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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, 1997

/_ /      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       (IRS Employer Identification No.)
      incorporation or organization)                  
                                          
2159   AVENIDA    DE    LA    PLAYA,     LA     JOLLA,      CALIFORNIA    92037
                      (Address of principal executive offices)
                                          
                                   (619) 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 issuers revenues for its most recent year:  $0.00.

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:  $22,149,000 as of March 12, 1998

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

Common Stock - 7,201,959 as of March 12, 1997.   Warrants to purchase common
stock - 1,256,701 as of March 12, 1998.

                        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, 1998 and the Form S-3
dated January 20, 1998 are incorporated by reference in Part III of this Form
10-K SB to the extent stated herein.

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 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 current research is 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. The Company is also developing a 
proprietary CD-Tagging-TM- gene and protein discovery technology in an effort 
to help accelerate its pharmaceutical and nutraceutical research programs.

     ANTIOXIDANT DRUG PROGRAM. In the Company's opinion, Vantox-Registered 
Trademark- is currently its lead drug candidate. The Company's research with 
Vantox-Registered Trademark- indicates it may have usefulness in the 
treatment of asthma, ARDS, cystic fibrosis, oxygen toxicity, smoke inhalation 
and other respiratory diseases and conditions. Vantox-Registered Trademark- 
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-Registered Trademark- 
has been shown in laboratory tests to be a free radical scavenger, or 
"antioxidant". The Company has demonstrated Vantox-Registered Trademark-'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-Registered Trademark- 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-Registered Trademark- 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 conducting clinical trials, the Company 
is currently  seeking a joint venture with a pharmaceutical company to assist 
in funding clinical development. There can be no assurance the Company will 
be successful in funding the further development of Vantox-Registered 
Trademark-, 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 a drug. The Company holds two patents in connection 
with Vantox-Registered Trademark-.

     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-Registered Trademark- and 
Panavir-Registered Trademark- another drug candidate being developed by the 
Company. 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

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disorders. The Company is continuing pre-clinical development of these 
compounds and has filed patent disclosures concerning their uses.

     Panavir-Registered Trademark- 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-Registered Trademark- 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 which lead to the 
formation of multinucleated giant cells called syncytia. Panavir-Registered 
Trademark- 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-Registered Trademark- 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-Registered Trademark- appears to inhibit the activity of certain of 
these cytokines, including interleukin-1 and tumor necrosis factor alpha. The 
Company hopes Panavir-Registered Trademark- 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-Registered Trademark- to treat patients infected with the HIV virus. 
This phase of the Panavir-Registered Trademark- 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-Registered Trademark- 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-Registered Trademark- 
analogs and prodrugs 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. In the event additional testing indicates 
potential therapeutic activity, the Company will determine the appropriate 
development plan for the compounds.

     Ultimately, further trials will be required involving the treatment of 
at least several hundred patients with Panavir-Registered Trademark- alone, 
or in combination with approved drugs. There can be no assurance such tests 
will be undertaken or completed, or that any form of Panavir-Registered 
Trademark- will be developed as a marketable product.
          
     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's research 
programs are currently being directed at developing proprietary formulas of 
nutritional supplements targeted at consumer health concerns and the 
development of proprietary supplements (Pronutrients-TM-) which may be 
marketed as single line supplements, in multi-formulations and in foods.
          
     During 1997 the Company entered into an agreement with Retired Persons 
Services, Inc. (RPS), which administers the AARP Pharmacy Service, to design 
and market four nutritional supplement products. The proposed products are 
intended to provide for the dietary support of the heart, the prostate, 
bones, joints and immunity/vitality. The Company has completed pilot 
production of these potential products contract manufacturers and has also 
initiated stability and safety studies. The

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Company has agreed to license these initial four formulas to RPS and allow 
RPS to manufacture and market the products. Pursuant to its agreement with 
RPS the Company is to receive a royalty from RPS based upon a percentage of 
RPS' sales of the products. The Company has granted RPS exclusive rights to 
market these potential products in the U.S. There can be no assurance that a 
market will develop for the products.

     In early 1998 the Company entered into an agreement with Uncle Ben's, 
Inc. to jointly develop "Wellness Foods". Wellness foods are proposed foods 
designed to offer health benefits beyond basic nutrition. Pursuant to an 
Agreement with Uncle Ben's several steps must be completed in 1998 including 
technical development, animal testing, safety testing as well as consumer 
assessment, product positioning and market analysis. There can be no 
assurance these development efforts will be successful or if they are, that 
any products will be produced or achieve acceptance or generate revenues.

     GENE DISCOVERY. A major goal of recent pharmaceutical research is to 
decipher the human genome. With  the gene databases rapidly filling, the 
Company and others believe the next step is not only to discover the genes 
but also to discover the genes' functions. The Company has acquired an 
exclusive world-wide license to a gene research method, called 
CD-Tagging-TM-. CD-Tagging-TM- is a proprietary functional genomics and 
proteomics technology that incorporates hereditary tags into genes, 
transcripts and proteins via recombinational events at the DNA level. 
CD-Tagging-TM- can be used to analyze known genes and gene products 
(proteins) and to identify and characterize new genes and gene products. The 
Company believes CD-Tagging-TM- may provide significant advantages over 
current methods by which genes and proteins are discovered and characterized. 
These advantages may include  identification and analysis of genes and 
proteins in their natural cellular and/or organismal environments, direct 
purification of tagged proteins from tagged cells by immunoaffinity methods, 
direct amplification of tagged proteins from tagged cells, and assessment of 
gene function via modulation of gene expression in vivo. The Company intends 
to use CD-Tagging-TM-, among other things, to identify genes whose proteins 
are expected to serve as the basis for new diagnostic agents and therapeutic 
drugs. The Company is developing CD-Tagging-TM- for its own drug discovery 
purposes and is evaluating the potential to sublicense the technology for 
both research and commercial applications.

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 which the Company has entered into 
are summarized below:

     JONATHAN W. JARVIK, PH.D. In January, 1996, the Company entered into 
license agreements with Jonathan W. Jarvik, Ph.D. ("AJarvik Agreement") 
pursuant to which Dr. Jarvik granted the Company a 99 year exclusive 
world-wide license to develop and market certain technology, processes and 
potential products relating to gene research methods discovered by Dr. Jarvik 
called CD-Tagging and epitope tagging. Dr. Jarvik presently has had a patent 
issued on the CD-Tagging-TM- technology and universal epitope technology. The 
Company is responsible for all costs and expenses in connection with 
obtaining patent protection and with the future development of the licensed 
technology. Pursuant to the agreement, Dr. Jarvik will receive royalties in 
the amount of 4% of the gross proceeds received from the sale by Vyrex of 
certain defined products developed by  CD-Tagging and universal epitope 
technology not including sales by sublicensees. Dr. Jarvik shall also receive 
royalties in an amount equal to the lesser of: 7% of the gross proceeds 
received by each sublicensee from products developed with the sublicensed 
technology; or 50% of any royalty received by Vyrex from each sublicensee. In 
addition, Dr. Jarvik shall receive 20% of any sublicense fees received by 
Vyrex. Dr. Jarvik also is entitled to an annual maintenance fee in the amount 
of $35,000 less all other compensation paid to Dr. Jarvik as salary or 
similar compensation. The License Agreement may be terminated by Dr. Jarvik 
or converted to a non-exclusive license in the event Vyrex fails to comply 
with certain obligations under the Agreement. 

                                       3

<PAGE>

     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 proprietary nutraceutical 
compositions. Dr. Miljkovic currently has a provisional patent application 
pending which covers the compounds, and expects to file a further United 
States patent application will be filed shortly. Pursuant to the agreement, 
the Company is responsible for all costs and expenses in connection with 
obtaining patent protection. 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 34% of gross revenues. The License Agreement 
may be terminated by Dr. Miljkovic or the Company under certain circumstances.
          
     THE IMMUNE RESPONSE CORPORATION. During 1997 the Company entered into an 
agreement with The Immune Response Corporation to search for treatments for 
spinal cord and other central nervous system trauma. The Immune Response 
Corporation is a Carlsbad, California-based biopharmaceutical company 
involved with research in T-cell therapy, molecular biology and gene therapy. 
The collaboration is focusing on an effort to discover proteins and small 
molecules which may lead to the development of drugs for the treatment of 
central and peripheral nervous system injury. The companies have agreed to 
share equally the ownership of potential proprietary discoveries within the 
scope of the collaboration.

     UNCLE BEN'S, INCORPORATED. On January 22, 1998, the Company entered into 
an exclusive development agreement with Uncle Ben's, Incorporated to develop 
wellness foods for human and animal consumption.
 
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-Registered Trademark- 
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-TM- 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-dilsopropylphenol.  This patent 
has been assigned to the Company and describes the technology underlying the 
Company's proposed Vantox-Registered Trademark- products.

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

                                       4
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          The Company has received two notices of allowance patent 
applications covering new antiviral applications of its antioxidant 
therapeutics.

          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-TM- 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-dilsopropylphenol.
          
          A United States Patent was issued in 1996 directed to a certain
delivery formulation for Probucol, related to the Company's 
Panavir-Registered Trademark- product.
          
          A United States Patent was issued in 1997 directed to a certain method
for producing tagged genes, transcripts and proteins related to the Company's
CD-Tagging-TM- technology.
          
          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.  
Pursuant to the Jarvik Agreement the Company is also responsible for 
processing the patent application pending in the name of Dr. Jarvik regarding 
a CD Tagging-TM- method. The Company has filed U.S. and foreign patent 
applications in the name of Dr. Jarvik covering the universal epitope 
technology. Pursuant to the Jarvik License Agreement, the Company is 
responsible for fees and costs associated with the patent applications 
covering the universal epitope technology.

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

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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 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-Registered 
Trademark-, Vantox-Registered Trademark-, and its logo in connection with 
the name Vyrex.  Federally registered trademarks have a perpetual life, as 
long as they are renewed on a timely basis, subject to the rights of third 
parties to seek cancellation of the marks.  The Company 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.

          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.

EMPLOYEES

          On December 31, 1997, the Company employed twenty-one individuals, 
three in executive positions, thirteen in scientific positions and five in 
administration. None of its employees are currently represented by a union or 
any other form of collective bargaining unit. The Company anticipates it will 
hire an undetermined number of new employees over the next 12 to 24 months. 
The Company's success will depend in large part upon its ability to retain 
its current employees and secure additional employees to continue its 
research and development 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.

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

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

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

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

          In general, the clinical testing for new compounds required by the 
FDA is an extremely costly, ongoing, multi-year project. The FDA itself 
estimates clinical drug development time requirements average five years, but 
range from two to ten years. Finally, the Company or the FDA may suspend 
clinical trials at any time if it is felt that the subjects or patients are 
being exposed to an unacceptable health risk. Other competitors of the 
Company have had their proposed pharmaceutical clinical trials halted due to 
safety concerns.
     
     The process of completing clinical testing and obtaining FDA approval of 
a NDA is likely to take a number of years and require the expenditure of 
substantial resources. If an application is submitted, there can be no 
assurance the FDA will review and approve the NDA in a timely manner if at 
all. Even after initial FDA approval of the NDA has been obtained, further 
studies, including post-market studies, may be required to provide additional 
data on safety or effectiveness and will be required to gain approval for the 
use of a potential product as a treatment for clinical indications other than 
those for which the potential product was initially tested. Also, the FDA 
will require post-market reporting and may require surveillance programs to 
monitor the side effects of 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

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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 product. The Company does not have any contracts with any 
suppliers of the raw materials used in the development of its proposed 
products.

COMPETITION

          The biotechnology and pharmaceutical industries are intensely 
competitive. There are many pharmaceutical companies, biotechnology 
companies, public and private universities and research organizations 
actively engaged in research and development of pharmaceutical products. Most 
of the Company's existing or potential competitors have substantially greater 
financial, human and other resources than the Company and may be better 
equipped to develop, manufacture and market products. In addition, many of 
these companies have extensive experience in preclinical testing and human 
clinical trials. These companies may develop and introduce products and 
processes competitive with or superior to those of the Company, and many of 
these companies may be further along in the product development and approval 
process for their potential products.
          
          The Company's competition will be determined in part by the 
potential indications for which the Company's proposed products are developed 
and ultimately approved, if at all, by regulatory authorities. For most, if 
not all, of the Company's potential products, an important factor in 
competition will be the timing of market introduction of competitive 
products. Accordingly, the relative speed with which the Company can develop 
potential products, complete the clinical trials and approval processes and 
supply commercial quantities of the products to the market are expected to be 
important competitive factors. The Company expects competition among products 
approved for sale will be based, among other things, on product 
effectiveness, safety, reliability, availability, price and the strength of 
the patents on which such products are based.

          The Company's competitive position also depends upon its ability to
attract and retain qualified personnel, obtain patent protection or otherwise
develop proprietary products or processes and secure sufficient capital
resources for the very substantial period between technological conception and
any commercial sales, which may develop. There can be no assurance the Company
will be able to compete successfully.


                                       8

<PAGE>

                                 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. It has not completed the 
development of any product and, accordingly, has not begun to generate 
revenues from operations. Most of the Company's proposed pharmaceutical 
products will require significant additional research and development, 
including in the majority of cases extensive preclinical and clinical 
testing, before the Company will be able to apply for FDA approval. There can 
be no assurance the Company's research and development efforts 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 which may not occur for 
a number of years. The Company is also developing nutraceutical products 
which the Company believes may be sold before any of its proposed 
pharmaceutical products will be sold. However, as of the date of this 
Prospectus no nutraceutical products have completed testing or been sold. 
There can be no assurance such products will complete testing, achieve 
consumer acceptance or generate any revenue. There can be no assurance that 
the Company can successfully complete the product development required to 
initiate its strategies with regard to nutraceutical products or to 
successfully market any nutraceutical product.

NO OPERATING REVENUES; ACCUMULATED DEFICIT; EXPECTATION OF FUTURE LOSSES

      The Company has experienced significant operating losses since its 
inception in 1991. As of December 31, 1997 the Company had a deficit 
accumulated in the development stage of $8,524,653. The Company expects to 
incur substantial additional operating losses over the next several years and 
expects cumulative losses to increase as the Company's research and 
development efforts and clinical trials expand. The Company has generated no 
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, 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 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. 

                                       9

<PAGE>

FUTURE CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FUNDING

      Substantial expenditures will be required to enable the Company to 
conduct existing and planned product research and development, continue 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, it is likely 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 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 delay, scale back or eliminate one or more of its 
potential product development and drug and nutraceutical discovery programs, 
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 that the Company would not otherwise relinquish. The Company's 
future cash requirements will be affected by results of research and 
development, preclinical studies and clinical trials, nutraceutical 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's success in developing marketable products and achieving a 
competitive position will depend, in large part, on its ability to attract 
and retain qualified scientific and management personnel and in particular, 
to retain Dr. Sheldon S. Hendler. The proprietary technology which has been 
transferred to the Company was primarily developed by Dr. Hendler. The 
Company does not currently maintain life insurance on Dr. Hendler, who is the 
largest stockholder in the Company. The loss of Dr. Hendler or other 
scientists and management personnel would likely have a material adverse 
impact on the business and operations of the Company. The Company will also 
need to hire additional management, administrative and scientific personnel 
in the future to meet its plans. Competition for such personnel is intense, 
and no assurance can be given that the Company will be able to hire and/or 
retain satisfactory personnel. The Company's anticipated growth and expansion 
into areas and activities requiring additional expertise, such as clinical 
trials, government approvals, nutraceutical product development, 
manufacturing and marketing are expected to place increased demands on the 
Company's resources. These demands are expected to require the addition of 
new management personnel and the development of additional expertise by 
existing management personnel. The failure to acquire such services or to 
develop such expertise could have a material adverse effect on the Company's 
prospects 

                                      10

<PAGE>

for success. In addition, the Company relies on consultants and advisors to 
assist the Company from time to time in reviewing its research and 
development strategy. All of the Company's consultants and advisors are 
employed by employers other than the Company, and may have commitments to or 
consulting or advisory contracts with other entities that may affect their 
ability to contribute to the Company.

RELIANCE ON COLLABORATIVE PARTNERS

      The Company has relied in the past on certain established companies 
interested in its technology to fund a portion of its research and 
development expenses. In March of 1997 the Company entered into a 
collaboration with The Immune Response Corporation to utilize the Company's 
CD-Tagging-TM- technology, along with other technologies, to discover small 
molecules to develop therapies for spinal cord and other central nervous 
system traumas. The Company is utilizing laboratory facilities and services 
at The Immune Response Corporation. The Company has also entered into license 
agreements with Dr. Jarvik regarding the Company's CD-Tagging-TM- technology. 
The Company anticipates that it may need to enter into collaborative 
arrangements with certain parties to further its development of nutraceutical 
products. To date the Company has not entered into any collaborative 
agreements with regard to the development of its proposed nutraceuticals.

      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 nine (includes CD-Tagging-TM-) patents issued, one patent allowed in the 
United States, and six 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 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 

                                      11

<PAGE>

interference proceedings declared by the U.S. Patent and Trademark Office to 
determine the priority of inventions which could result in substantial costs 
to the Company.

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

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

GOVERNMENTAL REGULATION AND UNCERTAINTY OF PRODUCT APPROVALS

      The production and marketing of the Company's proposed products are 
subject to strict regulation by federal and state governmental authorities in 
the United States and in foreign countries where such potential products may 
be produced and marketed. In the United States, the FDA regulates, where 
applicable, development, testing, labeling, manufacturing, registration, 
notification, clearance or approval, marketing, distribution, record keeping 
and reporting requirements for human and animal drugs, medical devices, 
biologies, cosmetics and food additives. Most, if not all, of the Company's 
proposed products, including its proposed Panavir-Registered Trademark-, 
Vantox-Registered Trademark-, 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 

                                      12

<PAGE>

granted, such approval may entail limitations on the indicated uses for which 
the drug may be marketed. Even if such regulatory approval is obtained, a 
marketed drug, its manufacturer and the facilities in which the drug is 
manufactured are subject to continual review and periodic inspections. Later 
discovery of previously unknown problems with a product, manufacturer or 
facility may result in restrictions on such product or manufacturer, 
including withdrawal of the potential product from the market, product 
seizures, a halt in operation and other materially adverse consequences. The 
Company is unable to predict the extent of adverse governmental regulation 
which might arise from future federal, state or foreign legislative or 
administrative action, or the extent of the impact of such legislative 
changes on the business of the Company.

DEBT SERVICE AND PENALTIES

      As of December 31, 1997, the Company has $1,000,000 of debentures 
outstanding and may issue additional Debentures or other debt instruments. 
Such instruments generally require the payment of interest as long as the 
Debentures are outstanding and the payment of principal upon maturity of the 
Debentures, or under certain conditions, upon demand. At maturity the payment 
of principal and interest on the Debentures may be made in Common Stock of 
the Company, provided certain conditions are met. The Debentures are 
convertible only under certain conditions and if such conditions are not met 
the Company could be required to repay the principal and all interest due on 
the Debentures in cash. If cash to repay the Debentures was not available the 
holders of the Debentures could force the Company into bankruptcy or take 
other measures which could materially adversely impact the Company. In order 
to convert the Debentures into Common Stock: (i) there must be an effective 
registration statement covering the Debenture Shares and Debenture Warrant 
Shares, (ii) the Company must currently be listed on the Nasdaq SmallCap or 
other exchange, (iii) the Company must not have certain legal action pending 
against it, and (iv) must meet other conditions. Additionally, the Company 
cannot convert the Debentures into Common Stock if such conversion would 
result in the issuance of 20% or more of the then outstanding Common Stock of 
the Company.
      
DILUTIVE AND OTHER ADVERSE EFFECTS OF OUTSTANDING OPTIONS AND WARRANTS
      
      Under the terms of the existing warrants, options issued under the 
Company's stock option plan and other outstanding options and warrants, 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 and 
warrants. The holders of the warrants 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 warrants. In 
addition, holders of certain Common Stock of the Company have registration 
rights, and the exercise of such rights may involve substantial expense to 
the Company.

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, and also make it difficult to sell the Company's 
securities purchased by investors herein. There are options outstanding both 
pursuant to the Company's Stock Option Plan and options not pursuant to any 
plan which are exercisable for up to 1,596,209 shares of Common Stock. The 
vast majority of all of these options and warrants are currently exercisable. 
Exercise of any of these warrants or options would result in additional 
dilution to the purchaser of the shares offered herein, and exercise of any 
significant amount of these options or warrants 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.

                                      13

<PAGE>

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, 
discourage hostile bids for control of the Company in which stockholders may 
receive premiums for their common stock or warrants and adversely affect the 
voting and other rights of the holder of the common stock, or depress the 
market price of the Common Stock or IPO Warrants.

POSSIBLE 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.

CONTROL BY PRESENT STOCKHOLDERS; POSSIBLE DEPRESSIVE EFFECT ON THE COMPANY'S 
SECURITIES

      The current officers and directors of the Company will be able to elect 
all of the Company's directors and otherwise control the Company's 
operations. This concentration of ownership by the Company's officers and 
directors may discourage potential purchasers from seeking control of the 
Company through the purchase of Common Stock, and this possibility could have 
a depressive effect on the price of the Company's securities.
      
      In addition, Dr. Sheldon S. Hendler, Chairman of the Board and Chief 
Executive Officer of the Company owns approximately 43% of the outstanding 
Common Stock of the Company. As a result thereof Dr. Hendler alone may 
control or exert overwhelming influence over the Company's operations.

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 

                                      14

<PAGE>

of any directorship nominations or other business to be brought by the 
stockholders at any stockholder's meeting. This provision makes it more 
difficult for stockholders to nominate candidates for the Board of Directors 
who are not supported by management. In addition, the Articles of 
Incorporation require advance notice for stockholder proposals to be brought 
before the annual meeting. The requirements include that the notice must 
specify certain information regarding the stockholder and the meeting. This 
provision to implement stockholder proposals makes it more difficult even if 
a majority of stockholders are in support thereof.  The Company is also 
subject to certain provisions of California law if more than 50% of its 
outstanding securities are held of record by persons with addresses in 
California, and if more than 50% of its property, payroll and sales are from 
California. These provisions of California law will control the operations of 
the Company with respect to certain of the anti-takeover provisions discussed 
herein, until such time as either (i) the Company is listed on the New York 
or American Stock Exchange or the National Market System of Nasdaq, and it 
has 800 stockholders; or (ii) the Company no longer has either more than 50% 
of its outstanding securities held by persons with addresses in California, 
or less than 50% of its property, payroll and sales are in California. Each 
of these provisions may also have the effect of deterring hostile take-overs 
or delaying changes in control or management of the Company. In addition, the 
indemnification provisions of the Company's Bylaws and Articles of 
Incorporation may represent a conflict of interest with the stockholders 
since officers and directors may be indemnified prior to any judicial 
determinations as to their conduct. 

CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE WARRANTS

      Holders of the Company's outstanding warrants will only be able to 
exercise the warrants if: (i) a current prospectus under the Securities Act 
relating to the securities underlying the warrants is then in effect and (ii) 
such securities are qualified for sale or exempt from qualification under the 
applicable securities laws of the states in which the various holders of the 
warrants reside. Although the Company has undertaken to use its best efforts 
to maintain the effectiveness of a current prospectus covering the securities 
underlying the warrants, there can be no assurance the Company will be able 
to do so. The warrants may have no value if a current prospectus, covering 
the securities issuable upon the exercise of the warrants, is not kept 
effective or if such securities are not qualified, or exempt from 
qualification, in the states in which the holders of the warrants reside.

POSSIBLE DELISTING OF SECURITIES FROM THE NASDAQ STOCK MARKET AND POSSIBLE 
ILLIQUIDITY

      While the Company's common stock and warrants are currently listed on 
the Nasdaq SmallCap Market, there can be no assurance the Company will meet 
the criteria for continued listing of its securities on the Nasdaq SmallCap 
Market. The continued listing criteria for the Nasdaq SmallCap Market 
generally include a minimum of $2,000,000 in net tangible assets, a market 
capitalization of $35 million or net income of $500,000 in less than two 
years, a minimum bid price for Common Stock of $1.00 per share, and 500,000 
shares in the public float. In addition, the Common Stock must have at least 
two registered and active market makers, must be held by at least 300 holders 
and the market value of its public float must be at least $200,000. If an 
issuer does not meet the $1.00 minimum bid price requirement, it may, 
however, remain on the Nasdaq SmallCap Market if the market value of its 
public float is at least $1,000,000, and the issuer has net tangible assets 
of at least $2,000,000. If the Company is unable to meet the continued 
listing criteria of the Nasdaq SmallCap Market and is delisted therefrom, 
trading, if any, in the common stock and the warrants would thereafter be 
conducted in the over-the-counter market in the so-called "pink sheets" or, 
if then available, the "OTC Bulletin Board Service." As a result, an investor 
would likely find it more difficult to dispose of, or to obtain accurate 
quotations as to the value of, the Company's securities.

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. 

                                      15

<PAGE>

This may result in a lack of control by the Company over some or all of the 
marketing and distribution of such potential products. There can be no 
assurance the Company will be able to enter into any marketing arrangements 
on terms acceptable to the Company or that any marketing efforts undertaken 
on behalf of the Company will be successful. The Company may, in the future, 
determine to directly market certain of its proposed products. The Company 
has limited marketing experience and significant additional capital 
expenditures and management resources would be required to develop a direct 
sales force. In the event the Company elects to engage in direct marketing 
activities, there can be no assurance the Company would be able to obtain the 
requisite funds or attract and retain the human resources necessary to 
successfully market any of its potential products.

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

LACK OF MANUFACTURING CAPABILITY; DEPENDENCE ON OUTSIDE PARTIES FOR 
MANUFACTURING OF PROPOSED PRODUCTS

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

                                      16

<PAGE>

the lack of such contracts or agreements will not have a material adverse 
impact on the business and operations of the Company. The unavailability of 
adequate commercial quantities, the inability to develop alternative sources, 
a reduction or interruption in supply or a significant increase in the price 
of materials could have a material adverse effect on the Company's ability to 
manufacture and market its proposed products.

PRODUCT LIABILITY; AVAILABILITY OF INSURANCE

      The design, development and manufacture of the Company's proposed 
products involve an inherent risk of product liability claims and associated 
adverse publicity. The Company obtained clinical trial product liability 
insurance for its Panavir-Registered Trademark- Phase I human clinical trial 
and intends to obtain insurance for future clinical trials of 
Panavir-Registered Trademark-, Vantox-Registered Trademark-, 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. Although the 
Company currently maintains liability insurance in connection with its 
Panavir-Registered Trademark- trials, there can be no assurance the coverage 
limits of the Company's insurance policies will be adequate. 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. The Company is required by 
the Retired Person's Services, Inc. agreement to have at least $1.0 million 
in insurance coverage for product liability on its proposed nutrition 
products. The Company intends to require the manufacturers of its 
nutraceutical products to add the Company as a named insured to their 
existing issuance policies. The Company has not yet received endorsements as 
named insured for any insurance policies. The Company also plans to seek 
additional coverage of its own. There can be no assurance the Company will be 
able to procure additional coverage or that existing or future coverage will 
be sufficient to cover potential liabilities. A successful claim brought 
against the Company in excess of the Company's insurance coverage would have 
a material adverse effect upon the Company.

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

                                      17

<PAGE>

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 Prospectus or documents incorporated by reference herein.

ITEM 2.   PROPERTIES

Vyrex Corporation leases a 2,000 square foot administrative facility located 
in La Jolla, California, and laboratory space in San Diego, California and 
Carlsbad, California. Current monthly rental on all the facilities is 
approximately $3,000.

ITEM 3.   LEGAL PROCEEDINGS

None


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

None


                                      PART II
                                          
ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's Common Stock is traded in the over-the-counter market on the
Nasdaq Small Capitalization market under the symbol "VYRX". The Company's Common
Stock Warrants are traded in the over-the-counter market under the symbol
"VYRXW."  The Company's Units sold as part of the initial public offering were
separated into Common Stock and Warrants on May 16, 1996. The following table

                                      18

<PAGE>

sets forth the range of high and low sales prices for the Common Stock on the 
Nasdaq Small Capitalization Market for the periods indicated:

<TABLE>
<CAPTION>

                                                       HIGH             LOW
                                                       -----           -----
<S>                      <C>                           <C>             <C>
May 17              -    June 31, 1996                 $7.00           $3.50
July 1              -    September 30, 1996            $6.37           $2.37
October 1           -    December 31, 1996             $12.87          $6.00
January 1, 1997     -    March 30, 1997                $12.75          $5.875
April 1, 1997       -    June 30, 1997                 $6.875          $6.00
July 1, 1997        -    September 30, 1997            $7.625          $5.19
October 1, 1997     -    December 31, 1997             $7.56           $5.50

</TABLE>

As of March 6, 1998, 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

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, nutraceuticals and gene discovery utilizing the 
Company's proprietary CD-Tagging-TM- method. The Company is a development 
stage company, has never generated any revenue from product sales and has 
relied primarily on equity financings, licensing revenues, and various debt 
instruments for its working capital. The Company has been unprofitable since 
its inception, and expects to incur substantial additional operating losses 
over at least the next several years. As of December 31, 1997, the Company's 
accumulated deficit was approximately $8,524,653.

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."

YEAR 2000 EXPOSURE

     The Company has determined that it will not need to modify or replace
significant portions of its software so that its computer systems will function
properly with respect to dates in the year 2000 and beyond. The Company will
verify that all activities are designed to ensure that there is no adverse
effect on the Company's core business operations and that transactions with
customers, suppliers, and financial institutions are fully supported. The
Company expects to have any necessary changes implemented by 1999. While the
Company believes its planning efforts are adequate to address its Year 2000
concerns, there can be no guarantee that the systems of other companies on
which the Company's systems and operations rely will be converted on a timely
basis and will not have a material effect on the Company. The cost of the Year
2000 initiatives is not expected to be material to the Company's results of
operation or financial position.

                                      19

<PAGE>

RESULTS OF OPERATIONS

     YEARS ENDED DECEMBER 31, 1997 AND 1996

No revenues were earned in 1997 or 1996. 

Research and Development expense increased $1,077,000 to $1,947,000 in 1997 
compared to $870,000 for 1996. The increase  was primarily due to a $300,000 
increase in salary expense and a $300,000 increase in supplies and services 
for the Company's CD-Tagging-TM- and epitope tagging projects in the current 
year. The Company also incurred higher expenses on its antioxidant drug 
development efforts, including a $200,000 increase in salaries and a $150,000 
increase in preclinical studies on Vantox-Registered Trademark-, and 
initiated research efforts on its nutraceutical projects for $100,000. The 
Company expects research and development costs to continue to increase if the 
candidate drug and nutrition products proceed towards or commence human 
clinical trials.

The Company incurred its initial marketing expenses of $222,000 in the second 
half of 1997. Marketing expense includes salaries and services of 
approximately $144,000 for nutrition products and $78,000 for pharmaceutical 
partnering efforts. General and administrative expense increased $177,000 to 
$1,304,000 in 1997 compared to $1,127,000 for 1996. The increase was 
primarily due to the growth of the finance department and other financial 
related expenses to support increased investor relations and fund raising 
activities.

Interest income increased $20,000 to $196,000 in 1997 compared to $176,000 
for 1996. The increase resulted from more efficient cash management partially 
offset by generally lower averages balances as well as interest on a note 
receivable. The Company incurred interest expense of $20,000 during the 
fourth quarter of 1997 related to the issuance of the Company's convertible 
debentures in November of 1997. Interest expense includes accrued interest as 
well as amortization of debt issuance costs and amortization of the market 
value of warrants issued in connection with the debentures.

Basic and diluted loss per share increased $0.18 to $0.46, compared to $0.28 
for 1996. Higher net loss was partially offset by increased shares 
outstanding during the period.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operation since inception through the sale of 
debt and equity securities. As of December 31, 1997, the Company had working 
capital of $2,445,000 which includes $3,055,000 of cash, cash equivalents and 
short-term investments. This compares with working capital of $4,625,000 at 
December 31, 1996. The decrease in working capital is the result of the 
Company's operating loss, partially offset by proceeds from the $1.0 million 
in convertible debentures issued.

For the twelve months ended December 31, 1997, the Company used $3,112,000 of 
cash in operating activities, compared to $1,352,000 during 1996. The 
increased cash usage was primarily related to the Company's net loss of 
$3,295,840 resulting from increased salaries, and sales and marketing 
expenditures. The Company generated $1,090,000 of cash in investing 
activities during the period compared to a use of cash of $2,269,000 during 
1996. During 1997, longer term investments matured and were classified as 
cash and equivalents prior to their use. Also in 1997 the Company collected 
$250,000 plus interest on a note due to the Company from the Company's former 
President. The Company generated $875,000 of cash in financing activities 
during 1997 compared to $6,742,000 during 1996. During 1997, the Company 
issued $1.0 million in convertible debentures, compared to 1996 where the 
Company raised $6.7 million in its initial public offering and subsequent 
exercise of stock options.

The Company believes that its current cash reserves and funding commitments 
will fund the business for at least 12 months from the balance sheet date. 
The Company does not have an existing bank line of credit or other form of 
revolving or renewable credit facility. The Company does not anticipate 
having 

                                      20

<PAGE>

significant revenues in the foreseeable future and will be required to raise 
additional funds to continue operations. There can be no assurance that funds 
will be available through the public or private markets.

PLAN OF OPERATION

During the 12 month period following the balance sheet date, the Company 
intends to focus substantially all of its efforts and resources on research 
and development related to the study of targeted antioxidant therapeutics, 
gene discovery and nutraceuticals. Most of these efforts will involve 
development of its potential products, and the remainder will involve other 
current projects developed from its ongoing research. During such 12 month 
period, the Company expects to retain additional consultants and hire 
additional employees in the areas of research, development, regulation, 
marketing, sales and administration, and to lease additional facilities. The 
Company will also continue discussions with potential collaborative partners 
concerning development, manufacture and marketing of Vantox-Registered 
Trademark-, epitope tagging, CD-Tagging-TM-, nutraceuticals and possibly 
other potential products which may include joint ventures and acquisitions.

ITEM 7.   FINANCIAL STATEMENTS

                                Vyrex Corporation
                         (a development stage enterprise)

                          Index to Financial Statements

<TABLE>

<S>                                                              <C>
Report of Ernst & Young, LLP, Independent Auditors.............. 22
Balance Sheets.................................................. 23
Statements of Operations........................................ 24
Statement of Stockholders' Equity............................... 25
Statements of Cash Flows........................................ 26
Notes to Financial Statements................................... 27

</TABLE>



                                      21

<PAGE>

                           Report of Independent Auditors


The Board of Directors and Stockholders
Vyrex Corporation

We have audited the accompanying balance sheet of Vyrex Corporation (a 
development stage enterprise) as of December 31, 1997 and 1996, and the 
related statements of operations, stockholders' equity and cash flows for the 
years then ended, and for the period from January 2, 1991 (inception) through 
December 31, 1997. 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 as of 
December 31, 1995, and for the period January 2, 1991 (inception) through 
December 31, 1995, were audited by other auditors whose report dated February 
9, 1996 expressed an unqualified opinion on those statements. The financial 
statements for the period January 2, 1991 (inception) through December 31, 
1995 include total revenues and net loss of $310,000 and $3,408,199 
respectively. Our opinion on the statements of operations, stockholders' 
equity, and cash flows for the period January 2, 1991 (inception) through 
December 31, 1997, insofar as it relates to amount for prior periods through 
December 31, 1995, is based solely on the report of other auditors.

We conducted our audits in accordance with generally accepted auditing 
standards. 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 provide a 
reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors (insofar 
as it relates to the financial statements for the period January 2, 1991 
(inception) through December 31, 1995, 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, 1997 and 
1996, and the results of its operations and its cash flows for the years then 
ended and the period from January 2, 1991 (inception) through December 31, 
1997 in conformity with generally accepted accounting principles.


                                             ERNST & YOUNG LLP

San Diego, California
February 12, 1998

                                      22

<PAGE>

                               Vyrex Corporation
                        (a development stage enterprise)

                                 Balance Sheets

<TABLE>
<CAPTION>

                                                                         DECEMBER 31,
                                                                      1997          1996
                                                                  -----------    -----------
<S>                                                               <C>            <C>
ASSETS
Current assets:
  Cash and cash equivalents                                       $ 2,041,339    $ 3,187,906
  Short-term investments, available-for-sale                        1,013,575      1,941,809
  Other current assets                                                117,341              -
                                                                  -----------    -----------
Total current assets                                                3,172,255      5,129,715

Property, plant and equipment, net of accumulated depreciation 
 of $71,495 in 1997 and $54,394 in 1996                               105,810         54,256

Notes receivable from related parties                                  49,506        313,304

Debt issuance cost                                                    119,147              -

Patents, trademarks and copyrights, net of accumulated 
 amortization of $24,449 in 1997 and $16,201 in 1996                  115,770        124,018
                                                                  -----------    -----------
Total assets                                                      $ 3,562,488     $5,621,293
                                                                  -----------    -----------
                                                                  -----------    -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued liabilities                        $   627,583    $   504,646
  Deferred revenue                                                    100,000              -
                                                                  -----------    -----------
Total current liabilities                                             727,583        504,646

Convertible debentures, net, including accrued interest               950,278              -
Commitments and contingencies

Stockholders' equity:
  Preferred stock, $.001 par value; 10,000,000 shares 
   authorized; none issued                                                  -              -
  Common stock, $.001 par value; 50,000,000 shares authorized;
   7,121,409 and 7,121,209 outstanding at December 31, 1997 and 
   1996 respectively                                                    7,121          7,121
  Additional paid-in capital                                       10,402,159     10,338,339
  Deficit accumulated during the development stage                 (8,524,653)    (5,228,813)
                                                                  -----------    -----------
Total stockholders' equity                                          1,884,627      5,116,647
                                                                  -----------    -----------
Total liabilities and stockholders' equity                        $ 3,562,488    $ 5,621,293
                                                                  -----------    -----------
                                                                  -----------    -----------

</TABLE>

SEE ACCOMPANYING NOTES.

                                      23

<PAGE>

                               Vyrex Corporation
                        (a development stage enterprise)
                                          
                            Statement of Operations

<TABLE>
<CAPTION>

                                          YEARS ENDED DECEMBER 31,   CUMULATIVE FROM 
                                             1997         1996          INCEPTION
                                         ------------  ------------  ----------------
<S>                                       <C>          <C>           <C>
Revenue and licensing agreement          $         -   $         -       $   310,000

Operating expenses:
  Research and development                 1,946,925       869,812         4,340,710
  Marketing and selling                      221,570             -           221,570
  General and administrative               1,303,876     1,127,270         3,301,424
                                         -----------   -----------       -----------
Totals                                     3,472,371     1,997,082         7,863,704
                                         -----------   -----------       -----------

Loss from operations                      (3,472,371)   (1,997,082)       (7,553,704)

Other income (expense):
  Interest income                            196,038       176,468           398,458
  Interest expense                           (19,507)            -           (19,507)
  Charge from issuance of stock options 
   for bridge financing costs                      -             -        (1,349,900)
                                         -----------   -----------       -----------
Total other income (expense)                 176,531       176,468          (970,949)
                                         -----------   -----------       -----------
Net loss                                 $(3,295,840)  $(1,820,614)      $(8,524,653)
                                         -----------   -----------       -----------
                                         -----------   -----------       -----------

Net loss per share--Basic and Diluted    $     (0.46)  $     (0.28)      $     (1.38)
                                         -----------   -----------       -----------
                                         -----------   -----------       -----------
Shares used in per share computations      7,121,332     6,514,324         6,164,499
                                         -----------   -----------       -----------
                                         -----------   -----------       -----------

</TABLE>

SEE ACCOMPANYING NOTES.

                                      24

<PAGE>
                               VYREX CORPORATION
                        (A DEVELOPMENT STAGE ENTERPRISE)

                       STATEMENT OF STOCKHOLDERS' EQUITY

                      FROM INCEPTION TO DECEMBER 31, 1997
 

 
<TABLE>
<CAPTION>
                                                        COMMON STOCK       ADDITIONAL   DEFICIT ACCUMULATED      TOTAL
                                                   ----------------------    PAID-IN        DURING THE       STOCKHOLDERS'
                                                    SHARES      AMOUNT       CAPITAL     DEVELOPMENT STAGE      EQUITY
                                                   ---------  -----------  -----------  -------------------  -------------
<S>                                                <C>        <C>          <C>          <C>                  <C>
  Issuance (at $.002 per share) for acquisition
     of technology retroactively reduced for
     150,000 shares returned and retired on
     October 1, 1995                               3,350,000   $   3,350    $   3,350        $      --         $   6,700
  Issuance (at $.002 per share) for cash             500,000         500          500               --             1,000
  Issuance (at $1.00 per share) for cash             800,000         800      799,200               --           800,000
  Issuance as compensation (at $1.00 per share)       32,500          33       32,467               --            32,500
  Issuance (at $2.00 per share) upon conversion
    of note payable                                  100,000         100      199,900               --           200,000
  Issuance (at $3.00 per share) for cash, net of
    issuance costs of $4,086                          33,000          33       94,881               --            94,914
  Net loss                                                --          --           --       (1,085,932)       (1,085,932)
                                                   ---------  -----------  -----------  -------------------  -------------
Balance at December 31, 1993                       4,815,500       4,816    1,130,298       (1,085,932)           49,182
  Issuance (at $3.00 per share) for cash, net of
    issuance costs of $21,000                         99,000          99      275,901               --            276,000
  Issuance (at $3.00 per share) in lieu of
    finder's fee                                       7,000           7       20,993               --            21,000
  Issuance (at $3.00 per share) in lieu of
    finder's fee                                       5,000           5       14,995               --            15,000
  Issuance (at $3.00 per share) for cash, net of
    issuance costs of $41,844                         24,990          25       33,101               --            33,126
  Net loss                                                --          --           --         (467,683)         (467,683)
                                                   ---------  -----------  -----------  -------------------  -------------
Balance at December 31, 1994                       4,951,490       4,952    1,475,288       (1,553,615)          (73,375)
  Issuance (at $3.00 per share) for cash, net of
    issuance costs of $46,976                        149,940         150      402,694               --           402,844
  Issuance (at $3.00 per share) in settlement of
    account payable                                    6,041           6       18,117               --            18,123
  Issuance (at par value) as compensation for
    services related to prior issuances of common
    stock                                             83,000          83          (83)              --                --
  Issuance (at $3.00 per share) as compensation
    for services related to offering                  13,334          13       39,989               --            40,002
  Issuance (at $3.00 per underlying share) of
    options for 450,000 shares as compensation
    for arranging bridge financing                        --          --    1,349,900               --         1,349,900
  Net loss                                                --          --           --       (1,854,584)       (1,854,584)
                                                   ---------  -----------  -----------  -------------------  -------------
Balance at December 31, 1995                       5,203,805       5,204    3,285,905       (3,408,199)         (117,090)
  Proceeds from initial public offering (at $6.50
    per unit), net of issuance costs of                                     5,734,620
    $1,135,453                                     1,057,097       1,057           --                          5,735,677
  Sale of option to purchase 300,000 shares at
    $3.00 per share                                       --          --       50,000               --            50,000
  Exercise of stock options (at $3.00 per share)
    for cash                                         300,000         300      899,700               --           900,000
  Conversion of notes payable and related accrued
    interest (at $3.00 per share)                     86,015          86      257,959               --           258,045
  Exercise of stock options (at $.00022 per
    share) for cash                                  450,000         450         (350)              --               100
  Issuance of units as compensation for legal
    services (at $4.55 per share)                     24,292          24      110,505               --           110,529
  Net loss                                                --          --           --       (1,820,614)       (1,820,614)
                                                   ---------  -----------  -----------  -------------------  -------------
Balance at December 31, 1996                       7,121,209       7,121   10,338,339       (5,228,813)        5,116,647
  Exercise of warrants (at $8.00 per share) for
    cash                                                 200          --        1,600               --             1,600
  Net loss                                                --          --           --       (3,295,840)       (3,295,840)
  Issuance of warrants in connection with
    convertible debenture                                 --          --       62,220               --            62,220
                                                   ---------  -----------  -----------  -------------------  -------------
Balance at December 31, 1997                       7,121,409   $   7,121   $10,402,159      $(8,524,653)       $1,884,627
                                                   ---------  -----------  -----------  -------------------  -------------
                                                   ---------  -----------  -----------  -------------------  -------------
</TABLE>
 
SEE ACCOMPANYING NOTES.

                                     25


<PAGE>
                               VYREX CORPORATION
                        (A DEVELOPMENT STAGE ENTERPRISE)

                            STATEMENT OF CASH FLOWS
 
 
<TABLE>
<CAPTION>
                                                                     YEARS ENDED
                                                                     DECEMBER 31,         CUMULATIVE
                                                                ----------------------       FROM
                                                                  1997         1996        INCEPTION
                                                                ---------    ---------    -----------
<S>                                                             <C>          <C>          <C>
OPERATING ACTIVITIES
Net loss                                                        $(3,295,840) $(1,820,614) $($8,524,653)
Adjustments to reconcile net loss to net cash
 used in operating activities:
  Depreciation and amortization                                      25,349       23,957        95,656
  Amortization of debt discount and debt issuance cost               10,466           --        10,466
  Interest receivable                                                33,631      (47,979)      (14,348)
  Issuance of compensatory notes, stock and stock options                --      110,529     1,561,052
  Other current assets                                              (17,341)          --       (17,341)
  Accounts payable and accrued liabilities                          122,937      382,264       627,587
  Accrued interest on convertible debentures                          9,041           --         9,041
                                                                  ---------    ---------   -----------
Net cash used in operating activities                            (3,111,757)  (1,351,843)   (6,252,540)
                                                                  ---------    ---------   -----------
INVESTING ACTIVITIES
Purchase of short-term investments                               (3,499,227)  (4,842,195)   (8,440,442)
Sale of short-term investments                                    4,393,830    2,948,365     7,442,195
Purchases of furniture and equipment                                (68,655)     (61,574)     (177,305)
Cost of patent, trademarks and copyrights                                --           --      (133,519)
Other assets, including notes receivable 
 from related parties                                               263,798     (313,304)      (50,202)
                                                                  ---------    ---------   -----------
Net cash provided by (used in) investing activities               1,089,746   (2,268,708)   (1,359,273)
                                                                  ---------    ---------   -----------
FINANCING ACTIVITIES
Advances from potential investors                                        --           --       100,000
Repayments of advances                                                   --           --      (100,000)
Proceeds from (repayment of) note payable                                --      (50,000)      400,000
Proceeds from issuance of Convertible
 Debentures                                                         873,844           --       873,844
Exercise of stock options and sale of option                             --      950,100       950,100
Net proceeds from issuance of common stock                            1,600    5,842,362     7,429,208
                                                                  ---------    ---------   -----------
Net cash provided by financing activities                           875,444    6,742,462     9,653,152
                                                                  ---------    ---------   -----------
Net increase (decrease) in cash and cash equivalents             (1,146,567)   3,121,911     2,041,339
Cash and cash equivalents, beginning of the period                3,187,906       65,995            --
                                                                  ---------    ---------   -----------
Cash and cash equivalents, end of the period                     $2,041,339   $3,187,906   $ 2,041,339
                                                                 ----------   ----------   -----------
                                                                 ----------   ----------   -----------
SUPPLEMENTAL CASH FLOW INFORMATION
Conversion of notes payable and related accrued interest         $       --   $  258,045   $   258,045
                                                                 ----------   ----------   -----------
                                                                 ----------   ----------   -----------
Warrants issued in connection with convertible debentures        $   62,220   $       --   $    62,220
                                                                 ----------   ----------   -----------
                                                                 ----------   ----------   -----------
</TABLE>
 
SEE ACCOMPANYING NOTES.

                                       26

<PAGE>
   
                                 VYREX CORPORATION
                          (A DEVELOPMENT STAGE ENTERPRISE)
                                          
                           NOTES TO FINANCIAL STATEMENTS


1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY

Vyrex Corporation (the "Company") was incorporated on January 2, 1991 in the
State of Nevada. Effective that date, the Company obtained the technology it is
developing through the issuance of common stock to its founder and principal
stockholder. The Company's operations focus primarily on the discovery and
development of pharmaceuticals and nutraceuticals for the treatment and
prevention of various disorders including respiratory, cardiovascular and
enurological diseases and aging related disorders. 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 any, that it has sufficient resources to conduct such activities on its
own.

The Company's major activities through December 31, 1997 have been limited to
conducting research and development related to its proposed products and raising
funds for such activities. These activities have not generated any recurring
revenues; accordingly, the Company has been in the development stage since its
inception.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets which
range from 3 to 7 years.

PATENTS, TRADEMARKS AND COPYRIGHTS

Certain costs of filing for patents, trademarks and copyrights are capitalized
as incurred. Such costs are being amortized on a straight-line basis over the
lesser of their statutory lives or estimated useful lives commencing on the date
of issuance.

INTEREST EXPENSE

Interest expense includes the amortization of debt discount and debt issuance
costs.

NET LOSS PER COMMON SHARE

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
EARNINGS PER SHARE. Statement No. 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Earnings per share amounts for all periods have been
presented and where appropriate, restated to conform to the Statement No. 128
requirements. Diluted loss per share including shares issuable upon exercise of
outstanding stock options

                                      27

<PAGE>
                                          
                                 VYREX CORPORATION
                          (A DEVELOPMENT STAGE ENTERPRISE)
                                          
                     NOTES TO FINANCIAL STATEMENTS (CONTINUED)

1.  THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

and warrants has not been presented since the effects of such conversions and
exercises would be anti-dilutive.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board issued Statement #130, 
REPORTING COMPREHENSIVE INCOME (SFAS No. 130) and Statement No. 131, 
DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (SFAS No. 
131). SFAS No. 130 establishes rules for reporting and displaying 
comprehensive income. SFAS No 131 will require the Company to use the 
"management approach" in disclosing segment information. Both statements are 
effective for the Company during 1998. The Company does not believe that the 
adoption of either SFAS No. 130 or SFAS No. 131 will have a material impact 
on the Company's results of operations, cash flows, or financial position.

2. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS 

Cash and cash equivalents consist of cash and highly liquid U.S. government
securities with remaining maturities, when acquired, of three months or less.
Included in cash and cash equivalents at December 31, 1997 was approximately
$1.0 million invested in U.S. Treasury bills.

Short-term investments classified as available-for-sale consist of U.S. 
Government securities maturing in March 1998 and are carried at amounts which 
approximate fair value. As of December 31, 1997, the difference between 
amortized cost and the estimated fair value of investments was not material. 
Realized gains and losses and declines in value judged to be 
other-than-temporary, if any, in available-for-sale securities are included 
in interest income. The cost of securities is based on the specific 
identification method.

3. FURNITURE AND EQUIPMENT
     
Furniture and equipment consist of the following:

<TABLE>
<CAPTION>

                                                     DECEMBER 31,
                                                 1997            1996
                                               -------         -------
<S>                                            <C>             <C>
Office furniture and equipment                 $119,593        $92,366
Laboratory equipment                             57,712         16,284
                                               --------        -------
                                                177,305        108,650
Less accumulated depreciation                    71,495         54,394
                                               --------        -------
Total                                          $105,810        $54,256
                                               --------        -------
                                               --------        -------
</TABLE>

Depreciation expense was $17,101 and $15,709 for the years ended December 31, 
1997 and 1996, respectively.

                                      28

<PAGE>

                                 VYREX CORPORATION
                          (A DEVELOPMENT STAGE ENTERPRISE)
                                          
                     NOTES TO FINANCIAL STATEMENTS (CONTINUED)


4. RELATED PARTY TRANSACTIONS

NOTES RECEIVABLE FROM RELATED PARTIES

On October 25, 1996, the Company loaned $260,000 to the Company's former 
President and Chief Operating Officer in the form of a note with 7% interest. 
The note was paid off in 1997. On December 23, 1996, the Company loaned 
$50,000 to its Vice President of Chemistry. The loan is in the form of a 
secured note carrying 7% interest, whose principal and interest is payable on 
demand. 

EMPLOYMENT AGREEMENT

Dr. Sheldon Hendler, the Company's Chairman and CEO entered into a one-year 
employment agreement on October 1, 1995. The agreement automatically renews 
on the anniversary date for an additional year unless previously terminated 
by the Company. Dr. Hendler's salary under the agreement is set by the Board 
of Directors and is currently $226,013 per year. The Company has the right to 
terminate Dr. Hendler's employment agreement for cause or as a result of 
death or permanent disability. In certain events, relating primarily to 
merger or reorganization and similar changes in the nature of the Company, 
Dr. Hendler is entitled to continue his employment or voluntarily terminate 
the agreement and receive a severance payment equal to 2.99 times his annual 
salary and fringe benefits during the five years preceding the date of 
termination.

5. TECHNOLOGY LICENSE AND COLLABORATIVE AGREEMENTS

In September 1995, the Company received a fee of $10,000 on signing a letter 
of intent to enter into an exclusive worldwide license agreement with 
Pollufil Trading, S.A. Tobacco Division ("Pollufil") to commercialize certain 
Company technology. In November 1995, the Company entered into a license 
agreement (the "Pollufil Agreement") pursuant to which the Company granted 
Pollufil an exclusive non-U.S. world-wide license to commercialize certain 
Company technology for use as an antioxidant cigarette filter additive. Under 
the Pollufil Agreement, the Company was entitled to receive two payments 
totaling $90,000 upon the achievement of certain milestone events with 
respect to testing of the potential products sought to be developed using the 
licensed technology. In December 1997, the Company terminated this license 
agreement for failure to pay amounts due.

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 50/50 
split of any funds raised or profits realized in connection with the venture. 
As part of the agreement, the Company licensed its CD-Tagging-TM- technology 
to The Immune Response Corporation for use in the research and development on 
products within the scope of the venture of the treatments mentioned above. 
Subsequently, the Company initiated discussions to license a limited number 
of its antioxidant drug candidates to the  venture for screening as potential 
treatments. The term of the agreement is three years. The Company and its 
partner, The Immune Response Corporation, are currently exploring funding for 
this venture.

                                      29
<PAGE>
                                 Vyrex Corporation
                          (a development stage enterprise)
                                          
                     Notes to Financial Statements (continued)

5. TECHNOLOGY LICENSE AND COLLABORATIVE AGREEMENTS (CONTINUED)

On October 7, 1997, the Company entered into an agreement with Retired Persons
Services, Inc. (RPS), the entity which administers the AARP Pharmacy Service.
The agreement called for the Company to provide $100,000 worth of dietary
supplement products. The Company designed and contract manufactured pilot
batches of the products and initiated safety and stability studies. RPS will
manufacture the final product and pay the Company a royalty based on sales. The
Company recorded a $100,000 accounts receivable and $100,000 of deferred revenue
since the amount represents an advance against 1998 shipments. The receivable
was collected in 1998.

6. INCOME TAXES

At December 31, 1997, the Company had net operating loss carryforwards available
to reduce future taxable income, if any, of approximately $12,425,000 and
$11,965,000 for federal and California income tax purposes, respectively. The
federal net operating loss begins to expire in 2007. California net operating
losses of $246,000 expired in 1997, and will continue to expire in 1998. The
difference between the federal and California tax loss carryforwards is
primarily related to the expiration of California loss carryforwards. At
December 31, 1997, the Company also had research and development credit
carryforwards of approximately $304,000 and $148,000 for federal and state
income tax reporting purposes, respectively.

Temporary differences (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, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>


                                                                    1997          1996
                                                                ------------   -----------
<S>                                                             <C>            <C>
Net operating loss carryforwards                                 $4,349,000    $3,505,000
Research and development credit carryforwards                       452,000       207,000
                                                                ------------   -----------
                                                                  4,801,000     3,712,000
                                                                 (4,801,000)   (3,712,000)
Valuation allowance                                             ------------   -----------
                                                                 $       -     $      -
                                                                ------------   -----------
</TABLE>



A valuation allowance has been recorded against the deferred tax assets as the
ultimate realization of these assets is uncertain.

7. DEBENTURES

On November 6, 1997, the Company entered into two securities purchase agreements
(the "Debenture Agreements") with two investors (the "Debenture Holders") and
pursuant thereto, the Company issued each Debenture Holder a Debenture in the
amount of $500,000 (the "Initial Debenture"), resulting in proceeds, net of
$126,156 of issuance costs, of $873,844. Each Initial Debenture is a 6% interest
accruing and deferred convertible debenture due November 15, 2000. The Initial
Debentures are convertible at the election of the holder at any time at a
conversion price based on current market prices.

                                      30
<PAGE>

                                 Vyrex Corporation
                          (a development stage enterprise)
                                          
                     Notes to Financial Statements (continued)

7. DEBENTURES (CONTINUED)

282,000 shares are reserved for issuance of common stock upon conversion. As of
December 31, 1997, no debentures had been converted into common stock.
          
No more than 33% of the principal amount of the Initial Debentures may be
convertible during any thirty (30) calendar day period. The entire unpaid
balance and all accrued interest outstanding on the maturity date automatically
converts in to Common Stock at a rate based on current market prices.

In connection with the issuance of the Initial Debentures, the Company issued
Debenture Warrants to the Debenture Holders, each exercisable for 8,500 shares
of Common Stock. The Debenture Warrants have a term of three years, an exercise
price per share of $7.50 and an estimated fair value of $62,220, which was
accounted for as debt discount in the accompanying balance sheet. Debt discount
and debt issuance costs are amortized over the life of the debentures.

Pursuant to the Debenture Agreements, the Debenture Holders have each agreed to
purchase an additional $1,500,000 of Debentures ("Additional Debentures") in
multiple tranches through October 1999.

Each Additional Debenture shall be substantially similar to the Initial
Debentures but shall have a term of 18 months and be convertible into Common
Stock at 86% of the Market Price on the date of issuance.

In connection with each Additional Debenture, the Company shall issue the
purchaser a Debenture Warrant to purchase Common Stock at a rate of one warrant
to purchase 1,700 shares of Common Stock for each $100,000 of Additional
Debentures purchased.

8. STOCKHOLDERS' EQUITY

Pursuant to a private placement memorandum dated November 18, 1994 (the "PPM"),
the Company commenced an offering of up to 60 units at a price of $49,980 per
unit. Each unit consisted of 16,660 shares of common stock and one common stock
warrant. Each warrant entitles the holder to purchase 5,000 shares of common
stock at $8.00 per share, subject to anti-dilution adjustments. The warrants may
be exercised in whole or in part during the three-year period following the date
of issuance, although the Company may, under certain conditions, accelerate the
termination of the exercise period. 

In December 1994, the Company issued 24,990 shares of common stock and warrants
to purchase 7,500 shares of common stock upon the sale of 1.5 units offered 
pursuant to the PPM. Gross proceeds from the sale of the units totaled $74,970
(or $3.00 per share based on the number of shares issued). Commissions
applicable to the units sold and costs related to the private offering totaling
$41,844 were charged against additional paid-in capital in 1994.

                                      31

<PAGE>
                                 Vyrex Corporation
                          (a development stage enterprise)
                                          
                     Notes to Financial Statements (continued)

8. STOCKHOLDERS' EQUITY (CONTINUED)

During 1995, the Company issued 149,940 shares of common stock and warrants to
purchase 45,000 shares of common stock upon the sale of nine units offered
pursuant to the PPM. Gross proceeds from the sale of the units totaled $449,820
(or $3.00 per share based on the number of shares issued).

Commissions applicable to the units sold and costs related to the private
offering totaling $46,976 were charged against additional paid-in capital.

On April 13, 1995, the Company issued 6,041 shares of common stock and a warrant
for the purchase of 1,812 shares as payment (at $3.00 per share issued) for
$18,123 of legal services previously rendered. The warrant is exercisable at
$8.00 per share during the three year period from the date of issuance.

In September 1995, the Company issued 58,000 shares of common stock to selling
agents for services in connection with the units sold pursuant to the PPM  and
25,000 shares to other individuals for services in connection with other
issuances of equity securities.

On October 1, 1995, the Company issued 13,334 shares of common stock and a
warrant for the purchase of 4,000 shares as a payment (at $3.00 per share
issued) for $40,002 of legal services rendered in connection with the IPO. The
warrant is exercisable at $8.00 per share during the three-year period from the
date of issuance.

On October 1, 1995, the Company granted an option for the purchase of 450,000
shares of its common stock at an aggregate exercise price of $100 (or $.00022
per share) as part of the consideration for the recipient's agreement to assist
in arranging certain bridge financing for the Company (see Note 6). Management
estimated that the aggregate fair value of the  options was $1,350,000 based on
the fair value of $3.00 per underlying share at date of grant. Accordingly, the
Company charged the difference between the estimated aggregate fair value and
the aggregate exercise price of the options of $1,349,900 to expense in 1995.
This option was exercised on April 1, 1996. The Company also agreed to sell
options for the purchase of 300,000 shares of its common stock exercisable at
$3.00 per share for $50,000, and  on February 22, 1996, the Company completed
the transaction. On December 19, 1996, the option was exercised.

On March 21, 1996, the Company completed its initial public offering for the
sale of 1,000,000 Units for $6.50 per Unit, which resulted in net proceeds of
$5,411,866. Each Unit entitles the purchaser to acquire one share of common
stock and one warrant to purchase one share of common stock at an exercise price
of $8.00, subject to certain anti-dilutive adjustments.

On April 1, 1996, the Company issued 86,015 shares at $3.00 per share for
conversion into common stock, the principal and accrued interest on a bridge
loan.

                                      32

<PAGE>
                                 Vyrex Corporation
                          (a development stage enterprise)
                                          
                     Notes to Financial Statements (continued)

8. STOCKHOLDERS' EQUITY (CONTINUED)

On May 10, 1996, the Company sold an additional 57,097 Units as a result of a
partial exercise of the Underwriters overallotment option granted as part of the
initial public offering, and received net proceeds of $323,811.

On July 1, 1996, the Company issued 24,292 Units as partial consideration for
legal services performed in preparation of the Company's initial public
offering.

9. WARRANTS

As of December 31, 1997, the Company had outstanding warrants to purchase a
total of 1,256,701 shares of common stock. 1,239,701 of the warrants will expire
on January 31, 1999, and the remaining 17,000 warrants will expire on November
6, 2000. The exercise price of 1,139,701 of these warrants is $8.00 per share,
subject to adjustment in the event of stock splits, stock dividends and similar
events.

The Company issued 100,000 warrants pursuant to the Underwriter's Purchase
Option granted as part of the initial public offering. These warrants are
exercisable at $11.20 per share at any time between March 21, 1997 and January
31, 1999. The warrants expire on January 31, 1999.

On November 6, 1997, the Company issued 17,000 warrants as partial consideration
related to the issuance of $1.0 million of the Company's convertible debentures.
The warrants are exercisable for three years from issuance at $7.50. 

The Company has reserved 1,256,701 shares for issuance of common stock upon
exercise of the warrants.

10. 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 nonstatutory stock options. Incentive stock options
may be granted only to employees, while consultants, employees, officers and
directors are eligible for the grant of nonstatutory options. The total number
of shares of common stock of the Company reserved and available for grant under
the Plan is 2,875,000 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 nonstatutory 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.

                                      33

<PAGE>
                                 Vyrex Corporation
                          (a development stage enterprise)
                                          
                     Notes to Financial Statements (continued)

10. STOCK OPTION PLAN (CONTINUED)

Subject to the Plan's change in control provisions, in the event of the sale of
substantially all of the assets of the Company or the merger of the Company with
or into another corporation, each outstanding option may be assumed or
substituted by such successor corporation or parent or subsidiary of such
successor corporation, or in some circumstances a cash payment in approximately
the amount of the equity held in the share award or option may be made to the
holder.

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


<TABLE>
<CAPTION>
                                                                                                        WEIGHTED
                                                  SHARES             STOCK            OPTION             AVERAGE
                                                 AVAILABLE          OPTIONS          EXERCISE            EXERCISE
                                                 FOR GRANT        OUTSTANDING          PRICE              PRICE
                                               --------------------------------------------------------------------------------
<S>                                              <C>               <C>              <C>                   <C> 

Balance at December 31, 1994                     2,875,000              -                 -                  -  
  Granted                                         (868,000)         868,000         $3.00 - $4.55         $3.04
  Exercised                                            -                -                 -                  -
  Canceled                                             -                -                 -                  -
                                                 --------------------------
Balance at December 31, 1995                     2,007,000          868,000         $3.00 - $4.55         $3.04
  Granted                                       (1,121,900)       1,121,900          $3.00 - $7.50         $3.01
  Exercised                                            -                -                 -                  -
  Canceled                                          31,091          (31,091)         $3.00 - $4.55         $3.96
                                                 --------------------------
Balance at December 31, 1996                       916,191        1,958,809          $3.00 - $7.50         $3.01
  Granted                                         (658,800)         658,800          $6.00 - $8.625        $3.01
  Exercised                                            -                -                    -               -
  Canceled                                       1,021,400       (1,021,400)         $3.00 - $7.13         $3.01
                                                 ---------------------------
Balance at December 31, 1997                     1,268,791        1,596,209          $3.00 - $8.625        $4.26

</TABLE>

Options for 984,206 shares are exercisable at December 31, 1997 and the
weighted-average contractual life of options outstanding at that date is
approximately six years. 

Following is a further breakdown of the options outstanding as of December 31,
1997:

<TABLE>
<CAPTION>

                                                                                Weighted
                                                                                 average
                                  Weighted      Weighted                        exercise
Range of                          average       average                          price of
exercise            Options      remaining      exercise       Options            options
 prices           outstanding  life in years     price       exercisable       exercisable
------------------------------------------------------------------------------------------
<S>                <C>               <C>          <C>           <C>               <C>

$3.00-6.00         1,557,209         6.57         $4.18         1,557,209         $4.18
$6.38-8.63            39,000         9.68         $7.03            39,000         $7.03
                   ---------         ----         -----         ---------          -----   
                   1,596,209         6.64         $4.25         1,596,209         $4.25
                   ---------         ----         -----         ---------         -----
                   ---------         ----         -----         ---------         -----
</TABLE>


                                      34

<PAGE>
                                 Vyrex Corporation
                          (a development stage enterprise)
                                          
                     Notes to Financial Statements (continued)
                                    

10. STOCK OPTION PLAN (CONTINUED)

The Company has elected to follow Accounting Principles Board Opinion No. 25, 
"Accounting for Stock Issued to Employees" (APB 25) and related 
Interpretations in accounting for its employee stock options because, as 
discussed below, the alternative fair value accounting provided for under 
FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires 
use of option valuation models that were not developed for use in valuing 
employee stock options. 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 grant, no compensation expense is recognized. Pro forma 
information regarding net loss and loss per share is required by Statement 
123, and has been determined as if the Company had accounted for its employee 
stock options under the fair value method of Statement 123. The fair value 
for these options was estimated at the date of grant using a Black-Scholes 
option pricing model with the following weighted-average assumptions:  
risk-free interest rate of 6.0%;  dividend yield of 0%; the volatility factor 
of the expected market price of the Company's common stock of 78%, and a 
weighted-average expected life of the options of 64 months.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options. 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 (in thousands except for earnings per share information).

<TABLE>
<CAPTION>
                                                              1997                     1996
                                                        -----------------------------------------
<S>                                                         <C>                    <C>

        Pro forma net loss                                  $(4,078,685)           $(1,855,350)
        Pro forma net loss per basic share                       $(0.57)                $(0.28)
        Pro forma net loss per diluted share                     $(0.57)                $(0.28)
</TABLE>

The weighted-average fair value of options granted in 1997 and 1996 is $5.36 and
$2.03 per share, respectively.

The pro forma effect on net loss for 1997 and 1996 is not representative of the
pro forma effect on net loss in future years because it does not take into
consideration pro forma compensation expense related to grants made prior to
1995.

11. SUBSEQUENT EVENT

On January 22, 1998, the Company entered into an exclusive development agreement
with the Uncle Ben's, Inc. Vyrex and Uncle Ben's intend to complete several
steps necessary to determine the feasability and timing of full-scale
development and marketing of "Wellness" foods.

                                      35

<PAGE>

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

None.

                                      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, 1998.


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,
1998.


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, 1998.


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, 1998.


ITEM 13.  EXHIBITS AND REPORTS ON FORM 8-K.
         
Exhibit 11 Statement regarding computation of per share earnings for 1995
required by Item 13(a) of Form 10-K SB is incorporated by reference to the
information contained in Exhibit 11.1 of the Company's registration statement of
Form SB-2 dated March 21, 1996.

The information required by Item 13(b) of Form 10-KSB is incorporated by
reference to the information contained in the registrant's Form 8-K dated
July 11, 1995.

                                      36
<PAGE>

                                     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
                                 Registrant
                                  
                                  
                                  
                                  By:  /S/SHELDON S. HENDLER/ 
                                       -----------------------------------
                                       Sheldon S. Hendler,
                                       President, Chief Executive Officer,
                                       and Chairman of the Board
                                     
                                      
                                  By:  /S/STEVEN J. KEMPER/     
                                       -----------------------------------
                                       Steven J. Kemper,
                                       Chief Financial Officer

Date:  March 27, 1998

     KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Sheldon S. Hendler, as his or her true and lawful
attorney-in-fact and agents, with full power of substitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering covered
by this Registration Statement, and to sign any registration statement for the
same offering covered by this Registration Statement that is to be effective
upon filing pursuant to Rule 462(b) promulgated under the Securities Act of
1933, and all post-effective amendments thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agents, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agents, or their substitutes
may lawfully do or cause to be done by virtue hereof.

     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.

<TABLE>
<CAPTION>

    SIGNATURE                     TITLE                                   DATE
    ---------                     -----                                   ----
<S>                             <C>                                     <C>

/S/Carl M. Lewis/               General Counsel, Secretary              March 27, 1998
-------------------------       and Director
Carl M. Lewis                   


/S/Joyce M. Hendler/            Director                                March 27, 1998
-------------------------
Joyce M. Hendler         


/S/Dennis J. Carlo/             Director                                March 27, 1998
-------------------------
Dennis J. Carlo          


/S/Nolan E. Penn/               Director                                March 27, 1998
-------------------------
Nolan E. Penn       


/S/Gregory F. Gilbert/          Director                                March 27, 1998
-------------------------
Gregory F. Gilbert
</TABLE>
                                      37