##### Table of Contents



United States Securities and Exchange Commission
 Washington D.C. 20549
 Form 10-KSB
 þ
    
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
 For the Fiscal Year ended December 31, 2006
 o
    
    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: 000-27866
 Vyrex Corporation
  Delaware
    
    88-0271109(State or other jurisdiction of
    
    (IRS Employer Identification No.)corporation or organization)
 2159 Avenida de la Playa, La Jolla, California 92037
 (858) 454-4446
 Securities registered pursuant to Section 12(b) of the Act:
    
    NoneSecurities registered pursuant to Section 12(g) of the Act:
    
    Common Stock, Par Value $.0001Warrants(Title of Class)
  þ o
 þ
 o o
        o þ




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TABLE OF CONTENTS  PART IItem 1. BUSINESSItem 2. PROPERTYItem 3. LEGAL PROCEEDINGSItem 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIItem 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERSItem 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND PLAN OF OPERATIONItem 7. FINANCIAL STATEMENTSItem 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKItem 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREItem 8a. CONTROLS AND PROCEDURESPART IIIItem 9. DIRECTORS AND EXECUTIVE OFFICERS, OF THE REGISTRANTItem 10. EXECUTIVE COMPENSATIONItem 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSItem 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSItem 13.  EXHIBITS, LIST AND REPORTS ON FORM 8-KItem 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESSIGNATURESEXHIBIT 31.1EXHIBIT 32.1    Table of Contents  
 PART I
 
 Item 1. BUSINESS
 General
  The Company
  Pharmaceutical Drug Program.
 
 ® ® ® ® ® ®
 2




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® ®
 ® ® ®
 ® ® ®
 ® ® ® ®
 ® ®
 Nutraceuticals.
 3




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Cosmeceuticals.
 CosmoFlavone
 Radioprotgective Agents
 4




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Research Collaborations and Licensing Agreements
  Dusan Miljkovic, Ph.D.
 FutureCeuticals.
 5




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Patents and Proprietary Technology
 ®
     ®
      6




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7




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Trademarks
 ® ®
  Employees
  Government Regulation
     8




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Sources of Supply
  9




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Competition
   Risk Factors
 This report contains, in addition to historical information, forward-looking statements that
involve risks and uncertainties. The Companys actual results could differ materially from the
results discussed in the forward-looking statements. Factors that could cause or contribute to such
differences include those discussed below as well as those discussed elsewhere in this report.
 Early Stage of Development; Absence of Products
  No Significant Operating Revenues; Accumulated Deficit; Expectation of Future Losses
  10




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Future Capital Requirements; Uncertainty of Additional Funding
  Intense Competition and Rapid Technological Change
  Dependence Upon Key Personnel
  11




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Reliance on Collaborative Partners
   Patents and Proprietary Rights
  12




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Governmental Regulation and Uncertainty of Product Approvals
 ® ®
 13




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Debt Service
   Dilutive and Other Adverse Effects of Outstanding Options and Warrants
  14




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Possible Depressive Effect on Price of Securities of Future Sales of Common Stock
  Possible Adverse Effects of Authorization and Issuance of Preferred Stock
  Delisting From NASDAQ Stock Market
  Volatility of Stock Price
  Disclosures Relating to Low Priced Stocks; Restrictions on Resale of Low Price Stocks and on
Broker-Deal Sale; Possible Adverse Effect of Penny Stock Rules on Liquidity for the Companys
Securities
 ,
 15




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Control by Present Stockholders; Possible Depressive Effect on the Companys Securities
  Anti-Takeover Provisions  Limitation on Voting Rights
  Warrants
  16




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Lack of Marketing Experience; Dependence on Outside Parties for Marketing and Distribution;
Uncertainty of Market Acceptance of Proposed Products
   Lack of Manufacturing Capability; Dependence on Outside Parties for Manufacturing of Proposed
Products
  Dependence on Suppliers
  17




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Product Liability; Availability of Insurance
 ® ® ®
 Hazardous Material; Environmental Matters
  Health Care Reform
  Uncertainty of Health Care Reimbursement
  Forward-Looking Statements
  18




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Item 2. PROPERTY
  
 Item 3. LEGAL PROCEEDINGS
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
  High
    
    LowJanuary 1, 2005
    
    March 31, 2005
    
    $
    1.17
    
    
    $
    0.83April 1, 2005
    
    June 30, 2005
    
    $
    1.00
    
    
    $
    0.50July 1, 2005
    
    September 30, 2005
    
    $
    0.92
    
    
    $
    0.33October 1, 2005
    
    December 31, 2005
    
    $
    1.17
    
    
    $
    0.42January 1, 2006
    
    March 31, 2006
    
    $
    2.08
    
    
    $
    0.42April 1, 2006
    
    June 30, 2006
    
    $
    1.42
    
    
    $
    0.67Jul 1, 2006
    
    September 30, 2006
    
    $
    2.75
    
    
    $
    0.85October 1, 2006
    
    December 31, 2006
    
    $
    1.55
    
    
    $
    0.87
  19




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Item 6.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND PLAN OF OPERATION
 The following discussion and analysis should be read in conjunction with the financial statements
and notes thereto  appearing elsewhere herein.
 Critical Accounting Policies
  Accounting for Uncertainty in Income Taxes
 Accounting for Uncertainty in Income
Taxes-an interpretation of SFAS 109,
 Revenue Recognition
  Stock Options and Warrants
  Accounting for stock issued to Employees, Accounting for Certain Transactions
involving Stock Compensation, and interpretation of APB Opinion No. 25, Accounting for Stock-Based Compensation,
 20




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Overview
    Results of Operations
 Years ended December 31, 2006 and 2005
     Liquidity and Capital Resources
   21




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Plan of Operation
  
 Item 7. FINANCIAL STATEMENTS
  
 Item 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
  
 Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
  
 Item 8a. CONTROLS AND PROCEDURES.
  22




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PART III
 
 Item 9. DIRECTORS AND EXECUTIVE OFFICERS, OF THE REGISTRANT.
 Sheldon S. Hendler, Ph.D., M.D (70)
    
    Director since 1991
  G. Dale Garlow (65)
    
    Director since 2000
  Richard G. McKee, Jr. (50)
    
    Director since 2000
  Tom K. Larson, Jr. (71)
    
    Director since 2000
  23




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COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES AND EXCHANGE ACT OF 1934
  CODE OF ETHICS
  
   Summary Compensation Table
 Long-TermAnnual Compensation
    
    Comp.AwardsOther
    
    Restricted
    
    SecuritiesAnnual
    
    Stock
    
    Underlying
    
    LTIP
    
    All OtherName and Principal Position
    
    Year
    
    Salary ($)
    
    Bonus ($)
    
    Comp.
    
    Awards
    
    Options (#)
    
    Payouts
    
    Comp.Sheldon S. Hendler
    
    
    2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chairman
    
    
    2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    G. Dale Garlow
    
    
    2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chief Executive Officer
    
    
    2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  24




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Item 11.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
  Name and address of
    
    Number of
    
    PercentBeneficial owner
    
    shares
    
    of classSheldon S. Hendler, Ph.D., M.D. (1)2159 Avenida de la Playa
La Jolla, CA 92037
    
    
    210,480
    
    
    
    16.1
    %G. Dale Garlow (2)
    
    
    93,100
    
    
    
    7.1
    %Richard G. McKee, Jr. (3)
    
    
    45,208
    
    
    
    3.5
    %Tom K. Larson, Jr. (4)
    
    
    12,600
    
    
    
    0.9
    %Directors and Executive Officers as a Group (4) persons)
    
    
    361,388
    
    
    
    27.6
    %
 
 1.
    
    Includes options to purchase 24,600 shares of common stock.2.
    
    Includes options to purchase 75,000 shares of common stock.3.
    
    Includes options to purchase 12,000 shares of common stock, 1,200 shares beneficially owned
by Wendy J. McKee and voting rights of 9,117 shares controlled by Dynamic Value Partners, Ltd.4.
    
    Includes options to purchase 9,000 shares of common stock.  
 Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
  
 Item 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
  
 Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
  25




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Audit Fees
  Tax Fees
  26




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Vyrex Corporation
Annual Report on Form 10-KSB
Year Ended December 31, 2006
Exhibit Index
 Exhibit Number
    
    Description2.1
    
    Agreement and Plan of Merger
dated as of October 17, 2005 by and between Vyrex Corporation and
Vyrex (Delaware) Corporation (incorporated by reference to the Form 8-K filed with the SEC on
October 17, 2005)3(i)
    
    Certificate of Incorporation
of Vyrex (Delaware) Corporation as filed with the Delaware Secretary of
State on September 8, 2005 (incorporated by reference to the Form 8-K filed with the SEC on
October 17, 2005)3(ii)
    
    Bylaws of Vyrex (Delaware)
Corporation dated as of September 9, 2005 (incorporated by reference to
the Form 8-K filed with the SEC on October 17, 2005)31.1
    
    Certification of the chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of
200232.1
    
    Certification of the chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of
2002
 27




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SIGNATURES
  VYREX CORPORATION
RegistrantBy:
    
    /s/ G. Dale GarlowG. Dale Garlow
Chief Executive Officer,
 signed
 Signature
    
    Title
    
    Date/S/Sheldon S. Hendler
    
    Director
    
    April 17, 2007/S/G. Dale Garlow
    
    Director
    
    April 17, 2007/S/Richard G. McKee, Jr.
    
    Director
    
    April 17, 2007/S/Tom K. Larson, Jr.
    
    Director
    
    April 17, 2007
 28




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Report of Berenfeld, Spritzer, Shechter & Sheer, CPAs Independent Registered
Public Accounting Firm
    
    F-2Balance Sheets
    
    F-3Statements of Operations
    
    F-4Statements of Stockholders Equity (Deficiency)
    
    F-5-7Statements of Cash Flows
    
    F-8Notes to Financial Statements
    
    F-9-16
 F-1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
 F-2




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December 312006
    
    2005AssetsCurrent assets:Cash
    
    $
    3,721
    
    
    $
    2,250Accounts receivable
    
    
    5,265
    
    
    
    22,500Investment in available-for-sale securities
    
    
    
    
    
    
    20,179Total assets
    
    $
    8,986
    
    
    $
    44,929Liabilities and stockholders deficiencyCurrent liabilities:Accounts payable
    
    $
    126,158
    
    
    $
    89,735Accrued liabilities and accrued vacation
    
    
    63,995
    
    
    
    44,730Accrued payroll
    
    
    20,637
    
    
    
    20,637Notes payable
    
    
    217,000
    
    
    
    200,000Total liabilities
    
    
    427,790
    
    
    
    355,102Commitments and contingenciesStockholders deficiency:Preferred stock, $.0001 par value; 50,000,000
shares authorized; none issued
    
    
    
    
    
    
    Common stock, $.0001 par value; 200,000,000 shares
authorized; 1,019,144 issued and outstanding (as
adjusted for a twelve for one
reverse split)
    
    
    102
    
    
    
    102Additional paid-in capital
    
    
    13,114,487
    
    
    
    13,114,487Accumulated other comprehensive income
    
    
    
    
    
    
    15,746Deficit accumulated during the development stage
    
    
    (13,533,393
    )
    
    
    (13,440,508
    )Total stockholders deficiency
    
    
    (418,804
    )
    
    
    (310,173
    )Total liabilities and stockholders deficiency
    
    $
    8,986
    
    
    $
    44,929
 The accompanying notes are an integral part of these financial statements.
 F-3




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Years ended December 31,
    
    Cumulative from2006
    
    2005
    
    InceptionLicensing and royalty revenue
    
    $
    43,465
    
    
    $
    97,500
    
    
    $
    896,664Operating expenses:Research and development
    
    
    7,525
    
    
    
    7,595
    
    
    
    6,486,278Marketing and selling
    
    
    
    
    
    
    
    
    
    
    438,664General and administrative
    
    
    121,995
    
    
    
    137,162
    
    
    
    6,450,665Loss on disposal of fixed assets
    
    
    
    
    
    
    
    
    
    
    13,664Total operating expenses
    
    
    129,520
    
    
    
    144,757
    
    
    
    13,389,271Loss from operations
    
    
    (86,055
    )
    
    
    (47,257
    )
    
    
    (12,492,607
    )Other income (expense):Interest income
    
    
    332
    
    
    
    318
    
    
    
    476,376Other income
    
    
    
    
    
    
    
    
    
    
    4,434Gain on sale of investment in
available-for-sale securities
    
    
    13,878
    
    
    
    
    
    
    
    13,878Interest expense
    
    
    (21,040
    )
    
    
    (22,181
    )
    
    
    (185,574
    )Charge from issuance of stock options for
bridge financing
    
    
    
    
    
    
    
    
    
    
    (1,349,900
    )Total other expense
    
    
    (6,830
    )
    
    
    (21,863
    )
    
    
    (1,040,786
    )Net loss
    
    $
    (92,885
    )
    
    $
    (69,120
    )
    
    $
    (13,533,393
    )Net loss per share  basic and diluted
    
    $
    (0.09
    )
    
    $
    (0.07
    )Weighted-average common shares outstanding
(as adjusted for a twelve for one hundred
reverse split)  basic and diluted
    
    
    1,019,144
    
    
    
    1,019,144
 The accompanying notes are an integral part of these financial statements.
 F-4




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Deficitaccumulated
    
    TotalAdditional
    
    during the
    
    stockholdersCommon stock
    
    paid-in
    
    development
    
    equityShares
    
    Amount
    
    capital
    
    stage
    
    (deficiency)Issuance (at $.02 per share) for acquisition of technology retroactively
reduced for 18,000 shares returned and retired on October 1, 1995
    
    
    402,000
    
    
    $
    40
    
    
    $
    6,660
    
    
    $
    
    
    
    $
    6,700Issuance (at $.02 per share) for cash
    
    
    60,000
    
    
    
    6
    
    
    
    994
    
    
    
    
    
    
    
    1,000Issuance (at $8.33 per share) for cash
    
    
    96,000
    
    
    
    10
    
    
    
    799,990
    
    
    
    
    
    
    
    800,000Issuance as compensation (at $8.33 per share)
    
    
    3,900
    
    
    
    
    
    
    
    32,500
    
    
    
    
    
    
    
    32,500Issuance (at $16.67 per share) upon conversion of note payable
    
    
    12,000
    
    
    
    2
    
    
    
    199,998
    
    
    
    
    
    
    
    200,000Issuance (at $25.00 per share) for cash, net of issuance costs of $4,086
    
    
    3,960
    
    
    
    
    
    
    
    94,914
    
    
    
    
    
    
    
    94,914Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,085,932
    )
    
    
    (1,085,932
    )Balance at December 31, 1993
    
    
    577,860
    
    
    
    58
    
    
    
    1,135,056
    
    
    
    (1,085,932
    )
    
    
    49,182Issuance (at $25.00 per share) for cash, net of issuance costs of $21,000
    
    
    11,880
    
    
    
    1
    
    
    
    275,999
    
    
    
    
    
    
    
    276,000Issuance (at $25.00 per share) in lieu of finders fee
    
    
    840
    
    
    
    
    
    
    
    21,000
    
    
    
    
    
    
    
    21,000Issuance (at $25.00 per share) in lieu of finders fee
    
    
    600
    
    
    
    
    
    
    
    15,000
    
    
    
    
    
    
    
    15,000Issuance (at $25.00 per share) for cash, net of issuance costs of $41,844
    
    
    2998
    
    
    
    
    
    
    
    33,126
    
    
    
    
    
    
    
    33,126Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (467,683
    )
    
    
    (467,683
    )Balance at December 31, 1994
    
    
    594,178
    
    
    
    59
    
    
    
    1,480,181
    
    
    
    (1,553,615
    )
    
    
    (73,375
    )Issuance (at $25.00 per share) for cash, net of issuance costs of $46,976
    
    
    17,993
    
    
    
    2
    
    
    
    402,842
    
    
    
    
    
    
    
    402,844Issuance (at $25.00 per share) in settlement of account payable
    
    
    725
    
    
    
    
    
    
    
    18,123
    
    
    
    
    
    
    
    18,123Issuance (at par value) as compensation for services related to prior
issuances of common stock
    
    
    9,960
    
    
    
    1
    
    
    
    (1
    )
    
    
    
    
    
    
    Issuance (at $25.00 per share) as compensation for services related to
offering
    
    
    1,600
    
    
    
    
    
    
    
    40,002
    
    
    
    
    
    
    
    40,002Issuance (at $25.00 per share) of options for 54,000 shares as
compensation for arranging bridge financing
    
    
    
    
    
    
    
    
    
    
    1,349,900
    
    
    
    
    
    
    
    1,349,900Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,854,584
    )
    
    
    (1,854,584
    )Balance at December 31, 1995
    
    
    624,456
    
    
    
    62
    
    
    
    3,291,047
    
    
    
    (3,408,199
    )
    
    
    (117,090
    )Proceeds from initial public offering (at $54.17 per unit), net of
issuance costs of $1,135,453
    
    
    126,852
    
    
    
    13
    
    
    
    5,735,664
    
    
    
    
    
    
    
    5,735,677Sale of option to purchase 36,000 shares (at $25.00 per share)
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    
    
    
    
    50,000Exercise of stock options (at $25.00 per share) for cash
    
    
    36,000
    
    
    
    4
    
    
    
    899,996
    
    
    
    
    
    
    
    900,000Conversion of notes payable and related accrued interest (at $25.00 per
share)
    
    
    10,322
    
    
    
    1
    
    
    
    258,044
    
    
    
    
    
    
    
    258,045Exercise of stock options (at $.0019 per share) for cash
    
    
    54,000
    
    
    
    5
    
    
    
    95
    
    
    
    
    
    
    
    100Issuance of units as compensation for legal services (at $37.92 per share)
    
    
    2,915
    
    
    
    
    
    
    
    110,529
    
    
    
    
    
    
    
    110,529Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,820,614
    )
    
    
    (1,820,614
    )Balance at December 31, 1996
    
    
    854,545
    
    
    
    85
    
    
    
    10,345,375
    
    
    
    (5,228,813
    )
    
    
    5,116,647
 (Continued)
 F-5




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##### Table of Contents



Deficitaccumulated
    
    TotalAdditional
    
    during the
    
    stockholdersCommon stock
    
    paid-in
    
    development
    
    equityShares
    
    Amount
    
    capital
    
    stage
    
    (deficiency)Balance at December 31, 1996
    
    
    854,545
    
    
    $
    85
    
    
    $
    10,345,375
    
    
    $
    (5,228,813
    )
    
    $
    5,116,647Exercise of warrants, 24 shares at $66.67 per share
    
    
    24
    
    
    
    
    
    
    
    1,600
    
    
    
    
    
    
    
    1,600Warrants issued in conjunction with debenture offering
    
    
    
    
    
    
    
    
    
    
    62,220
    
    
    
    
    
    
    
    62,220Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,295,840
    )
    
    
    (3,295,840
    )Balance at December 31, 1997
    
    
    854,569
    
    
    
    85
    
    
    
    10,409,195
    
    
    
    (8,524,653
    )
    
    
    1,884,627Issuance of stock as partial consideration for placement of debentures
    
    
    960
    
    
    
    
    
    
    
    50,000
    
    
    
    
    
    
    
    50,000Issuance of stock on conversion of debentures
    
    
    27,267
    
    
    
    3
    
    
    
    807,638
    
    
    
    
    
    
    
    807,641Issuance of shares upon cashless exercise of stock options
    
    
    8,019
    
    
    
    1
    
    
    
    396,579
    
    
    
    
    
    
    
    396,580Issuance of 45,000 stock options for services
    
    
    
    
    
    
    
    
    
    
    87,000
    
    
    
    
    
    
    
    87,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,388,412
    )
    
    
    (3,388,412
    )Balance at December 31, 1998
    
    
    890,815
    
    
    
    89
    
    
    
    11,750,412
    
    
    
    (11,913,065
    )
    
    
    (162,564
    )Issuance (at $2.83 per share) for cash
    
    
    14,329
    
    
    
    1
    
    
    
    40,599
    
    
    
    
    
    
    
    40,600Issuance of 5,640 stock options for services
    
    
    
    
    
    
    
    
    
    
    6,580
    
    
    
    
    
    
    
    6,580Issuance of 30,000 warrants for services
    
    
    
    
    
    
    
    
    
    
    30,500
    
    
    
    
    
    
    
    30,500Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (788,548
    )
    
    
    (788,548
    )Balance at December 31, 1999
    
    
    905,144
    
    
    
    90
    
    
    
    11,828,091
    
    
    
    (12,701,613
    )
    
    
    (873,432
    )Forgiveness of accrued compensation
    
    
    
    
    
    
    
    
    
    
    422,559
    
    
    
    
    
    
    
    422,559Issuance (at $7.50 per share) for cash
    
    
    36,000
    
    
    
    4
    
    
    
    269,996
    
    
    
    
    
    
    
    270,000Exercise of stock options (at $.83 per share) for cash
    
    
    30,000
    
    
    
    3
    
    
    
    24,997
    
    
    
    
    
    
    
    25,000Exercise of warrants (at $.83 per share) for cash
    
    
    12,000
    
    
    
    1
    
    
    
    9,999
    
    
    
    
    
    
    
    10,000Issuance (at $8.33 per share) for cash
    
    
    18,000
    
    
    
    2
    
    
    
    149,998
    
    
    
    
    
    
    
    150,000Reduction of exercise price for options and warrants
    
    
    
    
    
    
    
    
    
    
    148,000
    
    
    
    
    
    
    
    148,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (335,487
    )
    
    
    (335,487
    )Balance at December 31, 2000
    
    
    1,001,144
    
    
    
    100
    
    
    
    12,853,640
    
    
    
    (13,037,100
    )
    
    
    (183,360
    )Issuance of 6,000 stock options for services
    
    
    
    
    
    
    
    
    
    
    18,500
    
    
    
    
    
    
    
    18,500Issuance of 24,000 warrants for services
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    
    
    
    
    50,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (202,185
    )
    
    
    (202,185
    )Balance at December 31, 2001
    
    
    1,001,144
    
    
    
    100
    
    
    
    12,922,140
    
    
    
    (13,239,285
    )
    
    
    (317,045
    )
 (Continued)
 F-6




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##### Table of Contents



DeficitAccumulated
    
    
    accumulated
    
    
    TotalAdditional
    
    
    other
    
    
    during the
    
    
    stockholdersCommon stock
    
    
    paid-in
    
    
    comprehensive
    
    
    development
    
    
    equityShares
    
    
    Amount
    
    
    capital
    
    
    income
    
    
    stage
    
    
    (deficiency)Balance at December 31, 2001
    
    
    1,001,144
    
    
    $
    100
    
    
    $
    12,922,140
    
    
    
    
    
    
    $
    (13,239,285
    )
    
    $
    (317,045
    )Modification of stock options
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    2,000Issuance of stock upon exercise of warrants at $.83 per share
    
    
    18,000
    
    
    
    2
    
    
    
    14,998
    
    
    
    
    
    
    
    
    
    
    
    15,000Forgiveness of accrued compensation
    
    
    
    
    
    
    
    
    
    
    140,978
    
    
    
    
    
    
    
    
    
    
    
    140,978Issuance of 2,400 warrants for services
    
    
    
    
    
    
    
    
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    2,000Issuance of 600 warrants for services
    
    
    
    
    
    
    
    
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    300Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,763
    )
    
    
    (3,763
    )Balance at December 31, 2002
    
    
    1,019,144
    
    
    
    102
    
    
    
    13,082,416
    
    
    
    
    
    
    
    (13,243,048
    )
    
    
    (160,530
    )Issuance of 12,000 warrants in connection with debt issuance
    
    
    
    
    
    
    
    
    
    
    6,000
    
    
    
    
    
    
    
    
    
    
    
    6,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (90,540
    )
    
    
    (90,540
    )Balance at December 31, 2003
    
    
    1,019,144
    
    
    
    102
    
    
    
    13,088,416
    
    
    
    
    
    
    
    (13,333,588
    )
    
    
    (245,070
    )Forgiveness of accrued compensation
    
    
    
    
    
    
    
    
    
    
    26,071
    
    
    
    
    
    
    
    
    
    
    
    26,071Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (37,800
    )
    
    
    (37,800
    )Effect of change in fair value of available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    12,231
    
    
    
    
    
    
    
    12,231Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,569
    )Balance at December 31, 2004
    
    
    1,019,144
    
    
    
    102
    
    
    
    13,114,487
    
    
    
    12,231
    
    
    
    (13,371,388
    )
    
    
    (244,568
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (69,120
    )
    
    
    (69,120
    )Effect of change in fair value of available-for-sale securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,515
    
    
    
    
    
    
    
    3,515Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65,605
    )Balance at December 31, 2005
    
    
    1,019,144
    
    
    $
    102
    
    
    $
    13,114,487
    
    
    $
    15,746
    
    
    $
    (13,440,508
    )
    
    $
    (310,173
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (92,885
    )
    
    
    (92,885
    )Effect of securities sold Dec 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,746
    )
    
    
    
    
    
    
    (15,746
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (108,631
    )Balance at December 31, 2006
    
    
    1,019,144
    
    
    $
    102
    
    
    $
    13,114,487
    
    
    $
    
    
    
    $
    (13,533,393
    )
    
    $
    (418,804
    )
 The accompanying notes are an integral part of these financial statements.
 F-7




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##### Table of Contents



CumulativeYears ended December 31,
    
    
    from2006
    
    
    2005
    
    
    InceptionOperating activitiesNet loss
    
    $
    (92,885
    )
    
    $
    (69,120
    )
    
    $
    (13,533,393
    )Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:Depreciation, amortization and impairment charges
    
    
    
    
    
    
    
    
    
    
    336,329Accretion of debt discount
    
    
    
    
    
    
    2,000
    
    
    
    6,000Interest receivable
    
    
    
    
    
    
    
    
    
    
    3,506Loss on disposal of fixed assets
    
    
    
    
    
    
    
    
    
    
    13,664Issuance of compensatory notes, stock, stock options
and warrants
    
    
    
    
    
    
    
    
    
    
    2,302,512Gain on sale of available-for-sale securities
    
    
    (13,878
    )
    
    
    
    
    
    
    (13,878
    )Other income
    
    
    
    
    
    
    
    
    
    
    (4,434
    )Changes in operating assets and liabilities:Accounts receivable and other assets
    
    
    17,235
    
    
    
    
    
    
    
    94,735Accounts payable and accrued liabilities
    
    
    55,688
    
    
    
    73,696
    
    
    
    709,444Net cash provided by (used in) operating activities
    
    
    (33,840
    )
    
    
    6,576
    
    
    
    (10,085,515
    )Investing activitiesSale of available-for-sale securities
    
    
    18,311
    
    
    
    
    
    
    
    18,311Purchase of short-term investments
    
    
    
    
    
    
    
    
    
    
    (8,440,442
    )Sale of short-term investments
    
    
    
    
    
    
    
    
    
    
    8,467,931Purchases of fixed assets
    
    
    
    
    
    
    
    
    
    
    (209,595
    )Proceeds on sale of fixed assets
    
    
    
    
    
    
    
    
    
    
    10,000Patent, trademark and copyright costs
    
    
    
    
    
    
    
    
    
    
    (133,519
    )Other assets, including notes receivable from related
parties
    
    
    
    
    
    
    
    
    
    
    (4,202
    )Net cash provided by (used in) investing activities
    
    
    18,311
    
    
    
    
    
    
    
    (291,516
    )Financing activitiesNet proceeds from issuance of common stock
    
    
    
    
    
    
    
    
    
    
    7,889,808Exercise of stock options and sale of options
    
    
    
    
    
    
    
    
    
    
    975,100Exercise of warrants
    
    
    
    
    
    
    
    
    
    
    25,000Proceeds from short-term loan
    
    
    
    
    
    
    
    
    
    
    875,230Proceeds from notes payable
    
    
    17,000
    
    
    
    
    
    
    
    808,114Repayment of notes payable
    
    
    
    
    
    
    (7,500
    )
    
    
    (192,500
    )Advances from potential investors
    
    
    
    
    
    
    
    
    
    
    100,000Repayment of advances
    
    
    
    
    
    
    
    
    
    
    (100,000
    )Net cash provided by (used in) financing activities
    
    
    17,000
    
    
    
    (7,500
    )
    
    
    10,380,752Net increase (decrease) in cash and cash equivalents
    
    
    1,471
    
    
    
    (924
    )
    
    
    3,721Cash and cash equivalents, beginning of period
    
    
    2,250
    
    
    
    3,174
    
    
    
    Cash and cash equivalents, end of period
    
    $
    3,721
    
    
    $
    2,250
    
    
    $
    3,721Supplemental cash flow informationForgiveness of debt
    
    
    
    
    
    
    
    
    
    $
    589 608Conversion of notes payable and related accrued interest
    
    
    
    
    
    
    
    
    
    $
    258,045Issuance of stock as consideration for conversion of
debentures
    
    
    
    
    
    
    
    
    
    $
    857,641Issuance of stock upon cashless exercise of stock options
    
    
    
    
    
    
    
    
    
    $
    396,580Warrants issued in connection with convertible
debentures and notes payable
    
    
    
    
    
    
    
    
    
    $
    68,220
 The accompanying notes are an integral part of these financial statements.
 F-8




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##### Table of Contents



1. Basis of Presentation and the Company
 Basis of Presentation
    The Company
   F-9




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##### Table of Contents



th
   2. Summary of Significant Accounting Policies
 Stock Options and Warrants
  Accounting for stock issued to Employees, Accounting for Certain Transactions
involving Stock Compensation, and interpretation of APB Opinion No. 25,
 F-10




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##### Table of Contents



Accounting for Stock-Based Compensation,
    2005Net loss  as reported
    
    $
    (69,120
    )Stock-based employee compensation expense
assuming a fair value based method had been
used for all awards
    
    
    Net loss  pro forma
    
    $
    (69,120
    )Basic loss per share  as reported
    
    $
    (0.07
    )Basic loss per share  pro forma
    
    $
    (0.07
    )
 Revenue Recognition
  Income taxes
  F-11




---



##### Table of Contents



Net Loss Per Share
  Use of Estimates
  Investments
  Recent Accounting Developments
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements
 Fair Value Measurements
 F-12




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##### Table of Contents



Accounting for Uncertainty in Income
Taxes-an interpretation of SFAS 109,
 Accounting for Servicing of Financial Assets Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, a replacement of FASB Statement 125, ,
 Accounting for Certain Hybrid Financial
Instruments, Accounting for Derivative Instruments and Hedging
Activities
 Accounting Changes and Error Corrections,
 3. Warrants
  WeightedAverageWarrants
    
    
    
    
    
    ExerciseOutstanding
    
    Exercise Price
    
    PriceBalance at January 1, 2005
    
    
    12,000
    
    
    $
    0.92
    
    
    $
    0.92Balance at December 31, 2005
    
    
    12,000
    
    
    $
    0.92
    
    
    $
    0.92Issued in 2006
    
    
    25,000
    
    
    $
    0.87
    
    
    $
    0.87Balance at December 31, 2006
    
    
    37,000
    
    
    $
    0.92
    
    
    $
    0.89
  4. License and Collaboration Agreements
  F-13




---



##### Table of Contents



5. Concentration of Credit Risk
   6. Income Taxes
  F-14




---



##### Table of Contents



2006
    
    
    2005Net operating loss carryforwards
    
    $
    6,134,000
    
    
    $
    6,093,000Research and development credit carryforwards
    
    
    736,000
    
    
    
    736,000Other
    
    
    30,000
    
    
    
    9,0006,900,000
    
    
    
    6,838,000Valuation allowance
    
    
    (6,900,000
    )
    
    
    (6,838,000
    )$
    
    
    
    $
    
  7. Stock Option Plan
   F-15




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##### Table of Contents



Stock
    
    
    Option
    
    
    Weighted-Options
    
    
    Exercise
    
    
    AverageOutstanding
    
    
    Price
    
    
    Exercise PriceBalance at January 1, 2005
    
    
    334,471
    
    
    
    
    
    
    $
    12.04Expired
    
    
    (23,000
    )
    
    $
    25.00
    
    
    $
    25.00Balance at December 31, 2005
    
    
    311,471
    
    
    
    
    
    
    $
    11.04Expired
    
    
    (34,596
    )
    
    $
    3.39 - $62.50
    
    
    $
    3.39 - $62.50Balance at December 31, 2006
    
    
    276,875
    
    
    
    
    
    
    $
    10.73Shares available for grant
at December 31, 2006
    
    
    188,125
  Weighted-Weighted-
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    Weighted-
    
    
    
    
    
    
    Exercise PriceRange of
    
    Outstanding
    
    
    Remaining
    
    
    Average
    
    
    Options
    
    
    of OptionsExercise Prices
    
    Options
    
    
    Life in Years
    
    
    Exercise Price
    
    
    Exercisable
    
    
    Exercisable$0.83 - $4.67
    
    
    219,000
    
    
    
    3.79
    
    
    $
    2.85
    
    
    
    219,000
    
    
    $
    2.85$25.00
    
    
    21,000
    
    
    
    2.32
    
    
    
    25.00
    
    
    
    21,000
    
    
    
    25.00$47.92 - $50.00
    
    
    36,875
    
    
    
    0.95
    
    
    
    49.38
    
    
    
    36,875
    
    
    
    49.38276,875
    
    
    
    3.30
    
    
    
    10.73
    
    
    
    276,875
    
    
    
    10.73
 8. Notes Payable and Related Conversion and Stock Options
  F-16




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##### Table of Contents



9. Contingencies
  10. Available-for-sale securities
   F-17