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United States

Securities and Exchange Commission

Washington D.C. 20549



Form 10-K SB



|x | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------



For the Fiscal Year ended December 31, 2004



| ̈ | 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

(Name of small business issuer as specified in its charter)



|                                                            |  |                                 
|----------------------------------------------------------- |  | --------------------------------
|Nevada                                                      |  | 88-0271109                      
|(State or other jurisdiction ofcorporation or organization) |  | (IRS EmployerIdentification No.)



2159 Avenida de la
Playa, La Jolla, California 92037

(Address of principal executive offices)



(858) 454-4446

(Issuers telephone number including area code)



|                                                            |  |                              
|----------------------------------------------------------- |  | -----------------------------
|Securities registered pursuant to Section 12(b) of the Act: |  | None                         
|                                                            | 
|Securities registered pursuant to Section 12(g) of the Act: |  | Common Stock, Par Value $.001
|                                                            |  | Warrants
(Title of Class)    



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 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 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 registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K SB
or any amendment to this Form 10-K SB.  x



State issuers revenues for its most recent year: $90,000



State the aggregate market value of the voting and non-voting common equity held by non affiliates of the registrant computed by reference to the price at which the stock was sold, or the average bid and ask prices of
such stock equity, as of a date within the past 60 days: $1,019,000 as of March 15, 2005.



State the number of shares outstanding of each of the issuers classes of common equity, as of latest practicable date:



|                                            |  |                                                                
|------------------------------------------- |  | ---------------------------------------------------------------
|Common Stock8,492,867 as of March 15, 2005 |  | Warrants to purchase common stock125,000 as of March 15, 2005.



DOCUMENTS
INCORPORATED BY REFERENCE



The issuers definitive
Proxy Statement for its Annual Meeting of Shareholders to be submitted to the commission on or before April 30, 2005 is incorporated by reference into Part III hereof.



Transitional Small Business Disclosure Format    Yes ̈No  x



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PART I



|Item 1. | BUSINESS
|------- | --------



General



Certain
statements in this Form 10-K SB regarding future expectations and financial performance may be regarded as forward-looking statements within the meaning of the U.S. Securities Litigation Reform Act. They are subject to various risks and
uncertainties, such as those described in the Risk Factors section, and elsewhere, in this Form 10-K SB, and in the Companys Securities and Exchange Commission filings. Actual results may vary materially.



The Company



Vyrex Corporation (the Company) is a Nevada Corporation formed in
1991. The Company is a research and development stage company seeking to discover and develop pharmaceuticals, nutraceuticals and cosmeceuticals for the treatment and prevention of respiratory, cardiovascular and neurodegenerative diseases and
conditions associated with aging. The Companys research has been focused on targeted antioxidant therapeutics for respiratory, neurological and cardiovascular diseases and the development of nutraceuticals and cosmeceuticals to aid in the
support of certain age-related conditions.



Pharmaceutical Drug Program.The Companys pharmaceutical technology is currently focused on three proprietary formulations, Propofol Phosphate, Vantox® and Panavir®.



Propofol Phosphate is a water soluble pro-drug of propofol, the most widely used general anesthetic agent in the world. The compound is covered by U.S.
Patent No. 6,254,853 B1 issued on July 3, 2001. The patent contains several claims covering pharmaceutically acceptable formulations, methods of delivery and a variety of clinical applications. These applications encompass treatments for disease
states and conditions associated with the central or peripheral nervous system, including induction and maintenance of anesthesia and sedation, migraine headaches, inflammation, arthritis, neurodegenerative diseases, CNS trauma, pathologic
respiratory conditions, nausea, convulsive disorders and cancer. Propofol Phosphate eliminates many of the disadvantages associated with propofol itself. Propofol Phosphate is formulated in a clear aqueous solution that does not contain a lipid
emulsion nor does it contain any preservative. Propofol Phosphate can be synthesized easily from inexpensive starting materials in high yield and on a large scale. Propofol Phosphate is stable in solution and has demonstrated anesthetic and sedative
activity in animal models following administration by intravenous, intra-muscular, intra-peritoneal, subcutaneous, intra-dermal and oral routes. Propofol Phosphate is ready for clinical development and could be tested in any of the indications
listed above. The Company is currently seeking partners to aid in further development and commercialization of this unique propriety compound. Because this compound is the pro-drug of a proven product, the risk to reward ratio is substantially
reduced. Additionally, U.S. Patent No. 6,362,234 was awarded to the Company on March 26, 2002 for all claims of its U.S. Patent application for Water Soluble Pro-Drugs of Propofol for the specific Treatment of Migraine, adding to the estate of
patents that Vyrex holds on water soluble derivatives of propofol as well as propofol itself. To date, the Company has not received a commitment from any potential partners. There can be no assurance the Company will be successful in funding the
further development of Propofol Phosphate, or that pre-clinical trials will be completed, or that clinical trials will be initiated, or if they are initiated that the trials will be completed and the Companys claims confirmed. Even if
confirmed there is no assurance that it will result in the production or marketing of an FDA approved drug. The Company holds two patents in connection with Propofol Phosphate.



Vantox® studies indicate it may have usefulness in the treatment of asthma, ARDS, cystic fibrosis, oxygen toxicity, smoke inhalation and other respiratory
diseases and conditions. Vantox® is an inhaled
antioxidant intended to be used in vapor form. The Company believes certain mechanisms in the inflammatory cascade which lead to tissue damage may be mediated by free radicals. Free radicals are a by-product of oxidation, which can be damaging at
high levels. Vantox® has been shown in laboratory
tests to be a free radical scavenger, or antioxidant. The Company has demonstrated Vantox®s effects in preventing and treating oxidative lung



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damage in three different animal models. The models evaluated protection from lung damage induced by oxygen, paraquat and ozone. Vantox® showed protective effects in all three models. Based on
this data and growing evidence that oxidative stress and inflammation may be central to the pathogenesis of asthma and other respiratory conditions, the Company believes Vantox® is an appropriate drug candidate to take forward into clinical trials. Before initiating Phase I clinical trials, the
Company must complete toxicology and pharmacokinetic studies and submit an Investigational New Drug (IND) application with the U.S. Food and Drug Administration. Due to the expense of completing pre-clinical trials and conducting clinical trials,
the Company is unable to fund any additional development and is seeking a joint venture with a pharmaceutical company to provide the necessary funding for further clinical development. Preliminary pre-clinical data was provided to several
pharmaceutical companies to review, pursuant to confidentiality and nondisclosure agreements. To date, the Company has not received a commitment from any potential partners. There can be no assurance the Company will be successful in funding
the further development of Vantox®, or that
pre-clinical trials will be completed, or that clinical trials will be initiated, or if they are initiated that the trials will be completed and the Companys claims confirmed. Even if confirmed there is no assurance that it will result in the
production or marketing of an FDA approved drug. The Company holds two patents in connection with Vantox®.



Panavir® is an antioxidant drug candidate
the Company believes may inhibit HIV proliferation and may target the events leading to the slow progressive deterioration of the immune system. The Company believes Panavir® directly inhibits HIV-1 in part by interfering with the attachment of the virus to cells and also by inhibiting the syncytia-inducing strains of HIV-1. Many scientists today believe the most pathogenic strains
of HIV-1 are those that lead to the formation of multinucleated giant cells called syncytia. Panavir® may also prevent activation of HIV-1 in latently and
chronically infected cells, which is an activity not shown by the approved reverse transcriptase inhibitors or protease inhibitors. The Company believes the inhibition of viral activation in latently infected cells may be one of the most desirable
attributes of an anti-HIV/AIDS drug.



The Company believes the
activation of HIV infection from the latent state is associated with increased intracellular levels of oxygen free radicals. In laboratory tests the antioxidant and free radical scavenging activity of Panavir® inhibited activation of HIV-1 in latently infected cells. Chronic and inappropriate activation of immune cells in HIV infection has been linked to abnormal secretion of certain
immunological hormone-like substances called cytokines. Certain cytokines appear to be associated with increased production of oxygen free radicals. Based on the results of preliminary tests completed to date, Panavir® appears to inhibit the activity of certain of these cytokines, including interleukin-1 and tumor necrosis factor alpha. The Company hopes
Panavir® may allow HIV positive individuals to remain healthy by preventing latently infected cells from reactivating, as well as interfering with viral
replication and transmission to other cells when infected cells are activated by certain processes.



In May of 1992, the Company received an Investigational New Drug allowance from the FDA for a Phase I/II human clinical trial using Panavir® to treat patients infected with the HIV virus. This
phase of the Panavir® study began in July of 1992 and was completed in October of 1995. This trial examined safety, bioavailability and pharmacokinetics in a small
group of patients. Results indicated that Panavir®
was well tolerated and achieved targeted serum levels. CD4 counts, which normally decline in untreated AIDS patients, were stabilized, but did not show a significant increase. During 1996 and 1997, the Company synthesized new Panavir® analogs and pro-drugs in an effort to improve
bioavailability and the Companys proprietary position. These compounds have undergone initial pharmacologic testing and have exhibited antioxidant activity, but will require additional testing. The Company has, to date, been unable to obtain a
collaborative partner or partners to continue the development and clinical program involving Panavir®.



Ultimately, further trials will be required involving the treatment of at least several hundred patients with Panavir® alone, or in combination with approved drugs. There can be no assurance that funding will be secured or such tests will be undertaken or completed, or
that any form of Panavir® will be developed as a
marketable product.



Nutraceuticals.    The Company was awarded U.S. Patent No. 6,071,545 on June 6, 2000 for novel metallic oligopeptide complexes. This patent covers a wide array of novel mineral complexes, including
complexes of



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magnesium, calcium, chromium, zinc, copper and vanadium. The metallic oligopeptide complexes were designed specifically to increase mineral availability and
effectiveness, as well as to be non-toxic. The public is becoming ever more aware of the importance of minerals for the maintenance of good health and this is reflected in the increasing sales of minerals in the form of dietary supplements, as well
as in functional foods and functional drinks. This trend is expected to continue for a long time and therefore, the Company is poised to be a leader in this ever important market. The Companys novel metallic oligopeptide complexes address
health issues affecting all of the systems of the body, including the cardiovascular system, the nervous system, the musculoskeletal system and the gastrointestinal system. A specific complex covered by the patent is chromium carnosinate. Chromium
appears to play an important role in sugar and lipid metabolism. Carnosine is a dipeptide that occurs naturally in muscle and nervous tissue, including the brain. Carnosine has antioxidant, anti-inflammatory and anti-glycation activity. Carnosine is
also thought to have anti-aging activity. The Company believes that carnosine is a superior form for chromium delivery and if positioned correctly, can become a major, if not the major form of chromium supplementation.



Based on an Agreement between the Company and Dusan Miljkovic, Ph.D., Dr.
Miljkovic granted the Company an exclusive license to develop, manufacture and sell certain carbohydrate complexes of boron nutraceutical compounds covered by US Patent No. 5,962,049. In August 2000 the Company entered into an agreement sublicensing
the boron complex patent to FutureCeuticals, a division of Van Drunen Farms. FutureCeuticals formulated, tested, manufactured and is currently selling boron complexes, under the trade name FruiteX-B to manufactures and distributors of nutritional supplements. The agreement for the
boron complex technology remains in effect. Although the Company continues to seek partners to aid in the development of nutritional mineral products covered by its patent for novel metallic oligopeptide complexes there can be no assurance that the
Company will be successful in funding further development and commercialization of these compounds.



Cosmeceuticals.On April 1, 2003 Vyrex Corporation was awarded U.S. Patent Number 6,541,613 entitled Isoflavone
Derivatives. This is a significant patent that covers a number of isoflavone derivatives with potential pharmaceutical, nutraceutical and cosmeceutical applications. Additional proprietary protection is provided by U.S. Patent Application Number
20030212009 and WO 99/63995. Isoflavones are a group of naturally occurring plant compounds (phytochemicals) found in various edible beans, particularly in soy. Isoflavones possess a number of important biological activities, including antioxidant,
anti-inflammatory, estrogenic (phytoestrogens), antiatherogenic, anticarcinogenic and antiosteoporotic activities. Recently, some isoflavones have been shown to be protective against ionizing radiation (radioprotectants). Radioprotectants have
applications in oncology, space travel and in radiological terrorism. Clinical studies on plant-derived isoflavones have produced variable results. This variability is attributed to their erratic absorption and bioavailability. Vyrex, using its
expertise in the development of novel antioxidant/anti-inflammatory molecules and prodrugs has synthesized isoflavone derivatives that are stable and provide consistent bioavailability.



CosmoFlavone is a proprietary cosmeceutical agent that Vyrex is developing out of its isoflavone derivative
technology as a protector of the skin against aging. Isoflavones particularly have demonstrated biochemical and physiological activities indicating that these substances would make important skin care products. These activities include
phytoestrogenic, antioxidant, anti-inflammatory, antiangiogenic, radioprotective and ultraviolet protective actions. Such activities would be protective against common skin cancers and aging of the skin in general. Recently, negative results have
been published regarding hormone replacement (estrogen and progesterone) use in postmenopausal women. As a result, many postmenopausal women have stopped the use of estrogens and those who are entering menopause have decided not to start its use.
Estrogen counteracts many of the aging changes that skin undergoes. CosmoFlavone, which possesses phytoestrogenic activity, is expected to, as well. Vyrex has synthesized and is studying a number of compounds designed to take advantage of the many
activities of isoflavones that would aid in protecting the skin against aging. According to the Freedonia Group an industry market research group, the cosmeceutical industry grossed $3.4 billion in 2002 and is expected to hit $5.1 billion in 2007.
There can be no assurance that the Company will be successful in funding further development and commercialization of these compounds.



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Radioprotgective Agents.    Certain isoflavones have been shown to be
protective against ionizing radiation (radioprotectants). Radioprotectants have applications in oncology, space travel and of major importance, as an agent against nuclear/radiologic terrorism. Vyrex initiated research to develop radioprotective
agents against nuclear/radiologic terrorism after being contacted by a division of the Department of Defense expressing an interest in Vyrexs technologies as potential radioprotectants. Vyrex used its antioxidant and prodrug technologies to
develop its first radioprotective agent, GEN-VYX1-2004. GYN-VYX1-2004 has been synthesized, has undergone initial animal toxicity studies and has been found to be non-toxic. This represents a significant first step. The timing of the development of
this project is important based on the recent passage of the Governments Project BioShield. This bill allocates six billion dollars over the next ten years for development of effective drugs and vaccines to protect against the attack by
biological, chemical, nuclear and radiological agents. There can be no assurance that the Company will be successful in funding further development and commercialization of these compounds.



Research Collaborations and Licensing Agreements



As part of its strategy for developing and commercializing certain potential
products the Company has entered into research collaborations and licensing agreements. There can be no assurance the Company will enter into additional collaborative, license or similar agreements, or that its existing agreements will result in
development or successful commercialization of any potential product. Some of the agreements that the Company has entered into are summarized below:



Dusan Miljkovic, Ph.D. In October 1997, the Company entered into a License Agreement with Dusan Miljkovic, Ph.D. (Miljkovic Agreement)
pursuant to which Dr. Miljkovic granted the Company an exclusive worldwide license to develop, manufacture and sell certain carbohydrate complexes of boron nutraceutical compounds. Dr. Miljkovic originally filed a provisional patent application
covering the compounds, and subsequently filed a further United States patent application. Pursuant to the agreement, the Company is responsible for all costs and expenses in connection with obtaining patent protection. US Patent Number 5,962,049
Boron Carbohydrate Complexes and Uses Thereof was issued October 5, 1999. In the case of licensed products sold as bulk compounds or stand-alone supplements, Dr. Miljkovic will receive royalties in the amount of 2.5% of gross proceeds up to $1
million; 1.75% of gross proceeds of between $1.0 million and $5.0 million and 1% of gross proceeds in excess of $5 million. In the case of licensed products sold as a component of a supplement formulation, Dr. Miljkovic will receive royalties
according to the preceding schedule based on a factor of 34% of gross revenues. The License Agreement may be terminated by Dr. Miljkovic or the Company under certain circumstances. In addition, there can be no assurance that the Company will be in a
position to meet its annual minimum license fee of $7,500 and thereby maintain any rights to the covered compound. In August 2000 the Company entered into a license agreement with FutureCeuticals, a division of Van Drunen Farms, to further develop
and market compounds covered by the boron patent.



FutureCeuticals.The Company licensed a natural form of boron covered by US Patent No.: 5,962,049 and was issued US Patent No.: 6,071,545 for novel Metallic Oligopeptide Complexes June 6, 2000 covering several mineral complexes for
both nutritional and pharmaceutical applications. The patent covers a novel chromium complex, chromium carnosinate, which the Company feels is superior to the other forms of chromium supplements currently on the market. In August 2000 the Company
entered into an agreement sublicensing the boron complex patent and licensing the chromium mineral complex covered by the Metallic Oligopeptide Complexes Patent with FutureCeuticals, a division of Van Drunen Farms, to develop and market these
proprietary nutraceutical compounds. The agreement included an up front license fee of $25,000 and an additional license fee of $75,000 upon attaining $75,000 in initial sales of products developed and commercialized that are covered by the licensed
technology. After meeting certain development, approval and commercialization criteria the licensee shall pay the Company the greater of an escalating minimum monthly royalty payment or a total gross royalty of 30% of gross revenue from the sale of
licensed products. Of the 30% gross royalty, licensee shall credit and allocate 5% to further research and development of the products and pay the remaining 25% to the Company. FutureCeuticals reached $75,000 in sales in December 2002 allowing the
remaining license fee balance of $75,000 to be posted to accounts receivable in 2002. The cash payment was



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received and deposited in January 2003. FutureCeuticals formulated, tested, manufactured and is currently selling boron and chromium complexes as raw
materials to manufactures and distributors of nutritional supplements. Boron is marketed under the trade name FruiteX-B and Chromium under the trade name CarnoChrome. FutureCeuticals has conducted a number of studies reflecting the primary activities and benefits of both products. In order to allocate additional
funds to conduct new scientific studies designed to prove the superiority of CarnoChrome and FruiteX-B over competitive products, hire a proven product manager to specifically oversee the marketing and sales of CarnoChrome and FruiteX-B and fund the development of new products based on technology licensed from the Company the agreement between FutureCeuticals and the Company was
amended on February 17, 2003. Under the terms of the amended agreement the Company will receive a 15% royalty on gross sales of licensed product in a calendar year less than $3,000,000 three million dollars and 20% of gross sales equal to or in
excess of $3,000,000 three million dollars. There is a minimum guaranteed royalty payment of $90,000 in 2003, $150,000 in 2004 and $180,000 in 2005. Based on the terms of the agreement FuutureCeuticals has elected to cancel the license for the
chromium carnosinate technology effective March 24, 2004. The agreement for the boron complex technology remains in effect. The cancellation of the chromium portion of the license agreement effects the minimum royalty payment. Based on the agreement
the minimum payment for 2004 is $90,000 and 2005 is $112,500. In December of 2004 the agreement was amended to change the minimum payment for 2005 from $112.500 to $97,500. There can be no assurance that a significant market will develop for the
boron product or that any products will continue to produce revenue for the Company.



Patents and Proprietary Technology



A United
States Patent was issued in 1991 for methods of inhibiting viral and retroviral infections via the use of various antioxidants corresponding to the formulae set forth in the subject patent. The patent has been assigned to the Company and describes
the primary proprietary technology underlying the Companys proposed Panavir® products.



A United States
Patent was issued in 1992 for methods of inhibiting viral and retroviral replication and for treating viral and retroviral infections via the administration of compositions containing tocopherol, or a tocopherol derivative, or a pharmaceutically
effective product thereof.



A United States Patent was issued
in 1994 directed to certain preparations and methods for dilipidation of skin or hair through the use of cyclodextrin and cyclodextrin derivative preparations such as hydroxypropyl cyclodextrin. This patent also is directed to cerumen removal
methods involving introduction of cyclodextrin preparations to the ear canal, resulting in the removal of ear wax and related substances. This patent has been assigned to the Company. This patent describes the proprietary technology of the Company
underlying its proposed Cerex® products.



A United States Patent was issued in 1995 directed to certain
methods for delipidation of skin or hair through the use of cyclodextrin and cyclodextrin derivative preparations such as hydroxypropyl cyclodextrin. This patent is also directed to cerumen removal methods involving introduction of cyclodextrins to
the ear canal resulting in the removal of ear wax and related substances. This patent has been assigned to the Company. This patent describes the proprietary technology of the Company underlying its proposed Cerex® products.



A United States Patent was issued in 1995 directed to certain methods for the prevention and treatment of poison ivy and
poison oak dermatitis through the use of cyclodextrins in applications to complex urushiols. This patent is also directed to methods of desensitizing against urushiolinduced dermatitis through cyclodextrinurushiol complexes. This patent
has been assigned to the Company and describes the technology underlying the Companys proposed Vyderm products.



A United States Patent was issued in 1995 involving airborne protectants against oxidative tissue damage. This patent is also directed to methods for preventing free radical-induced oxidative damage and inflammatory
response in biological tissue through vapor-phase, phenolic antioxidants, such as vaporized 2,6-diisopropylpheno.



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A United States Patent was issued in 1996 directed to a certain delivery formulation for Probucol,
related to the Companys Panavir® product.



A United States Patent was issued in 1998 directed to the use
of cyclodextrins to complex urushiols to protect against and to treat irritation arising from exposure to urushiols. This patent has been assigned to the Company and relates to the proposed Vyderm products.



A United States Patent was issued in 1999 relating to compounds, compositions, uses and methods for inhibiting viral and
retroviral replication and for treating viral and retroviral infections via the administration of various compounds, including antioxidants. This patent has been assigned to the Company and relates to the proposed Panavir® products.



A United States Patent was issued in 1999 and covers compounds and compositions for use as microbicides, specifically
against viruses and retroviruses.



A United States Patent was
issued in 2000 relating to Metallic Oligopeptide Complexes as nutritional supplements, in particular metals of nutritional or therapeutic value in mixed complexes of oligopeptides.



A United States Patent was issued in 2001 for claims covering Water Soluble Pro-Drugs of Propofol. These claims cover
treatment of diseases, states or conditions associated with the nervous system, cardiovascular system and respiratory system, including but not limited to anesthesia, trauma of the nervous system, Alzheimers disease, Parkinsons disease
and migraine headache.



A United States Patent was issued in
2002 for claims covering water soluble Pro-drugs of Propofol for the Treatment of Migraine.



A United States Patent was issued in 2003 covering novel isoflavone derivatives, their uses and their enhanced bioavailability. Isoflavones possess a number of important biological activities, including antioxidant,
anti-inflammatory, estrogenic and antiangiogenic activities and have nutraceutical, cosmeceutical and pharmaceutical potential.



The Company has patent applications pending in the United States and Internationally.



The protection of proprietary rights relating to the Companys proposed products, processes and know-how is critical
for the Companys business. The Company intends to file patent applications to protect technology, inventions and improvements that are considered important to the development of its business. The Company also intends to rely on unpatented
trade secrets for a part of its intellectual property and property rights, and there can be no assurance others will not independently develop substantially equivalent proprietary information and techniques, or otherwise gain access to the
Companys trade secrets or disclose such technology, or that the Company can meaningfully protect its rights to any patented or unpatented technology.



Although the Company seeks patent protection for its proprietary technology and potential products in the United States and in foreign countries, the
patent positions of biotechnology and pharmaceutical firms, including the Company, are generally uncertain and involve complex legal and factual questions. Consequently, the Company does not know whether any of the patent applications pending, or
the unfiled patent applications which it is considering will result in the issuance of any patents, whether the patents which it owns will provide significant proprietary protection, or whether they will be circumvented or invalidated. Since patent
applications in the United States are maintained in secrecy until patents issue, and publication of discoveries in the scientific or patent literature tend to lag behind actual discoveries by several months, at the time of filing a patent
application or during the research phase prior to application the Company can not be certain it will be deemed the first creator of inventions covered by any future patent applications or that it will be deemed the first to file patent applications
for such inventions. There can be no assurance all United States or foreign patents that may pose a risk of infringement can or will be identified. If the Company is unable to obtain a license(s) where it may have infringed on other patents, it
could encounter delays in product market introductions while it attempts to



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design around such intellectual property rights, or could find that the development, manufacture or sale of potential products requiring such licenses could
be prevented. In addition, the Company could incur substantial costs in defending against suits brought against it in connection with such intellectual property rights or prosecuting suits which the Company may bring against other parties to protect
its intellectual property rights. Competitors or potential competitors may have filed applications for, or have received patents and may obtain additional patents and proprietary rights relating to, compounds or processes competitive with those of
the Company. See Business Competition.



The
prosecution and maintenance of U.S. and foreign patent matters is expensive and may require the commitment of significant funds to maintain its existing patents and patent applications or prosecute, or file, new patent applications. The Company can
make no assurance that it will be able to maintain existing patents and patent applications or prosecute new patent applications unless it is able to obtain significant funding in the future.



The Company will generally require all or certain of its employees,
consultants and advisors to execute a confidentiality agreement either upon the commencement of an employment or consulting relationship with the Company or at a later time. There can be no assurance these agreements will provide meaningful
protection for the Companys trade secrets in the event of unauthorized use or disclosure of such information.



The protection of intellectual properties owned by technology firms, including the Company is subject to uncertainty and involves complex legal and
factual questions. The degree of future protection for the Companys proprietary technology rights is therefore uncertain. There can be no assurance the Companys efforts to protect its intellectual property will prove to be adequate. See
Risk Factors Patents and Proprietary Rights.



Trademarks



The Company owns trademarks registered with the United
States Patent and Trademark Office (USPTO) for the names Panavir®, Vantox®, and its
logo in connection with the name Vyrex. Federally registered trademarks have a perpetual life, as long as they are renewed on a timely basis, subject to the rights of third parties to seek cancellation of the marks. The Company may claim common law
trade name rights as to other potential products, and anticipates filing additional trademark applications in the future.



The prosecution and maintenance of trademark matters is expensive and may require the commitment of significant funds to maintain its existing trademarks,
or prosecute, or file, new trademark applications. The Company can make no assurance that it will be able to maintain existing trademarks or prosecute new trademark applications unless it is able to obtain significant funding in the future.



Employees



On December 31, 2000, the Company employed three individuals, two in
executive positions and one in administration. In an effort to reduce operating expenses as well as terminating its clinical and gene discovery programs the Company either eliminated or did not replace certain positions in the Company. None of its
employees are currently represented by a union or any other form of collective bargaining unit. The Company is not contemplating, but may hire an undetermined number of new employees over the next 12 to 24 months, should the Company obtain
additional funding and expand its activities.



Government Regulation



The research and development, manufacture and marketing
of the Companys potential products may be subject to extensive regulation by the FDA and by other federal, state, local and foreign entities, which regulate, among other things, research and development activities and the testing, manufacture,
labeling, storage, record keeping, safety, advertising and promotion of pharmaceutical products. Governmental review of new drugs, devices or biologicals is an uncertain, costly and lengthy process.



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The Federal Food, Drug and Cosmetic Act, the Public Health Services Act, the Controlled Substances Act
and other federal statutes and regulations govern or influence all aspects of the Companys business. Noncompliance with applicable requirements can result in fines and other judicially imposed sanctions, including product seizures, injunction
actions and criminal prosecutions. In addition, administrative remedies can involve voluntary recall of products, and the total or partial suspension of products as well as the refusal of the government to approve pending applications or supplements
to approved applications. The FDA also has the authority to withdraw approval of drugs in accordance with statutory due process procedures.



Ongoing compliance with these requirements can require the expenditure of substantial resources. Any failure by the Company, or possible licensees to
obtain, or any delay in obtaining required regulatory approvals would adversely affect the planned marketing of the Companys proposed products and the Companys ability to derive product or royalty revenue.



The FDAs regulatory system requires an initial determination of whether
a subsequent filing by the Company for that product will be classified by the FDA as a drug, device or biological. The FDA has different approval procedures for drugs, devices and biologicals. The Company believes most, if not all, of its currently
proposed products will be classified as drugs, although the Company may develop proposed new potential products or potential therapeutic agents in the future which are considered devices or biologicals. If the Company is required to submit any
application to the FDA as a biological, or device, the application process may be significantly longer, more expensive and certain different compliance procedures would apply than those for a drug as described below.



The steps required by the FDA before a new drug may be marketed in the United
States include: (a) preclinical studies; (b) submission to the FDA of a request for authorization to conduct human clinical trials in an Investigational New Drug IND application, which includes the test data of the preclinical studies
and the proposed protocols (study designs) for clinical trials (an IND allows evaluation of the new drug in controlled clinical studies); (c) adequate and well controlled human clinical trials to establish the safety and effectiveness of the drug
for its intended use; (d) submission to the FDA of a New Drug Application (NDA); and (e) review and approval of the NDA by the FDA before the drug may be shipped or sold commercially.



In addition to obtaining the FDAs approval of an NDA for each of a
Companys proposed products, each manufacturing establishment for new drugs must receive some form of approval by the FDA. Among the conditions for such approval is the requirement that the prospective manufacturers quality control and
manufacturing procedures conform to the FDAs Good Manufacturing Practices regulations, which must be followed at all times. In complying with standards set forth in these regulations, manufacturers must continue to expend time, monies and
effort in the area of production and quality control to ensure full technical compliance. Manufacturing establishments, both foreign and domestic, also are subject to inspections by or under the authority of the FDA and by other federal, state or
local agencies.



In general, the clinical testing for new
compounds required by the FDA is an extremely costly, ongoing, multi-year project. The FDA itself estimates clinical drug development time requirements average five years, but range from two to ten years. Finally, the Company or the FDA may suspend
clinical trials at any time if it is felt that the subjects or patients are being exposed to an unacceptable health risk. Other competitors of the Company have had their proposed pharmaceutical clinical trials halted due to safety concerns.



The process of completing clinical testing and obtaining FDA
approval of a NDA is likely to take a number of years and require the expenditure of substantial resources. If an application is submitted, there can be no assurance the FDA will review and approve the NDA in a timely manner if at all. Even after
initial FDA approval of the NDA has been obtained, further studies, including post-market studies, may be required to provide additional data on safety or effectiveness and will be required to gain approval for the use of a potential product as a
treatment for clinical indications other than those for which the potential product was initially tested. Also, the FDA will require post-market reporting and may require surveillance programs to monitor the side effects of



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the drug. Results of post-marketing programs may limit or expand the further marketing of the potential products. Further, if there are any modifications to
the drug, including changes in indication, manufacturing process, labeling, or a change in manufacturing facility, an NDA supplement may be required to be submitted to the FDA.



Whether or not FDA approval has been obtained, approval of a potential product by regulatory authorities in foreign
countries must be obtained prior to the commencement of marketing of the product in such countries. The requirements governing the conduct of clinical trials and product approvals vary widely from country to country, and the time required for
approval may be longer or shorter than that required for FDA approval. Although there are some procedures for unified filings for certain European countries, in general, each country at this time has its own procedures and requirements.



Establishments handling controlled substances must be licensed by the
United States Drug Enforcement Administration. In addition to the regulatory framework for potential product approvals, the Company is and may be subject to regulation under state and federal law, including requirements regarding occupational
safety, laboratory practices, environmental protection and hazardous substance control, and may be subject to other present and possible future local, state, federal and foreign regulation.



Sources of Supply



The principal raw materials used in the Companys proposed products, have been obtained from several large chemical
suppliers. If and when the Company begins production on a commercial scale, its use of raw materials will significantly increase. The Company could experience raw material shortages which, in turn, could affect its ability to produce products. The
Company may, from time to time, rely on a single supplier for one or more of the raw materials and may represent a significant portion of any such suppliers total output. Although the Company believes there are and will continue to be
alternative sources for each of its anticipated raw materials, there can be no assurance this will be the case or that the qualification of additional vendors will not delay the Companys ability to manufacture products. The Company does not
have any contracts with any suppliers of the raw materials used in the development of its proposed products.



Competition



The
biotechnology and pharmaceutical industries are intensely competitive. There are many pharmaceutical companies, biotechnology companies, public and private universities and research organizations actively engaged in research and development of
pharmaceutical products. Most of the Companys existing or potential competitors have substantially greater financial, human and other resources than the Company and may be better equipped to develop, manufacture and market products. In
addition, many of these companies have extensive experience in preclinical testing and human clinical trials. These companies may develop and introduce products and processes competitive with or superior to those of the Company, and many of these
companies may be further along in the product development and approval process for their potential products.



The Companys competition will be determined in part by the potential indications for which the Companys proposed products are developed and
ultimately approved, if at all, by regulatory authorities. For most, if not all, of the Companys potential products, an important factor in competition will be the timing of market introduction of competitive products. Accordingly, the
relative speed with which the Company can develop potential products, complete the clinical trials and approval processes and supply commercial quantities of the products to the market are expected to be important competitive factors. The Company
expects competition among products approved for sale will be based, among other things, on product effectiveness, safety, reliability, availability, price and the strength of the patents on which such products are based. The Companys
competitive position also depends upon its ability to attract and retain qualified personnel, obtain patent protection or otherwise develop proprietary products or processes and secure sufficient capital resources for the very substantial period
between technological conception and any commercial sales, which may develop. There can be no assurance the Company will be able to compete successfully.



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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



The Company is in the development stage. Most
of the Companys proposed pharmaceutical products will require significant additional research and development, including extensive preclinical and clinical testing, before the Company will be able to apply for FDA approval. There can be no
assurance the Company can initiate or sustain any significant research and development efforts, and that such efforts, if undertaken, will be successful, that any of the Companys potential pharmaceutical products under development will prove
to be safe and effective in clinical trials, that the Company will be able to obtain FDA approval for any of its proposed pharmaceutical products, that any such proposed pharmaceutical products can be manufactured at acceptable cost and with
appropriate quality, or that any such proposed products, if they do receive regulatory approval, can be successfully marketed. The Company cannot predict when, if ever, it will begin to market any proposed pharmaceutical products.



No Significant Operating Revenues; Accumulated Deficit; Expectation of Future Losses



The Company has experienced significant operating losses
since its inception in 1991. As of December 31, 2004, the Company had a deficit accumulated in the development stage of $13,371,388. The Company expects operating losses to increase substantially in the future only if the Company decides to restart
its research and development and clinical trials internally. The Company has generated no significant revenues from operations. The development of the Companys proposed pharmaceutical products will require the commitment of substantial
resources to prepare and submit applications to the FDA, and to conduct research, preclinical and clinical trials, and for both its proposed pharmaceutical and nutraceutical products the Company must either establish commercial scale manufacturing
processes and facilities or contract for such manufacturing facilities, and to establish additional quality control, regulatory, marketing, sales and administrative capabilities. There can be no assurance the Company will be successful in these
endeavors or will continue as a going concern, especially in light of the high failure rate of development stage pharmaceutical and nutrition companies with limited resources. There can be no assurance the Company will not incur substantial and
continuing net losses beyond the next several years or that the Company will ever reach profitability. Furthermore, there can be no assurance the Company will apply for or obtain regulatory approvals, enter into arrangements with third parties for
product development and commercialization, or successfully market or license any additional products. To achieve profitable operations, the Company, alone or with others, must successfully identify, develop, manufacture and market its proprietary
products or technologies. There can be no assurance the Company will be able to accomplish these tasks. Significant delays in any of these matters could materially adversely impact the Company.



Future Capital Requirements; Uncertainty of Additional Funding



Substantial expenditures will be required to enable the Company to conduct
planned product research and development, resume the FDA application process, including conducting preclinical studies and clinical trials, and to manufacture and market its proposed products including its proposed nutraceutical products. The
Company will need to raise substantial additional funds to support its long-term proposed product development and commercialization programs including its nutraceutical product development programs. The Company has no established bank financing
arrangements and it is not anticipated the Company will secure any bank financing in the foreseeable future. Therefore, the Company will need to seek additional financing through subsequent future public or private sales of its securities, including
equity and debt securities. The Company may also seek



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funding for the development and marketing of its proposed products through strategic alliances and other arrangements with corporate partners. There can be
no assurance such collaborative arrangements or additional funds will be available when needed, or on terms acceptable to the Company, if at all. Any such additional financing may result in significant dilution to existing stockholders. If adequate
funds are not available, the Company may be required to halt operations, or obtain funds through arrangements with collaborative partners or others that may require the Company to relinquish rights to certain of its technologies, potential product
candidates or potential products the Company would not otherwise relinquish. In an effort to conserve funds, the Company has curtailed its internal research efforts and is dependent on its licensees and collaborations for continued studies and
clinical trials. The Companys future cash requirements will be affected by the degree to which the Company is able to resume operations in the future, as well as future results of research and development, preclinical studies and clinical
trials, nutraceuticals product development and marketing costs, relationships with corporate partners, changes in the focus and direction of the Companys research and development programs, competitive and technological advances, the regulatory
approval process and other factors.



Intense Competition and Rapid
Technological Change



The Company is engaged in rapidly
evolving and highly competitive fields and competition is expected to increase. There are many companies, including large pharmaceutical, chemical, and vitamin and nutrition supplement companies, engaged in developing, manufacturing and marketing
products similar to those proposed to be developed by the Company, many of which have established a significant presence in the markets which the Companys proposed products are designed to address. Virtually all of these companies have
substantially greater capital resources, research and development staffs, facilities and experience in obtaining regulatory approvals, as well as in the manufacturing, marketing and distribution of products, than the Company. There can be no
assurance the Companys competitors will not succeed in developing technologies and products that are more effective and less costly than any potential products under research and development by the Company or which could render the
Companys proposed products or technology obsolete.



Dependence Upon
Key Personnel



The Company has reduced its staff to three
people, and is dependent on its licensees and its scientific collaborations for the bulk of its continuing research and development activities. Consequently, further successful development of the Companys proprietary technology is dependent on
the ability of the research and development efforts of its licensees and scientific collaborations. Directing these efforts is Dr. Sheldon S. Hendler, Chairman of the Companys Board of Directors and the owner of approximately 18% of the
outstanding Common Stock of the Company. The ability to retain the services of Dr. Hendler is important to the success of the Company. The Company does not currently have an employment contract with Dr. Hendler does not pay or accrue compensation to
him, nor does it maintain insurance on Dr. Hendlers life. Even if the Company succeeded in obtaining financing necessary to fund internal research and development, it would continue its efforts to expand its research and development externally
by means of outsourcing and expanding collaborations with current or new scientific partners.



Reliance on Collaborative Partners



The Company licensed a natural form of boron covered by US Patent No.: 5,962,049 and was issued US Patent No.: 6,071,545 for novel Metallic Oligopeptide Complexes June 6, 2000 covering several mineral complexes for
both nutritional and pharmaceutical applications. The patent covers a novel chromium complex, chromium carnosinate, which the Company feels is superior to the other forms of chromium supplements currently on the market. In August 2000 the Company
entered into an agreement sublicensing the boron complex patent and licensing the chromium mineral complex covered by the Metallic Oligopeptide Complexes Patent with FutureCeuticals, a division of Van Drunen Farms, to develop and market these
proprietary nutraceutical compounds. The agreement included an up front license fee of $25,000 and an additional license fee of $75,000



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upon attaining $75,000 in initial sales of products developed and commercialized that are covered by the licensed technology. After meeting certain
development, approval and commercialization criteria the licensee shall pay the Company the greater of an escalating minimum monthly royalty payment or a total gross royalty of 30% of gross revenue from the sale of licensed products. Of the 30%
gross royalty, licensee shall credit and allocate 5% to further research and development of the products and pay the remaining 25% to the Company. FutureCeuticals reached $75,000 in sales in December 2002 allowing the remaining license fee balance
of $75,000 to be posted to accounts receivable in 2002. The cash payment was received and deposited in January 2003. FutureCeuticals formulated, tested, manufactured and is currently selling boron and chromium complexes as raw materials to
manufactures and distributors of nutritional supplements. Boron is marketed under the trade name FruiteX-B and Chromium under the trade name CarnoChrome. FutureCeuticals has conducted a number of studies reflecting the primary activities and benefits of both products. In order to allocate additional funds to conduct new scientific
studies designed to prove the superiority of CarnoChrome and FruiteX-B over
competitive products, hire a proven product manager to specifically oversee the marketing and sales of CarnoChrome and FruiteX-B and fund the development of new products based on technology licensed from the Company the agreement between FutureCeuticals and the Company was amended on February 17, 2003. Under the
terms of the amended agreement the Company will receive a 15% royalty on gross sales of licensed product in a calendar year less than $3,000,000 three million dollars and 20% of gross sales equal to or in excess of $3,000,000 three million dollars.
There is a minimum guaranteed royalty payment of $90,000 in 2003, $150,000 in 2004 and $180,000 in 2005. Based on the terms of the agreement FuutureCeuticals has elected to cancel the license for the chromium carnosinate technology effective March
24, 2004. The agreement for the boron complex technology remains in effect. The cancellation of the chromium portion of the license agreement effects the minimum royalty payment. Based on the agreement the minimum payment for 2004 is $90,000 and
2005 is $112,500. In December of 2004 the agreement was amended to change the minimum payment for 2005 from $112,500 to $97,500. There can be no assurance that a significant market will develop for the boron product or that any products will
continue to produce revenue for the Company.



There can be no
assurance the Company will be able to negotiate acceptable collaborative arrangements in the future, or that any collaborative arrangements will be successful. In addition, there can be no assurance the Companys collaborative partners will not
pursue alternative technologies or develop alternative compounds either on their own or in collaboration with others, including the Companys competitors, as a means of developing treatments for the diseases targeted by the collaborative
programs.



Patents and Proprietary Rights



The Companys success will depend in large part on its ability to
obtain patent protection for its proposed products, both in the United States and other countries. The patent position of biotechnology and pharmaceutical companies is highly uncertain and involves complex legal and factual questions. There is no
consistent policy regarding the breadth of claims allowed in biotechnology and pharmaceutical patents. The Company currently has fifteen patents issued. There have been foreign counterparts of certain of these applications filed in other countries
on behalf of the Company. The Company intends to file additional applications as appropriate for patents covering both its proposed products and processes. There can be no assurance patents will issue from any of the pending applications, or for
patents that have been issued or may be issued, the claims allowed will be sufficiently broad to protect the Companys technology. In addition, there can be no assurance any patents issued to the Company will not be challenged, invalidated or
circumvented, or the rights granted there under will provide proprietary protection to the Company. In addition, any patents obtained by the Company will be of limited duration. All United States patents issuing from patent applications applied for
June 8, 1995 or thereafter will have a term of 20 years from the date of filing. All United States patents in force before June 8, 1995 will have a term of the longer of: (1) 17 years from the date of issuance; or (2) 20 years from the date of
filing. All United States patents issuing from patent applications applied for before June 8, 1995 will have a term of the longer of (1) 17 years from the date of issuance; or (2) 20 years from the date of filing. The commercial success of the
Company will also depend in part on the Companys neither infringing patents issued to competitors nor breaching the technology licenses upon which the Companys proposed products might be based.



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It may become necessary for the Company to obtain licenses of potential products or other proprietary
rights or trade secrets from other parties. Failure by the Company to obtain such licenses may have a material adverse impact on the Company. Litigation, which could result in substantial costs to the Company, may also be necessary to enforce any
patents issued to the Company or to determine the scope and validity of others proprietary rights. In addition, the Company may have to participate in interference proceedings declared by the U.S. Patent and Trademark Office to determine the
priority of inventions which could result in substantial costs to the Company.



The Company also attempts to protect its proprietary technology and processes by seeking to obtain confidentiality agreements with its contractors, consultants, employees, potential collaborative partners, licensees,
licensors and others. There can be no assurance these agreements will adequately protect the Company, that these agreements will not be breached, or the Company will have adequate remedies for any breach, or that the Companys trade secrets
will not otherwise become known or be independently discovered by competitors. In addition the Company does not generally require its principal scientific advisors to enter into confidentiality agreements, and to the extent there is collaboration
between any of the scientific advisors and the Company, the aspects of such collaboration will not necessarily remain the trade secrets of the Company. This approach could increase the risk to the Company that it may not be able to protect its
proprietary information.



There can be no assurance others will
not independently develop similar or more advanced technologies or design around aspects of the Companys technology which may be patented, or duplicate the Companys trade secrets. In some cases, the Company may rely on trade secrets to
protect its innovations. There can be no assurance trade secrets will be established, or secrecy obligations will be honored, or that others will not independently develop similar or superior technology. To the extent consultants, key employees or
other third parties apply technological information independently developed by them or by others to Company projects, disputes may arise as to the proprietary rights to such information which may not be resolved in favor of the Company.



Governmental Regulation and Uncertainty of Product Approvals



The production and marketing of the Companys proposed products are
subject to strict regulation by federal and state governmental authorities in the United States and in foreign countries where such potential products may be produced and marketed. In the United States, the FDA regulates, where applicable,
development, testing, labeling, manufacturing, registration, notification, clearance or approval, marketing, distribution, record keeping and reporting requirements for human and animal drugs, medical devices, biologics, cosmetics and food
additives. Most, if not all, of the Companys proposed products, including its proposed Panavir®, Vantox®, and other products may require FDA clearance prior to marketing. The Federal Environmental Protection Agency (EPA) has regulations covering certain areas for some of the Companys proposed products.
Comparable state and local agencies may have similar regulations. The FDA and EPA regulatory approval processes may take a number of years and both FDA and EPA regulatory approval may require the expenditure of substantial resources. The processing,
formulation, packaging, labeling and advertising of the Companys proposed nutraceutical products is subject to regulation by one or more federal agencies, including the FDA, the Federal Trade Commission (the FTC), the Consumer
Product Safety Commission, the United States Department of Agriculture and the Environmental Protection Agency. These activities are also regulated by various agencies of the state and localities in which the Companys nutraceutical products
may be sold, including without limitation the California Department of Health and Human Services, Food and Drug branch. The Nutrition Labeling and Education Act and the Dietary Supplement Act provide regulations which require that vitamin, mineral
and dietary supplements labels have to provide the same basic nutritional information found on the labels on most conventional foods. The regulations also require that health claims made for vitamins, minerals and dietary supplements be
scientifically valid, and mandate nutrition information found on the label to state the nutrition content per serving. Compliance with these regulations could adversely affect the Companys operations and its financial condition. There can be
no assurance the production and marketing of the Companys proposed products or other potential products which may be developed by the Company in the future, if any, will satisfy then current requirements of the FDA, EPA, FTC, or comparable
state, local and



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foreign authorities. Delays in receiving or failure to receive governmental approvals may have a material adverse impact on the Company. In addition, there
can be no assurance that government regulations applicable to the Company or its proposed products or the interpretation thereof will not change and thereby prevent the Company from marketing some or all of its potential products for a period of
time or permanently, or otherwise materially and adversely affect the Company. Moreover, if regulatory approval of a drug is granted, such approval may entail limitations on the indicated uses for which the drug may be marketed. Even if such
regulatory approval is obtained, a marketed drug, its manufacturer and the facilities in which the drug is manufactured are subject to continual review and periodic inspections. Later discovery of previously unknown problems with a product,
manufacturer or facility may result in restrictions on such product or manufacturer, including withdrawal of the potential product from the market, product seizures, a halt in operation and other materially adverse consequences. The Company is
unable to predict the extent of adverse governmental regulation which might arise from future federal, state or foreign legislative or administrative action, or the extent of the impact of such legislative changes on the business of the Company.



Debt Service and Penalties



During March 2003, the Company obtained a note from a private investor to
loan the Company $200,000 in the form of a convertible note at an interest rate of 10% per annum Interest is to be paid quarterly with the principal due and payable at the end of the third year. The note is collateralized by substantially all of the
assets of the Company. The investor has the option to convert the principal amount into Vyrex common shares at a price of $0.25 during the first year, $0.50 the second year and $0.75 the third year. Further in connection with the Promissory Note,
the investor was issued warrants, exercisable within three years from the date of issuance, entitling the investor to purchase Vyrex Corporation common shares in the amount of one hundred thousand 100,000 shares at an exercise price of $0.11 per
share. The warrants had a fair value of $6,000 as of the date of issuance; accordingly, the Company discounted the note by $6,000 which was added to additional paid-in capital. The Company is accreting the discount on a straight-line basis over the
term of the note. The Company has recognized $2,000 additional interest expense related to the accretion of this debt discount for the period ended December 31, 2004. On August 24, 2004 the Company obtained an additional note from the same private
investor in the amount of $7,500. The principal amount plus 10% interest is due and payable on February 24, 2005. As further consideration for the loan the Company agreed to amend the strike price terms of the right to convert the principal amount
of the March 2003 note into Vyrex common shares from $0.50 to $0.25 the second year and from $0.75 to $0.50 the third year.



Dilutive and Other Adverse Effects of Outstanding Options and Warrants



Under the terms of existing options issued under the Companys stock option plan and other outstanding options, the holders thereof are given an
opportunity to profit from a rise in the market price of the Common Stock with a resulting dilution in the interests of the other stockholders. The terms on which the Company may obtain additional financing may be adversely affected by the existence
of such options. The holders of the options may exercise them at a time when the Company might be able to obtain additional capital through a new offering of securities on terms more favorable than those provided by the options.



Possible Depressive Effect on Price of Securities of Future Sales of Common Stock



Actual sales or the prospect of sales of Common Stock
under Rule 144 or otherwise in the future may depress the prices of the Companys securities or any market that may develop in the future. There are options outstanding both pursuant to the Companys Stock Option Plan and options not
pursuant to any plan which are exercisable for up to 2,787,259 shares of Common Stock. All of these options are currently exercisable; 13% are exercisable at a price range of $5.75 to $7.50, 14% at a price of $3.00, and 73% are exercisable at a
price range of $0.10 to $0.56. Exercise of any of these options would result in additional dilution to the purchaser of the shares offered herein, and exercise of any significant amount of these options will result in substantial additional
dilution. Resale of shares acquired upon the exercise of these options may depress the prices of the Companys



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securities or make them more difficult to sell by the investors herein. The sale or availability for sale of substantial amounts of Common Stock in the
public market after this offering could adversely affect the prevailing market prices of the Companys securities and could impair the Companys ability to raise additional capital through the sale of its equity securities.



Possible Adverse Effects of Authorization and Issuance of Preferred Stock



The Companys Board of Directors is authorized to issue up to
10,000,000 shares of preferred stock. The Board of Directors has the power to establish the dividend rates, liquidation preferences, voting rights, redemption and conversion terms and privileges with respect to any series of preferred stock. The
issuance of any series of preferred stock having rights superior to those of the common stock may result in a decrease in the value or market price of the common stock and could further be used by the Board as a device to prevent a change in control
favorable to the Company. Holders of preferred stock to be issued in the future may have the right to receive dividends and certain preferences in liquidation and conversion rights. The issuance of such preferred stock could make the possible
takeover of the Company or the removal of management of the Company more difficult, and adversely affect the voting and other rights of the holder of the common stock, or depress the market price of the Common Stock.



Delisting From NASDAQ Stock Market



The Company was notified that it had been delisted from the NASDAQ SmallCap
Market effective with the close of business October 21, 1998. As of October 22, 1998, the Companys securities commenced trading over the counter under the symbols OTC:BB  VYRX and OTC:BB  VYRXW. As a result, investors may find it
more difficult to dispose of or to obtain accurate quotations as to the value of, the Companys securities.



Volatility of Stock Price



The market prices for securities of emerging and development stage companies such as Vyrex have historically been highly volatile. Future announcements
concerning the Company or its competitors, including the results of testing, technological innovations or new commercial products, government regulations, developments concerning proprietary rights, litigation or public concern as to safety of
potential products developed by the Company or others, may have a significant impact on the market price of the Companys securities.



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



Since the
Companys securities were delisted from the NASDAQ SmallCap Market and the Company has net tangible assets of less than $2,000,000, transactions in the Companys securities are subject to Rule 15g-9 under the Exchange Act which imposes
additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally, individuals with a net worth in excess of $1,000,000 or annual incomes
exceeding $200,000 or $300,000 together with their spouses). For transactions covered by this Rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchasers written consent to the
transaction prior to the sale. Consequently, this Rule may affect the ability of broker-dealers to sell the Companys securities, and may affect the ability of Shareholders to sell any of the Companys securities in the secondary market.



The Commission has adopted regulations which generally define
a penny stock to be any non-NASDAQ equity security of a small Company that has a market price (as therein defined) less than $5.00 per share, or with an exercise price of less than $5.00 per share subject to certain exceptions, and which
is not traded on any exchange or quoted on NASDAQ. For any transaction by broker-dealers involving a penny stock (unless exempt), the rules require delivery, prior to a transaction in a penny stock, of a risk disclosure document relating to the
penny stock market. Disclosure is also required to be made about compensation payable to both the broker-



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dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent
price information for the penny stock held in an account and information on the limited market in penny stocks.



Control by Present Stockholders; Possible Depressive Effect on the Companys Securities



The current officers and directors of the Company own 24% of the outstanding Common Stock of the Company. Dr. Hendler
individually owns approximately 18% of the outstanding Common Stock. This concentration of ownership could have an influence over the election of directors and could exert influence or control over the Companys operations. This may discourage
potential purchasers from seeking control of the Company through purchase of Common Stock and this possibility could have a depressive effect on the price of the Companys securities.



Anti-Takeover Provisions - Limitation on Voting Rights



The Companys Articles of Incorporation and Bylaws contain provisions
that may make it more difficult to acquire control of the Company by means of tender offer, over-the-counter purchases, a proxy fight, or otherwise. The Articles of Incorporation also include provisions restricting stockholder voting rights. The
Companys Articles of Incorporation include a provision that requires that any action required by the stockholders may not be affected by a written consent, and that special meetings of the stockholders may only be called by the Board of
Directors. This provision makes it difficult for stockholders to pass any resolution not supported by the Board of Directors except at a regularly called meeting. The Companys Articles of Incorporation provide for a staggered term of the Board
of Directors, thus eliminating the ability to elect all of the directors in any one year. This provision may make the implementation of a change in management a process requiring more than one year even if supported by a majority of the
stockholders. The Companys Articles of Incorporation provide that directors may only be removed for cause and a vote of 70% of the shareholders. Certain provisions of the Articles of Incorporation may only be amended by a vote of 70% of the
stockholders. As a result of the number of shares currently owned by management, this provision may for some time have the effect of indirectly eliminating any possibility stockholders could pass a resolution unless approved by management, in
connection with any question submitted or required to be submitted to a vote of the stockholders. The Companys Articles of Incorporation also require that stockholders give advance notice to the Company of any directorship nominations or other
business to be brought by the stockholders at any stockholders meeting. This provision makes it more difficult for stockholders to nominate candidates for the Board of Directors who are not supported by management. In addition, the Articles of
Incorporation require advance notice for stockholder proposals to be brought before the annual meeting. The requirements include that the notice must specify certain information regarding the stockholder and the meeting. This provision to implement
stockholder proposals makes it more difficult even if a majority of stockholders are in support thereof. The Company is also subject to certain provisions of California law if more than 50% of its outstanding securities are held of record by persons
with addresses in California, and if more than 50% of its property, payroll and sales are from California. These provisions of California law will control the operations of the Company with respect to certain of the anti-takeover provisions
discussed herein, until such time as either (i) the Company is listed on the New York or American Stock Exchange or the National Market System of Nasdaq, and it has 800 stockholders; or (ii) the Company no longer has either more than 50% of its
outstanding securities held by persons with addresses in California, or less than 50% of its property, payroll and sales are in California. Each of these provisions may also have the effect of deterring hostile take-overs or delaying changes in
control or management of the Company. In addition, the indemnification provisions of the Companys Bylaws and Articles of Incorporation may represent a conflict of interest with the stockholders since officers and directors may be indemnified
prior to any judicial determinations as to their conduct.



Warrants



The Company entered into a consulting agreement with an
individual to provide consulting services to the Company on matters pertaining to the development and marketing of the Companys intellectual property. In



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April 2002, the individual was issued a warrant to purchase an aggregate of 20,000 shares of common stock at a price of $0.37 per share exercisable until
March 31, 2005.



To assist in the marketing of Vyrexs
Vantox® and its water soluble pro-drug form of
propofol, the Company entered into a consulting agreement with Sagitta Corporation. The Consultant has contacts in Japan that are potential candidates to license certain of the Companys intellectual property. In December 2002, Sagitta
Corporation was issued a warrant to purchase an aggregate of 5,000 shares of common stock at a price of $0.15 per share exercisable until December 5, 2005.



The Company issued Warrants in March 2003 in connection with entering into a loan transaction with a single entity with a principal amount of $200,000.
Warrants were issued entitling the lender to purchase 100,000 shares of stock at an exercise price equal to $0.11 per share.



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



If successfully developed and approved by applicable regulatory agencies,
the Company intends to market its proposed products currently under development through contractual arrangements with others such as joint venture, licensing or similar collaborative agreements and distribution agreements. This may result in a lack
of control by the Company over some or all of the marketing and distribution of such potential products. There can be no assurance the Company will be able to enter into any marketing arrangements on terms acceptable to the Company or that any
marketing efforts undertaken on behalf of the Company will be successful. The Company may, in the future, determine to directly market certain of its proposed products. The Company has limited marketing experience and significant additional capital
expenditures and management resources would be required to develop a direct sales force. In the event the Company elects to engage in direct marketing activities, there can be no assurance the Company would be able to obtain the requisite funds or
attract and retain the human resources necessary to successfully market any of its potential products.



The Companys future growth and profitability will depend, in large part, on the success of its personnel and others conducting marketing efforts on
behalf of the Company in fostering acceptance among the various markets of the use of the Companys potential products as an alternative to other available products or otherwise. The Companys success in marketing its potential products
will be substantially dependent on educating its targeted markets as to the distinctive characteristics and perceived benefits of the Companys potential products. There can be no assurance that the Companys efforts or the efforts of
others will be successful or that any of the Companys proposed products will be favorably accepted among the targeted markets.



Lack of Manufacturing Capability; Dependence on Outside Parties for Manufacturing of Proposed Products



The Company has no manufacturing facilities or expertise, and does not
intend to manufacture any potential product or products. The Company initially intends to enter into arrangements with others to manufacture all of its proposed products and has done so with respect to its nutraceutical products. The Company does
not have any contracts or agreements obligating any party to manufacture any quantity of nutraceuticals for any price. Failure to secure such contracts or agreements could have a material adverse impact on the business and operations of the Company.
There can be no assurance the Company will be able to enter into satisfactory arrangements for the manufacture of its proposed products with manufacturers whose facilities and procedures comply with FDA or other regulatory requirements, that the
manufacturers will continue to comply with such standards, or that such manufacturers will be able to adequately supply the Company with its product needs. The Companys dependence on third parties for manufacturing may adversely affect the
Companys ability to develop and deliver products on a timely and competitive basis. The Company may in the future undertake to manufacture some or all of its proposed products directly. The Company has no experience with the manufacture of any
of its proposed products under development. In the event the Company were to undertake to manufacture any of its proposed



17



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products, the Company would be required to finance considerable additional capital expenditures, attract and retain experienced personnel, develop a
manufacturing capability, and comply with extensive government regulations with respect to its facilities, including among others, FDA manufacturing requirements. The Company would not be able to develop any reasonable manufacturing capability
without obtaining significant capital in excess of the funds anticipated from this offering. There can be no assurance the Company would be able to successfully establish manufacturing operations.



Dependence on Suppliers



The materials used in the Companys potential products are currently available only from a limited number of suppliers.
The Company anticipates there will continue to be a limited number of suppliers for its proposed products. In the event the Company could not obtain adequate quantities of necessary materials from its existing suppliers, there can be no assurance
the Company would be able to access alternative sources of supply within a reasonable period of time or at commercially reasonable rates. Regulatory requirements applicable to pharmaceutical products tend to make the substitution of suppliers costly
and time-consuming. The Company does not have any contracts or agreements with any of its raw material suppliers for its proposed nutraceutical products to provide quantities of raw materials at specific prices. The Company believes there are
numerous suppliers of its raw materials for its proposed nutraceutical products. There can be no assurance adequate suppliers will be available or that the lack of such contracts or agreements will not have a material adverse impact on the business
and operations of the Company. The unavailability of adequate commercial quantities, the inability to develop alternative sources, a reduction or interruption in supply or a significant increase in the price of materials could have a material
adverse effect on the Companys ability to manufacture and market its proposed products.



Product Liability; Availability of Insurance



The design, development and manufacture of the Companys proposed products involve an inherent risk of product liability claims and associated adverse publicity. The Company obtained clinical trial product
liability insurance for its Panavir® Phase I human
clinical trial and intends to obtain insurance for future clinical trials of Panavir®, Vantox®,
and other potential products under development, and for potential product liability associated with the commercial sale of the Companys proposed products. There can be no assurance the Company will be able to obtain or maintain insurance for
any of its clinical trials or proposed commercial products. Such insurance is expensive, difficult to obtain and may not be available in the future on acceptable terms or at all. The Company is also exposed to product liability claims in the event
the use of its proposed products result in injury.



Hazardous Material;
Environmental Matters



The Company presently contracts
with outside vendors to manufacture its proposed products. However, the Companys research and development processes at times involve the controlled use of hazardous materials, chemicals, viruses and various radioactive compounds. In addition,
various of such materials, chemicals, viruses and compounds may be used by the Company in the future to the extent Vyrex undertakes to perform its own manufacturing. To the extent certain such materials, chemicals, viruses and compounds are or will
be used by the Company, Vyrex will be subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of certain materials and waste products. Although the Company believes its safety
procedures for handling and disposing of materials would comply with the standards prescribed by such laws and regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an
accident, the Company could be held liable for any damages that result, and any such liability could exceed the resources of the Company. There can be no assurance the Company will not be required to incur significant costs to comply with
environmental laws and regulations in the future, or that the operations, business or assets of the Company will not be affected adversely or materially by current or future environmental laws or regulations.



18



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Health Care Reform



Political, economic and regulatory influences are subjecting the health care industry in the United States to fundamental changes. Reforms under
consideration may include mandated basic health care benefits, controls on health care spending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending, the creation of large insurance purchasing
groups and fundamental changes to the health care delivery system. The Company anticipates Congress and certain state legislatures will continue to review and assess alternative health care delivery systems and payment methods and public debate of
these issues will likely continue in the future. Due to uncertainties regarding the ultimate features of reform initiatives and their enactment and implementation, the Company cannot predict which, if any, of such reform proposals will be adopted,
when they may be adopted or what impact they may have on the Company.



Uncertainty of Health Care Reimbursement



Vyrexs ability to commercialize its proposed products successfully may depend in part on the extent to which reimbursement for the cost of such proposed products and related treatment will be available from government health
administration authorities, private health insurers and other organizations. Third-party payers are increasingly challenging the price of medical products and services. Significant uncertainty exists as to the reimbursement status of newly approved
health care products, and there can be no assurance adequate third-party coverage will be available to enable Vyrex to maintain price levels sufficient to realize an appropriate return on its investment in product development.



Forward-Looking Statements



Prospective investors are cautioned that the statements in this Prospectus
that are not descriptions of historical facts may be forward-looking statements that are subject to risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors, including those
identified under Risk Factors and elsewhere in this report or documents incorporated by reference herein.



|Item 2. | PROPERTY
|------- | --------



Vyrex Corporation rents an 800 square foot administrative facility located in La Jolla, California and off site file storage units. Current monthly rental
on all facilities is approximately $1,300.



|Item 3. | LEGAL PROCEEDINGS
|------- | -----------------



None



|Item 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------



None



19



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PART II



|Item 5. | MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
|------- | --------------------------------------------------------



The Companys Common Stock began trading on the Over-The-Counter Bulletin Board on October 22, 1998 under the symbol VYRX. The
over-the-counter market quotations provided reflect inter-dealer prices, without retail mark-ups, mark-down or commission and may not represent actual transactions. The following table sets forth the range of high and low sales prices for the Common
Stock on the Nasdaq Small Capitalization Market for the periods indicated:



|                |  |                    |  |       |  |      
|--------------- |  | ------------------ |  | ----- |  | -----
|                |  |                    |  | High  |  | Low  
|January 1, 2003 |  | March 31, 2003     |  | $0.16 |  | $0.09
|April 1, 2003   |  | June 30, 2003      |  | $0.18 |  | $0.08
|July 1, 2003    |  | September 30, 2003 |  | $0.17 |  | $0.08
|October 1, 2003 |  | December 31, 2003  |  | $0.27 |  | $0.10
|January 1, 2004 |  | March 30, 2004     |  | $0.27 |  | $0.12
|April 1, 2004   |  | June 30, 2004      |  | $0.19 |  | $0.11
|July 1, 2004    |  | September 30, 2004 |  | $0.21 |  | $0.05
|October 1, 2004 |  | December 31, 2004  |  | $0.16 |  | $0.08



As of March 15, 2005,
the Companys Common Stock was held by approximately 600 stockholders of record. The Company has never paid cash dividends and does not anticipate paying any cash dividends in the foreseeable future.



|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



The financial statements of Vyrex
Corporation are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires our management to make estimates and assumptions about
future events that effect the amounts reported in the financial statements and related notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment.
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of financial statements.



Revenue Recognition



Licensing and royalty revenue from royalty agreements is recognized in accordance with the terms of the specific agreement, which generally includes a
quarterly minimum payment by the licensee.



Stock Options and Warrants



Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS 123), provides for use of a fair value based method of accounting for employee stock compensation. However, SFAS 123 also allows an entity to continue to measure compensation cost
for stock options granted to



20



---

employees using the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), which only requires charges to compensation expense for the excess, if any, of the fair value of the underlying stock at the date a stock option is granted (or at an appropriate subsequent measurement date) over
the amount the employee must pay to acquire the stock, if such amounts differ materially from the historical amounts. The Company has elected to continue to account for employee stock options using the intrinsic value method under APB 25. By making
that election, it is required by SFAS 123 and Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based CompensationTransition and Disclosure to provide pro forma disclosures of net income and earnings per
share as if a fair value based method of accounting had been applied.



Options and warrants granted to consultants and other non-employees are valued based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable, and expensed
over the term of the consulting or other agreements.



Recent Accounting
Developments



In December 2004, the FASB issued SFAS No.
123 (R), Share-Based Payment (SFAS 123 (R)). SFAS 123 (R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. SFAS No. 123 (R) focuses
primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123 (R) requires that the fair value of such equity instruments be recognized as expense in the historical financial
statements as services are performed. Prior to SFAS 123 (R), only certain pro forma disclosures of fair value were required. SFAS 123 (R) shall be effective for small business issuers as of the beginning of the first interim or annual reporting
period that begins after December 15, 2005. The adoption of this new accounting pronouncement is not expected to have a material impact on the financial statements of Vyrex Corporation during the year ended December 31, 2006.



In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 changes the accounting for certain financial instruments with characteristics of both liabilities and equity that, under pervious pronouncements, issuers
could account for as equity. The new accounting guidance contained in SFAS No. 150 requires that those instruments be classified as liabilities in the balance sheet.



SFAS No. 150 affects the issuers accounting for three types of freestanding financial instruments. One type is
mandatory redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets. A second type included put options and forward purchase contracts, which involves instruments that do or may require the issuer to
buy back some of its shares in exchange for cash or other assets. The third type of instruments that are liabilities under SFAS No. 150 are obligations that can be settled with shares, the monetary value of which is fixed, tied solely or
predominantly to a variable such as market index, or varies inversely with the value of the issuers shares. SFAS No. 150 does not apply to features embedded in a financial instrument that is not a derivative in its entirety.



Most of the provisions of SFAS No. 150 are consistent with the existing
definition of liabilities in FASB Concepts Statement No. 6, Elements of Financial Statements. The remaining provisions of SFAS No. 150 are consistent with the FASBs proposal to revise that definition to encompass certain
obligations that a reporting entity can or must settle by issuing its own shares. SFAS No. 150 shall be effective for financial instruments entered into or modified after May 31, 2003 and otherwise shall be effective at the beginning of the first
interim period beginning after June 15, 2003.



The FASB and the
Accounting Standards Executive Committee of the American Institute of Certified Public Accountants had issued certain other accounting pronouncements as of December 31, 2004 that will become effective in subsequent periods; however, management of
the Company does not believe that any of those pronouncements would have significantly affected the Companys financial accounting measurements or disclosures had they been in effect during 2004 or 2003.



21



---

Overview



Since its inception in January 1991, the Company has devoted substantially all of its efforts and resources to research and development related to the
study of biological oxidation and antioxidation directed to the development of potential therapeutic products for the treatment of various diseases and conditions. Currently the Companys research focuses mainly on targeted antioxidant
therapeutics and nutraceuticals. The Company is a development stage company, has never generated any substantial revenue from product sales and has relied primarily on equity financing, licensing revenues, and various debt instruments for its
working capital. The Company has been unprofitable since its inception.



With the ever increasing difficulty of biotechnology companies being able to raise funds in the capital markets, the Company has and is continuing to seek collaborative partners to license its existing technology with a view to raise
funding. In addition, the Companys short-term strategy will be to continue efforts to commercialize existing technology and to selectively defer research and development activity until such time as the Company has adequate operating funds.
During 2004, operating expenses for the Company decreased $50,000 primarily due to decreased patent costs. Royalty revenue remained the same at $90,000 for 2004 and 2003. The net loss for 2004 amounted to $38,000 compared to $91,000 in 2003. As of
December 31, 2004, the Companys accumulated deficit was approximately $13,371,000.



The Companys business is subject to significant risks, including the risks inherent in its research and development efforts, uncertainties associated with obtaining and enforcing patents, the lengthy and
expensive regulatory approval process and competition from other biotechnology companies. See Risk Factors.



Results of Operations



Years ended December 31, 2004 and 2003



Since January 2004, the Companys major activities consisted of reducing debt, seeking additional licensing opportunities for its intellectual
properties and joint ventures to market its nutraceutical products and initiating the research necessary to take its drug candidates forward into clinical trials. To supplement its existing resources, the Company will require additional capital from
the sale of debt or equity. There can be no assurance that such capital will be available on favorable terms, or at all, and if additional funds are raised by issuing equity securities, dilution to existing stockholders is likely to result.



Research and development expenses remained at $15,000 in 2004
and 2003. Expenses were limited to the cost of conducting research on the Companys proprietary skin care compound and the license fee for our Boron compound.



General and administrative expenses decreased $49,000 to $95,000 in 2003 compared to $144,000 in 2003. This decrease was
due, in part, to the reduction in patent costs. Other expenses were limited to consulting fees and general office expenses such as rent, accounting services, telephone expenses, utility expenses and postage.



Net loss decreased $53,000 to $38,000 in 2004 compared to $91,000 in 2003.
Basic and diluted loss per share decreased to $0.00 in 2004 compared to $0.01 in 2003. The lower net loss per common share is principally due to the decrease in the net loss.



Liquidity and Capital Resources



The Company has financed its operations since inception through the sale of debt and equity securities. As of December 31, 2004, the Company had a working
capital deficit of $47,000 compared to a working capital deficit of $49,000 at December 31, 2003.



For the year ended December 31, 2004, the Company used $15,000 of cash in operating activities, compared to $27,000 during 2003. Current employees are not
receiving salaries in order to conserve cash for critical operating activities. Salaries will be resumed when the Company can sufficiently fund payroll.



22



---

During 2004, management discovered it currently owns equity securities in which it previously held an old
insurance policy in 1997 and 1998 that was then converted into equity securities on April 21, 1999. The Company is considering liquidating these securities which have a current value of approximately $18,000 to further reduce outstanding
obligations.



While the Company may have revenues during 2005,
it is not anticipated that they will be significant and therefore without additional financing it is uncertain whether the Company can continue as a going concern. The Company is actively pursuing collaborations with potential partners in both the
pharmaceutical and nutraceutical divisions with the objective of raising financing to enable the Company to continue operations. The Company does not currently have any commitments for financing.



On March 10, 2003, the Company obtained a commitment from a private investor
to loan the Company $200,000 in the form of a three year convertible note at an interest rate of 10% per annum. The interest is to be paid semiannually with the principal due and payable at the end of the third year. The note is collateralized by
substantially all of the assets of the Company.



Management
anticipates, but cannot assure, the minimum guaranteed royalty payments of $97,500 based on the FutureCeuticals license agreement, will provide the Company with the funds necessary to continue operations through 2005. The Company does not have any
lease or other commitments. The Company does not have an existing bank line of credit or other form of revolving or renewable credit facility.



Plan of Operation



The Company will continue to work with FutureCeuticals to develop new studies designed to help increase the market share of its licensed product
FruiteX-B. The Company will take a more active
roll in the development and marketing of Propofol Phosphate now that the collaboration agreement with Immune Response Corporation has expired. In addition to working with our existing strategic partners, the Company will continue to focus its
efforts and resources on developing new strategic relationships concerning the development, manufacturing and marketing of additional antioxidant pharmaceutical and nutraceutical compounds. The Company will continue to fund, internally, the research
and development of its proprietary isoflavone derivative for cosmetic skin care.



|Item 7. | FINANCIAL STATEMENTS
|------- | --------------------



The financial statements of the Company and other information required by this item are set forth herein in a separate section beginning with the Index to the Financial Statements on page F-1.



|Item 7a. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
|-------- | ----------------------------------------------------------



Not applicable



|Item 8. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
|------- | -------------------------------------------------------------------------------------



None



|Item 8a. | CONTROLS AND PROCEDURES.
|-------- | ------------------------



The Company carried out an evaluation, under the supervision and with the participation of the Companys management, including the Companys
Chief Executive Officer and President, of the effectiveness of the design and operation of the Companys disclosure controls and procedures as of December 31, 2004 pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based upon that
evaluation, the principal executive officer



23



---

concluded that the Companys disclosure controls and procedures are effective in timely alerting them to material information relating to the Company,
required to be included in the Companys periodic SEC filings. Such evaluation did not identify any change in the Companys internal control over financial reporting that occurred during the year ended December 31, 2004 that has materially
affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



PART III



|Item 9. | DIRECTORS AND EXECUTIVE OFFICERS, OF THE REGISTRANT.
|------- | ----------------------------------------------------



The information required by Item 9 of Form 10-K SB is incorporated by reference to the information contained in the section captioned Election of
Directors and Compliance with Section 16(a) of the Exchange Act in the Registrants definitive proxy statement for the Annual Meeting of Shareholders (Proxy Statement) to be filed with the Commission on or before April
30, 2005.



|Item 10. | EXECUTIVE COMPENSATION.
|-------- | -----------------------



The information required by Item 10 of Form 10-K SB is incorporated by reference to the information contained in the section captioned Executive
Compensation in the Proxy Statement to be filed with the Commission on or before April 30, 2005.



|Item 11. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
|-------- | -----------------------------------------------------------------------------------------------



The information required by Item 11 of Form 10-K SB is incorporated by reference to the information contained in the section
captioned Security Ownership of Certain Beneficial Owners and Management in the Proxy Statement to be filed with the Commission on or before April 30, 2005.



|Item 12. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
|-------- | -----------------------------------------------



The information required by Item 12 of Form 10-K SB is incorporated by reference to the information contained in the section captioned Certain
Relationships and Related Transactions in the Proxy Statement to be filed with the Commission on or before April 30, 2005.



|Item 13. | EXHIBITS AND REPORTS ON FORM 8-K.
|-------- | ---------------------------------



Exhibit 23.1: Consent of J. H. Cohn LLP, Independent Registered Public Accounting Firm.



|Item 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES.
|-------- | ---------------------------------------



The information required by this item is incorporated by reference to the information under the caption Principal Accountant Fees and Services
of the Registrants definitive Proxy Statement and notice of the Companys 2005 Annual Meeting of Shareholders which the Company will file with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered
by this report.



24



---

Vyrex Corporation



Annual Report on Form 10-K SB

Year Ended December 31, 2004

Exhibit Index



|              |  |                                                                                                 
|------------- |  | ------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                     
|3.1           |  | Bylaws *                                                                                        
|              | 
|23.1          |  | Consent of Independent Registered Public Accounting Firm                                        
|              | 
|31.1          |  | Certification of the chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002
|              | 
|32.1          |  | Certification of the chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002



|(b) | The Company did not file any reports on Form 8-K during the three months ended December 31, 2004
|--- | ------------------------------------------------------------------------------------------------

---

|* | Previously Filed
|- | ----------------



25



---

SIGNATURES



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



VYREX CORPORATION RegistrantBy:

/s/    G. DALE GARLOWG. Dale GarlowChief Executive Officer,




In accordance
with the Exchange Act, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



|                             |  |          |  |               
|---------------------------- |  | -------- |  | --------------
|Signature                    |  | Title    |  | Date          
|/s/    SHELDON S. HENDLER    |  | Director |  | March 28, 2005
|                             |  |         
|/s/    G. DALE GARLOW        |  | Director |  | March 28, 2005
|                             |  |         
|/s/    RICHARD G. MCKEE,
JR. |  | Director |  | March 28, 2005
|                             |  |         
|/s/    TOM K. LARSON,
JR.    |  | Director |  | March 28, 2005
|                             |  |         
|/s/    MICHAEL L. EAGLE      |  | Director |  | March 28, 2005



26



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Vyrex Corporation



(a development stage enterprise)



Index to Financial Statements



|                                                                       |  |       
|---------------------------------------------------------------------- |  | ------
|                                                                       |  | Page  
|Report of J.H. Cohn LLP, Independent Registered Public Accounting Firm |  | F-2   
|Balance Sheets                                                         |  | F-3   
|Statements of Operations                                               |  | F-4   
|Statements of Stockholders Deficiency                                 |  | F-5-7 
|Statements of Cash Flows                                               |  | F-8   
|Notes to Financial Statements                                          |  | F-9-14



F-1



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders

Vyrex Corporation



We have audited the accompanying balance sheets of Vyrex Corporation (a development stage enterprise) as of December 31,
2004 and 2003, and the related statements of operations, stockholders deficiency and cash flows for the years then ended, and for the period from January 2, 1991 (date of inception) through December 31, 2004. 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. The financial statements for the years ended December 31, 1998, 1997 and 1996 were audited by other
auditors whose reports dated March 15, 1999 (except as to Note 10 to the 1998 financial statements for which the date was March 29, 1999) and February 12, 1998, expressed unqualified opinions and included explanatory paragraphs discussing
substantial doubt regarding Vyrex Corporations ability to continue as a going concern. Total revenues and net losses for the three years ended December 31, 1998, 1997 and 1996 were $1,600 and $8,504,866, respectively. Our opinion on the
statements of operations, stockholders deficiency and cash flows for the period from January 2, 1991 (inception) through December 31, 2004, insofar as it relates to amounts for the years ended December 31, 1998, 1997 and 1996, is based solely
on the reports of other auditors.



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



In our opinion, based on our audits and the reports of other auditors, the financial statements referred to above present
fairly, in all material respects, the financial position of Vyrex Corporation (a development stage enterprise) at December 31, 2004 and 2003, and its results of operations and cash flows for the years then ended and for the period from January 2,
1991 (date of inception) through December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.



The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 1,
the Company has incurred recurring operating losses, has a working capital deficiency and a net capital deficiency. These conditions raise substantial doubt about the Companys ability to continue as a going concern. Managements plans in
regard to these matters are also described in Note 1. The financial statements do not include any adjustments that may result from the outcome of this uncertainty.



/s/ J.H. Cohn LLP



San Diego, California

February 8, 2005



F-2



---

Vyrex Corporation



(a development
stage enterprise)



Balance Sheets



|                                                                                              |  |             |             |   |      |   |             |  
|--------------------------------------------------------------------------------------------- |  | ----------- | ----------- | - | ---- | - | ----------- | -
|                                                                                              |  | December 31 |            
|                                                                                              |  | 2004        |             |   | 2003 |  
|Assets                                                                                        |  |             |             |   |      |   |             |  
|Current assets:                                                                               |  |             |             |   |      |   |             |  
|Cash and cash equivalents                                                                     |  | $           | 3,174       |   |      | $ | 11,137      |  
|Accounts receivable                                                                           |  |             | 22,500      |   |      |   | 22,500      |  
|Investment in available-for-sale securities                                                   |  |             | 16,665      |   |      |   |             |  
|                                                                                              |  |             |             |   |      |   |             |  
|Total assets                                                                                  |  | $           | 42,339      |   |      | $ | 33,637      |  
|                                                                                              |  |             |             |   |      |   |             |  
|                                                                                              |  |            
|Liabilities and stockholders deficiency                                                      |  |             |             |   |      |   |             |  
|Current liabilities:                                                                          |  |             |             |   |      |   |             |  
|Accounts payable and accrued liabilities                                                      |  | $           | 81,407      |   |      | $ | 82,707      |  
|Current portion of notes payable                                                              |  |             | 7,500       |   |      |   |             |  
|                                                                                              |  |             |             |   |      |   |             |  
|Total current liabilities                                                                     |  |             | 88,907      |   |      |   | 82,707      |  
|Notes payable, net                                                                            |  |             | 198,000     |   |      |   | 196,000     |  
|                                                                                              |  |             |             |   |      |   |             |  
|Total liabilities                                                                             |  |             | 286,907     |   |      |   | 278,707     |  
|                                                                                              |  |             |             |   |      |   |             |  
|                                                                                              |  |            
|Commitments and contingencies                                                                 |  |             |             |   |      |   |             |  
|                                                                                              |  |            
|Stockholders deficiency:                                                                     |  |             |             |   |      |   |             |  
|Preferred stock, $.001 par value; 10,000,000 shares authorized; none issued                   |  |             |             |   |      |   |             |  
|Common stock, $.001 par value; 50,000,000 shares authorized; 8,492,867 issued and outstanding |  |             | 8,493       |   |      |   | 8,493       |  
|Additional paid-in capital                                                                    |  |             | 13,106,096  |   |      |   | 13,080,025  |  
|Accumulated other comprehensive income                                                        |  |             | 12,231      |   |      |   |             |  
|Deficit accumulated during the development stage                                              |  |             | (13,371,388 | ) |      |   | (13,333,588 | )
|                                                                                              |  |             |             |   |      |   |             |  
|Total stockholders deficiency                                                                |  |             | (244,568    | ) |      |   | (245,070    | )
|                                                                                              |  |             |             |   |      |   |             |  
|Total liabilities and stockholders deficiency                                                |  | $           | 42,339      |   |      | $ | 33,637      |  
|                                                                                              |  |             |             |   |      |   |             |  



See accompanying
notes.



F-3



---

Vyrex Corporation



(a development
stage enterprise)



Statements of Operations



|                                                           |  |                          |           |   |                          |   |           |   |  |   |             |  
|---------------------------------------------------------- |  | ------------------------ | --------- | - | ------------------------ | - | --------- | - |  | - | ----------- | -
|                                                           |  | Years ended December 31, |           |   | Cumulative fromInception |  
|                                                           |  | 2004                     |           |   | 2003                     |   |          
|Licensing and royalty revenue                              |  | $                        | 90,000    |   |                          | $ | 90,000    |   |  | $ | 755,699     |  
|                                                           |  |                          |           |   |                          |   |           |   |  |   |             |  
|Operating expenses:                                        |  |                          |           |   |                          |   |           |   |  |   |             |  
|Research and development                                   |  |                          | 14,699    |   |                          |   | 15,087    |   |  |   | 6,471,158   |  
|Marketing and selling                                      |  |                          |           |   |                          |   | 1,034     |   |  |   | 438,664     |  
|General and administrative                                 |  |                          | 95,439    |   |                          |   | 144,122   |   |  |   | 6,191,508   |  
|                                                           |  |                          |           |   |                          |   |           |   |  |   |             |  
|Total operating expenses                                   |  |                          | 110,138   |   |                          |   | 160,243   |   |  |   | 13,101,330  |  
|                                                           |  |                          |           |   |                          |   |           |   |  |   |             |  
|Loss from operations                                       |  |                          | (20,138   | ) |                          |   | (70,243   | ) |  |   | (12,345,631 | )
|                                                           |  |                          |           |   |                          |   |           |   |  |   |             |  
|Other income (expense):                                    |  |                          |           |   |                          |   |           |   |  |   |             |  
|Interest income                                            |  |                          | 226       |   |                          |   | 446       |   |  |   | 475,726     |  
|Other income                                               |  |                          | 4,434     |   |                          |   |           |   |  |   | 4,434       |  
|Loss on disposal of fixed assets                           |  |                          |           |   |                          |   |           |   |  |   | (13,664     | )
|Interest expense                                           |  |                          | (22,322   | ) |                          |   | (20,743   | ) |  |   | (142,353    | )
|Charge from issuance of stock options for bridge financing |  |                          |           |   |                          |   |           |   |  |   | (1,349,900  | )
|                                                           |  |                          |           |   |                          |   |           |   |  |   |             |  
|Total other expense                                        |  |                          | (17,662   | ) |                          |   | (20,297   | ) |  |   | (1,025,757  | )
|                                                           |  |                          |           |   |                          |   |           |   |  |   |             |  
|Net loss                                                   |  | $                        | (37,800   | ) |                          | $ | (90,540   | ) |  | $ | (13,371,388 | )
|                                                           |  |                          |           |   |                          |   |           |   |  |   |             |  
|Net loss per share  basic                                 |  | $                        | (0.00     | ) |                          | $ | (0.01     | ) |  |   |             |  
|                                                           |  |                          |           |   |                          |   |           |   |  |   |             |  
|Weighted-average common shares outstanding                 |  |                          | 8,492,867 |   |                          |   | 8,492,867 |   |  |   |             |  
|                                                           |  |                          |           |   |                          |   |           |   |  |   |             |  



See accompanying
notes.



F-4



---

Vyrex Corporation



(a development
stage enterprise)



Statements of Stockholders Deficiency



|                                                                                                                                             |  |              |  |                          |       |  |                                              |            |   |                                      |   |            |   |  |   |            |  
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | ------------------------ | ----- |  | -------------------------------------------- | ---------- | - | ------------------------------------ | - | ---------- | - |  | - | ---------- | -
|                                                                                                                                             |  | Common stock |  | Additionalpaid-incapital |       |  | Deficitaccumulatedduring thedevelopmentstage |            |   | Totalstockholdersequity(deficiency) |  
|                                                                                                                                             |  | Shares       |  | Amount                   |       |  |                                             
|Issuance (at $.002 per share) for acquisition of technology retroactively reduced for 150,000 shares returned and retired on October 1,
1995 |  | 3,350,000    |  | $                        | 3,350 |  | $                                            | 3,350      |   |                                      | $ |           |   |  | $ | 6,700      |  
|Issuance (at $.002 per share) for cash                                                                                                       |  | 500,000      |  |                          | 500   |  |                                              | 500        |   |                                      |   |            |   |  |   | 1,000      |  
|Issuance (at $1.00 per share) for cash                                                                                                       |  | 800,000      |  |                          | 800   |  |                                              | 799,200    |   |                                      |   |           |   |  |   | 800,000    |  
|Issuance as compensation (at $1.00 per share)                                                                                                |  | 32,500       |  |                          | 33    |  |                                              | 32,467     |   |                                      |   |           |   |  |   | 32,500     |  
|Issuance (at $2.00 per share) upon conversion of note payable                                                                                |  | 100,000      |  |                          | 100   |  |                                              | 199,900    |   |                                      |   |           |   |  |   | 200,000    |  
|Issuance (at $3.00 per share) for cash, net of issuance costs of $4,086                                                                      |  | 33,000       |  |                          | 33    |  |                                              | 94,881     |   |                                      |   |           |   |  |   | 94,914     |  
|Net loss                                                                                                                                     |  |             |  |                          |      |  |                                              |           |   |                                      |   | (1,085,932 | ) |  |   | (1,085,932 | )
|                                                                                                                                             |  |              |  |                          |       |  |                                              |            |   |                                      |   |            |   |  |   |            |  
|Balance at December 31, 1993                                                                                                                 |  | 4,815,500    |  |                          | 4,816 |  |                                              | 1,130,298  |   |                                      |   | (1,085,932 | ) |  |   | 49,182     |  
|Issuance (at $3.00 per share) for cash, net of issuance costs of $21,000                                                                     |  | 99,000       |  |                          | 99    |  |                                              | 275,901    |   |                                      |   |           |   |  |   | 276,000    |  
|Issuance (at $3.00 per share) in lieu of finders fee                                                                                        |  | 7,000        |  |                          | 7     |  |                                              | 20,993     |   |                                      |   |           |   |  |   | 21,000     |  
|Issuance (at $3.00 per share) in lieu of finders fee                                                                                        |  | 5,000        |  |                          | 5     |  |                                              | 14,995     |   |                                      |   |           |   |  |   | 15,000     |  
|Issuance (at $3.00 per share) for cash, net of issuance costs of $41,844                                                                     |  | 24,990       |  |                          | 25    |  |                                              | 33,101     |   |                                      |   |           |   |  |   | 33,126     |  
|Net loss                                                                                                                                     |  |             |  |                          |      |  |                                              |           |   |                                      |   | (467,683   | ) |  |   | (467,683   | )
|                                                                                                                                             |  |              |  |                          |       |  |                                              |            |   |                                      |   |            |   |  |   |            |  
|Balance at December 31, 1994                                                                                                                 |  | 4,951,490    |  |                          | 4,952 |  |                                              | 1,475,288  |   |                                      |   | (1,553,615 | ) |  |   | (73,375    | )
|Issuance (at $3.00 per share) for cash, net of issuance costs of $46,976                                                                     |  | 149,940      |  |                          | 150   |  |                                              | 402,694    |   |                                      |   |           |   |  |   | 402,844    |  
|Issuance (at $3.00 per share) in settlement of account payable                                                                               |  | 6,041        |  |                          | 6     |  |                                              | 18,117     |   |                                      |   |           |   |  |   | 18,123     |  
|Issuance (at par value) as compensation for services related to prior issuances of common stock                                              |  | 83,000       |  |                          | 83    |  |                                              | (83        | ) |                                      |   |           |   |  |   |           |  
|Issuance (at $3.00 per share) as compensation for services related to offering                                                               |  | 13,334       |  |                          | 13    |  |                                              | 39,989     |   |                                      |   |           |   |  |   | 40,002     |  
|Issuance (at $3.00 per share) of options for 450,000 shares as compensation for arranging bridge financing                                   |  |             |  |                          |      |  |                                              | 1,349,900  |   |                                      |   |           |   |  |   | 1,349,900  |  
|Net loss                                                                                                                                     |  |             |  |                          |      |  |                                              |           |   |                                      |   | (1,854,584 | ) |  |   | (1,854,584 | )
|                                                                                                                                             |  |              |  |                          |       |  |                                              |            |   |                                      |   |            |   |  |   |            |  
|Balance at December 31, 1995                                                                                                                 |  | 5,203,805    |  |                          | 5,204 |  |                                              | 3,285,905  |   |                                      |   | (3,408,199 | ) |  |   | (117,090   | )
|Proceeds from initial public offering (at $6.50 per unit), net of issuance costs of $1,135,453                                               |  | 1,057,097    |  |                          | 1,057 |  |                                              | 5,734,620  |   |                                      |   |           |   |  |   | 5,735,677  |  
|Sale of option to purchase 300,000 shares (at $3.00 per share)                                                                               |  |             |  |                          |      |  |                                              | 50,000     |   |                                      |   |           |   |  |   | 50,000     |  
|Exercise of stock options (at $3.00 per share) for cash                                                                                      |  | 300,000      |  |                          | 300   |  |                                              | 899,700    |   |                                      |   |           |   |  |   | 900,000    |  
|Conversion of notes payable and related accrued interest (at $3.00 per share)                                                                |  | 86,015       |  |                          | 86    |  |                                              | 257,959    |   |                                      |   |           |   |  |   | 258,045    |  
|Exercise of stock options (at $.00022 per share) for cash                                                                                    |  | 450,000      |  |                          | 450   |  |                                              | (350       | ) |                                      |   |           |   |  |   | 100        |  
|Issuance of units as compensation for legal services (at $4.55 per share)                                                                    |  | 24,292       |  |                          | 24    |  |                                              | 110,505    |   |                                      |   |           |   |  |   | 110,529    |  
|Net loss                                                                                                                                     |  |             |  |                          |      |  |                                              |           |   |                                      |   | (1,820,614 | ) |  |   | (1,820,614 | )
|                                                                                                                                             |  |              |  |                          |       |  |                                              |            |   |                                      |   |            |   |  |   |            |  
|Balance at December 31, 1996                                                                                                                 |  | 7,121,209    |  |                          | 7,121 |  |                                              | 10,338,339 |   |                                      |   | (5,228,813 | ) |  |   | 5,116,647  |  



F-5



---

Vyrex Corporation



(a development stage enterprise)



Statements of Stockholders Deficiency(Continued)



|                                                                       |  |              |  |                          |       |                                              |   |            |                                      |   |             |   |  |   |            |  
|---------------------------------------------------------------------- |  | ------------ |  | ------------------------ | ----- | -------------------------------------------- | - | ---------- | ------------------------------------ | - | ----------- | - |  | - | ---------- | -
|                                                                       |  | Common stock |  | Additionalpaid-incapital |       | Deficitaccumulatedduring thedevelopmentstage |   |            | Totalstockholdersequity(deficiency) |  
|                                                                       |  | Shares       |  | Amount                   |       |                                              |  
|Balance at December 31, 1996                                           |  | 7,121,209    |  | $                        | 7,121 |                                              | $ | 10,338,339 |                                      | $ | (5,228,813  | ) |  | $ | 5,116,647  |  
|Exercise of warrants, 200 shares at $8.00 per share                    |  | 200          |  |                          |      |                                              |   | 1,600      |                                      |   |            |   |  |   | 1,600      |  
|Warrants issued in conjunction with debenture offering                 |  |             |  |                          |      |                                              |   | 62,220     |                                      |   |            |   |  |   | 62,220     |  
|Net loss                                                               |  |             |  |                          |      |                                              |   |           |                                      |   | (3,295,840  | ) |  |   | (3,295,840 | )
|                                                                       |  |              |  |                          |       |                                              |   |            |                                      |   |             |   |  |   |            |  
|Balance at December 31, 1997                                           |  | 7,121,409    |  |                          | 7,121 |                                              |   | 10,402,159 |                                      |   | (8,524,653  | ) |  |   | 1,884,627  |  
|Issuance of stock as partial consideration for placement of debentures |  | 8,000        |  |                          | 8     |                                              |   | 49,992     |                                      |   |            |   |  |   | 50,000     |  
|Issuance of stock on conversion of debentures                          |  | 227,222      |  |                          | 227   |                                              |   | 807,414    |                                      |   |            |   |  |   | 807,641    |  
|Issuance of shares upon cashless exercise of stock options             |  | 66,824       |  |                          | 67    |                                              |   | 396,513    |                                      |   |            |   |  |   | 396,580    |  
|Issuance of 375,000 stock options for services                         |  |             |  |                          |      |                                              |   | 87,000     |                                      |   |            |   |  |   | 87,000     |  
|Net loss                                                               |  |             |  |                          |      |                                              |   |           |                                      |   | (3,388,412  | ) |  |   | (3,388,412 | )
|                                                                       |  |              |  |                          |       |                                              |   |            |                                      |   |             |   |  |   |            |  
|Balance at December 31, 1998                                           |  | 7,423,455    |  |                          | 7,423 |                                              |   | 11,743,078 |                                      |   | (11,913,065 | ) |  |   | (162,564   | )
|Issuance (at $.34 per share) for cash                                  |  | 119,412      |  |                          | 120   |                                              |   | 40,480     |                                      |   |             |   |  |   | 40,600     |  
|Issuance of 47,000 stock options for services                          |  |              |  |                          |       |                                              |   | 6,580      |                                      |   |             |   |  |   | 6,580      |  
|Issuance of 250,000 warrants for services                              |  |              |  |                          |       |                                              |   | 30,500     |                                      |   |             |   |  |   | 30,500     |  
|Net loss                                                               |  |              |  |                          |       |                                              |   |            |                                      |   | (788,548    | ) |  |   | (788,548   | )
|                                                                       |  |              |  |                          |       |                                              |   |            |                                      |   |             |   |  |   |            |  
|Balance at December 31, 1999                                           |  | 7,542,867    |  |                          | 7,543 |                                              |   | 11,820,638 |                                      |   | (12,701,613 | ) |  |   | (873,432   | )
|Forgiveness of accrued compensation                                    |  |              |  |                          |       |                                              |   | 422,559    |                                      |   |             |   |  |   | 422,559    |  
|Issuance (at $.90 per share) for cash                                  |  | 300,000      |  |                          | 300   |                                              |   | 269,700    |                                      |   |             |   |  |   | 270,000    |  
|Exercise of stock options (at $.10 per share) for cash                 |  | 250,000      |  |                          | 250   |                                              |   | 24,750     |                                      |   |             |   |  |   | 25,000     |  
|Exercise of warrants (at $.10 per share) for cash                      |  | 100,000      |  |                          | 100   |                                              |   | 9,900      |                                      |   |             |   |  |   | 10,000     |  
|Issuance (at $1.00 per share) for cash                                 |  | 150,000      |  |                          | 150   |                                              |   | 149,850    |                                      |   |             |   |  |   | 150,000    |  
|Reduction of exercise price for options and warrants                   |  |              |  |                          |       |                                              |   | 148,000    |                                      |   |             |   |  |   | 148,000    |  
|Net loss                                                               |  |              |  |                          |       |                                              |   |            |                                      |   | (335,487    | ) |  |   | (335,487   | )
|                                                                       |  |              |  |                          |       |                                              |   |            |                                      |   |             |   |  |   |            |  
|Balance at December 31, 2000                                           |  | 8,342,867    |  |                          | 8,343 |                                              |   | 12,845,397 |                                      |   | (13,037,100 | ) |  |   | (183,360   | )
|Issuance of 50,000 stock options for services                          |  |              |  |                          |       |                                              |   | 18,500     |                                      |   |             |   |  |   | 18,500     |  
|Issuance of 200,000 warrants for services                              |  |              |  |                          |       |                                              |   | 50,000     |                                      |   |             |   |  |   | 50,000     |  
|Net loss                                                               |  |              |  |                          |       |                                              |   |            |                                      |   | (202,185    | ) |  |   | (202,185   | )
|                                                                       |  |              |  |                          |       |                                              |   |            |                                      |   |             |   |  |   |            |  
|Balance at December 31, 2001                                           |  | 8,342,867    |  |                          | 8,343 |                                              |   | 12,913,897 |                                      |   | (13,239,285 | ) |  |   | (317,045   | )



F-6



---

Vyrex Corporation



(a development stage enterprise)



Statements of Stockholders Deficiency(Continued)



|                                                                |  |              |  |                          |       |                                     |   |                                              |  |   |                                      |  |   |             |   |  |   |          |  
|--------------------------------------------------------------- |  | ------------ |  | ------------------------ | ----- | ----------------------------------- | - | -------------------------------------------- |  | - | ------------------------------------ |  | - | ----------- | - |  | - | -------- | -
|                                                                |  | Common stock |  | Additionalpaid-incapital |       | Accumulatedothercomprehensiveincome |   | Deficitaccumulatedduring thedevelopmentstage |  |   | Totalstockholdersequity(deficiency) | 
|                                                                |  | Shares       |  | Amount                   |       |                                     |   |                                             
|Balance at December 31, 2001                                    |  | 8,342,867    |  | $                        | 8,343 |                                     | $ | 12,913,897                                   |  |   |                                      |  | $ | (13,239,285 | ) |  | $ | (317,045 | )
|Modification of stock options                                   |  |              |  |                          |       |                                     |   | 2,000                                        |  |   |                                      |  |   |             |   |  |   | 2,000    |  
|Issuance of stock upon exercise of warrants at $.10 per share   |  | 150,000      |  |                          | 150   |                                     |   | 14,850                                       |  |   |                                      |  |   |             |   |  |   | 15,000   |  
|Forgiveness of accrued compensation                             |  |              |  |                          |       |                                     |   | 140,978                                      |  |   |                                      |  |   |             |   |  |   | 140,978  |  
|Issuance of 20,000 warrants for services                        |  |              |  |                          |       |                                     |   | 2,000                                        |  |   |                                      |  |   |             |   |  |   | 2,000    |  
|Issuance of 5,000 warrants for services                         |  |              |  |                          |       |                                     |   | 300                                          |  |   |                                      |  |   |             |   |  |   | 300      |  
|Net loss                                                        |  |              |  |                          |       |                                     |   |                                              |  |   |                                      |  |   | (3,763      | ) |  |   | (3,763   | )
|                                                                |  |              |  |                          |       |                                     |   |                                              |  |   |                                      |  |   |             |   |  |   |          |  
|Balance at December 31, 2002                                    |  | 8,492,867    |  |                          | 8,493 |                                     |   | 13,074,025                                   |  |   |                                      |  |   | (13,243,048 | ) |  |   | (160,530 | )
|Issuance of 100,000 warrants in connection with debt issuance   |  |              |  |                          |       |                                     |   | 6,000                                        |  |   |                                      |  |   |             |   |  |   | 6,000    |  
|Net loss                                                        |  |              |  |                          |       |                                     |   |                                              |  |   |                                      |  |   | (90,540     | ) |  |   | (90,540  | )
|                                                                |  |              |  |                          |       |                                     |   |                                              |  |   |                                      |  |   |             |   |  |   |          |  
|Balance at December 31, 2003                                    |  | 8,492,967    |  |                          | 8,493 |                                     |   | 13,080,025                                   |  |   |                                      |  |   | (13,333,588 | ) |  |   | (245,070 | )
|Forgiveness of accrued compensation                             |  |              |  |                          |       |                                     |   | 26,071                                       |  |   |                                      |  |   |             |   |  |   | 26,071   |  
|Net loss                                                        |  |              |  |                          |       |                                     |   |                                              |  |   |                                      |  |   | (37,800     | ) |  |   | (37,800  | )
|Effect of change in fair value of available-for-sale securities |  |              |  |                          |       |                                     |   |                                              |  | $ | 12,231                               |  |   |             |   |  |   | 12,231   |  
|                                                                |  |              |  |                          |       |                                     |   |                                              |  |   |                                      |  |   |             |   |  |   |          |  
|Comprehensive loss                                              |  |              |  |                          |       |                                     |   |                                              |  |   |                                      |  |   |             |   |  |   | (25,569  | )
|                                                                |  |              |  |                          |       |                                     |   |                                              |  |   |                                      |  |   |             |   |  |   |          |  
|Balance at December 31, 2004                                    |  | 8,492,867    |  | $                        | 8,493 |                                     | $ | 13,106,096                                   |  | $ | 12,231                               |  | $ | (13,371,388 | ) |  | $ | (244,568 | )
|                                                                |  |              |  |                          |       |                                     |   |                                              |  |   |                                      |  |   |             |   |  |   |          |  



See accompanying notes.



F-7



---

Vyrex Corporation



(a development
stage enterprise)



Statements of Cash Flows



|                                                                            |  |                         |         |   |                         |   |          |   |  |   |             |  
|--------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ----------------------- | - | -------- | - |  | - | ----------- | -
|                                                                            |  | Years endedDecember 31, |         |   | CumulativefromInception |  
|                                                                            |  | 2004                    |         |   | 2003                    |   |         
|Operating activities                                                        |  |                         |         |   |                         |   |          |   |  |   |             |  
|Net loss                                                                    |  | $                       | (37,800 | ) |                         | $ | (90,540  | ) |  | $ | (13,371,388 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                         |         |   |                         |   |          |   |  |   |             |  
|Depreciation, amortization and impairment charges                           |  |                         |         |   |                         |   |          |   |  |   | 336,329     |  
|Accretion of debt discount                                                  |  |                         | 2,000   |   |                         |   | 2,000    |   |  |   | 4,000       |  
|Interest receivable                                                         |  |                         |         |   |                         |   |          |   |  |   | 3,506       |  
|Loss on disposal of fixed assets                                            |  |                         |         |   |                         |   |          |   |  |   | 13,664      |  
|Issuance of compensatory notes, stock, stock options and warrants           |  |                         |         |   |                         |   |          |   |  |   | 2,302,512   |  
|Other income                                                                |  |                         | (4,434  | ) |                         |   |          |   |  |   | (4.434      | )
|Changes in operating assets and liabilities:                                |  |                         |         |   |                         |   |          |   |  |   |             |  
|Accounts receivable and other assets                                        |  |                         |         |   |                         |   | 57,500   |   |  |   | 77,500      |  
|Accounts payable and accrued liabilities                                    |  |                         | 24,771  |   |                         |   | 4,151    |   |  |   | 580,060     |  
|                                                                            |  |                         |         |   |                         |   |          |   |  |   |             |  
|Net cash used in operating activities                                       |  |                         | (15,463 | ) |                         |   | (26,889  | ) |  |   | (10,058,251 | )
|                                                                            |  |                         |         |   |                         |   |          |   |  |   |             |  
|Investing activities                                                        |  |                         |         |   |                         |   |          |   |  |   |             |  
|Purchase of short-term investments                                          |  |                         |         |   |                         |   |          |   |  |   | (8,440,442  | )
|Sale of short-term investments                                              |  |                         |         |   |                         |   |          |   |  |   | 8,467,931   |  
|Purchases of fixed assets                                                   |  |                         |         |   |                         |   |          |   |  |   | (209,595    | )
|Proceeds on sale of fixed assets                                            |  |                         |         |   |                         |   |          |   |  |   | 10,000      |  
|Patent, 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 activities                                                        |  |                         |         |   |                         |   |          |   |  |   |             |  
|Net proceeds from issuance of common stock                                  |  |                         |         |   |                         |   |          |   |  |   | 7,889,808   |  
|Exercise of stock options and sale of options                               |  |                         |         |   |                         |   |          |   |  |   | 975,100     |  
|Exercise of warrants                                                        |  |                         |         |   |                         |   |          |   |  |   | 25,000      |  
|Proceeds from short-term loan                                               |  |                         | 7,500   |   |                         |   |          |   |  |   | 875,230     |  
|Proceeds from notes payable                                                 |  |                         |         |   |                         |   | 200,000  |   |  |   | 791,114     |  
|Repayment of notes payable                                                  |  |                         |         |   |                         |   | (165,000 | ) |  |   | (185,000    | )
|Advances from potential investors                                           |  |                         |         |   |                         |   |          |   |  |   | 100,000     |  
|Repayment of advances                                                       |  |                         |         |   |                         |   |          |   |  |   | (100,000    | )
|                                                                            |  |                         |         |   |                         |   |          |   |  |   |             |  
|Net cash provided by financing activities                                   |  |                         | 7,500   |   |                         |   | 35,000   |   |  |   | 10,371,252  |  
|                                                                            |  |                         |         |   |                         |   |          |   |  |   |             |  
|Net increase (decrease) in cash and cash equivalents                        |  |                         | (7,963  | ) |                         |   | 8,111    |   |  |   | 3,174       |  
|Cash and cash equivalents, beginning of the period                          |  |                         | 11,137  |   |                         |   | 3,026    |   |  |   |            |  
|                                                                            |  |                         |         |   |                         |   |          |   |  |   |             |  
|Cash and cash equivalents, end of the period                                |  | $                       | 3,174   |   |                         | $ | 11,137   |   |  | $ | 3,174       |  
|                                                                            |  |                         |         |   |                         |   |          |   |  |   |             |  
|Supplemental cash flow information                                          |  |                         |         |   |                         |   |          |   |  |   |             |  
|Forgiveness of debt                                                         |  | $                       | 26,071  |   |                         |   |          |   |  | $ | 589 608     |  
|                                                                            |  |                         |         |   |                         |   |          |   |  |   |             |  
|Conversion of notes payable and related accrued interest                    |  |                         |         |   |                         |   |          |   |  | $ | 258,045     |  
|                                                                            |  |                         |         |   |                         |   |          |   |  |   |             |  
|Issuance of stock as consideration for conversion of debentures             |  |                         |         |   |                         |   |          |   |  | $ | 857,641     |  
|                                                                            |  |                         |         |   |                         |   |          |   |  |   |             |  
|Issuance of stock upon cashless exercise of stock options                   |  |                         |         |   |                         |   |          |   |  | $ | 396,580     |  
|                                                                            |  |                         |         |   |                         |   |          |   |  |   |             |  
|Warrants issued in connection with convertible debentures and notes payable |  |                         |         |   |                         | $ | 6,000    |   |  | $ | 68,220      |  
|                                                                            |  |                         |         |   |                         |   |          |   |  |   |             |  



See accompanying
notes.



F-8



---

|1. | Basis of Presentation and the Company
|-- | -------------------------------------



Basis of Presentation



The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America which
contemplate continuation of Vyrex Corporation (the Company) as a going concern and the realization of the Companys assets and the satisfaction of its liabilities in the normal course of business. As of December 31, 2004, the
Company has an accumulated deficit of $13,371,388 and stockholders deficiency of $244,568. Due to the Companys recurring losses and stockholders deficiency, there can be no assurance that the Company will be able to obtain
additional operating capital, which may impact the Companys ability to continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that may result from the potential inability of the Company to continue as a going concern.



The Company is seeking collaborative or other arrangements with larger pharmaceutical and nutraceutical companies, under
which such companies would provide additional capital to the Company in exchange for exclusive or non-exclusive licenses or other rights to certain of the technologies and products the Company is developing. Competition for corporate partnering
arrangements with major pharmaceutical and nutraceutical companies is intense, with a large number of biopharmaceutical companies attempting to arrive at such arrangements. Accordingly, there can be no assurance that an agreement will be reached in
a timely manner, or at all, or that any agreement that may be reached will successfully reduce the Companys short-term or long-term funding requirements.



The Companys major activities through December 31, 2004 have been limited to out-sourcing research and development related to its proposed
products and raising funds for such activities. These activities have not generated any significant revenues; accordingly, the Company has been in the development stage since its inception. Successful completion of the Companys development
program and its transition, ultimately, to attaining profitable operations is dependent upon obtaining additional financing adequate to fulfill its research and development activities, and achieving a level of revenue adequate to support the
Companys cost structure. There can be no assurance that the Company will be successful in these areas. To supplement its existing resources, the Company will require additional capital through the sale of debt or equity. There can be no
assurance that such capital will be available on favorable terms, or at all, and if additional funds are raised by issuing equity securities, dilution to existing stockholders is likely to result.



The Company



The Company was incorporated on January 2, 1991 in the State of Nevada. The Companys operations focus primarily on the
discovery and development of biopharmaceuticals for the treatment and prevention of various disorders including AIDS, respiratory diseases, cancer and aging and it is involved in various stages of the investigation and development of several
potential therapeutic products. The Company is using contractors for manufacturing and testing of the products it is developing and is seeking strategic partners to market and distribute them. Management expects the Company to continue to use
contractors and strategic partners until such time, if ever, that it has sufficient resources to conduct such activities on its own.



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



Cash and Cash Equivalents



Cash and cash equivalents consists of cash and highly-liquid U.S. Government securities with maturities of three months or less when acquired.



F-9



---

Stock Options and Warrants



Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation (SFAS
123), provides for use of a fair value based method of accounting for employee stock compensation. However, SFAS 123 also allows an entity to continue to measure compensation cost for stock options granted to employees using the intrinsic
value method of accounting prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), which only requires charges to compensation expense for the excess, if any, of the fair
value of the underlying stock at the date a stock option is granted (or at an appropriate subsequent measurement date) over the amount the employee must pay to acquire the stock, if such amounts differ materially from the historical amounts. The
Company has elected to continue to account for employee stock options using the intrinsic value method under APB 25. By making that election, it is required by SFAS 123 and Statement of Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure to provide pro forma disclosures of net income and earnings per share as if a fair value based method of accounting had been applied.



Under APB 25, because the exercise price of the Companys employee stock
options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. Pro forma information regarding net loss and loss per share is required by SFAS 123, and has been determined as if the Company
had accounted for its employee stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
risk-free interest rate of 4.00% dividend yield of 0%; the volatility factor of the expected market price of the Companys common stock of 100% in 2003 and a weighted-average expected life of the options of 120 months. No options were issued in
2004.



Options and warrants granted to consultants and other
non-employees are valued based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable, and expensed over the term of the consulting or other agreements.



For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The Companys pro forma information follows:



|                                                                                                          |  |      |          |   |      |   |          |  
|--------------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                                                                          |  | 2004 |          |   | 2003 |  
|Net loss  as reported                                                                                    |  | $    | (37,800) |   |      | $ | (90,540  | )
|Stock-based employee compensation expense assuming a fair value based method had been used for all awards |  |      | (16,000  | ) |      |   | (59,000  | )
|                                                                                                          |  |      |          |   |      |   |          |  
|Net loss  pro forma                                                                                      |  | $    | (53,800  | ) |      | $ | (149,540 | )
|                                                                                                          |  |      |          |   |      |   |          |  
|Basic loss per share  as reported                                                                        |  | $    | (0.00    | ) |      | $ | (0.01    | )
|Basic loss per share  pro forma                                                                          |  | $    | (0.01    | ) |      | $ | (0.02    | )



The weighted-average
fair value of options granted in 2003 was $0.07.



Revenue Recognition



Licensing and royalty revenue from royalty agreements is
recognized in accordance with the terms of the specific agreement, which generally includes a quarterly minimum payment by the licensee.



Income taxes



The Company accounts for income taxes pursuant to the asset and liability method which requires deferred income tax assets and liabilities to be computed
for temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in future periods based on enacted laws and rates applicable to the periods in which the temporary
differences are expected to affect taxable



F-10



---

income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The income tax provision is
the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.



Net Loss Per Share



Basic net loss per share is computed using the weighted-average number of common shares outstanding during the periods presented. Diluted earnings per
share have not been presented because the assumed conversion of convertible notes payable and the exercise of the Companys outstanding options and warrants would have been antidilutive. Options and warrants will have a dilutive effect only
when the average market price of the common stock during the period exceeds the exercise price of the options or warrants. The number of shares potentially issuable at December 31, 2004 and 2003 upon the conversion or exercise that were not included
in the computation of net loss per share totaled 2,912,259 and 3,294,259, respectively.



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 certain reported amounts and disclosures. Accordingly, actual results could
differ from those estimates.



Investments



Pursuant to Statement of Financial Accounting Standards No. 115, ACCOUNTING
FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, the Companys investments in marketable equity securities have been classified as available-for-sale securities and, accordingly, are valued at fair value at the end of each period. Any
material unrealized holding gains and losses arising from such valuation are excluded from net income and reported, net of applicable income taxes, in other comprehensive income. Accumulated net unrealized holding gains and losses are included at
the end of each year in accumulated other comprehensive income which is a separate component of stockholders equity.



|3. | Warrants
|-- | --------



Activity with respect to warrants for the purchase of the Companys common stock is summarized as follows:



|                             |  |                     |   |  |                |  |                              |     
|---------------------------- |  | ------------------- | - |  | -------------- |  | ---------------------------- | ----
|                             |  | WarrantsOutstanding |   |  | Exercise Price |  | WeightedAverageExercisePrice
|Balance at January 1, 2003   |  | 225,000             |   |  | $0.15 - $0.37  |  | $                            | 0.30
|Issued                       |  | 100,000             |   |  | $0.11          |  | $                            | 0.11
|                             |  |                     |   |  |                |  |                              |     
|Balance at December 31, 2003 |  | 325,000             |   |  | $0.11 - $0.37  |  | $                            | 0.24
|Expired                      |  | (200,000            | ) |  | $0.30          |  | $                            | 0.30
|                             |  |                     |   |  |                |  |                              |     
|Balance at December 31, 2004 |  | 125,000             |   |  | $0.11 - $0.37  |  | $                            | 0.15
|                             |  |                     |   |  |                |  |                              |     



The warrants
outstanding at December 31, 2004 will expire on varying dates through March 10, 2006.



|4. | License and Collaboration Agreements
|-- | ------------------------------------



On August 29, 2000, the Company entered into a license agreement with VDF FutureCeuticals, Inc. (VDF). The licensee paid a license fee of
$100,000 to manufacture certain boron compounds. The agreement also included terms relating to royalty payments based on sales and a guaranteed minimum royalty payment. During both 2004 and 2003 the Company received $90,000 in guaranteed royalty
payments. There can be no assurance that a significant market will develop for the boron product to produce revenue for the Company.



F-11



---

|5. | Concentration of Credit Risk
|-- | ----------------------------



The Company maintains its cash and cash equivalent balances primarily in one financial institution.



Concentrations of credit risk with respect to accounts receivable are
significant due to the Company only having one customer, although the payment terms are generally short. On a periodic basis, the Company evaluates its trade accounts receivable and establishes an allowance for doubtful accounts, based on a history
of past write-offs, which have been nil and collections.



|6. | Income Taxes
|-- | ------------



At December 31, 2004, the Company had net operating loss carryforwards available to reduce future taxable income, if any, of approximately $16,059,000 and
$7,076,000 for Federal and California income tax purposes, respectively. The Federal net operating loss begins to expire in 2006. The remaining California net operating losses have been suspended for two years and will begin to expire in 2007. The
difference between the Federal and California tax loss carryforwards is primarily related to the expiration of California loss carryforwards. At December 31, 2004, the Company also had research and development credit carryforwards of approximately
$486,000 and $250,000 for Federal and state income tax reporting purposes, respectively. Pursuant to Internal Revenue Code Sections 382 and 383, use of the Companys net operating loss and credit carryforwards may be limited if a cumulative
change in ownership of more than 50% occurs within a three year period.



Temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes (the loss and tax credit carryforwards described above) give rise to the
Companys deferred income taxes. The components of the Companys deferred tax assets as of December 31, 2004 and 2003 are as follows:



|                                              |  |      |            |   |      |   |            |  
|--------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                              |  | 2004 |            |   | 2003 |  
|Net operating loss carryforwards              |  | $    | 6,086,000  |   |      | $ | 6,059,000  |  
|Research and development credit carryforwards |  |      | 648,000    |   |      |   | 648,000    |  
|Other                                         |  |      | 120,000    |   |      |   | 120,000    |  
|                                              |  |      |            |   |      |   |            |  
|                                              |  |      | 6,854,000  |   |      |   | 6,827,000  |  
|Valuation allowance                           |  |      | (6,854,000 | ) |      |   | (6,827,000 | )
|                                              |  |      |            |   |      |   |            |  
|                                              |  | $    |           |   |      | $ |           |  
|                                              |  |      |            |   |      |   |            |  



As the ultimate
realization of the potential benefits of the Companys net operating loss carryforwards is considered unlikely by management, the Company has offset the deferred tax assets attributable to those potential benefits through valuation allowances
in 2004 and 2003 and, accordingly, the Company did not recognize any benefit from income taxes in the accompanying statements of operations to offset its pre-tax losses. The valuation allowance increased by $27,000 in 2004 and decreased by $22,000
in 2003.



|7. | Stock Option Plan
|-- | -----------------



The Companys 1993 Stock Option Plan (the Plan) was adopted by the Board of Directors in February 1994. Pursuant to the Plan, the Company
may grant both incentive stock options and nonqualified stock options. Incentive stock options may be granted only to employees, while consultants, employees, officers and directors are eligible for the grant of nonqualified options. The total
number of shares of common stock of the Company reserved and available for grant under the Plan is 3,875,000 shares.



The maximum term of stock options granted under the Plan is ten years, but if the optionee at the time of the grant has voting power over more than 10% of
the Companys outstanding capital stock, the maximum term is five years. The exercise price of incentive stock options granted under the Plan must be at least equal to the fair



F-12



---

market value of such shares on the date of grant. The exercise price of nonqualified stock options granted under the Plan must be at least 85%, or 110% with
respect to holders of 10% of the voting power of the Companys outstanding capital stock, of the fair market value of the stock subject to the option on the date of the grant.



Activity with respect to the stock option plan is summarized as follows:



|                                                |  |                         |   |  |                      |      |                               |   |     
|----------------------------------------------- |  | ----------------------- | - |  | -------------------- | ---- | ----------------------------- | - | ----
|                                                |  | StockOptionsOutstanding |   |  | OptionExercise Price |      | Weighted-AverageExercisePrice
|Balance at January 1, 2003                      |  | 2,609,259               |   |  |                      |      |                               | $ | 1.54
|Granted                                         |  | 360,000                 |   |  | $                    | 0.25 |                               | $ | 0.25
|Balance at December 31, 2003                    |  | 2,969,259               |   |  |                      |      |                               | $ | 1.38
|Expired                                         |  | (182,000                | ) |  | $                    | 0.56 |                               | $ | 0.56
|                                                |  |                         |   |  |                      |      |                               |   |     
|Balance at December 31, 2004                    |  | 2,787,259               |   |  |                      |      |                               | $ | 1.44
|                                                |  |                         |   |  |                      |      |                               |   |     
|Shares available for grant at December 31, 2004 |  | 1,087,741               |   |  |                      |      |                               |   |     
|                                                |  |                         |   |  |                      |      |                               |   |     



Following is a further
breakdown of the options outstanding as of December 31, 2004:



|                        |  |                    |  |                                        |  |                                |      |                    |           |                                                     |   |     
|----------------------- |  | ------------------ |  | -------------------------------------- |  | ------------------------------ | ---- | ------------------ | --------- | --------------------------------------------------- | - | ----
|Range ofExercise Prices |  | OutstandingOptions |  | Weighted-AverageRemainingLife in Years |  | Weighted-AverageExercise Price |      | OptionsExercisable |           | Weighted-AverageExercise Priceof OptionsExercisable
|$0.10  $0.56           |  | 2,035,000          |  | 5.37                                   |  | $                              | 0.35 |                    | 2,035,000 |                                                     | $ | 0.35
|$3.00                   |  | 398,668            |  | 2.37                                   |  |                                | 3.00 |                    | 398,668   |                                                     |   | 3.00
|$5.75  $7.50           |  | 353,591            |  | 2.94                                   |  |                                | 5.94 |                    | 353,591   |                                                     |   | 5.94
|                        |  |                    |  |                                        |  |                                |      |                    |           |                                                     |   |     
|                        |  | 2,787,259          |  | 4.63                                   |  |                                | 1.44 |                    | 2,787,259 |                                                     |   | 1.44
|                        |  |                    |  |                                        |  |                                |      |                    |           |                                                     |   |     



|8. | Notes Payable and Related Conversion and Stock Options
|-- | ------------------------------------------------------



At December 31, 2004 and 2003, the Company has an outstanding note payable with an aggregate principal balance of $198,000 and $196,000, net of
unamortized debt discount and bears interest at an annual rate of 10%, respectively. The note is collateralized by substantially all of the assets of the Company and is due on March 10, 2006. The investor has the option to convert the principal
amount into Vyrex common shares at a price of $0.25 during the first year, $0.50 the second year and $0.75 the third year. Further in connection with the Promissory Note, the investor was issued warrants, exercisable within three years from the date
of issuance, entitling the investor to purchase 100,000 Vyrex common shares at an exercise price of $0.11 per share. The Company determined the fair market value of these warrants were $0.06 per warrant utilizing the Black-Scholes option pricing
model. The $6,000 was treated as a discount to the note and is being accreted over the term of the loan. On August 24, 2004, the Company obtained an additional note from the same private investor in the amount of $7,500. The principal amount plus
10% interest is due and payable on February 24, 2005, this due date has been extended and agreed upon by the note holder to be paid on April 1, 2005 plus accrued interest. As further consideration for the loan the Company agreed to amend the strike
price terms of the right to convert the principal amount of the March 2003 note into Vyrex common shares from $0.50 to $0.25 the second year and from $0.75 to $0.50 the third year.



|9. | Contingencies
|-- | -------------



Due to cash constraints, the Company has been unable to remain current in the payment of insurance premiums. As a result, no insurance coverage is in
effect for the Company at December 31, 2004.



F-13



---

|10. | Available-for-sale securities
|--- | -----------------------------



During 2004, management discovered it has an investment in equity securities derived from its ownership of an old insurance policy that was converted into
equity securities on April 21, 1999. The Company has determined the affect of the omission to be immaterial to the financial statements through December 31, 2003. The impact of the adjustment to the net loss of $788,548 for the year ended December
31, 1999 would have been a reduction of the net loss by approximately $4,000.



The unrealized holding gains of approximately $12,000 as of December 31, 2004 have been reflected as a separate component of stockholders deficiency. Total comprehensive loss for the year ended December 31, 2004
amounted to approximately $26,000.



F-14