##### 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, 2005
 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
corporation or organization)
    
    (IRS Employer Identification No.)
 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)
  Yes þ
    
    No o
 þ
 o þ
    Common Stock  1,019,144 as of April 15, 2006
    
    Warrants to purchase common stock  12,000 as of April 15, 2006.
    Yes o
    
    No 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 7. FINANCIAL STATEMENTSItem 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.PART IIIItem 9. DIRECTORS AND EXECUTIVE OFFICERS, OF THE REGISTRANT.Item 10. EXECUTIVE COMPENSATION.Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.Item 13. EXHIBITS, LIST AND REPORTS ON FORM 8-KItem 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.SIGNATURESExhibit IndexEXHIBIT 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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##### Table of Contents









Cosmeceuticals.


CosmoFlavone


Radioprotgective Agents


Research Collaborations and Licensing Agreements


4



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##### Table of Contents



Dusan Miljkovic, Ph.D.
 FutureCeuticals.
 5




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Patents and Proprietary Technology
 ®
 ®
 ®
   ®
  ®
     6




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Trademarks
 ® ®
 7




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Employees
  Government Regulation
       8




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Sources of Supply
  Competition
   9




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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
  Future Capital Requirements; Uncertainty of Additional Funding
  10




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Intense Competition and Rapid Technological Change
  Dependence Upon Key Personnel
  Reliance on Collaborative Partners
  11




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Patents and Proprietary Rights
    12




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Governmental Regulation and Uncertainty of Product Approvals
  Debt Service
  13




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Dilutive and Other Adverse Effects of Outstanding Options and Warrants
  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
  14




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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
 ,
  Control by Present Stockholders; Possible Depressive Effect on the Companys Securities
  Anti-Takeover Provisions  Limitation on Voting Rights
  15




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##### Table of Contents



Warrants
  ®
  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
  16




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Dependence on Suppliers
  Product Liability; Availability of Insurance
  Hazardous Material; Environmental Matters
  17




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Health Care Reform
  Uncertainty of Health Care Reimbursement
  Forward-Looking Statements
  
 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
  18




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##### Table of Contents



High
    
    
    
    
    
    
    
    LowJanuary 1, 2004
    
    March 30, 2004
    
    $
    2.25
    
    
    $
    1.00April 1, 2004
    
    June 30, 2004
    
    $
    1.58
    
    
    $
    0.92July 1, 2004
    
    September 30, 2004
    
    $
    1.75
    
    
    $
    0.42October 1, 2004
    
    December 31, 2004
    
    $
    1.33
    
    
    $
    0.67January 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
    
    
    $
    0.42
  Item 6.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS AND PLAN OF OPERATION
 The following discussion and analysis should be read in conjunction with the financial statements
and notes theretoappearing elsewhere herein.
 Critical Accounting Policies
  Revenue Recognition
  Stock Options and Warrants
   Recent Accounting Developments
  19




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Overview
  20




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Results of Operations
 Years ended December 31, 2005 and 2004
     Liquidity and Capital Resources
     21




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Plan of Operation
  
 Item 7.
    
    FINANCIAL STATEMENTS
  22




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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.
  
 PART III
 
 Item 9.
    
    DIRECTORS AND EXECUTIVE OFFICERS, OF THE REGISTRANT.
 Sheldon S. Hendler, Ph.D., M.D (68)
    
    Director since 1991
  G. Dale Garlow (63)
    
    Director since 2000
  Richard G. McKee, Jr. (48)
    
    Director since 2000
  23




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Tom K. Larson, Jr. (69)
    
    Director since 2000
  24




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Michael L. Eagle (57)
    
    Director since 2002
  COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES AND EXCHANGE ACT OF 1934
  CODE OF ETHICS
  
 Item 10.
    
    EXECUTIVE COMPENSATION.
 The following table sets forth the compensation for services to the Company in all capacities
for the fiscal year ended December 31, 2005 by those persons who were, respectively, at December
31, 2005 the Companys Chairman and the Companys Chief Executive Officer (the Named Officers).
 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
    
    
    2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chairman
    
    
    2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    G. Dale Garlow
    
    
    2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chief Executive Officer
    
    
    2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125,000
    
    
    
    
    
    
    
    
 25




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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)
    
    
    1,904,003
    
    
    
    16.7
    %2159 Avenida de la PlayaLa Jolla, CA 92037G. Dale Garlow (2)
    
    
    775,833
    
    
    
    6.8
    %Richard G. McKee, Jr. (3)
    
    
    376,734
    
    
    
    3.3
    %Tom K. Larson, Jr. (4)
    
    
    105,000
    
    
    
    0.9
    %Michael L. Eagle (5)
    
    
    75,000
    
    
    
    0.7
    %Directors and Executive Officers as a Group (5) persons)
    
    
    3,236,570
    
    
    
    28.4
    %
 
 1.
    
    Includes options to purchase 355,000 shares of common stock.2.
    
    Includes options to purchase 625,000 shares of common stock.3.
    
    Includes options to purchase 100,000 shares of common stock, 10,000 shares beneficially owned
by Wendy J. McKee and voting rights of 75,973 shares controlled by Dynamic Value Partners,
Ltd.4.
    
    Includes options to purchase 75,000 shares of common stock.5.
    
    Includes options to purchase 75,000 shares of common stock  
 Item 12.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
  26




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Item 13.
    
    EXHIBITS, LIST AND REPORTS ON FORM 8-K
  
 Item 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES.
   Audit Fees
  Tax Fees
  27




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Vyrex Corporation
Annual Report on Form 10-KSB
Year Ended December 31, 2005
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)16
    
    Change in Registrants
certifying Accountants: A letter from J.H. Cohn LLP (incorporated by reference
to the Form 8-K filed with the SEC on February 28, 2006)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
 28




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SIGNATURES
  VYREX CORPORATION
RegistrantBy:
    /s/ G. Dale GarlowG. Dale GarlowChief Executive Officer, signed
 Signature
    
    Title
    
    Date/S/Sheldon S. Hendler
    
    Director
    
    May 31, 2006/S/G. Dale Garlow
    
    Director
    
    May 31, 2006/S/Richard G. McKee, Jr.
    
    Director
    
    May 31, 2006/S/Tom K. Larson, Jr.
    
    Director
    
    May 31, 2006
 29




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Vyrex Corporation
Annual Report on Form 10-KSB
Year Ended December 31, 2005
 
 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)16
    
    Change in Registrants
certifying Accountants: A letter from J.H. Cohn LLP (incorporated by reference
to the Form 8-K filed with the SEC on February 28, 2006)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
 30




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Reports of Berenfeld, Spritzer, Shechter & Sheer,
CPAs, and J.H. Cohn LLP Independent Registered
Public Accounting Firms
    
    F-2-3Balance Sheets
    
    F-4Statements of Operations
    
    F-5Statements of Stockholders Equity (Deficiency)
    
    F-5-8Statements of Cash Flows
    
    F-9Notes to Financial Statements
    
    F-10-16




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
 F- 2




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
 F- 3




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December 312005
    
    
    2004AssetsCurrent assets:Cash and cash equivalents
    
    $
    2,250
    
    
    $
    3,174Accounts receivable
    
    
    22,500
    
    
    
    22,500Investment in available-for-sale securities
    
    
    20,179
    
    
    
    16,665Total assets
    
    $
    44,929
    
    
    $
    42,339Liabilities and stockholders deficiencyCurrent liabilities:Accounts payable
    
    $
    89,735
    
    
    $
    36,958Accrued liabilities and accrued vacation
    
    
    44,730
    
    
    
    23,812Accrued payroll
    
    
    20,637
    
    
    
    20,637Current portion of notes payable, net
    
    
    200,000
    
    
    
    7,500Total current liabilities
    
    
    355,102
    
    
    
    88,907Notes payable, net
    
    
    
    
    
    
    198,000Total liabilities
    
    
    355,102
    
    
    
    286,907Commitments and contingenciesStockholders deficiency:Preferred stock, $.0001 par value; 50,000,000
shares authorized; none issuedCommon 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
    
    
    15,746
    
    
    
    12,231Deficit accumulated during the development stage
    
    
    (13,440,508
    )
    
    
    (13,371,388
    )Total stockholders deficiency
    
    
    (310,173
    )
    
    
    (244,568
    )Total liabilities and stockholders deficiency
    
    $
    44,929
    
    
    $
    42,339
 The accompanying notes are an integral part of these financial statements.
 F- 4




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Years ended December 31,
    
    
    Cumulative from2005
    
    
    2004
    
    
    InceptionLicensing and royalty revenue
    
    $
    97,500
    
    
    $
    90,000
    
    
    $
    853,199Operating expenses:Research and development
    
    
    7,595
    
    
    
    14,699
    
    
    
    6,478,753Marketing and selling
    
    
    
    
    
    
    
    
    
    
    438,664General and administrative
    
    
    137,162
    
    
    
    95,439
    
    
    
    6,328,670Loss on disposal of fixed assets
    
    
    
    
    
    
    
    
    
    
    13,664Total operating expenses
    
    
    144,757
    
    
    
    110,138
    
    
    
    13,259,751Loss from operations
    
    
    (47,257
    )
    
    
    (20,138
    )
    
    
    (12,406,552
    )Other income (expense):Interest income
    
    
    318
    
    
    
    226
    
    
    
    476,044Other income
    
    
    
    
    
    
    4,434
    
    
    
    4,434Interest expense
    
    
    (22,181
    )
    
    
    (22,322
    )
    
    
    (164,534
    )Charge from issuance of stock options
for bridge financing
    
    
    
    
    
    
    
    
    
    
    (1,349,900
    )Total other expense
    
    
    (21,863
    )
    
    
    (17,662
    )
    
    
    (1,033,956
    )Net loss
    
    $
    (69,120
    )
    
    $
    (37,800
    )
    
    $
    (13,440,508
    )Net loss per share  basic and diluted
    
    $
    (0.07
    )
    
    $
    (0.04
    )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- 5




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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
    
    
    2,998
    
    
    
    
    
    
    
    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- 6




---



##### Table of Contents



Deficit accumulated
    
    
    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-7




---



##### Table of Contents



Deficit accumulated
    
    
    TotalAdditional
    
    
    Accumulated
    
    
    during the
    
    
    stockholdersCommon stock
    
    
    paid-in
    
    
    other 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
    )
 The accompanying notes are an integral part of these financial statements..
 F-8




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##### Table of Contents



CumulativeYears ended December 31,
    
    
    from2005
    
    
    2004
    
    
    InceptionOperating activitiesNet loss
    
    $
    (69,120
    )
    
    $
    (37,800
    )
    
    $
    (13,440,508
    )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
    
    
    
    2,000
    
    
    
    6,000Interest receivable
    
    
    
    
    
    
    
    
    
    
    3,506Loss on disposal of fixed assets
    
    
    
    
    
    
    
    
    
    
    13,664Issuance of compensatory notes, stock, stock options
and warrants
    
    
    
    
    
    
    
    
    
    
    2,302,512Other income
    
    
    
    
    
    
    (4,434
    )
    
    
    (4.434
    )Changes in operating assets and liabilities:Accounts receivable and other assets
    
    
    
    
    
    
    
    
    
    
    77,500Accounts payable and accrued liabilities
    
    
    73,696
    
    
    
    24,771
    
    
    
    653,756Net cash provided by (used in) operating activities
    
    
    6,576
    
    
    
    (15,463
    )
    
    
    (10,051,675
    )Investing activitiesPurchase 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 used in investing activities
    
    
    
    
    
    
    
    
    
    
    (309,827
    )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
    
    
    
    
    
    
    7,500
    
    
    
    875,230Proceeds from notes payable
    
    
    
    
    
    
    
    
    
    
    791,114Repayment 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
    
    
    (7,500
    )
    
    
    7,500
    
    
    
    10,363,752Net increase (decrease) in cash and cash equivalents
    
    
    (924
    )
    
    
    (7,963
    )
    
    
    2,250Cash and cash equivalents, beginning of period
    
    
    3,174
    
    
    
    11,137
    
    
    
    Cash and cash equivalents, end of period
    
    $
    2,250
    
    
    $
    3,174
    
    
    $Supplemental cash flow informationForgiveness of debt
    
    
    
    
    
    $
    26,071
    
    
    $
    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
 See accompanying notes.
 F-9




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##### Table of Contents



1. Basis of Presentation and the Company
 Basis of Presentation
    The Company
   F-10




---



##### Table of Contents



th
   F-11




---



##### Table of Contents



2. Summary of Significant Accounting Policies
 Cash and Cash Equivalents
  Stock Options and Warrants
 ,
   F-12




---



##### Table of Contents



2005
    
    
    2004Net loss  as reported
    
    $
    (69,120
    )
    
    $
    (37,800
    )Stock-based employee compensation expense
assuming a fair value based method had been
used for all awards
    
    
    
    
    
    
    (16,000
    )Net loss  pro forma
    
    $
    (69,120
    )
    
    $
    (53,800
    )Basic loss per share  as reported
    
    $
    (0.07
    )
    
    $
    (0.04
    )Basic loss per share  pro forma
    
    $
    (0.07
    )
    
    $
    (0.05
    )
 Revenue Recognition
  Income taxes
  Net Loss Per Share
  Use of Estimates
  Investments
  F-13




---



##### Table of Contents



Recent Accounting Developments
        F-14




---



##### Table of Contents



3. Warrants
  WeightedAverageWarrants
    
    
    
    
    
    
    ExerciseOutstanding
    
    
    Exercise Price
    
    
    PriceBalance at January 1, 2004
    
    
    39,000
    
    
    $
    0.92 - $3.08
    
    
    $
    2.03Expired
    
    
    (24,000
    )
    
    $
    2.50
    
    
    $
    2.50Balance at December 31, 2004
    
    
    15,000
    
    
    $
    0.92 - $3.08
    
    
    $
    1.28Expired
    
    
    (3,000
    )
    
    $
    1.25 - $3.08
    
    
    $
    2.72Balance at December 31, 2005
    
    
    12,000
    
    
    $
    0.92
    
    
    $
    0.92
  4. License and Collaboration Agreements
  F-15




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##### Table of Contents



5. Concentration of Credit Risk
   6. Income Taxes
   2005
    
    
    2004Net operating loss carryforwards
    
    $
    6,093,000
    
    
    $
    6,086,000Research and development credit carryforwards
    
    
    648,000
    
    
    
    648,000Other
    
    
    97,000
    
    
    
    120,0006,838,000
    
    
    
    6,854,000Valuation allowance
    
    
    (6,838,000
    )
    
    
    (6,854,000
    )$
    
    
    
    $
    
  7. Stock Option Plan
  F-16




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##### Table of Contents



Weighted-Stock
    
    
    Option
    
    
    AverageOptions
    
    
    Exercise
    
    
    ExerciseOutstanding
    
    
    Price
    
    
    PriceBalance at January 1, 2004
    
    
    356,311
    
    
    
    
    
    
    $
    11.86Expired
    
    
    (21,840
    )
    
    $
    4.67
    
    
    $
    4.67Balance at December 31, 2004
    
    
    334,471
    
    
    
    
    
    
    $
    12.04Expired
    
    
    (23,000
    )
    
    $
    25.00
    
    
    $
    25.00Balance at December 31, 2005
    
    
    311,471
    
    
    
    
    
    
    $
    11.04Shares available for grant
at December 31, 2005
    
    
    153,529
  Weighted-Average
    
    
    
    
    
    
    
    
    
    Weighted-AverageRange of Exercise
    
    
    
    
    
    Remaining Life in
    
    Weighted-Average
    
    
    
    
    
    Exercise Price ofPrices
    
    Outstanding Options
    
    Years
    
    Exercise Price
    
    Options Exercisable
    
    Options Exercisable$2.08  $4.67
    
    
    244,200
    
    
    
    4.41
    
    
    $
    2.93
    
    
    
    244,200
    
    
    $
    2.93$25.00
    
    
    24,840
    
    
    
    2.89
    
    
    
    25.00
    
    
    
    24,840
    
    
    
    25.00$47.92  $62.50
    
    
    42,431
    
    
    
    194
    
    
    
    49.49
    
    
    
    42431
    
    
    
    49.49311,471
    
    
    
    3.96
    
    
    
    11.04
    
    
    
    311,471
    
    
    
    11.04
 8. Notes Payable and Related Conversion and Stock Options
  F-17




---



##### Table of Contents



9. Contingencies
  10. Available-for-sale securities
   F-18