Board
      or committee meetings.






41




*2003
      Non-Employee Director Compensation Plan*




The
      2003 Non-Employee Director Compensation Plan (the “Director Plan”) was adopted
      in August 2003. Non-employee directors are eligible to participate in the
      Director Plan. The purpose of the Director Plan is to assist the Company in
      attracting and retaining highly qualified individuals to serve as directors
      of
      the Company by providing them with a performance incentive as a result of stock
      ownership in the Company.




The
      Director Plan provides for the grant of nonqualified stock options, restricted
      stock grants, and stock appreciation rights to purchase up to an aggregate
      of
      900,000 shares of Class A Common Stock. No grants or awards may be made under
      the Director Plan after August 22, 2013, but the term and exercise of awards
      or
      grants made prior to that date may extend beyond that date.




Under
      the
      Director Plan, except as otherwise determined by the Board, each person who
      becomes a Non-Employee Director for the first time after June 1, 2003 shall
      be
      granted options **** to
      purchase 60,000 shares of Class A Common Stock at an exercise price equal to
      the
      fair market value on the date of grant. At the consummation of the initial
      public offering, Mr. Anderson, Mr. Shear and Dr. Strasnick each received an
      option to purchase 60,000 shares of Class A Common Stock at $1.67 per share.
      In
      December 2004, each non-employee director received an option to purchase 30,000
      shares of Class A Common Stock at $0.50 per share.




**ITEM
      11.**  **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS**




**SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**




The
      following table sets forth certain information regarding the beneficial
      ownership of the Company’s Common Stock as of April 6, 2006 by (i) each director
      of the Company; (ii) each executive officer of the Company; (iii) all executive
      officers and directors of the Company as a group; and (iv) each stockholder
      known by the Company to be the beneficial owner of more than 5% of the
      outstanding shares of Class A Common Stock or Class B Common Stock. In compiling
      the table, the Company has relied upon information supplied by such persons
      and
      upon information contained in SEC filings. On April 6, 2006, 5,828,604 shares
      of
      Class A Common Stock were outstanding and 4,500,000 shares of Class B Common
      Stock were outstanding.




Under
      applicable rules of the Securities Exchange Act of 1934 (the “Exchange Act”), a
      person is deemed to beneficially own shares of Common Stock if that person
      directly or indirectly has or shares voting power or investment power with
      respect to those shares. Except as indicated in the footnotes to the table,
      the
      individuals and entities named in the table have sole voting and investment
      power with respect to all shares of Common Stock that they respectively own
      beneficially.




Under
      applicable Exchange Act rules, a person is also deemed to beneficially own
      shares which the person has the right to acquire within sixty (60) days. For
      example, on April 6, 2006, if an individual owns options to acquire 1,000 shares
      of Class A Common Stock and those options are or would be exercisable on or
      before June 5, 2006, that individual will also be deemed to own those 1,000
      shares of Class A Common Stock as of April 6, 2006.




Because
      each share of Class B Common Stock is convertible at any time into one share
      of
      Class A Common Stock, under Exchange Act rules holders of Class B Common Stock
      are deemed to own beneficially an equal number of shares of Class A Common
      Stock. All outstanding shares of Class B Common Stock are held by BioChemics.




Unless
      otherwise noted, the address for each person is: Vaso Active Pharmaceuticals,
      Inc., 99 Rosewood Drive, Suite 260, Danvers, Massachusetts 01923.






42


**Class
                  A Common Stock**
              
              **Class
                  B Common Stock****Name
                  of Beneficial Owner**
              
              **Number**
                **of
                  Shares**
              
              
              **Percent**
                **of
                  Class**
              
              **Number
                  of**
                **Shares**
              
              **Percent**
                **of
                  Class**Robert
                  E. Anderson
              
              101,000
              (1)
              
              1.7%
              
              0
              
              *BioChemics,
                  Inc.
              
              4,500,000
              (2)
              
              43.6%
              
              4,500,000
              
              100%Stephen
                  G. Carter, Ph.D.
              
              225,000
              (3)
              
              3.7%
              
              0
              
              *Joseph
                  Frattaroli
              
              160,000
              (4)
              
              2.7%
              
              0
              
              *Ronald
                  Guerriero
              
              25,000
              (5)
              
              *
              
              0
              
              *D’Anne
                  Hurd
              
              20,000
              (6)
              
              *
              
              0John
                  Masiz
              
              4,800,000
              (7)
              
              45.2%
              
              4,500,000
              (8)
              100%Bruce
                  A. Shear
              
              65,000
              (9)
              
              1.1%
              
              0
              
              *Brian
                  Strasnick, Ph.D.
              
              129,233
              (10)
              
              2.2%
              
              0
              
              *Directors
                  and executive officers as a group
                (7
                  persons)
              
              725,233
              (11)
              
              9.4%
              
              0
              
              ***______________**




*  Represents
      less than 1%.




(1)
            Consists
                of 36,000 shares of Class A Common Stock and 65,000 shares of Class
                A
                Common Stock issuable upon exercise of director
                options.




(2)
            BioChemics,
                99 Rosewood Drive, Danvers, MA 01923, has sole voting and investment
                power
                with respect to the 4,500,000 shares of Class B Common Stock of which
                it
                is holder of record. All the aggregate 4,500,000 shares of Class B
                Common Stock held of record and beneficially owned by BioChemics
                are also
                deemed beneficially owned by Mr.
                Masiz.




(3)
            Consists
                of 225,000 shares of Class A Common Stock issuable upon exercise
                of
                employee options.




(4)
            Consists
                of 160,000 shares of Class A Common Stock issuable upon exercise
                of
                employee options.




(5)
            Consists
                of 5,000 shares of Class A Common Stock and 20,000 shares of Class
                A
                Common Stock issuable upon exercise of director
                options.






43




(6)
            Consists
                of 20,000 shares of Class A Common Stock issuable upon exercise of
                director options.




(7)
            Consists
                of 300,000 shares of Class A Common Stock issuable upon exercise
                of
                employee options and 4,500,000 shares of Class B Common Stock owned
                by
                BioChemics deemed to be beneficially owned by Mr.
                Masiz.




(8)
            Consists
                of 4,500,000 shares of Class B Common Stock deemed to be beneficially
                owned by Mr. Masiz as a result of his being the controlling stockholder
                of
                BioChemics. Mr. Masiz’s ownership of approximately 83% of the outstanding
                capital stock of BioChemics permits him to control the election of
                all of
                Biochemics’ directors. Mr. Masiz disclaims beneficial ownership of all
                shares listed as beneficially owned by BioChemics except to the extent
                of
                his pecuniary interest therein. The 4,500,000 shares of Class B Common
                Stock deemed beneficially owned by Mr. Masiz are also deemed beneficially
                owned by BioChemics.




(9)
            Consists
                of 65,000 shares of Class A Common Stock issuable upon exercise of
                director options.




(10)
            Consists
                of 64,233 shares of Class A Common Stock and 65,000 shares of Class
                A
                Common Stock issuable upon exercise of director
                options.




(11)
            See
                Notes 1-10 above.







**ITEM
      12.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**




**Policy
      Regarding Related Party Transactions**




Any
      transactions between the Company and its officers, directors, principal
      stockholders or affiliates are required to be on terms no less favorable to
      us
      than could reasonably be obtained in arm’s-length transactions with independent
      third parties, and any such transaction must also be approved by a majority
      of
      our outside independent directors disinterested in the transaction. In addition,
      under our Code of Ethics, all related-party transactions must be reviewed and
      approved by the Audit Committee of our Board of Directors.




**Relationship
      with BioChemics Generally**




BioChemics
      owns all issued and outstanding shares of the Company’s Class B Common Stock.
      Because the Class B Common Stock has three (3) votes per share, BioChemics
      controls approximately 70% of the total votes entitled to be cast at the
      Meeting. Our former Chairman, Chief Executive Officer and President, John Masiz,
      who is presently an employee of the Company, is also the Chairman, Chief
      Executive Officer, President and controlling stockholder of BioChemics. Mr.
      Masiz owns approximately 83% of the outstanding capital stock of BioChemics.




In
      addition, Robert Anderson, the Company’s Chairman of the Board, serves as a
      director of BioChemics, and Stephen Carter, a Company director and its Chief
      Scientific Officer, serves as the Chief Scientific Officer of BioChemics. In
      2005, the Company made, and expects to make in 2006, payments in excess of
      five
      percent of the Company’s 2005 gross revenues to BioChemics. ****




**Private
      Placement of Securities in 2003**




In
      a
      private placement in April 2003, the Company issued subordinated 10% convertible
      pay-in-kind promissory notes in the aggregate principal amount of $500,000
      to
      accredited investors, including a Company director, Dr. Strasnick, who purchased
      notes in the principal amount of $50,000. Upon the consummation of the Company’s
      initial public offering in December 2003, all of the notes were converted into
      shares of Class A Common Stock at a conversion price of $0.83 per share, which
      resulted in the issuance of approximately 600,000 shares of Class A Common
      Stock
      by the Company to the holders of these notes. Dr. Strasnick received 64,233
      shares of Class A Common Stock upon the conversion of the notes he
      held.






44




**License
      Agreement with BioChemics**




The
      Company has entered into a license agreement with BioChemics, dated as of
      February 1, 2003, under which the Company has a worldwide, exclusive right
      to
      use and practice certain patents owned by BioChemics relating to transdermal
      drug delivery technology. Under this agreement, the Company has the right to
      sell, market and commercialize all products (“OTC 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 $1.0 million
      of
      clinical development. Specifically excluded from the license are certain
      diabetic products developed by BioChemics, products used by dermatologists
      to
      treat cosmetic conditions, and products used or marketed to the animal health
      care industry.




In
      exchange for the granting of the license, the Company issued 4,500,000 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. This is a one-time license fee.
      No royalties are payable to BioChemics under the license agreement.




With
      respect to the licensed patents, this agreement will terminate on the expiration
      date of the last of the licensed patents to expire. With respect to licensed
      non-patented technology, this agreement will have an initial term of ten (10)
      years, and will be automatically renewed for successive terms of two (2) years.
      The Company may terminate the license agreement upon providing ninety (90)
      days’
prior written notice of termination to BioChemics.




Any
      improvements to the licensed 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 the Company on the same terms as the initial
      license under the license agreement. BioChemics must maintain existing patent
      filings as well as register the patents in other jurisdictions as required.
      If
      BioChemics does not do so on a timely basis, the Company may make the required
      filings at BioChemics' expense.




Pursuant
      to an amendment to the license agreement, dated as of July 2, 2003, the
      trademarks “Osteon” and “PENtoCORE” were licensed to the Company by BioChemics,
      subject to quality control standards to be set by BioChemics. In addition,
      this
      amendment provides that all revenue related to the “deFEET” (now known as
“Termin8”) mark owned by BioChemics, though not licensed to the Company, will be
      paid to the Company, and that the Company will bear all costs associated with
      the sale and marketing of the product bearing the mark.




**Manufacturing
      Agreement**




The
      Company entered into a manufacturing and development agreement, dated as of
      February 1, 2003, with BioChemics with respect to the manufacturing and
      development of the Company’s OTC products. Under this agreement, BioChemics
      researches, develops and manufactures, or contracts for the manufacture of,
      OTC
      products as the Company may request from time to time. For example, BioChemics
      has conducted research for the Company in the form of pre-clinical studies
      utilizing animals and the Company has paid BioChemics for this
      research.




For
      the
      described services, the Company pays BioChemics a fee equal to BioChemics’ costs
      plus 10%. As permitted by the agreement, BioChemics retains an unaffiliated
      company to manufacture the OTC products. The agreement has an initial term
      of
      five years and will be automatically renewed for one additional year so long
      as
      the agreement has not been terminated earlier in accordance with its terms.




The
      Company does not currently, nor does it intend in the future, to engage in
      the
      manufacture of, or conduct any research and development with respect to, any
      of
      the Company’s products. However, if BioChemics is unwilling or unable to meet
      its obligations under the agreement to the Company, the Company has the right
      to
      retain outside third parties to manufacture its products although the Company
      may not terminate the agreement with BioChemics for this breach.




During
      2005 and 2004, research and development costs incurred under this agreement
      were
      approximately $287,600 and $266,500, respectively, and manufacturing costs
      incurred under this agreement were approximately $24,000 and $147,000,
      respectively. The Company did not incur any such costs during 2003.







45





**Office
      Space and Administrative Support**




The
      Company presently maintains its principal corporate offices on premises that
      it
      shares with BioChemics. The Company does not have a lease agreement with
      BioChemics. During 2005, 2004 and 2003, the Company recorded approximately
      $44,000, $44,000 and $20,000, respectively, in rent expense for this facility.




BioChemics
      and the Company entered into an administrative services agreement, dated as
      of
      September 1, 2003. Under this agreement, BioChemics provides the Company with
      administrative support services, including accounting and tax services;
      utilities; office, warehouse and storage space; and computer services and
      equipment, as reasonably requested by the Company.




The
      Company pays BioChemics a fee equal to BioChemics’ cost plus 10%. The initial
      term of this agreement is five years and will be automatically renewed on each
      anniversary date for an additional period of twelve months unless sooner
      terminated in accordance.




During
      2005, 2004 and 2003, the Company paid BioChemics approximately $46,000, $46,000
      and $122,000, respectively, for these services.




**Registration
      Rights Agreement**




The
      Company entered into a registration rights agreement with BioChemics in March
      2003 under which the Company has 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 (the
“Securities Act”). Subject to limitations set forth in the registration rights
      agreement, holders of the securities may require the Company, at its expense,
      to
      file one registration statement under the Securities Act with respect to the
      public resale of the securities. If the Company proposes to register any of
      its
      securities under the Securities Act, either for its 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 Company expense, their shares in
      the
      registration. In addition, BioChemics has agreed to subordinate its registration
      rights to those held by the investors in the Company’s August 2005 private
      financing. All registration expenses, as specified in the registration rights
      agreement, must be borne by the Company 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 advances in 2003 in the amount of $518,200 to cover Company deficits.
      The Company subsequently repaid the advances.




**Certain
      Relationships**




*Robert
      E. Anderson* .
      The
      Chairman of the Board of the Company, Mr. Anderson, has been a director of
      BioChemics since 2003 and is the holder of three convertible promissory notes
      issued by BioChemics, dated August 19, 2000, September 18, 2000, and December
      14, 2000 respectively.




These
      notes are convertible into approximately 338,000 shares of BioChemics' common
      stock, which represents approximately 5.7% ownership of BioChemics. BioChemics
      is in default under these notes. See the BioChemics-related discussion contained
      in the “Business-Risk Factors” section of this report.




Mr.
      Anderson does not receive any compensation as a director or otherwise from
      BioChemics.




*Joseph
      Frattaroli* .
      Mr.
      Frattaroli, the Company’s acting Chief Executive Officer, President and Chief
      Financial Officer, directly owns 195,000 shares of BioChemics common stock.
      In
      addition, Mr. Frattaroli indirectly owns 90,000 shares of BioChemics common
      stock held by a corporation which had provided accounting services to BioChemics
      during the period of January 2002 through April 2003. The shares of BioChemics
      common stock owned directly and indirectly by Mr. Frattaroli represent
      approximately 5% ownership of BioChemics.








46




*Stephen
      Carter* .
      Dr.
      Carter, a director and Chief Scientific Officer of the Company, holds stock
      options that are exercisable for 300,000 shares of BioChemics common stock,
      representing approximately 5.1% ownership of BioChemics. Dr. Carter is also
      employed by BioChemics and receives a salary of $80,000 per year.




**Item
      13.   Exhibits**




(a)
      Exhibits.




**Exhibit**
              **Number**
            
            **Description
                of Exhibit**
            **Incorporated
                by Reference to:****Form**
            **SEC
                Filing Date**
            **Exhibit
                No.**3.1
            
            Amended
                and Restated Certificate of Incorporation (as amended through December
                8,
                2005)
            SB-2
            December
                15, 2005
            3.13.2
            
            Amended
                and Restated By-laws (as amended through September 16,
                2005)
            8-K
            September
                22, 2005
            3.24.1
            
            Specimen
                Certificate for Class A Common Stock
            SB-2/A
            September
                12, 2003
            4.14.2
            
            Form
                of Convertible Settlement Note*10.1
            
            Employment
                Agreement, effective June 16, 2003, between Vaso Active Pharmaceuticals,
                Inc. and Stephen G. Carter**
            SB-2/A
            September
                12, 2003
            10.210.2
            
            Employment
                Agreement, dated August 12, 2004, between Vaso Active Pharmaceuticals,
                Inc. and John J. Masiz**
            10-QSB
            November
                15, 2004
            10.110.3
            
            2003
                Stock Incentive Plan**
            SB-2
            July
                3, 2003
            10.310.4
            
            Form
                of 2003 Non-Employee Director Compensation Plan**
            SB-2/A
            September
                12, 2003
            10.410.5
            
            Registration
                Rights Agreement by and between Vaso Active Pharmaceuticals, Inc.
                and
                BioChemics, Inc.
            SB-2/A
            September
                12, 2003
            10.510.6
            
            License
                Agreement, dated February 1, 2003, between BioChemics, Inc. and Vaso
                Active Pharmaceuticals, Inc., as amended by an amendment agreement,
                dated
                July 2, 2003
            SB-2/A
            September
                12, 2003
            10.610.7
            
            Manufacturing
                and Development Agreement, dated February 1, 2003, between Vaso Active
                Pharmaceuticals, Inc. and BioChemics, Inc.
            SB-2/A
            September
                12, 2003
            10.710.8
            
            Administrative
                Services Agreement, dated September 1, 2003, between BioChemics,
                Inc. and
                Vaso Active Pharmaceuticals, Inc.
            SB-2/A
            September
                12, 2003
            10.810.9
            
            Brokerage
                Agreement, effective August 1, 2005, between
                Vaso Active Pharmaceuticals, Inc. and Ferolie
                Corporation*10.10
            
            Securities
                Purchase Agreement dated August 16, 2005 (including exhibits and
                schedules)
            8-K/A
            August
                19, 2005
            99.110.11
            
            Letter
                Agreement, dated as of October 12, 2005, among Vaso Active
                Pharmaceuticals, Inc., Iroquois Master Fund, Ltd., Omnicron Master
                Trust,
                and RAQ, LLC
            8-K
            November
                14, 2005
            10.1(a)10.12
            
            Letter
                Agreement, dated as of October 12, 2005, between Vaso Active
                Pharmaceuticals, Inc. and Smithfield Fiduciary LLC
            8-K
            November
                14, 2005
            10.1(b)10.13
            
            Standstill
                Agreement with respect to Conversion Rights, as amended, dated as
                of
                October 13, 2005, between Vaso Active Pharmaceuticals, Inc. and
                BioChemics, Inc.
            8-K
            November
                14, 2005
            10.210.14
            
            Stipulation
                and Agreement of Settlement, dated
                September 21, 2005, among Lead Counsel (as defined therein) and certain
                other parties, with respect to In Re Vaso Active Pharmaceuticals
                Securities Litigation*10.15
            
            Stipulation
                and Agreement of Settlement, dated
                September 22, 2005, among lead counsel for the Company and the plaintiffs
                and certain other parties, with respect to In Re Vaso Active
                Pharmaceuticals Derivative Litigation*






47






14
            
            Code
                of Ethics
            8-K
            January
                25, 2005
            99.123
            
            Consent
                of Stowe & Degon*31.1
            
            Certification
                of Joseph Frattaroli, Acting Chief
                Executive Officer and Chief Financial Officer, pursuant to Section
                302 of
                the Sarbanes-Oxley Act of 2002*32.1
            
            Certification
                of Joseph Frattaroli, Acting Chief
                Executive Officer and Chief Financial Officer, pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002*




* Exhibit filed with this report.


**
      Management contract or compensatory plan.




(b)
            Reports
                On Form 8-K.




The
      following reports were filed by the Company on Form 8-K during the fourth
      quarter of fiscal year 2005:





Date
                of Form 8-K
            Items
                Reported (By Number)November
                14, 2005
            1.01,
                3.02 and 9.01December
                12, 2005
            1.01
                and 5.02December
                20, 2005
            1.01,
                8.01 and 9.01




**ITEM
      14.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**




The
      following table presents fees for professional audit services rendered by Stowe
      & Degon for the fiscal years 2004 and 2005:




2004
            
            2005Audit
            
            $
            73,675
            
            $
            73,000Non-Audit
            
            
            --
            
            
            --Tax
            
            
            --
            
            
            --All
                Other
            
            
            --
            
            
            7,100Total:
            
            $
            73,675
            
            $
            80,100


**Audit
      Fees**




Audit
      fees include the aggregate fees billed for the audit of the our annual financial
      statements, reviews of our unaudited condensed quarterly financial statements,
      the financial statements included in our Form SB-2, as amended, and other
      registration statements.




**Non-Audit
      Related Fees**




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




**Tax
      Fees**




Tax
      fees
      of $1,200 were paid during 2005 for preparation of the 2004 Company income
      tax
      returns. The tax services were not provided by our independent
      auditors.




**All
      Other Fees**




Stowe
      & Degon billed us $7,100 in 2005 for work related to our registration
      statement we filed in December 2005. These fees were paid in January
      2006.






48




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







49





**SIGNATURES**




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





VASO ACTIVE
                PHARMACEUTICALS, INC.Date:
                  April 14, 2006
              By:/s/
                  Joseph FrattaroliJoseph
                  FrattaroliActing
                  Chief Executive OfficerChief
                Financial
                Officer


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 and on
      the
      dates indicated.




**Name**
            **Title**
            **Date**/s/
                Joseph
                Frattaroli
            Acting
                Chief Executive Officer
            April 14,
                2006Joseph
                Frattaroli
            Chief
                Financial Officer******/**s/
                Stephen Carter, Ph.D.
            Vice
                President, Chief Scientific
            April 14,
                2006Stephen
                Carter, Ph.D.
            Officer,
                Director/s/
                Robert E. Anderson
            Director,
                Chairman
            April 14,
                2006Robert
                E. Anderson/s/
                Ronald
                Guerriero
            Director
            April 14,
                2006Ronald
                Guerriero/s/
                D’Anne Hurd****
            Director
            April 14,
                2006D’Anne
                Hurd/s/
                Bruce
                A.
                Shear
            Director
            April 14,
                  2006Bruce
                A. Shear/s/
                Brian J. Strasnick****
            Director
            April 14,
                2006Brian
                J. Strasnick, Ph.D.













50





**VASO
      ACTIVE PHARMACEUTICALS, INC.**


**INDEX
      TO FINANCIAL STATEMENTS**




PageReport
                of Independent Registered Public Accounting Firm
            F-2Balance
                Sheets as of December 31, 2005 and 2004
            F-3Statements
                of Operations for the Years Ended
              December
                31, 2005, 2004 and 2003
            F-4Statements
                of Stockholders’ Equity (Deficiency) for the Years Ended
              December
                31, 2005, 2004 and 2003
            F-5Statements
                of Cash Flows for the Years Ended
              December
                31, 2005, 2004 and 2003
            F-6Notes
                to the Financial Statements
            F-7










F-1





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




The
      Board
      of 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, 2005 and 2004, and the related statements of
      operations, stockholders’ equity (deficiency), and cash flows for each of the
      three years ended December 31, 2005. 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 audits to obtain reasonable assurance about whether the
      financial statements are free of material misstatement. The Company is not
      required to have, nor were we engaged to perform, an audit of its internal
      control over financial reporting. Our audit included consideration of internal
      control over financial reporting as a basis for designing audit procedures
      that
      are appropriate in the circumstances, but not for the purpose of expressing
      an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly we express no such opinion. An audit also includes
      examining, on a test basis, evidence supporting the amounts and disclosures
      in
      the financial statements, 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,
      2005
      and 2004 and the results of its operations and its cash flows for each of the
      three years in the period ended December 31, 2005 in conformity with accounting
      principles generally accepted in the United States of America.




The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. However, certain conditions exist such as
      the
      Company's inability to generate sufficient cash from operations and to obtain
      additional debt or equity financing to meet its future obligations. As
      discussed in Note 2 to the financial statements, the stockholders’ deficiency
      and the deficiency in working capital at December 31, 2005 raise substantial
      doubt about the Company’s ability to continue as a going concern. Management’s
      plans concerning these matters are also described in Note 2. The financial
      statements do not include any adjustments that might result from the outcome
      of
      these uncertainties.




/S/
      STOWE & DEGON




Worcester,
      MA


March
      16,
      2006




F-2


**VASO
                ACTIVE PHARMACEUTICALS, INC.****BALANCE
                SHEETS****December
                31**
            
            **December
                31****2005**
            
            **2004****ASSETS****Current
                assets:**Cash
                and cash equivalents
            
            $
            707,640
            
            $
            2,175,388Accounts
                receivable
            
            
            628
            
            
            888Inventory
            
            
            14,964
            
            
            140,296Debt
                issuance costs
            
            
            274,852
            
            
            -Prepaid
                expenses
            
            
            76,954
            
            
            28,995**Total
                current assets**
            
            
            1,075,038
            
            
            2,345,567Restricted
                cash
            
            
            385,901
            
            
            -Property
                and equipment - net
            
            
            53,802
            
            
            37,551$
            1,514,741
            
            $
            2,383,118LIABILITIES
                AND STOCKHOLDERS' EQUITY (DEFICIENCY)**Current
                liabilities:**Accounts
                payable
            
            $
            401,668
            
            $
            474,369Accrued
                compensation
            
            
            18,019
            
            
            43,805Other
                accrued expenses
            
            
            151,723
            
            
            116,045Obligations
                under capital leases - short-term portion
            
            
            2,387
            
            
            -Due
                to parent company
            
            
            79,505
            
            
            10,780**Total
                current liabilities**
            
            
            653,302
            
            
            644,999**Long-term
                liabilities:**Accrued
                legal settlement
            
            
            885,000Senior
                secured convertible notes, net of discount
            
            
            2,058,011Obligations
                under capital leases - long-term portion
            
            
            11,622
            
            
            -**Total

                long-term liabilities**
            
            
            2,954,633
            
            
            -Commitments
                and contingencies3,607,935
            
            
            644,999**Stockholders'
                equity (deficiency):**Preferred
                stock - $0.0001 par value; authorized10,000,000
                shares; issued and outstanding, none
            
            
            -
            
            
            -Common
                stock - $0.0001 par value; authorized60,000,000
                shares; issued and outstanding, 10,328,604
            
            
            1,033
            
            
            1,033Additional
                paid-in capital
            
            
            8,674,344
            
            
            8,093,656Deferred
                compensation
            
            
            (130,559
            )
            
            (183,777
            )Accumulated
                deficit
            
            
            (10,638,012
            )
            
            (6,172,793
            )**Total
                stockholders' equity (deficiency)**
            
            
            (
                2,093,194
            )
            
            1,738,119$
            1,514,741
            
            $
            2,383,118




*See
      notes to financial statements.*







F-3





**VASO
      ACTIVE PHARMACEUTICALS, INC.**


**STATEMENTS
      OF OPERATIONS**




**YEAR
                ENDED DECEMBER 31**
            
            **2005**
            
            **2004**
            
            **2003**Net
                revenues
            
            $
            25,221
            
            $
            12,888
            
            $
            53,270Cost
                of revenues
            
            
            42,887
            
            
            67,536
            
            
            31,622**Gross
                profit (loss)**
            
            
            (17,666
            )
            
            (54,648
            )
            
            21,648Costs
                and expenses:Marketing,
                advertising and promotion
            
            
            318,964
            
            
            348,541
            
            
            116,642Selling,
                general and administrative
            
            
            2,633,229
            
            
            3,796,351
            
            
            1,047,918Research
                and development
            
            
            342,482
            
            
            319,012
            
            
            -Legal
                settlement
            
            
            885,000
            
            
            -
            
            
            -Loss
                from operations
            
            
            (4,197,341
            )
            
            (4,518,552
            )
            
            (1,142,912
            )Interest
                expense
            
            
            (292,532
            )
            
            -
            
            
            -Other
                income (expense), net
            
            
            24,654
            
            
            25,231
            
            
            (536,560
            )Net
                loss
            
            $
            (4,465,219
            )
            $
            (4,493,321
            )
            $
            (1,679,472
            )Net
                loss per share - basic and diluted (Note 2)
            
            $
            (0.43
            )
            $
            (0.44
            )
            $
            (0.62
            )Weighted
                average shares outstanding - basic and
              diluted
                (Note 2)
            
            
            10,328,604
            
            
            10,296,805
            
            
            2,714,180




Includes
      stock-based compensation expense as follows:




Marketing,
                advertising and promotion
            
            $
            -
            
            $
            101,757
            
            $
            -Selling,
                general and administrative
            
            
            15,556
            
            
            -
            
            
            -Research
                and development
            
            
            54,912
            
            
            52,579
            
            
            -Total
            
            $
            70,468
            
            $
            154,336
            
            $
            -






*See
      notes to financial statements.*







F-4





**VASO
      ACTIVE PHARMACEUTICALS INC.**


**STATEMENTS
      OF STOCKHOLDERS' EQUITY (DEFICIENCY)**




COMMON
                STOCKNUMBER
              OF
            
            $0.0001
            
            ADDITIONAL
                  PAID-IN
            
            DEFERRED
            
            ACCUMULATEDSHARES
            
            PAR
                VALUE
            
            CAPITAL
            
            COMP
            
            DEFICIT
            
            TOTAL**BALANCE,
                JANUARY 1, 2003**
            
            
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Effect
                of incorporation
            
            
            -
            
            
            -Issuance
                of Class B commonStock
                to parent
            
            
            4,500,000
            
            
            450
            
            
            -
            
            
            -
            
            
            -
            
            
            450Issuance
                of Class A commonStock
                at $1.67 per share, netof
                $1,935,305 issuance costs
            
            
            5,002,500
            
            
            501
            
            
            6,401,694
            
            
            -
            
            
            -
            
            
            6,402,195Conversion
                of 10% convertiblePromissory
                notes andaccrued
                interest
            
            
            601,113
            
            
            60
            
            
            903,871
            
            
            -
            
            
            -
            
            
            903,931Loss
                from operations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,679,472
            )
            
            (1,679,472
            )**BALANCE,
                DECEMBER 31, 2003**
            
            
            10,103,604
            
            
            1,011
            
            
            7,305,565
            
            
            -
            
            
            (1,679,472
            )
            
            5,627,104Issuance
                of Class A common stockat
                $2.00 per share
            
            
            225,000
            
            
            22
            
            
            449,978
            
            
            -
            
            
            -
            
            
            450,000Stock
                options granted non-employees
            
            
            -
            
            
            -
            
            
            338,113
            
            
            (338,113
            )
            
            -
            
            
            -Amortization
                of deferred compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            154,336
            
            
            -
            
            
            154,336Loss
                from operations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (4,493,321
            )
            
            (4,493,321
            )**BALANCE,
                DECEMBER 31, 2004**
            
            
            10,328,604
            
            
            1,033
            
            
            8,093,656
            
            
            (183,777
            )
            
            (6,172,793
            )
            
            1,738,119Fair
                market value detachable warrants
            
            
            -
            
            
            -
            
            
            563,438
            
            
            -
            
            
            -
            
            
            563,438Stock
                options granted below market
            
            
            -
            
            
            -
            
            
            17,250
            
            
            (
                17,250
            )
            
            -
            
            
            -Amortization
                of deferred compensation
            
            
            -
            
            
            -
            
            
            -
            
            
            70,468
            
            
            -
            
            
            70,468Loss
                from operations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (4,465,219
            )
            
            (4,465,219
            )**BALANCE
                DECEMBER 31, 2005**
            
            
            10,328,604
            
            $
            1,033
            
            $
            8,674,344
            
            $
            (130,559
            )
            $
            (10,638,012
            )
            $
            (2,093,194
            )




*See
      notes to the financial statements.*





F-5







**VASO
      ACTIVE PHARMACEUTICALS INC.**


**STATEMENTS
      OF CASH FLOWS**




**YEAR
                ENDED DECEMBER 31**
            
            2005
            
            2004
            
            2003**CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                loss
            
            $
            (4,465,219
            )
            $
            (4,493,321
            )
            $
            (1,679,472
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                of equipment
            
            
            13,147
            
            
            3,328
            
            
            -Amortization
                of discount and issuance costs related to convertible
                notes
            
            
            198,751
            
            
            -
            
            
            -Beneficial
                conversion feature of 10% convertible promissory notes
            
            
            -
            
            
            -
            
            
            500,926Accrued
                interest converted to Class A common stock
            
            
            -
            
            
            -
            
            
            35,907Stock-based
                compensation
            
            
            70,468
            
            
            154,336
            
            
            -Write-off
                of prepaid offering costs
            
            
            -
            
            
            55,000
            
            
            -Inventory
                write-off
            
            
            27,049
            
            
            54,662
            
            
            -Accrued
                legal settlement
            
            
            885,000
            
            
            -
            
            
            -Increase
                (decrease) in cash from change in:Accounts
                receivable
            
            
            260
            
            
            469
            
            
            52,080Inventory
            
            
            98,283
            
            
            (134,132
            )
            
            (46,324
            )Prepaid
                expenses
            
            
            (47,959
            )
            
            61,689
            
            
            (141,380
            )Accounts
                payable
            
            
            (72,701
            )
            
            349,340
            
            
            75,729Accrued
                compensation
            
            
            (25,785
            )
            
            (234,633
            )
            
            277,834Other
                accrued expenses
            
            
            35,678
            
            
            (81,519
            )
            
            197,564Net
                cash used in operating activities
            
            
            (3,283,028
            )
            
            (4,264,781
            )
            
            (727,136
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Additions
                to restricted cash
            
            
            (385,901
            )
            
            -
            
            
            -Purchase
                of property and equipment
            
            
            (14,063
            )
            
            (40,879
            )
            
            -Net
                cash used in investing activities
            
            
            (399,964
            )
            
            (40,879
            )
            
            -**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Issuance
                of Class A common stock
            
            
            -
            
            
            450,000
            
            
            6,402,195Issuance
                of senior secured convertible notes
            
            
            2,500,000
            
            
            -
            
            
            450Offering
                costs associated with the issuance of senior secured convertible
                notes
            
            
            (352,155
            )
            
            7,500,000
            
            
            -Repayment
                of convertible notes
            
            
            -
            
            
            (7,500,000
            )
            
            -Net
                proceeds from issuance of 10% convertible promissory notes
            
            
            -
            
            
            -
            
            
            367,098Obligations
                under capital leases
            
            
            (1,326
            )
            
            -
            
            
            -Due
                to/from parent company - net
            
            
            68,725
            
            
            (78,727
            )
            
            67,168Net
                cash provided by financing activities.
            
            
            2,215,244
            
            
            371,273
            
            
            6,836,911**NET
                DECREASE IN CASH AND CASH EQUIVALENTS**
            
            
            (1,467,748
            )
            
            (3,934,387
            )
            
            6,109,775**CASH
                AND CASH EQUIVALENTS, Beginning of period**
            
            
            2,175,388
            
            
            6,109,775
            
            
            -**CASH
                AND CASH EQUIVALENTS, End of period**
            
            $
            707,640
            
            $
            2,175,388
            
            $
            6,109,775**SUPPLEMENTAL
                DISCLOSURES:**Interest
                paid
            
            $
            51,336
            
            $
            -
            
            $
            -Income
                taxes paid
            
            
            -
            
            
            -
            
            
            -**NONCASH
                DISCLOSURES:**Fair
                value of detachable warrants
            
            $
            563,438
            
            $
            -
            
            $
            185,000Issuance
                of capital leases to purchase property and equipment
            
            $
            15,335
            
            $
            -
            
            $
            -




*See
      notes to financial statements.*





F-6





**VASO
      ACTIVE PHARMACEUTICALS, INC.**


**NOTES
      TO THE FINANCIAL STATEMENTS**




**1.**  **NATURE
      OF BUSINESS AND OPERATIONS**




**The
      Company**




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
      subject to a number of risks similar to those of other companies in an early
      stage of development. Principal among these risks are dependencies on key
      individuals, competition from substitute products and larger companies, the
      successful development and marketing of its products and the need to obtain
      adequate additional financing necessary to fund future operations.




The
      Company is engaged in a single operating segment of the OTC pharmaceutical
      industry.




**Business
      Development**




The
      Company commenced operations in January 2001 as the OTC division of BioChemics,
      Inc. (“BioChemics”), a privately owned pharmaceutical company. In January 2003,
      the Company incorporated in the state of Delaware and became a wholly-owned
      subsidiary of BioChemics. The Company licenses the VALE patents and PENtoCORE
      technology from BioChemics. As discussed in Notes 6 and 8, 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.




**Initial
      Public Offering**




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 raising
      approximately $6.4 million, net of issuance costs.




**Stock
      Split**




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 has been restated to give retroactive effect to this stock
      split.




**Settlement
      of Private Litigation**




In
      2004,
      the Company and certain of its officers and directors (the “Defendants”) were
      sued in several securities class action lawsuits filed in the United States
      District Court for the District of Massachusetts. The complaints, which were
      consolidated and sought equitable and monetary relief, an unspecified amount
      of
      damages, with interest, attorneys’ fees and costs, were filed on behalf of
      purchasers of Vaso Active Class A Common Stock during the period December 9,
      2003 to March 31, 2004.




The
      Company was also named as a nominal defendant in three shareholder derivative
      actions (the “Derivative Actions”). The actions were filed against certain
      of its officers and directors and against BioChemics, Inc. The Complaints
      alleged, among other things, that the alleged conduct challenged in the
      securities class action case pending against the Company in Massachusetts
      (described above) constituted, among other things, a breach of the Defendants’
fiduciary duties to Vaso Active. The Complaints sought equitable and monetary
      relief, an unspecified amount of damages, and attorneys and other fees, costs
      and expenses, ostensibly on behalf of Vaso Active.




F-7


In
      September 2005, Vaso Active and certain of its named officers and directors
      entered into agreements to settle the class action and the Derivative Actions.
      The parties to the agreements obtained the court’s final approval of the
      settlements on December 14, 2005. The court also dismissed the actions. There
      have been no appeals to the court’s orders. Under the terms of the Class Action
      Agreement, Vaso Active, disclaiming any liability, has caused to be paid into
      escrow for the benefit of the putative class $1,100,000 in cash and, at a future
      date, after certain conditions of the settlement agreement have been met, will
      issue $750,000 face amount of 2-year 5% subordinated callable notes convertible
      at $1.75 per share (with full dilution protection). Vaso Active’s insurance
      carrier agreed to pay and has paid the $1,100,000 cash payment in exchange
      for a
      release of its liability under its insurance policy with Vaso Active. Under
      the
      terms of the Derivative Action Agreement, Vaso Active, disclaiming any
      liability, agreed to pay to plaintiffs’ counsel a total of $25,000 in cash and
      $110,000 face amount of 2-year 5% subordinated callable notes convertible at
      $1.75 per share. In addition, the terms of the Derivative Action Agreement
      require Vaso Active to institute or maintain certain corporate governance
      measures. In consideration of these settlements, the parties agreed to fully
      and
      finally release and discharge all claims against each other. The Company issued
      $110,000 in aggregate principal amount of the 2-year 5% subordinated callable
      notes subsequent to year-end.




Although
      the parties have agreed on settlements, there is no guarantee that these will
      be
      the only lawsuits brought against the Company with respect to these matters
      and
      if any additional litigation is commenced against the Company, there can be
      no
      guarantee that these matters ultimately will be resolved in the Company’s favor.
      An unfavorable outcome of these matters would have a material adverse impact
      on
      our business, results of operations, financial position and
      liquidity.




**2.**  **SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES**




*Going
      Concern* **-** These
      financial statements have been prepared on the assumption that the Company
      will
      be able to realize its assets and discharge its liabilities in the normal course
      of business. This assumption is presently in question and contingent upon the
      Company’s ability to raise additional funds. Management is in the process of
      identifying various fund-raising strategies it will pursue in 2006. These
      strategies may include an additional private placement of the Company’s equity
      securities. There are no assurances that Management will successfully execute
      such strategies.




*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. Significant estimates relied upon in preparing
      these financial statements include revenue recognition, allowances for doubtful
      accounts, product return reserves, expected future cash flows used to evaluate
      the recoverability of long-lived assets and the determination of the useful
      lives of property and equipment. Although the Company regularly assesses these
      estimates, actual results could differ materially from those estimates. Changes
      in estimates are recorded in the period in which they become known.




*Cash
      and Cash Equivalents* **** -
      The
      Company classifies investments with original maturities of three months or
      less
      when acquired as cash equivalents. The Company invests its excess cash in money
      market funds that invest primarily in U.S. government securities, commercial
      paper and municipal obligations and are subject to minimal credit and market
      risk. The Company maintains deposits in financial institutions, which
      occasionally exceed federally insured limits. Management continually reviews
      the
      financial stability of these institutions.




*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 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, 2005 and 2004 and therefore no allowance for doubtful accounts provision
      has
      been established.




F-8


*Inventory* **-** Inventory
      is stated at the lower of cost or market, with cost being determined on the
      first-in, first-out method. The Company uses third-party contract manufacturers
      for the production of its products. Therefore, all inventory is in the form
      of
      finished goods.




*Property
      and Equipment* -
      Property and equipment is stated at cost. Depreciation is provided using
      the straight-line method over the estimated useful lives of the related assets,
      generally three to five years. Repairs and maintenance are expensed as
      incurred.




*Due
      to Parent* **-** The
      Company reimburses certain administrative services provided by BioChemics as
      well as general overhead fees pursuant to agreements between the Company and
      BioChemics. The due to parent balance represents the net obligation from the
      Company to BioChemics at December 31, 2005 and 2004.




*Debt
      Issuance Costs* - The
      Company incurred debt issuance costs in connection with the senior secured
      convertible notes (see Note 4). These costs are deferred and included in current
      assets on the balance sheets. The debt issuance costs are amortized over the
      term of the related debt issuance. The amortization expense is included in
      interest expense.




*Revenue
      Recognition* **-** The
      Company recognizes revenue from product sales in accordance with accounting
      principles generally accepted in the United States of America, including the
      guidance in Staff Accounting Bulletin (“SAB”) Bulletin No. 104 “Revenue
      Recognition” and Statement of Financial Accounting Standards (“SFAS”) No. 48,
“Revenue Recognition When Right of Return Exists.” Specifically, revenue is
      recognized when there is persuasive evidence of an arrangement, delivery has
      occurred, the price is fixed and determinable and collectibility is reasonably
      assured.




In
      general, revenue is recognized when products are shipped to customers. It is
      the
      Company’s policy that all sales are final. As is common in the consumer products
      industry, customers return products for a variety of reasons including products
      damaged in transit, packaging changes, product discontinuance and shipping
      errors. As sales are recorded, the Company accrues an estimated amount for
      product returns as a reduction of revenue. These estimates are based on
      historical experience and known specific events such as product expiration
      dates.




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 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.




F-9


**2005**
            
            **2004**
            
            **2003**Net
                loss as reported
            
            $
            (4,465,219
            )
            $
            (4,493,321
            )
            $
            (1,679,472
            )Less
                stock-based compensation had all
              options
                been recorded at fair value
            
            
            (359,076
            )
            
            (596,580
            )
            
            (114,356
            )Adjusted
                net loss
            
            $
            (4,824,295
            )
            $
            (5,089,901
            )
            $
            (1,793,828
            )Weighted
                average shares outstanding
              basic
                and diluted
            
            
            10,328,604
            
            
            10,296,805
            
            
            2,714,180Net
                loss per share - basic and diluted
            
            $
            (0.43
            )
            $
            (0.44
            )
            $
            (0.62
            )Pro
                forma net loss per share - basic
              and
                diluted
            
            $
            (0.47
            )
            $
            (0.49
            )
            $
            (0.66
            )




The
      fair
      value for these options was estimated at the date of grant using a Black-Scholes
      option pricing model using the following weighted average assumptions for 2005,
      2004 and 2003, respectively: risk-free interest rates of 4.3%, 3.3% and 3.3%;
      a
      dividend yield of 0.0% (for all years); volatility factors of the expected
      market price of the Company’s common stock of 98% (for all years); and a
      weighted average expected life of the option of 4 years (for all years).
      The pro forma effect on net losses for 2005, 2004 and 2003 is not necessarily
      representative of the effects on reported income or loss in future
      years.




Effective
      January 1, 2006, the Company is required to adopt SFAS No. 123R, “Share-Based
      Payment.” This revised statement eliminates the intrinsic value method provided
      under APB No. 25. SFAS No. 123R requires companies to recognize as compensation
      expense the fair value of stock options and other equity-based awards issued
      to
      employees. The Company has evaluated the two methods of adoption and determined
      to apply the modified-prospective method.




*Income
      Taxes* - 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
      Expenses* - Costs
      incurred to advertise and promote the Company are expensed as incurred.
      Advertising costs were approximately $153,000, $16,000 and $74,000 in 2005,
      2004
      and 2003, respectively.




*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 were netted against revenues in 2003. No sales incentives
      were incurred during 2005 or 2004.




*Research
      and Development* -
      Research and development costs primarily include salaries, contractor fees,
      facilities costs, administrative expenses and allocations of corporate costs.
      All such costs are charged to research and development expense as incurred.
      Research and development costs incurred were approximately $342,500 in 2005
      and
      $319,000 in 2004. There were no research and development costs in 2003.




*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 $45,900, $45,900 and $122,000
      in 2005, 2004 and 2003, 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.




F-10


Basic
      and
      diluted loss per common share are the same for 2005, 2004 and 2003 as
      potentially dilutive equity securities have not been included in calculations
      of
      diluted net loss per common share available to common stockholders, as their
      inclusion would have been antidilutive.




*Reclassifications
      -* Certain
      reclassifications have been made to the 2004 and 2003 amounts to conform to
      the
      2005 presentation.




**3.**  **CAPITAL
      LEASE**




In
      2005,
      the Company leased equipment which was capitalized for financial reporting
      purposes under a noncancelable lease. Assets under capital lease totaled $15,335
      at December 31, 2005. Accumulated depreciation of leased assets totaled
      $1,917.




Future
      minimum payments under the Company’s capital lease consist of the following at
      December 31, 2005:




**Years
                Ending December 31**2006
            
            $
            3,0242007
            
            
            3,0242008
            
            
            3,0242009
            
            
            3,0242010
            
            
            3,560Total
                minimum payments
            
            
            15,656Less
                amounts representing interest
            
            
            (1,647
            )Present
                value of future minimum payments
            
            
            14,009Less
                current portion
            
            
            (2,387
            )Long-term
                portion
            
            $
            11,622




**4.**  **SENIOR
      SECURED CONVERTIBLE NOTES**




In
      August
      2005, the Company sold $2,500,000 in aggregate principal amount of Senior
      Secured Convertible Notes due May 1, 2007 (the “Notes”) to independent
      institutional investors. The Notes are convertible at any time into shares
      of
      the Company’s Class A common stock at a price of $0.70 per share, subject to
      adjustment under certain circumstances. The investors also received five-year
      warrants (the “Warrants”) to purchase a total of 1,298,701 shares of the
      Company’s Class A common stock at an exercise price of $0.77 per share. In
      October, the investors also received an additional 100,000 shares in return
      for
      extending the required date of filing the registration associated with this
      transaction by 60 days. In addition, the investors received rights (“Rights”) to
      purchase up to $1,875,000 in aggregate principal amount of additional Notes
      at
      any time through the maturity date of the Notes, together with additional
      Warrants to purchase a total of 974,026 shares of Class A common stock. The
      additional Notes are convertible and the additional Warrants are exercisable
      at
      the same respective prices per share as the Notes and Warrants.




The
      Notes
      bear interest, payable quarterly, at the six month LIBOR plus 6.0%, with a
      floor
      of 10.0% and a ceiling of 12.0%. As part of the agreement, the Company placed
      $437,000 into escrow for the purpose of funding substantially all of the
      interest payments due under the Notes. Such remaining amount after disbursing
      required interest payments is reflected as restricted cash on the balance
      sheet.




The
      Notes
      are secured by substantially all of the Company’s assets and rank senior to all
      corporate indebtedness. The terms of the Notes permit the Company to finance
      capital equipment purchases, provided the lender is given a security interest
      only in the specific assets being financed. On conversion or full payment,
      the
      senior security interests included in the Notes will terminate.




F-11


The
      Company incurred debt issuance costs of approximately $377,725 in connection
      with this transaction. Included in this cost is $25,571, which represents the
      fair value of 64,935 warrants, issued to third party financial advisors to
      this
      transaction. In addition, the debt was issued with detachable warrants, which
      were valued at $563,438 calculated using the Black-Scholes valuation model.
      The
      key assumptions used in the Black-Scholes valuation calculations were an
      expected life of two and one-half years, expected volatility of 98%, a risk
      free
      rate of return of 4.04% and no expected dividends.




The
      debt
      issuance costs are deferred and included in other assets on the balance sheets.
      The debt issuance costs are amortized over the term of the related debt
      issuance. The amortization expense is included in interest expense on the
      statement of operations. The value of the detachable warrants is accounted
      for
      as a discount on the debt and is amortized over the life of the debt as interest
      expense. In 2005, the Company recorded $77,303 and $121,449 in interest expense
      related to debt issuance costs and the accretion of the debt discount associated
      with the detachable warrants, respectively.




**5.**  **INCOME
      TAXES**




The
      Company has federal and state tax net operating loss carry forwards available
      for future periods of approximately $9,010,000. 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 o f
      significant items comprising the Company’s approximate net deferred tax assets
      at December 31, 2005, 2004, and 2003 are as follows:




**2005**
            
            **2004**
            
            **2003**Deferred
                tax assets:Net
                operating loss carryforwards
            
            $
            3,628,000
            
            $
            2,173,000
            
            $
            451,000Accrued
                legal settlement
            
            
            356,000
            
            
            -
            
            
            -Accrued
                compensation
            
            
            -
            
            
            -
            
            
            (43,000
            )3,984,000
            
            
            2,173,000
            
            
            408,000Valuation
                allowance
            
            
            (3,984,000
            )
            
            (2,173,000
            )
            
            (408,000
            )Net
                deferred tax assets
            
            $
            -
            
            $
            -
            
            $
            -




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, 2005, 2004 and 2003.




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




**2005**
            
            **2004**
            
            **2003**Federal
                statutory rate
            
            
            34
            %
            
            34
            %
            
            34
            %State
                tax, net of federal impact
            
            
            6
            %
            
            6
            %
            
            6
            %Provision
                for valuation allowance on
              deferred
                tax assets
            
            
            (40)
            %
            
            (40)
            %
            
            (40)
            %Effective
                tax rate
            
            
            -
            %
            
            -
            %
            
            -
            %




**6.**  **STOCKHOLDERS’
      EQUITY**




*Preferred
      Stock* - At
      December 31, 2005, 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.




F-12


*Common
      Stock* - The
      Company maintains two classes of common stock. The Company has 40,000,000
      authorized shares of Class A common stock and 20,000,000 authorized shares
      of
      Class B common stock. The per share 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, 2005, there were 5,828,613 shares of Class
      A
      common stock issued and outstanding, and there were 4,500,000 shares of Class
      B
      common stock issued and outstanding, all of which are held by
      BioChemics.




**7.**  **STOCK
      OPTION PLANS**




The
      Company maintains two stock option plans. The 2003 Stock Incentive Plan provides
      for the issuance of up to 2,100,000 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.
      As of December 31, 2005, there were 1,245,000 and 330,000 remaining options
      available under the 2003 Stock Incentive Plan and the 2003 Non-Employee Director
      Compensation Plan, respectively. The following table sets forth the stock option
      activity under the Company’s two stock option plans:




**Number
                of**
              **Shares**
            
            **Weighted-Average
                Exercise Price**
            
            **Average**
              **Fair
                Value**Outstanding,
                January 1, 2003
            
            
            -
            
            $
            -Granted
            
            
            1,140,000
            
            
            1.71
            
            $
            1.15Exercised
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -Outstanding,
                December 31, 2003
            
            
            1,140,000
            
            
            1.71Granted
            
            
            627,000
            
            
            1.42
            
            
            0.90Exercised
            
            
            -
            
            
            -Forfeited
            
            
            (225,000
            )
            
            1.67Outstanding,
                December 31, 2004
            
            
            1,542,000
            
            
            1.60Granted
            
            
            150,000
            
            
            0.50
            
            
            0.35Exercised
            
            
            -
            
            
            -Forfeited
            
            
            (267,000
            )
            
            1.19Outstanding,
                December 31, 2005
            
            
            1,425,000
            
            $
            1.56Exercisable
                at December 31, 2005
            
            
            960,000
            
            $
            1.59Exercisable
                at December 31, 2004
            
            
            663,750
            
            $
            1.57Exercisable
                at December 31, 2003
            
            
            75,000
            
            $
            1.67







**Outstanding**
            
            **Exercisable****Number
                of**
              **Options**
            **Range
                of**
              **Exercise
                Prices**
            **Weighted-Average**
              **Remaining
                Life**
              **(in
                years)**
            
            **Number
                of**
              **Options**
            **Weighted-Average**
              **Exercise
                Price**300,000
            $
                0.50
            9.1
            
            150,000
            $
                0.501,125,000
            $
                1.67 to $ 2.11
            8.0
            
            810,000
            1.791,425,000
            
            8.2
            
            960,000
            $
                1.59




F-13


*Equity
      Instruments Issued to Non-Employees* - As
      discussed in Note 2, the Company accounts for stock options granted to employees
      in accordance with APB No. 25. The Company granted 350,000 stock options to
      non-employees in 2004. 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. In 2005 and 2004,
      the
      Company recorded $60,404 and $57,836 in stock-based compensation related to
      stock options, respectively. There were no other options granted to
      non-employees.




**8.**  **RELATED
      PARTY AGREEMENTS**




On
      F e bruary
      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 and 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.




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.




Effective
      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%.




**9.**  **COMMITMENTS
      AND CONTINGENCIES**




*Employment
      Agreements* - The
      Company has non-cancelable employment agreements with the Acting Chief Executive
      Officer through March 31, 2006 and the Chief Scientific Officer and the former
      Chief Executive Officer, through June 30, 2008. The remaining payments due
      under
      these employment contracts are as follows - $341,167 for 2006, $315,000 for
      2007; and $157,500 for 2008.




F-14


*Facility
      Lease* - 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 $44,000, $44,000 and $20,000 in 2005, 2004 and 2003,
      respectively. With the exception of its capital lease (see Note 3), the Company
      is not obligated to any significant long-term lease commitments or other
      off-balance sheet financing arrangements.




*Litigation* - As
      discussed in Note 1, in 2004 the Company and certain of its officers and
      directors (the “Defendants”) were sued in several securities class action
      lawsuits filed in the United States District Court for the District of
      Massachusetts. In addition, the Company was also named as a nominal defendant
      in
      three shareholder derivative actions (the “Derivative Actions”). The actions
      were filed against certain of its officers and directors and against
      BioChemics. In September 2005, Vaso Active and certain of its named officers
      and
      directors entered into agreements to settle the class action and the Derivative
      Actions. The parties to the agreements obtained the court’s final approval of
      the settlements on December 14, 2005.




Although
      these cases have been settled, there is no guarantee that these will be the
      only
      lawsuits brought against the Company with respect to these matters and if any
      additional litigation is commenced against the Company, there can be no
      guarantee that these matters ultimately will be resolved in the Company’s favor.
      An unfavorable outcome of these matters would have a material adverse impact
      on
      our business, results of operations, financial position and
      liquidity.




**10.**  **UNWINDING
      OF PRIVATE INVESTMENT IN PUBLIC ENTITY**




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 convertible into shares of the Company's Class
      A
      common stock at a conversion rate of $9.00 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.
      On April 1, 2004, as a result of the alleged conduct challenged in the
      securities class action case, the Company’s securities were suspended from
      trading by the Securities and Exchange Commission (“SEC”). Given that the
      initiation and continuation of the trading suspension by the SEC constituted
      a
      breach under this private placement transaction, 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 during
      2004.







F-15




Exhibit
      Index


**Exhibit**
                **Number**
              
              **Description
                  of Exhibit**
              **Incorporated
                  by Reference to:****Form**
              **SEC
                  Filing Date**
              **Exhibit
                  No.**3.1
              
              Amended
                  and Restated Certificate of Incorporation (as amended through December
                  8,
                  2005)
              SB-2
              December
                  15, 2005
              3.13.2
              
              Amended
                  and Restated By-laws (as amended through September 16,
                  2005)
              8-K
              September
                  22, 2005
              3.24.1
              
              Specimen
                  Certificate for Class A Common Stock
              SB-2/A
              September
                  12, 2003
              4.14.2
              
              Form
                  of Convertible Settlement Note*10.1
              
              Employment
                  Agreement, effective June 16, 2003, between Vaso Active Pharmaceuticals,
                  Inc. and Stephen G. Carter**
              SB-2/A
              September
                  12, 2003
              10.210.2
              
              Employment
                  Agreement, dated August 12, 2004, between Vaso Active Pharmaceuticals,
                  Inc. and John J. Masiz**
              10-QSB
              November
                  15, 2004
              10.110.3
              
              2003
                  Stock Incentive Plan**
              SB-2
              July
                  3, 2003
              10.310.4
              
              Form
                  of 2003 Non-Employee Director Compensation Plan**
              SB-2/A
              September
                  12, 2003
              10.410.5
              
              Registration
                  Rights Agreement by and between Vaso Active Pharmaceuticals, Inc.
                  and
                  BioChemics, Inc.
              SB-2/A
              September
                  12, 2003
              10.510.6
              
              License
                  Agreement, dated February 1, 2003, between BioChemics, Inc. and
                  Vaso
                  Active Pharmaceuticals, Inc., as amended by an amendment agreement,
                  dated
                  July 2, 2003
              SB-2/A
              September
                  12, 2003
              10.610.7
              
              Manufacturing
                  and Development Agreement, dated February 1, 2003, between Vaso
                  Active
                  Pharmaceuticals, Inc. and BioChemics, Inc.
              SB-2/A
              September
                  12, 2003
              10.710.8
              
              Administrative
                  Services Agreement, dated September 1, 2003, between BioChemics,
                  Inc. and
                  Vaso Active Pharmaceuticals, Inc.
              SB-2/A
              September
                  12, 2003
              10.810.9
              
              Brokerage
                  Agreement, effective August 1, 2005, between
                  Vaso Active Pharmaceuticals, Inc. and Ferolie
                  Corporation*10.10
              
              Securities
                  Purchase Agreement dated August 16, 2005 (including exhibits and
                  schedules)
              8-K/A
              August
                  19, 2005
              99.110.11
              
              Letter
                  Agreement, dated as of October 12, 2005, among Vaso Active
                  Pharmaceuticals, Inc., Iroquois Master Fund, Ltd., Omnicron Master
                  Trust,
                  and RAQ, LLC
              8-K
              November
                  14, 2005
              10.1(a)10.12
              
              Letter
                  Agreement, dated as of October 12, 2005, between Vaso Active
                  Pharmaceuticals, Inc. and Smithfield Fiduciary LLC
              8-K
              November
                  14, 2005
              10.1(b)10.13
              
              Standstill
                  Agreement with respect to Conversion Rights, as amended, dated
                  as of
                  October 13, 2005, between Vaso Active Pharmaceuticals, Inc. and
                  BioChemics, Inc.
              8-K
              November
                  14, 2005
              10.210.14
              
              Stipulation
                  and Agreement of Settlement, dated
                  September 21, 2005, among Lead Counsel (as defined therein) and
                  certain
                  other parties, with respect to In Re Vaso Active Pharmaceuticals
                  Securities Litigation*10.15
              
              Stipulation
                  and Agreement of Settlement, dated
                  September 22, 2005, among lead counsel for the Company and the
                  plaintiffs
                  and certain other parties, with respect to In Re Vaso Active
                  Pharmaceuticals Derivative Litigation*14
              
              Code
                of
                Ethics
              8-K
              January
                  25, 2005
              99.123
              
              Consent
                  of Stowe & Degon*31.1
              
              Certification
                  of Joseph Frattaroli, Acting Chief
                  Executive Officer and Chief Financial Officer, pursuant to Section
                  302 of
                  the Sarbanes-Oxley Act of 2002*32.1
              
              Certification
                  of Joseph Frattaroli, Acting Chief
                  Executive Officer and Chief Financial Officer, pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002*
 * Exhibit filed with this report.
 **
          Management contract or compensatory plan.