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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, 2002



| ̈ |  | 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 of corporation or organization) |  | (IRS Employer Identification 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: $122,500



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: $1,274,000 as of March 15, 2003.



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



|Common Stock                  |  | Warrants to purchase common stock
|------------------------------ |  | ----------------------------------
|8,492,867 as of March 15, 2003 |  | 225,000 as of March 15, 2003.     



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, 2002 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 and nutraceuticals 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 for the dietary support of certain age-related conditions.



Antioxidant Drug Program.    In the Companys opinion, Vantox®is currently its lead drug candidate. The Companys research with Vantox®indicates 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 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®.



The Company believes oxidative damage is implicated in a variety of diseases including cardiovascular, neurological and viral disorders.
Based on its research in oxidative stress and antioxidants, the Company has designed several analogs and pro-drugs of Vantox®and Panavir®. These derivatives are designed to provide improved bioavailability, oral delivery
and disease targeting. In laboratory tests, some of these compounds have been shown to protect mitochondria from oxidative damage and have been shown to be potentially potent antioxidants. On the basis of these preliminary results, and the
Companys view of a body of knowledge surrounding certain disorders, the Company believes these derivatives may be useful in treating Alzheimers Disease, Parkinsons Disease, atherosclerosis, spinal cord trauma and other disorders.
The Company has filed



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patent disclosures concerning their uses and will continue pre-clinical development as funding becomes available. The Company applied for a
U.S. patent for Water Soluble Pro-Drugs of Propofol on May 8, 1998. Patent No. US 6,254,853 B1 was issued on July 3, 2001.In 2000, Immune Response Corporation (IRC) expanded its research and development activities to include
neurological applications of the Companys water-soluble prodrugs of its propofol patent. An additional U.S. patent for these indications was applied for by the Company in August 2000. Patent No. US 6,362,234 B1 Water Soluble Pro-Drugs for the
Treatment of Migraine was issued March 26, 2002, adding to the estate of patents that Vyrex holds on water-soluble derivatives of propofol as well as propofol itself. Although these indications are promising, there is no assurance that the Company
and IRC will be successful in funding further development and commercialization of these compounds.



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 its 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.



In August of 2002 the Company entered into a Materials
Cooperative Research and Development Agreement (M-CRADA) with the National Institute of Neurological Disorders and Stroke (NINDS), a branch of the National Institutes of Health (NIH). The title of the collaboration is the Prevention of delayed
cerebral vasospasm by Panavir®, the Companys patented, proprietary formulation of probucol, in a primate
model of subarachnoid hemorrhage. Subarachnoid hemorrhage (SAH) typically results from the rupture of a berry



3



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aneurysm or arteriovenous malformation in the brain. In the U.S. the mortality rate reaches as high as 40% within the first week for patients
suffering ruptured intracranial aneurysms. Despite extensive investigative efforts, there are almost no treatments that can prevent SAH-induced delayed cerebral vasospasm. Panavir®is a more available and safer form of probucol than older formulations of this drug. The study with NINDS is ongoing. Although the Company is
hopeful that Panavir®might ultimately emerge as a drug for the prevention of the dire consequences of
SAH-induced delayed cerebral vasospasm there is no assurance the study will prove successful.



In 1997, the Company entered into an agreement with IRC to develop the certain proprietary technology licensed by the Company for producing tagged genes, transcripts and proteins under the trademark of
CD-Tagging. The agreement was amended in 1998 to include research and development of certain proprietary
Vantox®pro-drugs as potential treatments for spinal cord and central nervous system trauma. The Company
terminated its license covering CD-Taggingin conjunction with its decision to terminate its gene discovery
program. The Company and IRC continue to seek a pharmaceutical partner or outside financing for further development and commercialization of the spinal cord and central nervous system technology. There can be no assurance that the Company and IRC
will be able to secure funding in the future for this project. In May of 1998 the company applied for a patent covering Water-Soluble Prodrugs of Propofol with claims covering the 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. IRC expanded its research and development
activities to include these claims. Patent No. US 6,254,853 B1 was issued on July 3, 2001 for Water Soluble Pro-Drugs of Propofol. In 2000, Immune Response Corporation (IRC) expanded its research and development activities to include
neurological applications of the Companys water-soluble prodrugs of its propofol patent. An additional U.S. patent for these indications was applied for by the Company in August 2000. Patent No. US 6,362,234 B1 Water Soluble Pro-Drugs for the
Treatment of Migraine was issued March 26, 2002, adding to the estate of patents that Vyrex holds on water-soluble derivatives of propofol as well as propofol itself. Although these indications are promising, there is no assurance that the Company
and IRC will be successful in funding further development and commercialization of these compounds.



Nutraceuticals.    The nutraceutical market includes nutritional supplements and foods, which may deliver
health benefits beyond basic nutrition. Consumer research seems to indicate consumers may seek out nutritional supplements provided they are backed by reliable science, and that many consumers prefer to receive their health benefits through foods
rather than through pills. There are a large number of companies competing in the market to provide nutraceuticals to consumers. The Company has licensed, developed and patented proprietary nutritional supplement technology targeted at consumer
health concerns, which may be marketed as single line supplements, in multi-formulations and in foods. The Company currently has a pipeline of proprietary nutraceutical technology designed to provide health benefits through nutritional
supplementation.



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 esculating 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. The Company received royalty income of $10,000 in 2001 and $47,500 in 2002. 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



4



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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.
FrutureCeuticals has conducted a number of studies reflecting the primary activities and benefits of both products. An open label preliminary pilot study was conducted at the Department of Orthopedic Medicine, University of Novi Sad, Novi Sad,
Yugoslavia on 20 subjects with mild to severe osteoarthritis. 79% study volunteers suffering mild to moderate osteoarthritis experienced a reduction of joint pain, stiffness and inflexibility after taking 6 mg of FruiteX-Bper day for 8 weeks. 50% of volunteers suffering severe osteoarthritis experienced a reduction of joint pain,
stiffness and inflexibility after taking 12 mg of FruiteX-Bper day for 8 weeks. In a study conducted at the
Department of Biochemistry, University of Wisconsin bone ash increased by 5.8% in Vitamin D deficient animals supplemented with FruiteX-Bas compared to animals that did not receive the supplementation. 25-OH-Vitamin D-3 serum level was raised an average of 24% in a group of 11 patients during a 60 day consumption of 6 mg of
FruiteX-Bper day. In studies conducted by FutureCeuticals CarnoChromehas been found to: Reduce both fasting and postprandial (after mealtime) hyperglycemia by up to 25%. Lower glycosylated hemoglobin levels by up to
15%. Decrease triglyceride levels by up to 35%. Effectively stimulate glucose uptake into human skeletal muscle cell in vitro. Stimulate fusion of myoblasts and formation of myotubes in vitro. 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. There can be no assurance that a significant market will develop for the products or that any products will continue to produce any revenue for the
Company.



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 No.: 5,962,049 was issued October 5, 1999 Boron Carbohydrate Complexes and Uses Thereof. 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.



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The Immune
Response Corporation.    In 1997, the Company entered into an agreement with the Immune Response Corporation (IRC) to develop the certain proprietary technology licensed by the Company for producing tagged genes,
transcripts and proteins under the trademark of CD-Tagging. The agreement was amended in 1998 to include
research and development of certain proprietary Vantox®pro-drugs as potential treatments for spinal cord and
central nervous system trauma. The Company terminated its license covering CD-Taggingin conjunction with its
decision to terminate its gene discovery program. The Company and IRC continue to seek a pharmaceutical partner or outside financing for further development and commercialization of the spinal cord and central nervous system technology. There can be
no assurance that the Company and IRC will be able to secure funding in the future for this project. In May of 1998 the company applied for a patent covering Water-Soluble Prodrugs of Propofol with claims covering the 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. IRC
expanded its research and development activities to include these claims. Patent No. US 6,254,853 B1 was issued on July 3, 2001 for Water Soluble Pro-Drugs of Propofol. In 2000 Immune Response Corporation (IRC) expanded its research and
development activities to include neurological applications of the Companys water soluble prodrugs of its propofol patent. An additional U.S. patent for these indications was applied for by the Company in August 2000. Patent No. US 6,362,234
B1 Water Soluble Pro-Drugs for the Treatment of Migraine was issued March 26, 2002, adding to the estate of patents that Vyrex holds on water-soluble derivatives of propofol as well as propofol itself. Although these indications are promising, there
is no assurance that the Company and IRC will be successful in funding further development and commercialization of these compounds.



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. The Company received royalty income of $10,000 in 2001 and $47,500 in 2002. 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. FrutureCeuticals has conducted a number of studies reflecting the primary
activities and benefits of both products. An open label preliminary pilot study was conducted at the Department of Orthopedic Medicine, University of Novi Sad, Novi Sad, Yugoslavia on 20 subjects with mild to severe osteoarthritis. 79% study
v0lunteers suffering mild to moderate osteoarthritis experienced a reduction of joint pain, stiffness and inflexibility after taking 6 mg of FruiteX-Bper day for 8 weeks. 50% of volunteers suffering severe osteoarthritis experienced a reduction of joint pain, stiffness and inflexibility after taking 12 mg of FruiteX-Bper day for 8 weeks. In a study conducted at the Department of Biochemistry, University of Wisconsin bone ash
increased by 5.8% in Vitamin D deficient animals supplemented with FruiteX-Bas compared to animals that did
not receive the supplementation. 25-OH-Vitamin D-3 serum level was raised an average of 24% in a group of 11 patients during a 60 day consumption of 6 mg of FruiteX-Bper day. In studies conducted by FrutureCeuticals CarnoChromehas been found to: Reduce both fasting and postprandial (after mealtime) hyperglycemia by up to 25%. Lower glycosylated hemoglobin levels by up to
15%. Decrease triglyceride levels by up to 35%. Effectively stimulate glucose uptake into human skeletal muscle



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cell in vitro. Stimulate fusion of myoblasts and formation of myotubes in vitro. 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 FrutureCeuticals 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 $180,000in 2005. There can be no assurance that a significant market will develop for the products or that any products will continue to produce any revenue for the Company.



National Institute of Neurological Disorders
and Stroke.    In August of 2002 the Company entered into a Materials Cooperative Research and Development Agreement (M-CRADA) with the National Institute of Neurological Disorders and Stroke (NINDS), a branch of the National
Institutes of Health (NIH). The title of the collaboration is the Prevention of delayed cerebral vasospasm by Panavir®, the Companys patented, proprietary formulation of probucol, in a primate model of subarachnoid hemorrhage. Subarachnoid hemorrhage (SAH) typically results from the rupture of a berry aneurysm or arteriovenous
malformation in the brain. In the U.S. the mortality rate reaches as high as 40% within the first week for patients suffering ruptured intracranial aneurysms. Despite extensive investigative efforts, there are almost no treatments that can prevent
SAH-induced delayed cerebral vasospasm. Panavir®is a more available and safer form of probucol than older
formulations of this drug. The study with NINDS is ongoing. Although the Company is hopeful that Panavir®might
ultimately emerge as a drug for the prevention of the dire consequences of SAH-induced delayed cerebral vasospasm there is no assurance the study will prove successful.



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. The Company is one of two assignees of this patent, with Biodor U.S. Holding.



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 1994 involving airborne protectants against oxidative tissue damage. This patent is directed to
certain methods for preventing free radical-induced oxidative damage and inflammatory response in biological tissue through the use of vapor-phase, phenolic antioxidants such as vaporized 2,6-diisopropylphenol. This patent has been assigned to the
Company and describes the technology underlying the Companys proposed Vantox®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



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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.



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 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 Prodrugs of Propofol for the
Treatment of Migraine.



The Company has patent
applications pending in the United States and there have been foreign counterparts filed for certain of the Companys patent applications. One of the U.S. patent applications and certain foreign patent filings are jointly owned by the Company
and Biodor U.S. Holding.



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



8



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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 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. Additionally the company is prosecuting a number of
trademarks in connection with its nutraceutical and genomics programs. 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 has filed other trademark applications, 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 and trademark applications, or prosecute, or file, new trademark applications. The Company can make no assurance that it will be able to maintain
existing trademarks and trademark applications or prosecute new trademark applications unless it is able to obtain significant funding in the future.



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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.



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



10



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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 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



11



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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.



The Company desires to
develop nutraceutical products which the Company believes may be sold before any of its proposed pharmaceutical products will be sold. During 1997, the Company entered into an agreement with Retired Persons Services, Inc. (RPS) to allow
RPS to produce and market four nutritional supplement products designed by the Company. In exchange, the Company was to receive a royalty in the amount of 15% of gross sales. The products were launched by RPS in January, 1999. The Company was
notified in September, 2000, that RPS was relinquishing its exclusive rights to the products and discontinuing the product line. The Company will continue to receive royalties on sales until the inventory is depleted. The Company continued to
receive royalties on sales until the inventory was depleted in May 2001. Although the Company has the rights to market the formulas to other marketers, there is no assurance that can be accomplished.



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. The Company received royalty income of $10,000 in 2001 and $47,500 in 2002. 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. FrutureCeuticals has conducted a number of
studies reflecting the primary activities and benefits of both products. An open label preliminary pilot study was conducted at the Department of Orthopedic Medicine, University of Novi Sad, Novi Sad, Yugoslavia on 20 subjects with mild to severe
osteoarthritis. 79% study v0lunteers suffering mild to moderate osteoarthritis experienced a reduction of joint



13



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pain, stiffness and inflexibility after taking 6 mg of FruiteX-Bper day for 8 weeks. 50% of volunteers suffering severe osteoarthritis experienced a reduction of joint pain, stiffness and inflexibility after
taking 12 mg of FruiteX-Bper day for 8 weeks. In a study conducted at the Department of Biochemistry,
University of Wisconsin bone ash increased by 5.8% in Vitamin D deficient animals supplemented with FruiteX-Bas compared to animals that did not receive the supplementation. 25-OH-Vitamin D-3 serum level was raised an average of 24% in a group of 11 patients during a 60 day consumption of 6 mg of FruiteX-Bper day. In studies conducted by FutureCeuticals CarnoChromehas been found to: Reduce both fasting and postprandial (after mealtime) hyperglycemia by up to 25%. Lower glycosylated hemoglobin levels by up to
15%. Decrease triglyceride levels by up to 35%. Effectively stimulate glucose uptake into human skeletal muscle cell in vitro. Stimulate fusion of myoblasts and formation of myotubes in vitro. 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. There can be no assurance that a significant market will develop for the products or that any products will continue to produce any revenue for the
Company.



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, 2002, the Company had a deficit accumulated in the development stage of $13,243,048. 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



14



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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, 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



In 1997, the Company entered into an agreement with IRC to
develop the certain proprietary technology licensed by the Company for producing tagged genes, transcripts and proteins under the trademark of CD-Tagging. The agreement was amended in 1998 to include research and development of certain proprietary Vantox®pro-drugs as potential treatments for spinal cord and central nervous system trauma. The Company terminated its license covering CD-Taggingin conjunction with its decision to terminate its gene discovery program. The Company and IRC continue to seek a pharmaceutical partner or outside
financing for further development and commercialization of the spinal cord and central nervous system technology. There can be no assurance that the Company and IRC will be able to secure funding in the future for this project. In May of 1998



15



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the company applied for a patent covering Water-Soluble Prodrugs of Propofol with claims covering the 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. IRC
expanded its research and development activities to include these claims. Patent No. US 6,254,853 B1 was issued on July 3, 2001 for Water-Soluble ProDrugs of Propofol.In 2000, Immune Response Corporation (IRC) expanded its
research and development activities to include neurological applications of the Companys water-soluble prodrugs of its propofol patent. An additional U.S. patent for these indications was applied for by the Company in August 2000. Patent
No. US 6,362,234 B1 Water Soluble Pro-Drugs for the Treatment of Migraine was issued March 26, 2002, adding to the estate of patents that Vyrex holds on water-soluble derivatives of propofol as well as propofol itself. Although these indications are
promising, there is no assurance that the Company and IRC will be successful in funding further development and commercialization of these compounds.



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. The Company received royalty income of $10,000 in 2001 and $47,500 in 2002. 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. FrutureCeuticals has conducted a number of studies reflecting the primary activities and benefits of both
products. An open label preliminary pilot study was conducted at the Department of Orthopedic Medicine, University of Novi Sad, Novi Sad, Yugoslavia on 20 subjects with mild to severe osteoarthritis. 79% study volunteers suffering mild to moderate
osteoarthritis experienced a reduction of joint pain, stiffness and inflexibility after taking 6 mg of FruiteX-Bper day for 8 weeks. 50% of volunteers suffering severe osteoarthritis experienced a reduction of joint pain, stiffness and inflexibility after taking 12 mg of FruiteX-Bper day for 8 weeks. In a study conducted at the Department of Biochemistry, University of Wisconsin bone ash increased by 5.8% in Vitamin D
deficient animals supplemented with FruiteX-Bas compared to animals that did not receive the supplementation.
25-OH-Vitamin D-3 serum level was raised an average of 24% in a group of 11 patients during a 60 day consumption of 6 mg of FruiteX-Bper day. In studies conducted by FutureCeuticals CarnoChromehas been found to:
Reduce both fasting and postprandial (after mealtime) hyperglycemia by up to 25%. Lower glycosylated hemoglobin levels by up to 15%. Decrease triglyceride levels by up to 35%. Effectively stimulate glucose uptake into human skeletal muscle cell in
vitro. Stimulate fusion of myoblasts and formation of myotubes in vitro. 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



16



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$180,000 in 2005. There can be no assurance that a significant market will develop for the products or that any products will continue to
produce any revenue for the Company.



In August
of 2002 the Company entered into a Materials Cooperative Research and Development Agreement (M-CRADA) with the National Institute of Neurological Disorders and Stroke (NINDS), a branch of the National Institutes of Health (NIH). The title of the
collaboration is the Prevention of delayed cerebral vasospasm by Panavir®, the Companys patented,
proprietary formulation of probucol, in a primate model of subarachnoid hemorrhage. Subarachnoid hemorrhage (SAH) typically results from the rupture of a berry aneurysm or arteriovenous malformation in the brain. In the U.S. the mortality rate
reaches as high as 40% within the first week for patients suffering ruptured intracranial aneurysms. Despite extensive investigative efforts, there are almost no treatments that can prevent SAH-induced delayed cerebral vasospasm. Panavir®is a more available and safer form of probucol than older formulations of this drug. The study with NINDS is
ongoing. Although the Company is hopeful that Panavir®might ultimately emerge as a drug for the prevention of
the dire consequences of SAH-induced delayed cerebral vasospasm there is no assurance the study will prove successful.



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 twelve patents issued and several patent applications pending in the United States. 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 thereunder 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.



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.



17



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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 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



18



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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



The Company has two notes payable, one of $100,000 principal
amount, and the other of $60,000 principal amount, which notes are collateralized by substantially all of the assets of the Company. In January 2001, the maturity date of both notes was extended to March 22, 2002, provided the Company made interest
payments on such debt of $8,000 on March 22, 2001 and $4,800 on August 17, 2001. The March 22, 2001 and August 17, 2001 interest payments were paid within the prescribed terms. In connection with the extension of the maturity of this debt,
the Company issued the note holders an option exercisable for two years to purchase 50,000 shares of Common Stock at a price of $0.50 per share. Furthermore, the Company amended the $60,000 note to make it convertible into Common Stock at
a purchase price of $0.60 per share in increments of not less than 20,000 shares.



On March 5, 2002, the note holder agreed to extend the principal balance which bears interest at an annual rate of 8% for a period of one year making it due and payable on March 22, 2003. In
consideration of the extension, the option to purchase 50,000 shares at $0.50 per share and the option to convert the note with the principal balance of $60,000 into 100,000 shares of Vyrex stock at a purchase price of $0.60 per share have been
increased by one year respectively. In the event of prepayment of the note, the note holder will retain the right to purchase 100,000 shares at $0.60 per share until March 22, 2003. The March 22, 2002 and August 17, 2002 interest payments of $10,858
were paid within the prescribed terms.



During
March 2003, the Company obtained a commitment 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 semiannually with the principal due and payable at the
end of the third year. 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 will be 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 funds will be used to pay off the notes payable and the related parties with the remainder used for general operating expenses.



Dilutive and Other Adverse Effects of Outstanding Options and Warrants



Certain warrants issued in connection with private and public placement of the Companys common stock
prior to April 1, 1996, expired on January 31, 2000, and are no longer exercisable. 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



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outstanding both pursuant to the Companys Stock Option Plan and options not pursuant to any plan which are exercisable for up to
2,609,259 shares of Common Stock. Approximately 92% of these options are currently exercisable; 15% are exercisable at a price of $3.00 and 14% exercisable at a price range of $5.75 to $7.50. 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 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.



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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-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 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



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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 issued Debenture Warrants to purchase 17,000 shares of Common Stock issued in conjunction with the issuance of Debentures in
November 1997, in the principal amount of $1,000,000. The Debentures were converted to Common Stock in 1998. The Debenture Warrants were exercisable for a period of three years from the date of issuance and were exercisable at a price equal to $7.50
per share. These Warrants expired in November 2000.



The Company issued Warrants in March and August of 1999 in connection with entering into loan transactions with a single entity with an aggregate principal amount equal to $160,000. Warrants were issued in this transaction entitling
the lender to purchase 50,000 shares at an exercise price equal to $1.00 per share, 50,000 shares at an exercise price equal to $0.50 per share, and 150,000 shares at an exercise price of $0.25 per share. In consideration of extending the maturity
of this debt during February 2000, the exercise price of the Warrants to purchase an aggregate of 250,000 shares of common stock was reduced to $0.10. The lender purchased 100,000 shares during June and July 2000 at a price of $0.10 per share. The
lender purchased the remaining 150,000 shares in March 2002 at a price of $0.10 per share.



To assist in the further development of Vyrexs proprietary compound Panavir®The Company entered into a Collaroration Agreement with Biological Business Creativity, LLC, (BBC). In November 2001 BBC was issued a Warrant to purchase an aggregate of 200,000 shares of common stock at a price
of $0.30 per share exercisable until November 18, 2004 and was granted a license to certain claims of Vyrexs United States Patent Number 4,985,465, Method For Inhibiting Viral And Retroviral Infections dated January 15, 1991. BBC will pay
royalties to Vyrex equal to (a) twenty five (25%) if the Gross Margin for those products sold by BBC and (b) twenty five (25%) of the gross revenues for the technology or products (sub) licensed to Third Parties.



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 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 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.



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.



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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 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 PanavirâPhase I human clinical trial and intends to obtain
insurance for future clinical trials of



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Panavirâ, Vantoxâ, 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 will also be exposed to product liability claims in the event that, among other things, the use of its proposed nutraceutical products
result in injury.



Hazardous Material; Environmental Matters



The Company, at present, contracts with
outside vendors for manufacture of 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.



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.



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Item
2.    PROPERTIES



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 $1,700.



Item 3.    LEGAL PROCEEDINGS



None



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



None



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PART II



Item 5.    MARKET FOR REGISTRANTS 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, 2001 |  | March 31, 2001     |  | $    | 0.875 |    
|April 1, 2001   |  | June 30, 2001      |  | $    | 0.80  |    
|July 1, 2001    |  | September 30, 2001 |  | $    | 0.45  |    
|October 1, 2001 |  | December 31, 2001  |  | $    | 0.35  |    
|January 1, 2002 |  | March 30, 2002     |  | $    | 0.42  |    
|April 1, 2002   |  | June 30, 2002      |  | $    | 0.38  |    
|July 1, 2002    |  | September 30, 2002 |  | $    | 0.25  |    
|October 1, 2002 |  | December 31, 2002  |  | $    | 0.16  |    



As of
March 15, 2003, 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 monthly minimum payment by the licensee.



Recent Accounting Developments



In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (Statement 146).
Management does not believe that the adoption of Statement 146 will have a material impact on the Companys financial position or results of operations.



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In December
2002, the FASB issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation- Transition and Disclosure (SFAS 148), which amended SFAS No. 123, Accounting for Stock-Based Compensation to
provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. In addition, this statement amended the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the chosen method on reporting results. The provisions of SFAS No.148 are effective for annual periods
ending December 15, 2002, and for interim periods beginning after December 15, 2002. Management does not believe that the adoption of SFAS 148 will have a material impact on the Companys financial position or results of operations.



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 2002, the Company continued to reduce operating expenses. The net loss for 2002 amounted to $4,000 compared to $202,000 in 2001. As of December 31,
2002, the Companys accumulated deficit was approximately $13,243,000.



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, 2002 and 2001



The Company licensed a natural form of boron covered by US Patent No. 5,962,049, and developed 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 believes 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. The Company received royalty income of $10,000 in 2001 and $47,500 in 2002. FutureCeuticals reached $75,000 in sales in December 2002 allowing the remaining license fee balance of



27



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7$75,000 to be recorded in accounts receivable and revenues 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 manufacturers and distributors of nutritional supplements. Boron is marketed under the trade name FruiteX-Band Chromium under the trade name CarnoChrome. FrutureCeuticals has conducted a number of studies reflecting the primary activities and benefits of both products. An open label preliminary
pilot study was conducted at the Department of Orthopedic Medicine, University of Novi Sad, Novi Sad, Yugoslavia on 20 subjects with mild to severe osteoarthritis. 79% of the study volunteers suffering mild to moderate osteoarthritis experienced a
reduction of joint pain, stiffness and inflexibility after taking 6 mg of FruiteX-Bper day for 8 weeks. 50%
of the study volunteers suffering severe osteoarthritis experienced a reduction of joint pain, stiffness and inflexibility after taking 12 mg of FruiteX-Bper day for 8 weeks. In a study conducted at the Department of Biochemistry, University of Wisconsin, bone ash increased by 5.8% in Vitamin D deficient animals supplemented with FruiteX-Bas compared to animals that did not receive the supplementation. 25-OH-Vitamin D-3 serum level was raised an
average of 24% in a group of 11 patients during a 60 day consumption of 6 mg of FruiteX-Bper day. In studies
conducted by FutureCeuticals, CarnoChromehas been found to: reduce both fasting and postprandial (after
mealtime) hyperglycemia by up to 25%, lower glycosylated hemoglobin levels by up to 15%, decrease triglyceride levels by up to 35%, effectively stimulate glucose uptake into human skeletal muscle cell in vitro, and stimulate fusion of myoblasts and
formation of myotubes in vitro. 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 and 20% of gross sales
equal to or in excess of $3,000,000. There is a minimum guaranteed royalty payment of $90,000 in 2003, $150,000 in 2004 and $180,000 in 2005. There can be no assurance that a significant market will develop for the products or that any products will
continue to produce any revenue for the Company.



Since January 2002, the Companys major activities consisted of reducing overhead and 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 decreased $3,000 to $3,000 in 2002 compared to $6,000 in 2001. The decrease
in research and development expenses is attributed to the fact there were no purchased services and part of the annual boron license fee was waived. This waiver was in consideration of receiving lab equipment as payment for two years of license
fees. Expenses were limited to general office expenses.



Marketing and selling expenses were minimal in 2002 compared to $4,000 in 2001. General and administrative expenses decreased $85,000 to $110,000 in 2002 compared to $195,000 in 2001. Expenses were limited to consulting fees,
maintenance of patents, and general office expenses such as rent, accounting services, telephone expenses, utility expenses and postage.



Net loss decreased $198,000 to $4,000 in 2002 compared to $202,000 in 2001. Basic and diluted loss per share decreased $0.02 to $0.00 in
2002 compared to $0.02 in 2001. 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, 2002, the
Company had working capital of $4,470 compared to a working capital deficit of $157,045 at December 31, 2001.



28



---



For the year
ended December 31, 2002, the Company used $72,000 of cash in operating activities, compared to $174,000 during 2001. The decrease in cash usage was primarily related to decrease in consulting fees, legal fees and general operating expenses. Salaries
to administrative and science staff have been deferred until such time as the Company has the funds to fund the payroll. During the 3rdquarter of 2002, two former employees forgave previously accrued compensation totaling $140,978. This amount has been treated as a contribution to the Company and, accordingly, added to additional paid-in capital instead of
a reduction of expenses in the accompanying financial statements. As of December 31, 2002, accrued payroll amounted to approximately $48,000.



While the Company may have revenues during 2003, 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 22, 1999, the Company obtained a loan for $100,000 at 10% interest. The loan was originally due and payable on March 22, 2000, and
is collateralized by the general assets of the Company with applicable provisions of the Uniform Commercial Code. The principal amount of the loan was increased in August of 1999 to $160,000. The loan was renegotiated to provide that the interest
only on the $100,000 was due and payable on March 22, 2000, and interest only on the $60,000 was due and payable on August 17, 2000. The March 22, 2000 and August 17, 2000 interest payments were paid within the prescribed terms. The remaining
principal balance was extended one year and was due and payable on March 22, 2001. In January 2001, the Company agreed with the holder of the two promissory notes to extend the maturity of such notes to March 22, 2002. Interest on the $100,000 note
in the amount of $8,000 was due and payable on March 22, 2001, and interest on the $60,000 note in the amount of $4,800 was due and payable on August 17, 2001. The March 22, 2001 and August 17, 2001 interest payments were paid within the prescribed
terms. All principal and accrued and unpaid interest at the rate of 8% per annum on each note was due and payable on March 22, 2002. In consideration of such extension in March 2000, the Company issued the debt holder an option exercisable for two
years to purchase 50,000 shares of Common Stock at a price of $0.50 per share. Furthermore, the Company amended the $60,000 note to make it convertible at any time prior to maturity into 100,000 shares of Common Stock at a price of $0.60 per share
in increments of not less than 20,000 shares.



On
March 5, 2002, the note holder agreed to extend the principal balance which bears interest at an annual rate of 8% for a period of one year making it due and payable on March 22, 2003. In consideration of the extension, the option to purchase 50,000
shares at $0.50 per share and the option to convert the $60,000 portion of the note into 100,000 shares of Vyrex Common Stock at a purchase price of $0.60 per share have been increased by one year respectively. In the event of prepayment of the
note, the note holder will retain the right to purchase 100,000 shares at $0.60 per share until March 22, 2003. The interest portion of the note due and payable on March 22, 2002 in the amount of $10,858 was paid within the prescribed terms.



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. Interest to be paid semiannually with the principal due and payable at the end of the third year. The
investor has the option to convert the principal amount into shares of Vyrex Common Stock at a price of $0.25 per share during the first year, $0.50 per share the second year and $0.75 per share the third year. Further, in connection with the
Promissory Note, the investor will be issued warrants, exercisable within three years from the date of issuance, entitling the investor to purchase 100,000 shares of Vyrex Common Stock at an exercise price of $0.11 per share.



Management anticipates, but cannot assure, that the $75,000
license fee payment received in January 2003, the minimum guaranteed royalty payments of $90,000 in 2003 based on the FutureCeutical license agreement and the proceeds of $27,500 from the new loan commitment in excess of amounts needed to repay the
old note will provide the Company with the funds necessary to continue operations through 2003. 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.



29



---



Plan of Operation



The Company will continue to work with
FutureCeuticals to develop new studies designed to help increase market share of its licensed products, FruiteX-Band CarnoChrome. The Company will take a more active roll in the development and marketing of
profofol phosphate currently licensed to Immune Response Corporation. In addition to working with our existing 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.



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



30



---

PART III



|Item 9.    DIRECTORS, |  | EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.  COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
|--------------------- |  | ------------------------------------------------------------------------------------------------------



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, 2003.



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, 2003.



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



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, 2003.



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, 2003.



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



Exhibit 23.1: Consent
of J. H. Cohn LLP, Independent Public Accountants.



31



---

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 Garlow Chief 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, 2003
|                            
|/s/    G. DALE
GARLOW        |  | Director |  | March 28, 2003
|                            
|/s/    RICHARD G. MCKEE,
JR. |  | Director |  | March 28, 2003
|                            
|/s/    TOM K. LARSON,
JR.    |  | Director |  | March 28, 2003
|                            
|/s/    MICHAEL L.
EAGLE      |  | Director |  | March 28, 2003



32



---

VYREX CORPORATION



Annual Report on Form 10-KSB

Year Ended December 31, 2002



Exhibit Index



|Exhibit Number |  | Description                              
|-------------- |  | -----------------------------------------
|              
|3.1            |  | Bylaws*                                  
|              
|23.1           |  | Consent of Independent Public Accountants

---

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





33



---

CERTIFICATION OF CHIEF EXECUTIVE OFFICER



I, G. Dale Garlow, certify that:



1. I have reviewed this annual report on Form 10-KSB of Vyrex
Corporation;



2. Based on my knowledge, this
annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this annual report;



3. Based
on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this annual report.



|                      
|----------------------
|Dated:  March 28, 2003
|                      





34



---

VYREX CORPORATION

(a development stage enterprise)



INDEX TO FINANCIAL STATEMENTS



|                                                        |  | Page  
|------------------------------------------------------- |  | ------
|Report of J.H. Cohn LLP, Independent Public Accountants |  | 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-9-15



F-1



---

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



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, 2002 and 2001,
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, 2002. 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 uncertainty 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, 2002, 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 auditing standards generally accepted in the United States of America. 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, 2002 and 2001, 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, 2002, 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.



J.H. COHN LLP



San Diego, California

March 10, 2003



F-2



---

VYREX CORPORATION

(a development stage enterprise)



BALANCE SHEETS



|                                                                                                                             |  | December 31 |            
|---------------------------------------------------------------------------------------------------------------------------- |  | ----------- | -----------
|                                                                                                                             |  | 2002        |            
|ASSETS                                                                                                                       |  |             |            
|Current assets:                                                                                                              |  |             |            
|Cash and cash equivalents                                                                                                    |  | $           | 3,026      
|Accounts receivable                                                                                                          |  |             | 80,000     
|Prepaid assets                                                                                                               |  |             |            
|                                                                                                                             |  |             |            
|Total assets                                                                                                                 |  | $           | 83,026     
|                                                                                                                             |  |             |            
|LIABILITIES AND STOCKHOLDERS DEFICIENCY                                                                                     |  |             |            
|                                                                                                                            
|Current liabilities:                                                                                                         |  |             |            
|Accounts payable and accrued liabilities                                                                                     |  | $           | 78,556     
|Notes payable to related party                                                                                               |  |             |            
|                                                                                                                             |  |             |            
|Total current liabilities                                                                                                    |  |             | 78,556     
|Notes payable to related party                                                                                               |  |             | 5,000      
|Notes payable                                                                                                                |  |             | 160,000    
|                                                                                                                             |  |             |            
|Total liabilities                                                                                                            |  |             | 243,556    
|                                                                                                                             |  |             |            
|                                                                                                                            
|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 and 8,342,867
issued and outstanding in 2002 and 2001 |  |             | 8,493      
|Additional paid-in capital                                                                                                   |  |             | 13,074,025 
|Deficit accumulated during the development stage                                                                             |  |             | (13,243,048
|                                                                                                                             |  |             |            
|Total stockholders deficiency                                                                                               |  |             | (160,530   
|                                                                                                                             |  |             |            
|Total liabilities and stockholders deficiency                                                                               |  | $           | 83,026     
|                                                                                                                             |  |             |            







See accompanying notes.



F-3



---

VYREX CORPORATION

(a development stage enterprise)



STATEMENTS OF OPERATIONS



|                                                           |  | Years ended December 31, |           |   | Cumulative from Inception |  
|---------------------------------------------------------- |  | ------------------------ | --------- | - | ------------------------- | -
|                                                           |  | 2002                     |           |   | 2001                      |  
|Licensing and royalty revenue                              |  | $                        | 122,500   |   |                           | $
|                                                           |  |                          |           |   |                           |  
|Operating expenses:                                        |  |                          |           |   |                           |  
|Research and development                                   |  |                          | 3,029     |   |                           |  
|Marketing and selling                                      |  |                          | 448       |   |                           |  
|General and administrative                                 |  |                          | 109,848   |   |                           |  
|                                                           |  |                          |           |   |                           |  
|Total operating expenses                                   |  |                          | 113,325   |   |                           |  
|                                                           |  |                          |           |   |                           |  
|Income (loss) from operations                              |  |                          | 9,175     |   |                           |  
|                                                           |  |                          |           |   |                           |  
|Other income (expense):                                    |  |                          |           |   |                           |  
|Interest income                                            |  |                          | 362       |   |                           |  
|(Loss) on disposal of fixed assets                         |  |                          |          |   |                           |  
|Interest expense                                           |  |                          | (13,300   | ) |                           |  
|Charge from issuance of stock options for bridge financing |  |                          |          |   |                           |  
|                                                           |  |                          |           |   |                           |  
|Total other expense                                        |  |                          | (12,938   | ) |                           |  
|                                                           |  |                          |           |   |                           |  
|Net loss                                                   |  | $                        | (3,763    | ) |                           | $
|                                                           |  |                          |           |   |                           |  
|Net loss per sharebasic                                   |  | $                        | (0.00     | ) |                           | $
|                                                           |  |                          |           |   |                           |  
|Shares used in per share computations                      |  |                          | 8,466,977 |   |                           |  
|                                                           |  |                          |           |   |                           |  









See accompanying notes.



F-4



---

VYREX CORPORATION

(a development stage enterprise)



STATEMENTS OF STOCKHOLDERS DEFICIENCY



|                                                                                                                                             |  | Common stock |  | Additional paid-in Capital |       |  | Deficit accumulated during the development stage |            |   | Total stockholders 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      |   |                                         | $
|Issuance (at $.002 per share) for cash                                                                                                       |  | 500,000      |  |                            | 500   |  |                                                  | 500        |   |                                         |  
|Issuance (at $1.00 per share) for cash                                                                                                       |  | 800,000      |  |                            | 800   |  |                                                  | 799,200    |   |                                         |  
|Issuance as compensation (at $1.00 per share)                                                                                                |  | 32,500       |  |                            | 33    |  |                                                  | 32,467     |   |                                         |  
|Issuance (at $2.00 per share) upon conversion of note payable                                                                                |  | 100,000      |  |                            | 100   |  |                                                  | 199,900    |   |                                         |  
|Issuance (at $3.00 per share) for cash, net of issuance costs of $4,086                                                                      |  | 33,000       |  |                            | 33    |  |                                                  | 94,881     |   |                                         |  
|Net loss                                                                                                                                     |  |             |  |                            |      |  |                                                  |           |   |                                         |  
|                                                                                                                                             |  |              |  |                            |       |  |                                                  |            |   |                                         |  
|Balance at December 31, 1993                                                                                                                 |  | 4,815,500    |  |                            | 4,816 |  |                                                  | 1,130,298  |   |                                         |  
|Issuance (at $3.00 per share) for cash, net of issuance
costs of $21,000                                                                     |  | 99,000       |  |                            | 99    |  |                                                  | 275,901    |   |                                         |  
|Issuance (at $3.00 per share) in lieu of finders fee                                                                                        |  | 7,000        |  |                            | 7     |  |                                                  | 20,993     |   |                                         |  
|Issuance (at $3.00 per share) in lieu of finders fee                                                                                        |  | 5,000        |  |                            | 5     |  |                                                  | 14,995     |   |                                         |  
|Issuance (at $3.00 per share) for cash, net of issuance
costs of $41,844                                                                     |  | 24,990       |  |                            | 25    |  |                                                  | 33,101     |   |                                         |  
|Net loss                                                                                                                                     |  |             |  |                            |      |  |                                                  |           |   |                                         |  
|                                                                                                                                             |  |              |  |                            |       |  |                                                  |            |   |                                         |  
|Balance at December 31, 1994                                                                                                                 |  | 4,951,490    |  |                            | 4,952 |  |                                                  | 1,475,288  |   |                                         |  
|Issuance (at $3.00 per share) for cash, net of issuance
costs of $46,976                                                                     |  | 149,940      |  |                            | 150   |  |                                                  | 402,694    |   |                                         |  
|Issuance (at $3.00 per share) in settlement of account payable                                                                               |  | 6,041        |  |                            | 6     |  |                                                  | 18,117     |   |                                         |  
|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     |   |                                         |  
|Issuance (at $3.00 per share) of options for 450,000 shares as compensation for
arranging bridge financing                                   |  |             |  |                            |      |  |                                                  | 1,349,900  |   |                                         |  
|Net loss                                                                                                                                     |  |             |  |                            |      |  |                                                  |           |   |                                         |  
|                                                                                                                                             |  |              |  |                            |       |  |                                                  |            |   |                                         |  
|Balance at December 31, 1995                                                                                                                 |  | 5,203,805    |  |                            | 5,204 |  |                                                  | 3,285,905  |   |                                         |  
|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  |   |                                         |  
|Sale of option to purchase 300,000 shares (at $3.00 per share)                                                                               |  |             |  |                            |      |  |                                                  | 50,000     |   |                                         |  
|Exercise of stock options (at $3.00 per share) for cash                                                                                      |  | 300,000      |  |                            | 300   |  |                                                  | 899,700    |   |                                         |  
|Conversion of notes payable and related accrued interest (at $3.00 per
share)                                                                |  | 86,015       |  |                            | 86    |  |                                                  | 257,959    |   |                                         |  
|Exercise of stock options (at $.00022 per share) for cash                                                                                    |  | 450,000      |  |                            | 450   |  |                                                  | (350       | ) |                                         |  
|Issuance of units as compensation for legal services
(at $4.55 per share)                                                                    |  | 24,292       |  |                            | 24    |  |                                                  | 110,505    |   |                                         |  
|Net loss                                                                                                                                     |  |             |  |                            |      |  |                                                  |           |   |                                         |  
|                                                                                                                                             |  |              |  |                            |       |  |                                                  |            |   |                                         |  
|Balance at December 31, 1996                                                                                                                 |  | 7,121,209    |  |                            | 7,121 |  |                                                  | 10,338,339 |   |                                         |  





(Continued)



F-5



---

VYREX CORPORATION

(a development stage enterprise)



STATEMENTS OF STOCKHOLDERS DEFICIENCY(Continued)



|                                                                       |  | Common stock |  | Additional paid-in capital |       | Deficit accumulated during the development stage |   |            | Total stockholders equity (deficiency) |  
|---------------------------------------------------------------------- |  | ------------ |  | -------------------------- | ----- | ------------------------------------------------ | - | ---------- | --------------------------------------- | -
|                                                                       |  | Shares       |  | Amount                     |       |                                                  |  
|Balance at December 31, 1996                                           |  | 7,121,209    |  | $                          | 7,121 |                                                  | $ | 10,338,339 |                                         | $
|Exercise of warrants, 200 shares at $8.00 per share                    |  | 200          |  |                            |      |                                                  |   | 1,600      |                                         |  
|Warrants issued in conjunction with debenture offering                 |  |             |  |                            |      |                                                  |   | 62,220     |                                         |  
|Net loss                                                               |  |             |  |                            |      |                                                  |   |           |                                         |  
|                                                                       |  |              |  |                            |       |                                                  |   |            |                                         |  
|Balance at December 31, 1997                                           |  | 7,121,409    |  |                            | 7,121 |                                                  |   | 10,402,159 |                                         |  
|Issuance of stock as partial consideration for placement of debentures |  | 8,000        |  |                            | 8     |                                                  |   | 49,992     |                                         |  
|Issuance of stock on conversion of debentures                          |  | 227,222      |  |                            | 227   |                                                  |   | 807,414    |                                         |  
|Issuance of shares upon cashless exercise of stock options             |  | 66,824       |  |                            | 67    |                                                  |   | 396,513    |                                         |  
|Issuance of 375,000 stock options for services                         |  |             |  |                            |      |                                                  |   | 87,000     |                                         |  
|Net loss                                                               |  |             |  |                            |      |                                                  |   |           |                                         |  
|                                                                       |  |              |  |                            |       |                                                  |   |            |                                         |  
|Balance at December 31, 1998                                           |  | 7,423,455    |  |                            | 7,423 |                                                  |   | 11,743,078 |                                         |  
|Issuance (at $.34 per share) for cash                                  |  | 119,412      |  |                            | 120   |                                                  |   | 40,480     |                                         |  
|Issuance of 47,000 stock options for services                          |  |              |  |                            |       |                                                  |   | 6,580      |                                         |  
|Issuance of 250,000 warrants for services                              |  |              |  |                            |       |                                                  |   | 30,500     |                                         |  
|Net loss                                                               |  |              |  |                            |       |                                                  |   |            |                                         |  
|                                                                       |  |              |  |                            |       |                                                  |   |            |                                         |  
|Balance at December 31, 1999                                           |  | 7,542,867    |  |                            | 7,543 |                                                  |   | 11,820,638 |                                         |  
|Forgiveness of accrued compensation                                    |  |              |  |                            |       |                                                  |   | 422,559    |                                         |  
|Issuance (at $.90 per share) for cash                                  |  | 300,000      |  |                            | 300   |                                                  |   | 269,700    |                                         |  
|Exercise of stock options (at $.10 per share) for cash                 |  | 250,000      |  |                            | 250   |                                                  |   | 24,750     |                                         |  
|Exercise of warrants (at $.10 per share) for cash                      |  | 100,000      |  |                            | 100   |                                                  |   | 9,900      |                                         |  
|Issuance (at $1.00 per share) for cash                                 |  | 150,000      |  |                            | 150   |                                                  |   | 149,850    |                                         |  
|Reduction of exercise price for options and warrants                   |  |              |  |                            |       |                                                  |   | 148,000    |                                         |  
|Net loss                                                               |  |              |  |                            |       |                                                  |   |            |                                         |  
|                                                                       |  |              |  |                            |       |                                                  |   |            |                                         |  
|Balance at December 31, 2000                                           |  | 8,342,867    |  |                            | 8,343 |                                                  |   | 12,845,397 |                                         |  
|Issuance of 50,000 stock options for services                          |  |              |  |                            |       |                                                  |   | 18,500     |                                         |  
|Issuance of 200,000 warrants for services                              |  |              |  |                            |       |                                                  |   | 50,000     |                                         |  
|Net loss                                                               |  |              |  |                            |       |                                                  |   |            |                                         |  
|                                                                       |  |              |  |                            |       |                                                  |   |            |                                         |  
|Balance at December 31, 2001                                           |  | 8,342,867    |  | $                          | 8,343 |                                                  | $ | 12,913,897 |                                         | $







(Continued)



F-6



---

VYREX CORPORATION

(a development stage enterprise)



STATEMENTS OF STOCKHOLDERS DEFICIENCY(Continued)



|                                                              |  | Common stock |  | Additional paid-in capital |       | Deficit accumulated during the development stage |   |            | Total stockholders equity (deficiency) |  
|------------------------------------------------------------- |  | ------------ |  | -------------------------- | ----- | ------------------------------------------------ | - | ---------- | --------------------------------------- | -
|                                                              |  | Shares       |  | Amount                     |       |                                                  |  
|Balance at December 31, 2001                                  |  | 8,342,867    |  | $                          | 8,343 |                                                  | $ | 12,913,897 |                                         | $
|Modification of stock options                                 |  |              |  |                            |       |                                                  |   | 2,000      |                                         |  
|Issuance of stock upon exercise of warrants at $.10 per share |  | 150,000      |  |                            | 150   |                                                  |   | 14,850     |                                         |  
|Forgiveness of accrued compensation                           |  |              |  |                            |       |                                                  |   | 140,978    |                                         |  
|Issuance of 20,000 warrants for services                      |  |              |  |                            |       |                                                  |   | 2,000      |                                         |  
|Issuance of 5,000 warrants for services                       |  |              |  |                            |       |                                                  |   | 300        |                                         |  
|Net loss                                                      |  |              |  |                            |       |                                                  |   |            |                                         |  
|                                                              |  |              |  |                            |       |                                                  |   |            |                                         |  
|Balance at December 31, 2002                                  |  | 8,492,867    |  |                            | 8,493 |                                                  |   | 13,074,025 |                                         |  
|                                                              |  |              |  |                            |       |                                                  |   |            |                                         |  











See accompanying notes.



F-7



---

VYREX CORPORATION

(a development stage enterprise)



STATEMENTS OF CASH FLOWS



|                                                                            |  | Years ended December 31, |         |   | Cumulative from Inception |  
|--------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ------------------------- | -
|                                                                            |  | 2002                     |         |   | 2001                      |  
|Operating activities                                                        |  |                          |         |   |                           |  
|Net loss                                                                    |  | $                        | (3,763  | ) |                           | $
|Adjustments to reconcile net loss to net cash used in operating
activities: |  |                          |         |   |                           |  
|Depreciation, amortization and impairment charges                           |  |                          |        |   |                           |  
|Interest receivable                                                         |  |                          |        |   |                           |  
|Loss on disposal of fixed assets                                            |  |                          |        |   |                           |  
|Issuance of compensatory notes, stock, stock options and warrants           |  |                          | 4,300   |   |                           |  
|Changes in operating assets and liabilities:                                |  |                          |         |   |                           |  
|Accounts receivable and other assets                                        |  |                          | (79,471 | ) |                           |  
|Accounts payable and accrued liabilities                                    |  |                          | 6,957   |   |                           |  
|Deferred revenue                                                            |  |                          |        |   |                           |  
|Accrued interest on convertible debentures                                  |  |                          |        |   |                           |  
|                                                                            |  |                          |         |   |                           |  
|Net cash used in operating activities                                       |  |                          | (71,977 | ) |                           |  
|                                                                            |  |                          |         |   |                           |  
|Investing activities                                                        |  |                          |         |   |                           |  
|Purchase of short-term investments                                          |  |                          |        |   |                           |  
|Sale of short-term investments                                              |  |                          |        |   |                           |  
|Purchases of fixed assets                                                   |  |                          |        |   |                           |  
|Proceeds on sale of fixed assets                                            |  |                          |        |   |                           |  
|Patent, trademark and copyright costs                                       |  |                          |        |   |                           |  
|Other assets, including notes receivable from related parties               |  |                          |        |   |                           |  
|                                                                            |  |                          |         |   |                           |  
|Net cash used in investing activities                                       |  |                          |        |   |                           |  
|                                                                            |  |                          |         |   |                           |  
|Financing activities                                                        |  |                          |         |   |                           |  
|Net proceeds from issuance of common stock                                  |  |                          |        |   |                           |  
|Exercise of stock options and sale of options                               |  |                          |         |   |                           |  
|Exercise of warrants                                                        |  |                          | 15,000  |   |                           |  
|Proceeds from short-term loan                                               |  |                          |        |   |                           |  
|Proceeds from note payable                                                  |  |                          |        |   |                           |  
|Repayment of note payable                                                   |  |                          |        |   |                           |  
|Advances from potential investors                                           |  |                          |        |   |                           |  
|Repayment of advances                                                       |  |                          |        |   |                           |  
|                                                                            |  |                          |         |   |                           |  
|Net cash provided by (used in) financing activities                         |  |                          | 15,000  |   |                           |  
|                                                                            |  |                          |         |   |                           |  
|Net increase (decrease) in cash and cash equivalents                        |  |                          | (56,977 | ) |                           |  
|Cash and cash equivalents, beginning of the period                          |  |                          | 60,003  |   |                           |  
|                                                                            |  |                          |         |   |                           |  
|Cash and cash equivalents, end of the period                                |  | $                        | 3,026   |   |                           | $
|                                                                            |  |                          |         |   |                           |  
|Supplemental cash flow information                                          |  |                          |         |   |                           |  
|Conversion of notes payable and related accrued interest                    |  |                          |         |   |                           |  
|                                                                            |  |                          |         |   |                           |  
|Issuance of stock as consideration for conversion of debentures             |  |                          |         |   |                           |  
|                                                                            |  |                          |         |   |                           |  
|Issuance of stock upon cashless exercise of stock options                   |  |                          |         |   |                           |  
|                                                                            |  |                          |         |   |                           |  
|Warrants issued in connection with convertible debentures                   |  |                          |         |   |                           |  
|                                                                            |  |                          |         |   |                           |  
|Forgiveness of debt                                                         |  | $                        | 140,978 |   |                           |  
|                                                                            |  |                          |         |   |                           |  



See
accompanying notes.



F-8



---

VYREX CORPORATION

(a development stage enterprise)



NOTES TO FINANCIAL STATEMENTS



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,
2002, the Company has an accumulated deficit of $13,243,048 and stockholders deficiency of $160,530. 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 possible 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, 2002 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.



F-9



---

VYREX CORPORATION

(a development stage enterprise)



NOTES TO FINANCIAL STATEMENTS(Continued)





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.



Stock Options and Warrants



Statement of Financial Accounting Standards No. 123,Accounting for Stock-Based Compensation (SFAS 123), establishes the use of the fair value based method of accounting for stock-based compensation arrangements, under which compensation cost is determined using the fair
value of stock-based compensation determined as of the grant date, and is recognized over the periods in which the related services are rendered. SFAS 123 also permits companies to elect to continue using the intrinsic value accounting method
specified in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) to account for stock-based compensation. The Company has elected to retain the intrinsic value based method and has
disclosed the pro forma effect of using the fair value based method to account for its stock-based compensation to employees and directors of the Company.



Options and warrants granted to consultants and other nonemployees 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.



Revenue Recognition



Licensing and royalty revenue from royalty agreements is recognized in accordance with the terms of the specific agreement, which
generally includes a monthly 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 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, 2002 and 2001 upon the conversion or exercise that were not included in the computation of net loss per share totaled 2,934,259 and 3,220,259, respectively.





F-10



---

VYREX CORPORATION

(a development stage enterprise)



NOTES TO FINANCIAL STATEMENTS(Continued)



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.



3.    Related Party Transactions



Note Payable



The Company has an outstanding note payable to a related
party totaling $5,000 at December 31, 2002. The note is unsecured, bears interest at an annual rate of 10% and has a maturity date of June 2, 2003.



Forgiveness of Debt



Current and former employees of the Company forgave accrued salaries and vacation amounting to $140,978 during 2002. The amount forgiven
was credited to additional paid-in capital.



4.    Warrants



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



|                             |  | Warrants Outstanding |   |  | Exercise Price |  | Weighted Average Exercise Price
|---------------------------- |  | -------------------- | - |  | -------------- |  | -------------------------------
|Balance at January 1, 2001   |  | 150,000              |   |  | $0.10          |  | $                              
|Issued                       |  | 200,000              |   |  | $0.30          |  | $                              
|                             |  |                      |   |  |                |  |                                
|Balance at December 31, 2001 |  | 350,000              |   |  | $0.10$0.30    |  | $                              
|Exercised                    |  | (150,000             | ) |  | $0.10          |  | $                              
|Issued                       |  | 25,000               |   |  | $0.15$0.37    |  | $                              
|                             |  |                      |   |  |                |  |                                
|Balance at December 31, 2002 |  | 225,000              |   |  | $0.15$0.37    |  | $                              
|                             |  |                      |   |  |                |  |                                



The
warrants outstanding at December 31, 2002 will expire on November 18, 2004, March 31, 2005 and December 5, 2005, respectively.



During 2002, the Company issued 25,000 warrants for the purchase of common stock at a weighted average price of $.33 per share in exchange
for consulting services. The fair value of the warrants was $2,300 and has been charged to general and administrative expenses in the accompanying 2002 statement of operations.



5.    License and Collaboration Agreements



On August 1, 1997, the Company entered into a collaboration
agreement with The Immune Response Corporation, Inc. to develop treatments for spinal cord and other central nervous system traumas. The agreement calls for a 50% split of any funds raised or profits realized in connection with the venture. As part
of the agreement, the Company licensed its CD-Tagging technology to The Immune Response Corporation, Inc. for use in the research and development of products within the scope of the venture for the treatments mentioned above.



On August 29, 2000, the Company entered into a license
agreement with VDF Futureceuticals, Inc. (VDF). The agreement calls for the licensee to manufacture certain chromium and boron compounds and/or



F-11



---

VYREX CORPORATION

(a development stage enterprise)



NOTES TO FINANCIAL STATEMENTS(Continued)



complexes, including method and know-how, which compounds and/or complexes are covered by U.S. patents. The Company received license fees of
$25,000 in 2000 after signing this agreement, $10,000 after the boron compound was launched in 2001 and $75,000 after it generated $75,000 of sales of the licensed products in 2002. VDF also agreed to pay the Company a total gross royalty of 15% of
gross revenue derived from the sale of licensed products.



To assist in the further development of Vyrexs proprietary compound Panavir®, the Company
entered into a Collaboration Agreement with Biological Business Creativity, LLC (BBC). In November 2001, BBC was issued a warrant to purchase an aggregate of 200,000 shares of common stock at a price of $0.30 per share exercisable until
November 18, 2004. The fair value of the warrants was $50,000 and has been charged to general and administrative expenses in the accompanying 2001 statement of operations. In addition, the BBC was granted a license to certain claims of Vyrexs
United States Patent Number 4,985,465, Method for Inhibiting Viral and Retroviral Infections dated January 15, 1991. BBC will pay royalties to Vyrex equal to (a) 25% of the gross margin for those products sold by BBC and (b) 25% of the gross
revenues for the technology or products (sub) licensed to third parties.



6.    Concentration of Credit Risk



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



7.    Income Taxes



At December 31, 2002, the Company had net operating loss carryforwards available to reduce future taxable income, if any, of approximately
$16,039,000 and $7,113,000 for Federal and California income tax purposes, respectively. The Federal net operating loss begins to expire in 2006. Some of the Companys California net operating losses expired during 2002. 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, 2002, the Company also had research and development credit carryforwards of approximately $486,000 and $162,000 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, 2002 and 2001 are
as follows:



|                                              |  | 2002 |            |   | 2001 |  
|--------------------------------------------- |  | ---- | ---------- | - | ---- | -
|Net operating loss carryforwards              |  | $    | 6,082,000  |   |      | $
|Research and development credit carryforwards |  |      | 648,000    |   |      |  
|Other                                         |  |      | 119,000    |   |      |  
|                                              |  |      |            |   |      |  
|                                              |  |      | 6,849,000  |   |      |  
|Valuation allowance                           |  |      | (6,849,000 | ) |      |  
|                                              |  |      |            |   |      |  
|                                              |  | $    |           |   |      | $
|                                              |  |      |            |   |      |  



F-12



---

VYREX CORPORATION

(a development stage enterprise)



NOTES TO FINANCIAL STATEMENTS(Continued)





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 2002 and 2001 and, accordingly, the Company did not recognize any credits for income taxes in the accompanying statements of operations to offset its pre-tax losses. The valuation allowance decreased by $659,000 in 2002 and increased
by $178,000 in 2001.



8.    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 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.



During 2001, the Company issued 50,000 options for the purchase of common stock at $.50 per share in exchange for consulting services. The
fair value of the options was $18,500 and has been charged to general and administrative expenses in the accompanying 2001 statement of operations.



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



|                                                |  | Stock Options Outstanding |   |  | Option Exercise Price |  | Weighted-Average Exercise Price
|----------------------------------------------- |  | ------------------------- | - |  | --------------------- |  | -------------------------------
|Balance at December 31, 2000                    |  | 2,180,259                 |   |  |                       |  |                                
|Granted                                         |  | 665,000                   |   |  | $0.37$0.50           |  | $                              
|Canceled                                        |  | (75,000                   | ) |  | $3.00                 |  | $                              
|                                                |  |                           |   |  |                       |  |                                
|Balance at December 31, 2001                    |  | 2,770,259                 |   |  |                       |  |                                
|Granted                                         |  | 25,000                    |   |  | $0.25                 |  | $                              
|Canceled                                        |  | (186,000                  | ) |  | $6.00                 |  | $                              
|                                                |  |                           |   |  |                       |  |                                
|Balance at December 31, 2002                    |  | 2,609,259                 |   |  |                       |  |                                
|                                                |  |                           |   |  |                       |  |                                
|Shares available for grant at December 31, 2002 |  | 1,265,741                 |   |  |                       |  |                                
|                                                |  |                           |   |  |                       |  |                                



Following is a further breakdown of the options outstanding as of December 31, 2002:



|Range of Exercise Prices |  | Outstanding Options |  | Weighted-Average Remaining Life in Years |  | Weighted-Average Exercise Price |  | Options Exercisable |  | Weighted-Average Exercise Price of Options Exercisable
|------------------------ |  | ------------------- |  | ---------------------------------------- |  | ------------------------------- |  | ------------------- |  | ------------------------------------------------------
|$0.10$0.56              |  | 1,857,000           |  | 6.32                                     |  | $0.39                           |  | 1,652,458           |  | $0.40                                                 
|$3.00                    |  | 398,668             |  | 4.37                                     |  | 3.00                            |  | 384,085             |  | 3.00                                                  
|$5.75$7.50              |  | 353,591             |  | 4.94                                     |  | 5.94                            |  | 353,591             |  | 5.94                                                  
|                         |  |                     |  |                                          |  |                                 |  |                     |  |                                                       
|                         |  | 2,609,259           |  | 5.83                                     |  | 1.54                            |  | 2,390,134           |  | 1.64                                                  
|                         |  |                     |  |                                          |  |                                 |  |                     |  |                                                       



F-13



---

VYREX CORPORATION

(a development stage enterprise)



NOTES TO FINANCIAL STATEMENTS(Continued)





The
Company has elected to follow APB 25 for options granted to employees. 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 4.75% and 5.04%, dividend yield of 0%; the volatility factor of the
expected market price of the Companys common stock of 55% and 153% in 2002 and 2001, respectively, and a weighted-average expected life of the options of 60 months in 2002 and 48 months in 2001.



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:



|                             |  | 2002 |         |   | 2001 |  
|---------------------------- |  | ---- | ------- | - | ---- | -
|Pro forma net loss           |  | $    | (42,000 | ) |      | $
|Pro forma net loss per share |  | $    | (0.00   | ) |      | $



The
weighted-average fair value of options granted in 2002 and 2001 was $0.06 and $0.34, respectively.



9.    Notes Payable and Related Conversion and Stock Options



At December 31, 2002 and 2001, the Company has outstanding notes payable with an aggregate principal balance of $160,000 which bear
interest at an annual rate of 8%. Accrued interest of approximately $10,000 at December 31, 2002 is included in accounts payable and accrued expenses in the accompanying 2002 balance sheet. These notes had an original maturity date of March 22, 2000
and have been extended two times through March 22, 2003 (see Note 11). They are collateralized by substantially all of the Companys assets. One note with a principal balance of $60,000 contains an option for the conversion of the note into
100,000 shares of common stock at a price of $0.60 per share exercisable until March 22, 2003. In connection with the extension of the maturity of this debt during 2000, the Company granted the noteholder an option to purchase 50,000 shares of
common stock at a price of $.50 per share. The option was due to expire two years from the date of grant.



On March 5, 2002, the noteholder agreed to extend the maturity date for a period of one-year making it due and payable on March 22, 2003.
In consideration of the extension, the terms of the option to purchase 50,000 shares at $0.50 per share and the option to convert $60,000 of principal into 100,000 shares of common stock at $0.60 per share have been increased by one year
respectively. The fair value of the new option in excess of the value of the prior option at the date of amendment of $2,000 has been charged to general and administrative expenses in the accompanying 2002 statement of operations. In the event of
prepayment of the note, the noteholder will retain the right to purchase 100,000 shares at $0.60 per share until March 22, 2003. The interest portion of the note due and payable on March 22, 2002 was paid per the agreement.



10.    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, 2002.



F-14



---

VYREX CORPORATION

(a development stage enterprise)



NOTES TO FINANCIAL STATEMENTS(Continued)





11.    Subsequent Events



On March 10, 2003, the Company obtained a commitment from a private investor to loan the Company $200,000 in exchange for the issuance of a convertible note with 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 investor has the option to convert the principal amount into common stock at a price of $0.25 per share during the first year, $0.50 the second year and $0.75 the third
year. The investor will be issued warrants, exercisable within three years from the date of issuance, entitling the investor to purchase 100,000 shares of common stock at an exercise price of $0.11 per share. The funds will be used to pay off the
notes payable and the related party note with the remainder used for general operating purposes.



F-15