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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-KSB



|x | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2003.
|- | ---------------------------------------------------------------------------------------------------------------------------------



or



| ̈ | 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 0-8092



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OXIS International, Inc.

A Delaware corporation

I.R.S. Employer Identification No. 94-1620407

6040 N. Cutter Circle, Suite
317

Portland, OR 97217

Telephone: (503) 283-3911



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Securities registered pursuant to Section 12(b) of the Act:

NONE



Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value



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Indicate by check mark whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such 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 ̈



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not contained herein,
and will not 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-KSB or any amendment to this Form 10-KSB. ̈



The Registrants revenues for its fiscal year ended December 31, 2003 were $2,740,000.



Aggregate market value of the voting common equity held by nonaffiliates of the Registrant as of March 1, 2004 was $17,000,609.28.



Number of shares outstanding of Registrants common stock as of March 1,
2004: 26,563,452 shares.



Certain of the information required
by Part III of this Form 10-KSB is incorporated by reference to portions of the Companys definitive form of Proxy Statement which will be filed with the Commission during April 2004 with respect to the Companys Annual Meeting of
Shareholders scheduled for June 2004.



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TABLE OF CONTENTS



|              |  |                                                                                                                  |  |     
|------------- |  | ---------------------------------------------------------------------------------------------------------------- |  | ----
|              |  |                                                                                                                  |  | Page
|PART I       
|              |  |                                                                                                                 
|ITEM 1.       |  | BUSINESS                                                                                                         |  | 2   
|              |  |                                                                                                                 
|ITEM 2.       |  | PROPERTIES                                                                                                       |  | 7   
|              |  |                                                                                                                 
|ITEM 3.       |  | LEGAL PROCEEDINGS                                                                                                |  | 7   
|              |  |                                                                                                                 
|ITEM 4.       |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                              |  | 7   
|             
|PART II      
|              |  |                                                                                                                 
|ITEM 5.       |  | MARKET FOR REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER MATTERS                                             |  | 8   
|              |  |                                                                                                                 
|ITEM 6.       |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                            |  | 10  
|              |  |                                                                                                                 
|ITEM 7.       |  | FINANCIAL STATEMENTS                                                                                             |  | 18  
|              |  |                                                                                                                 
|ITEM 8.       |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                             |  | 38  
|              |  |                                                                                                                 
|ITEM 8A.      |  | CERTAIN CONTROLS AND PROCEDURES                                                                                  |  | 38  
|             
|PART III     
|              |  |                                                                                                                 
|ITEM 9.       |  | DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16 (a) OF THE SECURITIES EXCHANGE ACT |  | 39  
|              |  |                                                                                                                 
|ITEM 10.      |  | EXECUTIVE COMPENSATION                                                                                           |  | 39  
|              |  |                                                                                                                 
|ITEM 11.      |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                                                   |  | 39  
|              |  |                                                                                                                 
|ITEM 12.      |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                                   |  | 39  
|              |  |                                                                                                                 
|ITEM 13.      |  | EXHIBITS AND REPORTS ON FORM 8-K                                                                                 |  | 39  
|              |  |                                                                                                                 
|ITEM 14.      |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                           |  | 39  
|              | 
|SIGNATURES    |  | 41                                                                                                              
|              | 
|EXHIBIT INDEX |  | 42                                                                                                              



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PART 1



The statements contained in this Report on Form 10-KSB that are not purely historical are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding the Companys expectations, objectives, anticipations, plans, hopes, beliefs, intentions or strategies
regarding the future. Forward-looking statements include, without limitation, statements regarding: (i) the Company continuing to refocus with the objective of maximizing current operations and increasing the value of its therapeutic ethical and
nutraceutical product portfolio; (ii) the Company focusing on and intensifying its efforts to consummate the successful development of pharmaceutical/nutraceutical relationships and/or strategic partnerships with larger companies; (iii) the
Companys intention to increase the value of its OXIS Health Products, Inc. portfolio by the filing of new patent applications related to its current products under development, through new acquisitions and expanded marketing efforts in both
commercial and research aspects; (iv) the Companys belief that its assays offer advantages over conventional laboratory methods, including ease of use, speed, specificity and accuracy; (v) the Companys intention not to seek approval for
human use bSOD in the U.S. and its intention to sell bulk bSOD only to the extent there is demand for it; (vi) the Companys anticipation of a positive resolution of the FDAs questions concerning the use of Palosein and the possibility of
future sales of Palosein to the veterinary market; (vii) the Companys expectation of incurring operating losses for the foreseeable future which should be smaller than they have been in preceding periods, but that losses and expenses could
increase and fluctuate from quarter to quarter as the Company expands its development activities; (viii) the Companys estimates that there are more than 10,000 scientists and clinicians who are working directly in research on free radical
biochemistry, and who are potential customers for these research assays; (ix) the Companys plans to work with key feeding companies to determine the economic significance of the animal health profiling program to manage high risk cattle; (x)
the Companys plan to continue attempts to validate and commercialize the use of Company products for cattle respiratory disease management; (xi) the Companys expectation that that the test for cattle respiratory disease management could
be ready to market during the first or second quarter of 2004; (xii) the Companys belief that it has a limited risk of over reliance on any supplier; (xiii) the Companys statement that it would continue to research and develop, where
possible, selected therapeutics classes of antioxidant small molecules currently under development; (xiv) the Companys statement that the additional capital it received from the January 12, 2004 bridge loan will allow the Company to continue
operating in accordance with its current plans for 2004; (xv) the Companys belief that its new products and technologies show considerable promise; and (xvi) the Companys statement that its ability to realize significant revenues from
new products and technologies is dependent upon the Companys success in developing business alliances with nutraceutical/pharmaceutical and/or health related companies to develop and market these products.



All forward-looking statements included in this document are based on
information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. It is important to note that the Companys actual results could differ materially from those included
in such forward-looking statements. Factors that could cause actual results to differ materially from the forward looking statements include risks and uncertainties detailed throughout this Annual Report, and in particular in the Risk
Factors section at the end of Item 6, Managements Discussion And Analysis Of Financial Condition And Results Of Operations. Such factors include, but are not limited to, the following cautions: (1) the Company may not be able
to obtain necessary financing; (2) Axonyx Inc.s concentration of voting power permits it to control all matters affecting the Company, and such concentration of voting power could have the effect of delaying, deterring or preventing a change
of control or other business combination or could complicate or prohibit certain financing of the Company by the Axonyx affiliate group; (3) if the Company is unable to develop and maintain alliances with collaborative partners, the Company may have
difficulty developing and selling the Companys products and services; (4) uncertainties exist relating to issuance, validity and ability to enforce and protect patents, other intellectual property and certain proprietary information; (5) the
potential for patent-related litigation expenses and other costs resulting from claims asserted against the Company or its customers by third parties; (6) the Companys products may not meet product performance specifications; (7) new products
may be unable to compete successfully in either existing or new markets; (8) availability and future costs of



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materials and other operating expenses; (9) the uncertain performance and needs of industries served by the Company and the financial capacity of
customers in these industries to purchase the Companys products; (10) the Companys dependence on a single supplier for its bSOD product could limit sales of its bSOD product; and (11) the potential for exposure to liability due to
product defects. These cautionary statements should be considered in the context of such factors, as well as those disclosed from time to time in the Companys Reports on Forms 10-QSB and 8-K. Given these uncertainties, readers are cautioned
not to place undue reliance on the forward-looking statements.



ITEM 1.    BUSINESS



Introduction.



OXIS International, Inc.
(OXIS or the Company) is a biopharmaceutical/nutraceutical company engaged in the development of research diagnostics, nutraceutical and therapeutic products, which include new technologies applicable to conditions and/or
diseases associated with oxidative stress. The Company also markets and sells chemical compounds to customers in the United States and Europe. Oxidative stress is associated with an excess of free radicals, reactive oxygen species (ROS),
and/or a decrease in antioxidant levels with a resultant development of tissue or organ damage.



The Companys corporate offices and assay manufacturing facilities are located in a 15,000 sq. ft. facility at 6040 N. Cutter Circle, Suite 317,
Portland OR 97217.



In 1965 Diagnostic Data, Inc. was
incorporated in the State of California. The Company changed its incorporation to the State of Delaware in 1972; and changed its name to DDI Pharmaceuticals, Inc. in 1985. In 1994 the Company merged with International BioClinical, Inc. and Bioxytech
S.A. and changed its name to OXIS International, Inc. In 1995 the Company acquired Therox Pharmaceuticals, Inc.; and in 1998 it acquired Innovative Medical Systems Corp.



The Company has invested significant resources to build an early and substantial patent position on both its antioxidant
therapeutic technologies and selected oxidative stress assays.



The Company is structured into two wholly owned subsidiaries, OXIS Health Products, Inc. and OXIS Therapeutics, Inc. The Companys commercial health products business, which markets research and commercial diagnostic assays and fine
chemicals to research and clinical laboratories and other customers, has been carried out by OXIS Health Products, Inc. The Companys pharmaceutical and nutraceutical discovery and research business, which is focused on new drugs and compounds
to treat diseases associated with tissue damage from free radicals and ROS, is being carried out by OXIS Therapeutics, Inc. For financial information about these two operating segments, see Note 8 to the consolidated financial statements.



The Company derives revenues primarily from sales of products
from its wholly owned subsidiary, OXIS Heath Products, Inc., which includes the sale of research assays, fine chemicals such as Ergothioneine to the cosmetics industry and researchers, and bovine superoxide dismutase (SOD) for human clinical use in
Spain. The Companys diagnostic products include twenty-eight assays to measure markers of oxidative stress.



The Companys lead therapeutic drug candidate, BXT-51072, completed a Phase IIA clinical trial in inflammatory bowel disease (IBD) in 1999 and
further clinical studies continue to be reviewed. Two other therapeutic programs are in the pre-clinical stage of development.



OXIS continues to refocus with the objective of maximizing current operations and increasing the value of its therapeutic ethical and nutraceutical
product portfolio. This portfolio includes, but is not limited to, three classes of small molecular weight antioxidant molecules and a SOD product for veterinary research and human clinical application in Spain. The Company will focus on and
intensify its efforts to consummate successful development of pharmaceutical/nutraceutical relationships and/or strategic partnerships with larger companies in



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the industry. The Company intends to increase the value of their OXIS Health Products, Inc. portfolio by the filing of new patent applications related to its
current products under development, through new acquisitions and expanded marketing efforts in both commercial and research aspects. No assurance can be given that the Companys efforts at refocusing its business will generate the results
anticipated by the management of the Company or will in the future be favorable to the Company.



Commercial Health Products.    Government regulation in the United States and certain foreign countries today is not currently
a significant factor in the Companys health products business. In the United States, the products the Company currently sells and its current manufacturing practices are not subject to regulation by the United States Food and Drug
Administration (FDA) pursuant to the Federal Food, Drug and Cosmetic Act as it relates to research products.



Therapeutic Development.    Therapeutic development is regulated by the FDA and all of the Companys therapeutic
development is in compliance with these regulations at this stage.



Patents
and Trademarks.



The Company has an extensive portfolio of
patents for diagnostic assays and several novel series of molecules to detect, treat and monitor diseases associated with damage from free radicals and ROS. This portfolio provides opportunities for the Company to apply its technologies to a wide
range of diseases and conditions of oxidative stress.



Currently, the Company has strong patent protection with over 45 currently issued or pending patents internationally. Patent coverage includes aspects of all three of the Companys families of molecules currently under development.
During 2004, the Company may choose to abandon certain issued United States and international patents that it deems to be of lesser importance to the strategic direction of the Company, in an effort to preserve its financial resources.



Marketing.



During 2003, the Company continued to market its research products to professional scientists in academia, industry and
government through its OXISResearch catalog. The Companys marketing program is centered on targeting medical, environmental and various industry audiences interested in oxidative and nitrosative stress. Primary vehicles for this purpose
include printed literature, the OXISResearch website and attendance at conferences targeting neuroscience, cancer, cardiac and nutritional researchers, among others.



During 2003, the Company continued to strengthen its international distribution network by adding new distributors around
the world. The distribution partners are exclusively focused on sales of research products in the life science market.



Competition.



The biopharmaceutical/nutraceutical and research assay industries are in a highly competitive arena. Competition in most of the Companys primary
current and potential market areas (large pharmaceutical/nutraceutical companies, research diagnostic companies, universities and research institutions) is intense and expected to increase.



The main commercial competition at present is represented but not limited to
the following three companies: Randox, Cayman Chemical and Assay Designs. These companies work in the same market place but none of them has a marketing edge over the other at this time. Relative to the Company, many of these entities may have
substantially greater capital resources, research and development staffs, facilities, as well as greater expertise manufacturing and making products. In addition, these companies, as well as others, may have or may develop new technologies or use
existing technologies that are, or may in the future be, the basis for competitive products.



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Commercial Health Products.



Revenues from sales of the Companys research diagnostic assays and fine chemicals comprised 75% of total revenues in
2003, and 73% of total revenues in 2002. Certain key products are described below in this subsection.



Oxidative Stress Research Products.    The Company offers more than 100 research products for sale including:



Assays for markers of oxidative and nitrosative stress

Antibodies

Enzymes

Controls



The Company continues to offer a few specialty/proprietary antioxidants and specialty chemicals but product development focus and support are directed at
assays, antibodies and enzymes in the area of oxidative and nitrosative stress.



The primary technology foundation for the research product line is twenty-eight assay test kits, which measure key markers in free radical biochemistry (markers of oxidative stress). Specifically, these assays measure
levels of general and specific antioxidant activity, oxidative alterations to organic lipid, protein and DNA substrates, and pro-oxidant activation of specific white blood cells.



These assay kits utilize either chemical (colorimetric) or immunoenzymatic (EIA) reactions that can be read using laboratory
spectrophotometers and microplate readers, respectively. The Company believes its assays offer advantages over conventional laboratory methods, including ease of use, speed, specificity and accuracy.



The assays for markers of oxidative stress are currently being sold both
directly by the Company and through a network of distributors to researchers primarily in Europe, Japan and the United States. The Company estimates that there are more than 10,000 scientists and clinicians who are working directly in research on
free radical biochemistry, and who are potential customers for these research assays. Nineteen of the Companys research assays are manufactured at the facility in Portland, Oregon. The others are manufactured pursuant to private label
agreements.



The Companys assays for markers of oxidative
stress are generally protected by trade secrets, and to some extent, patents. Four U.S. patents have been issued with respect to these assays. The oxidative stress assays are sold under the registered trademark Bioxytech®.



Animal Health Profiling.    In 2002 the Company began investigating the potential commercial application of several of its
assays to the prediction of susceptibility to disease in cattle. The beef industry attributes over $1 billion per year in losses to disease. In 2003 the Company continued to collect blood samples from over 4,000 head of cattle in commercial
feedlots. Complete records of all morbidity, mortality, treatment costs and weight gain were retained for these cattle. Upon slaughter of the cattle, carcass data and lung lesions were recorded. The Company then compared these health and production
parameters with various oxidative stress biomarkers that are used in the animal health profiling model. From the compiled data a strong and statistically significant relationship between oxidative stress and respiratory disease in cattle was
demonstrated. The health parameters that were of significance are: first treatment for respiratory disease, total number of respiratory treatments and respiratory deaths. Production parameters of significance were ADG (average daily gain) and HCW
(hot carcass weight). In 2004, the Company plans to work with key feeding companies to determine the economic significance of the animal health profiling program to manage high risk cattle. With the discovery in the United States on December 23,
2003 of a single case of Bovine Spongiform Encephalopathy (BSE), commonly known as mad cow disease, the beef industry became by necessity more sensitive to the consumers concerns about the beef industry. Policies
including mandatory individual identification, live animal testing, and overall beef



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safety have created new awareness for management tools such as the Companys animal health profiling program. The Company will continue its attempts to
validate and commercialize the use of its test for cattle respiratory disease management. In addition, the Company has also taken steps to look at relationships of oxidative stress to prion diseases such as BSE in cattle. The Company expects that
this new service could be ready to market during the first or second quarter of 2004. However, no assurances can be given that this service will be available on such a schedule or that this service will be successful.



Myeloperoxidase (MPO).    Another research assay
with commercial potential is the Companys myeloperoxidase assay kit (MPO). In 2003, the total economic cost of cardiovascular disease is estimated at $129.9 billion by the Heart Disease and Stroke Statistics, 2003 Update. Early
detection of cardiovascular disease may not only contribute to health and wellness, but also may reduce skyrocketing health care costs. In the fourth quarter of 2003 MPO was used in a study that potentially demonstrates the role of oxidative stress
in cardiovascular disease. Currently, biomarkers used for myocardial infarction present significant limitations in predictive quality due to variability of patient population, the range for abnormal test results, and other factors. In contrast,
blood plasma MPO levels, as measured by the Companys MPO kit with the Companys own monoclonal antibody, appear to be a better predictor of patients at risk for cardiac events before they occurred, according to the New England Journal of
Medicine report. The Company intends to pursue the development of the MPO assay and the possibility of FDA diagnostic approval. The Company has plans for a commercial myeloperoxidase product by the end of 2004; however, no assurances can be given
that the commercial product will be available on such a schedule or that the commercial product will be successful.



Bovine Superoxide Dismutase (bSOD).    Revenues from sales of bulk bovine SOD (bSOD) comprised approximately 21% of the
Companys total revenues in 2003 and 19% of the Companys total revenues in 2002. Commercial-scale manufacture and quality control of bulk bSOD, as well as subsequent quality control and processing of United States Department of
Agriculture-inspected edible beef liver into highly purified bulk bSOD requires a complex, multi-step process. The Company has significant knowledge regarding the manufacture of bSOD that is protected through trade secrets and proprietary know-how.



The Companys patents protecting the manufacture of bSOD
have expired. Expiration of the Companys patents may enable other companies to benefit from research and development efforts of the Company, but such other companies would still lack the benefits of the Companys unpatented trade secrets
and know-how or unpublished pre-clinical or clinical data.



The
Company sells bulk bSOD for human use outside the United States, but does not market dosage forms of bSOD for human use. The Company does not currently intend to seek approval for human use of bSOD in the United States for any indication and only
intends to sell bulk bSOD to the extent that there is a demand for it. Palosein® is OXIS registered trademark for its veterinary brand of bSOD.
Palosein® is indicated for acute and chronic inflammatory conditions in equine and canine animals. OXIS is in the process of revising, updating and modernizing
the Palosein testing procedures and revalidating its manufacturing procedures to meet new requirements requested by the FDA to re-market the product in the U.S. and Europe. The Company will respond to all of the FDAs questions and will be
using appropriate experts in the field, as needed. We anticipate positive resolution of this matter and selling this product to the veterinary market in the future. However, no assurances can be given regarding the success of this product.



Although there are other sources of bSOD and other laboratory
and pilot-scale processes to produce bSOD, the Company believes that it is the only company manufacturing bSOD on a commercial scale for pharmaceutical uses. The Company maintains a single contracted supplier for bSOD. There is the only one
manufacturer of bSOD worldwide, using the Companys proprietary information and know how. If this company were to halt manufacturing bSOD, it could cause an interruption of sales.



A European customer, which distributes bSOD for human use, has been responsible for a significant portion of the
Companys revenues in recent years. Sales of bSOD to this customer were $562,000, or 21% of the Companys revenues in 2003 and $380,000, or 19%, of the Companys revenues in 2002.



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Ergothioneine.    The Company sells Ergothioneine to selected customers as a
compound used in the cosmetics industry. Sales of Ergothioneine were $333,000 in 2003 and $85,000 in 2002.



Raw Material Suppliers.    No major supplier represents more than 20% of Companys purchases, and the Company believes
there is limited risk of over reliance on any supplier. The Company believes that its list of suppliers constitutes proprietary information and publicly announcing the list could be detrimental to the Companys competitive position.



Research and Development



Research and development expenses were $369,000 and $463,000 for the years
ended December 31, 2003 and 2002, respectively.



The
Companys lead therapeutic drug candidate, BXT-51027, completed a Phase IIA clinical trial in inflammatory bowel disease (IBD) in 1999. Further clinical studies have been reviewed but due to financial constraints no further work has
been completed.



The Company will continue to research and
develop, where possible, selected therapeutics classes of antioxidant small molecules currently under development. These classes are chemically diverse and represent the major molecules with antioxidant activity present in naturecatalysts,
lipid soluble membrane antioxidants and thiols.



Much of the
Companys future growth would likely depend on potential products that are in research and development and no material revenues have been generated to date from sales of these potential products. The pre-clinical work for one potential new
therapeutic/nutraceutical product is completed, and the clinical development stage has commenced. In addition, the Company is in the final stages of completing testing on a commercial application for animal health profiling (the cattle industry). No
assurance can be given that the Companys product development efforts will be successfully completed, that regulatory approvals will be obtained if required, or that any such products, if developed and introduced, will be successfully marketed.
If the Company does not successfully introduce new products, the revenues and results of operations will be materially adversely affected.



Employees.



As of December 31, 2003, the Company had fifteen full time employees in the United States. None of the Companys employees are subject to a
collective bargaining agreement. The Company has never experienced a work interruption.



Foreign Operations and Export Sales.



Revenues
attributed to countries based on the location of customers:



|                        |  |      |         |      |   |        
|----------------------- |  | ---- | ------- | ---- | - | -------
|                        |  | 2003 |         | 2002
|Spain                   |  | $    | 596,000 |      | $ | 402,000
|France                  |  | $    | 259,000 |      | $ | 106,000
|Japan                   |  | $    | 333,000 |      | $ | 155,000
|Korea                   |  | $    | 67,000  |      | $ | 40,000 
|United Kingdom          |  | $    | 39,000  |      | $ | 42,000 
|Other foreign countries |  | $    | 207,000 |      | $ | 195,000



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ITEM 2.    PROPERTIES.



The Company occupies, pursuant to leases expiring in November of 2004, office, laboratory and manufacturing space in Portland, Oregon, which is shared by the Companys health products and therapeutic development
segments.



Although the premises currently occupied are
suitable and in adequate condition for the Companys present requirements, the Company believes that other equally suitable premises are readily available.



The Company does not have a real estate investment policy since the Company does not make any such investments.



ITEM 3.    LEGAL PROCEEDINGS.



In 1997, the Company completed an offering of its common stock to European investors, and listed the resulting shares on the Nouveau Marché in France. The Company has been notified that a Paris lower court
(Tribunal de grande instance de Paris) on November 12, 2003, issued an order (the Order) requiring the Company (i) to file its 2002 Document de Reference (2002 Reference Document) as required under French law and the
regulations of the Autorité des marchés financiers (the AMF), the French regulatory agency overseeing the Nouveau Marché, within eight days of the courts Order (filing deadline) and (ii) if the
Company has not filed with the AMF its 2002 Reference Document by the filing deadline, to pay a fine of 1,500 Euros for each day until it files its 2002 Reference Document with the AMF. The AMF is also engaged in a separate pending investigation
relating to the Companys financial information disclosure since December 1, 1999 (the Investigation). Since issuance of the Order, the Company has since filed its 2002 Reference Document with the AMF and is in the process of
responding to comments from the AMF regarding that filing. The Company has also appealed the Order to the extent that it imposes fines on the Company. Meanwhile, the Company continues discussions with the AMF to resolve these filing issues and the
Investigation and avoid the payment of any fines. In the event the Company fails to resolve these issues with the AMF, the Company may incur further substantial costs and fines. No assurances can be given that the Company will be able to settle
these matters with the AMF, or if it does settle these matters with the AMF, that it can do so on terms favorable to the Company. The Company intends to seek the delisting of its stock from trading on the Nouveau Marché.



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



No matter was submitted during the fourth quarter of 2003 to a vote of security holders, through solicitation or proxies or otherwise.



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PART II



|ITEM 5. |  | MARKET FOR REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER MATTERS.
|------- |  | ---------------------------------------------------------------------



The Companys common stock continues to be traded in the Over-The-Counter Bulletin Board and remains listed in France
on the Nouveau Marche.



The quotations are reflective on
inter-dealer prices, without retail markup, markdown or commission and may not represent actual transactions. Previous quarterly high and low sales prices of the Companys common stock on the over-the-counter board are as follows:



|     |  |      |      |      |   |      |  |     |      |     |   |      |  |     |      |     |   |      |  |   |      |  |   |     
|---- |  | ---- | ---- | ---- | - | ---- |  | --- | ---- | --- | - | ---- |  | --- | ---- | --- | - | ---- |  | - | ---- |  | - | ----
|     |  | 2003 |      | 2002
|     |  | 4th  |      | 3rd  |   | 2nd  |  | 1st |      | 4th |   | 3rd  |  | 2nd |      | 1st
|High |  | $    | 0.72 |      | $ | 0.51 |  | $   | 0.58 |     | $ | 0.21 |  | $   | 0.19 |     | $ | 0.25 |  | $ | 0.28 |  | $ | 0.26
|Low  |  | $    | 0.20 |      | $ | 0.22 |  | $   | 0.12 |     | $ | 0.12 |  | $   | 0.11 |     | $ | 0.12 |  | $ | 0.21 |  | $ | 0.10



The Company has an
estimated 4,500 shareholders, including approximately 3,500 shareholders who hold their shares in street name. The Company utilizes its assets to develop its business and, consequently, has never paid a dividend and does not expect to pay dividends
in the foreseeable future.



On March 7, 2002, the Company
consummated the sale of 1.5 million shares of its Series F preferred stock to Meridian Financial Group L.L.P. (Meridian) at a price of $1 per share, paid in cash. Each share of Series F preferred stock was initially convertible into ten
(10) shares of the Companys common stock. As part of the sale, the Company also issued a warrant granting Meridian the right to purchase up to 1.5 million shares of common stock at $1.00 per share. In June 2003, Meridian converted its shares
of Series F Preferred Stock into 15,000,000 shares of the Companys Common Stock and distributed such shares, and the 1,500,000 warrants, to its members/investors and to Triax Capital Management, Inc. (Triax) as managing member.
Triax in turn distributed its shares of the Companys Common Stock allocated to it as its managing member to its shareholders.



During July 2003, the board of directors of the Company agreed to unilaterally offer to all holders of warrants a reduced exercise price for a limited
period of time. The exercise price for these warrants was reduced to $0.20 per shares, and maturity date for 598,449 warrants issued in 1998 was extended to August 11, 2003. The exercise price for these warrants was previously $1.00 per share. All
warrants issued prior to July 1998 have lapsed and were not affected by this board action. The decrease of exercise price did not result in any change to the outstanding value of the warrants. Pursuant to the offered reduced exercise price, a total
of 1,133,000 warrants were exercised at an aggregate purchase price of $226,600. As part of the offer, with each share of stock issued one new warrant was issued having a $1.00 exercise price and a two-year life.



On January 9, 2004, the Company completed a private placement of securities
(the Bridge Loan Transaction), pursuant to which (i) certain investors paid to the Company $570,000 in the aggregate, (ii) the Company issued promissory notes to the investors in principal amount of $570,000 in the aggregate, which
promissory notes are convertible in due course into up to 1,425,000 shares of the Companys common stock or into up to 3,800,000 shares of Common Stock in the event of a default by the Company, and (iii) the Company issued warrants to the
investors exercisable for up to 1,250,000 shares of Common Stock at an exercise price of $0.50 per share.



8



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##### Table of Contents

Throughout the first ten weeks of 2004, Axonyx Inc. acquired a controlling position in the Companys
outstanding voting stock. Under the terms of the agreements with several of the Companys shareholders (including shareholders that received stock directly or indirectly from Meridian and/or Triax as referenced above), Axonyx acquired
approximately 14 million shares of the Companys common stock, representing approximately 52.4% of the Company. Together with shares of Company common stock currently held by Marvin S. Hausman, M.D., Axonyxs Chairman and CEO, the Axonyx
affiliated group controls approximately 56.8% the Companys voting stock.



In connection with such acquisitions of Company common stock, representatives of Axonyx expressed their intent to have discussions with management and with members of the Companys Board of Directors about
possible changes in management and on the Board and about strategies for maximizing and enhancing shareholder value. The Company and Axonyx discussed implementation of Axonyxs intent to change the composition of the Board, and reached an
understanding with respect thereto (the Understanding). On March 10, 2004, Company directors William G. Pryor, Ted Ford Webb and Thomas M. Wolf resigned from the Companys Board of Directors, effective upon the satisfaction of
certain conditions and at the later of: (i) 8:00 p.m. (Pacific) on the day following the filing with the Securities and Exchange Commission of the Companys Report on Form 10-K for the year ending December 31, 2003; and (ii) 8:00 p.m. (Pacific)
on the tenth day after the Company has filed with the SEC, and transmitted to all holders of record of securities of the Company who would be entitled to vote at a meeting for election of directors (Shareholders), an information
statement meeting the requirements of Rule 14f 1 (the Information Statement). Shortly after receipt of such resignations, the Companys Board of Directors on March 10, 2004 appointed each of Gosse Bruinsma, Colin Neill, Gerard Vlak
and Steven Ferris to serve as a director of the Company effective at the later of: (i) 8:01 p.m. (Pacific) on the day following the filing with the Securities and Exchange Commission of the Companys Report on Form 10-K for the year ending
December 31, 2003; and (ii) 8:01 p.m. (Pacific) on the tenth day after the Company has filed with the SEC and transmitted to all Shareholders the Information Statement.



The following is a summary of the Companys equity compensation plans at December 31, 2003:



|                                                          |  |                                                                                    |  |                                                                   |      |                                                                                                                                           |          
|--------------------------------------------------------- |  | ---------------------------------------------------------------------------------- |  | ----------------------------------------------------------------- | ---- | ----------------------------------------------------------------------------------------------------------------------------------------- | ---------
|                                                          |  | Number of securities tobe issued upon exerciseof outstanding optionsand
rights (a) |  | Weighted-average exerciseprice ofoutstandingoptions andrights
(b) |      | Number of securitiesremaining available forfuture issuance underequity
compensationplans (excludingsecurities reflected incolumn (a)) (c)
|Equity compensation plan approved by security holders     |  | 3,707,911                                                                          |  | $                                                                 | 0.89 |                                                                                                                                           | 3,542,089
|Equity compensation plan not approved by security holders |  |                                                                                   |  | $                                                                 |     |                                                                                                                                           |         
|                                                          |  |                                                                                    |  |                                                                   |      |                                                                                                                                           |          
|Total                                                     |  | 3,707,911                                                                          |  |                                                                   |      |                                                                                                                                           | 3,542,089
|                                                          |  |                                                                                    |  |                                                                   |      |                                                                                                                                           |          



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##### Table of Contents

|ITEM 6. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- | --------------------------------------------------------------------------------------



The Company expects to have smaller losses in 2004 but can give no assurance as to when and if it will become profitable.
The Companys research and development expenses are expected to continue as the Company continues testing. These losses and expenses may increase and fluctuate from quarter to quarter as the Company expands its development activities. There can
be no assurance that the Company will achieve profitable operations.



Additional capital was received in the form of a bridge loan, convertible to equity, on January 12, 2004 in the amount of $570,000. The Company believes that these funds will allow the Company to continue operating in accordance with its
current plans for 2004. If the Company is able to generate additional funding through an increase in revenues, additional borrowings or equity financings during 2004, it intends to fund the development and expansion of the programs described herein.
If the Company is unable to fund its operations with the capital available and is unable to raise additional money, it might be forced to seek protection of the courts through reorganization, bankruptcy or insolvency proceedings.



The report of the Companys independent auditors on the Companys
financial statements for the period ended December 31, 2003 includes an explanatory paragraph expressing doubt about the Companys ability to continue as a going concern. The Companys continuation as a going concern is contingent upon its
ability to obtain additional financing, and to generate revenue and cash flow to meet its obligations on a timely basis. For more information concerning the Companys ability to continue as a going concern, see Note 1 to the consolidated
financial statements.



While the Company believes that its new
products and technologies show considerable promise, its ability to realize significant revenues therefrom is dependent upon the Companys success in developing business alliances with biotechnology/pharmaceutical and/or health related
companies that have the required resources to develop and market certain of these products. There is no assurance that the Companys effort to develop such business alliances will be successful.



The Companys significant accounting policies are noted in Note 2 of the
Companys Consolidated Financial Statements.



Results of Operations



Revenues



The Companys revenues for the past two years consisted of the
following:



|                                   |  |      |           |      |   |          
|---------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                   |  | 2003 |           | 2002
|Research assays and fine chemicals |  | $    | 2,056,000 |      | $ | 1,489,000
|Medical instruments                |  |      | 12,000    |      |   | 17,000   
|bSOD for research and human use    |  |      | 562,000   |      |   | 380,000  
|Other                              |  |      | 110,000   |      |   | 164,000  
|                                   |  |      |           |      |   |          
|Total sales                        |  | $    | 2,740,000 |      | $ | 2,050,000
|                                   |  |      |           |      |   |          



In 2003, sales of
research assays and fine chemicals increased by $567,000 to $2,056,000, a 38% increase over the 2002 sales of $1,489,000. This increase is due primarily to increased sales volumes of Ergothioneine and the Companys Myeloperoxidase assay.



Revenue from medical instruments in 2003 and 2002 was derived
from an inventory purchase and royalty agreement entered into in 2001. This agreement terminated in 2003, and no further revenue will be generated from this agreement. This concluded all transactions and activity for medical instruments.



10



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##### Table of Contents

Sales of bSOD have been made primarily to the Companys Spanish licensee. In 2003, sales of bulk
bSOD increased by $182,000 to $562,000 from $380,000 in 2002. Future sales of bulk bSOD in 2004 and beyond are largely dependent on the needs of the Companys Spanish licensee, which are uncertain and difficult to predict, and no assurances can
be given that the Company will continue to sell bulk bSOD to its Spanish licensee.



Other revenue represents primarily royalty income, which concluded in 2003.



Costs and Expenses



Cost of revenue (sales) for research products decreased by 3% to 47% in 2003 due to improvements in efficient use of materials and supplies. Cost of
revenue recorded for the new animal health profiling program brought the net decrease in cost of revenue to 55%. Total cost of revenue decreased 1% from 56% in 2002 to 55% in 2003.



Research and Development costs were $463,000 in 2002 and decreased to $369,000 in 2003, resulting in a decrease of $94,000,
primarily as a result of a reduction in research and development activity by the Companys health products ($40,000) and therapeutic ($37,000) segments as necessitated by the Companys lack of capital.



In 2003, sales, general and administrative expenses increased by $328,000,
from $1,320,000 in 2002 to $1,648,000 in 2003. This increase is primarily due to expenses related to the development of the animal health profiling program ($124,000), increased legal expenses due to the French stock exchange matter ($84,000), a new
contract with a public relations firm ($60,000), a new contract with an equity investment firm ($38,000) and an increase in director and officer insurance premiums ($14,000).



Interest Income and Expense



The net interest income decreased by $6,000 in 2003 from 2002 due primarily to the reduction of the Companys cash balance.



Liquidity and Capital Resources



The Company, on a consolidated basis, had cash and cash equivalents of
$372,000 and $424,000 at December 31, 2003 and 2002, respectively.



Net cash used in operations was $229,000 in the year ended December 31, 2003. During 2002 net cash used in operations was $1,008,000.



Net cash used in investing activities in 2002 was $180,000 and $98,000 in 2003 and was primarily related to purchases of property, plant and equipment and
additions to patents.



The net cash provided by financing
activities in 2002 was $1,406,000. This was a result of repayments of long-term and short-term debt of $94,000 and the receipt of the net proceeds from the issuance of stock and warrants in the amount of $1,500,000. Net cash provided by financing
activities in 2003 was $247,000, which is the result of proceeds from the exercise of warrants and stock options.



Net Loss



The Company incurred net losses in 2003 and 2002, and expects smaller losses in the future but can not predict profitability in the foreseeable future.
The Companys net loss decrease of $31,000 to $791,000 is due primarily to a reduction of $233,000 in reduction of cost of revenue and research and development expenses partially offset by an investment of $200,000 in the animal health
profiling program.



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##### Table of Contents

The Company expects to incur a net loss for 2004. If the Company develops substantial new revenue sources
or if additional capital is raised through further sales of securities, the Company plans to continue to invest in research and development activities and incur sales, general and administrative expenses in amounts greater than its anticipated
near-term profit margins. If the Company is unable to raise sufficient additional capital or to develop new revenue sources, it will have to cease, or severely curtail, its operations. In this event, while expenses will be reduced, expense levels,
and the potential write down of various assets, would still be in amounts greater than anticipated revenues.



Risk Factors.



The
Company operates in a rapidly changing environment that involves a number of risks, some of which are beyond its control. The following discussion highlights some of these risks and others are discussed elsewhere in this Annual Report on Form
10-KSB.



The Companys future profitability is
uncertain.



The Company has scaled down its operations and
is moving in new directions. Although the Company has been able to reduce its operating losses in recent years, the Company incurred net losses of $791,000 in 2003 and $822,000 in 2002, the Company cannot predict its ability to continue cost
reductions or achieve profitability with its limited capital resources. The Company research and development expenses are expected to increase if the Company obtains financing to develop potential products. These losses and expenses may increase and
fluctuate from quarter to quarter as the Company expands its research and development and sales and marketing activities. There can be no assurance that the Company will ever achieve profitable operations.



Need for Additional Financing.



As of December 31, 2003, the Company had an accumulated deficit of
approximately $59,494,000. Although the Company expects to incur a smaller operating loss during 2004, the Company currently does not have sufficient capital resources to complete the Companys contemplated development and commercialization
programs and no assurances can be given that the Company will be able to raise such capital on terms favorable to the Company, or at all. The unavailability of additional capital could cause the Company to cease or curtail its operations and/or
delay or prevent the development and marketing of the Companys potential products. In addition, the Company may choose to abandon certain issued United States and international patents that it deems to be of lesser importance to the strategic
direction of the Company, in an effort to preserve its financial resources. In this regard, the report of the Companys independent auditors on the Companys financial statements for the period ended December 31, 2003 includes an
explanatory paragraph raising doubts about the Companys ability to continue as a going concern.



The Companys future capital requirements will depend on many factors including the following:



| |  | continued scientific progress in the Companys research and development programs and the commercialization of additional products;
| | - | ----------------------------------------------------------------------------------------------------------------------------------



| |  | the cost of our research and development and commercialization activities and arrangements, including sales and marketing;
| | - | --------------------------------------------------------------------------------------------------------------------------



| |  | the costs associated with the scale-up of manufacturing;
| | - | --------------------------------------------------------



| |  | the success of pre-clinical and clinical trials;
| | - | ------------------------------------------------



| |  | the establishment of and changes in collaborative relationships;
| | - | ----------------------------------------------------------------



| |  | the time and costs involved in filing, prosecuting, enforcing and defending patent claims;
| | - | ------------------------------------------------------------------------------------------



| |  | the time and costs required for regulatory approvals; and
| | - | ---------------------------------------------------------



| |  | technological competition and market developments.
| | - | --------------------------------------------------



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Axonyx Inc. acquired the voting power to control all matters affecting the Company.



Axonyx Inc. recently acquired approximately 52.4% of the issued and
outstanding shares of the Companys common stock. Marvin S. Hausman, M.D., Axonyx Chairman and CEO, separately holds an additional approximately 4.4% of the Companys issued and outstanding shares of common stock. As a result, the Axonyx
affiliated group has acquired the controlling interest in the Company.



As long as the Axonyx affiliated group owns a majority of the Companys outstanding common stock, it will continue to be able to elect the Companys entire board of directors. Other investors in the Companys stock will not
be able to affect the outcome of any shareholder vote. As a result, the Axonyx affiliated group will, in effect, have the ability to control all matters affecting the Company, including:



| |  | the composition of the Companys board of directors and, through it, any determination with respect to the Companys business direction and policies, including the
appointment and removal of officers;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | any determinations with respect to mergers or other business combinations;
| | - | --------------------------------------------------------------------------



| |  | acquisition of the Company or disposition of assets;
| | - | ----------------------------------------------------



| |  | financing the Company;
| | - | ----------------------



| |  | the payment of dividends on Company common stock; and
| | - | -----------------------------------------------------



| |  | determinations with respect to the Companys tax returns.
| | - | ---------------------------------------------------------



In addition, such concentration of voting power could have the effect of delaying, deterring or preventing a change of control or other business
combination that might otherwise be beneficial to the Companys shareholders. The Axonyx affiliated group is not prohibited from selling a controlling interest in the Company to a third party or a participant in the Companys industry.



The Company may experience disruption or may fail to
achieve any benefits in connection with the recent change in control.



The change in control to Axonyx involves substantial risks, including the following:



| |  | the Axonyx affiliated group has used its controlling position to affect Board composition, and may in the future use its controlling position to effect changes in management,
entailing risk that such changes could harm the Company or that such directors and officers may prove less effective than current directors and management;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the potential inability to take advantage of anticipated synergies, economies of scale or other value arising from the relationship with Axonyx;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  | incurrence of time and expenses attendant to transactions that may or may not be consummated; and
| | - | -------------------------------------------------------------------------------------------------



| |  | difficulties in managing and coordinating operations at multiple venues, which, among other things, could divert managements attention from other important business matters.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, the Company and Axonyx are subject
to certain provisions of Delaware law, which could delay, complicate or prevent a merger, tender offer or proxy contest involving the parties. In particular, Section 203 of the Delaware General Corporation Law prohibits a Delaware corporation from
engaging in any business combination with any interested shareholder for a period of three years unless the transaction meets certain conditions. Section 203 also limits the extent to which an interested shareholder can receive benefits from the
Companys assets. The provisions could complicate or prohibit certain financing of the Company by the Axonyx affiliate group, or limit the price that other investors might be willing to pay in the future for shares of the Companys common
stock.



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##### Table of Contents

The Companys principal shareholders, executive officers and directors own a significant
percentage of the Companys stock, and as a result, the trading price for the Companys shares may be depressed and these shareholders can take actions that may be adverse to your interests.



As of December 31, 2003, the Companys executive officers and
directors, the Axonyx affiliated group and entities affiliated with them, beneficially own, in the aggregate, approximately 58.8% of the Companys common stock. This significant concentration of share ownership may adversely affect the trading
price for the Companys common stock because investors often perceive disadvantages in owning stock in companies with controlling shareholders.



Further, the Company is unable to predict whether significant amounts of common stock will be sold in the open market in anticipation of, or following,
any sale by Axonyx. The Company is also unable to predict whether a sufficient number of buyers will be in the market at that time. Any sales of substantial amounts of common stock in the public market by Axonyx, or the perception that such sales
might occur, could harm the market price of the Companys common stock.



If the Company is unable to develop and maintain alliances with collaborative partners, the Company may have difficulty developing and selling the Companys products and services.



While the Company believes that the new products and technologies show
considerable promise, its ability to realize significant revenues therefrom is dependent upon the Companys success in developing business alliances with nutraceutical/pharmaceutical and/or health related companies to develop and market these
products. To date, the Company has not established such business alliances and there can be no assurance that the Companys effort to develop such business alliances will be successful. Further, relying on these or other alliances is risky to
the Companys future success because:



| |  | the Companys partners may develop products or technologies competitive with the Companys products and technologies;
| | - | ---------------------------------------------------------------------------------------------------------------------



| |  | the Companys partners may not devote sufficient resources to the development and sale of the Companys products and technologies;
| | - | ----------------------------------------------------------------------------------------------------------------------------------



| |  | the Companys collaborations may be unsuccessful; or
| | - | ----------------------------------------------------



| |  | the Company may not be able to negotiate future alliances on acceptable terms.
| | - | ------------------------------------------------------------------------------



The Companys revenues and quarterly results have fluctuated historically and may continue to fluctuate, which could cause its stock price to
decrease.



The Companys revenues and operating
results may fluctuate due in part to factors that are beyond its control and which it cannot predict. Because the Companys expenses are largely fixed in the short to medium term, any material shortfall in revenues will materially adversely
affect the Companys results and may cause it to experience losses. In particular, the Companys revenue growth and profitability depend on sales of its Commercial Health Products. Factors that could cause sales for these products and
other products to fluctuate include:



| |  | an inability to produce products in sufficient quantities and with appropriate quality;
| | - | ---------------------------------------------------------------------------------------



| |  | the loss of or reduction in orders from key customers;
| | - | ------------------------------------------------------



| |  | variable or decreased demand from the Companys customers;
| | - | ----------------------------------------------------------



| |  | the Companys customers inventory of Commercial Health Products;
| | - | -----------------------------------------------------------------



| |  | the receipt of relatively large orders with short lead times; and
| | - | -----------------------------------------------------------------



| |  | the Companys customers expectations as to how long it takes the Company to fill future orders.
| | - | ------------------------------------------------------------------------------------------------



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Some additional factors that could cause the Companys operating results to fluctuate include:



| |  | weakness in the global economy and changing market conditions; and
| | - | ------------------------------------------------------------------



| |  | general economic conditions affecting the Companys target industries.
| | - | ----------------------------------------------------------------------



Each of these factors has impacted, and may in the future impact, the demand for the Companys products and its quarterly operating results. Although
the Company is expanding its customer base, the Company expects that these customers will in the aggregate continue to account for a substantial portion of revenues for the foreseeable future.



The Companys stock price is highly volatile, and you may not be able
to sell your shares of its common stock at a price greater than or equal to the price you paid for such shares.



The market price of the Companys common stock is extremely volatile. To demonstrate the volatility of its stock price, during the twelve-month
period ending on March 1, 2004, the volume of the Companys common stock traded on any given day has ranged from 0 to 779,900 shares. Moreover, during that period, its common stock has traded as low as $0.08 per share and as high as $0.90 per
share, a 1,125% difference. This may impact your decision to buy or sell the Companys common stock. Factors affecting the Companys stock price include:



| |  | the Companys financial results;
| | - | --------------------------------



| |  | fluctuations in the Companys operating results;
| | - | ------------------------------------------------



| |  | announcements of technological innovations or new commercial health care products or therapeutic products by the Company or its competitors;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------



| |  | government regulation;
| | - | ----------------------



| |  | developments in patent or other proprietary rights;
| | - | ---------------------------------------------------



| |  | developments in the Companys relationship with customers; and
| | - | --------------------------------------------------------------



| |  | general market conditions.
| | - | --------------------------



Furthermore, volatility in the stock price of other companies has often led to securities class action litigation against those companies. Any such
securities litigation against the Company could result in substantial costs and divert managements attention and resources, which could seriously harm the Companys business and financial condition.



The Company depends on a single supplier for its bSOD product and the
Company might be unable to maintain sales of its bSOD product if shipments from this supplier are delayed or interrupted.



The Company depends on a single supplier to provide bSOD in required volumes, and at appropriate quality and reliability levels. If supplies from this
vendor were delayed or interrupted for any reason, the Company might not be able to get manufacturing equipment, produce bSOD, or develop an alternative supplier relationship in a timely fashion or in sufficient quantities or under acceptable terms.



The Companys success will require that it establish a
strong intellectual property position and that it can defend itself against intellectual property claims from others.



Maintaining a strong patent position is important to the Companys competitive advantage. Litigation on these matters has been prevalent in the
Companys industry and the Company expects that this will continue. Patent law relating to the scope of claims in the technology fields in which the Company operates is still evolving and the extent of future protection is highly uncertain, so
there can be no assurance that the patent rights that the Company has or may obtain will be valuable. Others may have filed, or may in the future file, patent applications that are similar or identical to the Companys. To determine the
priority of inventions, the Company may have to



15



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##### Table of Contents

participate in interference proceedings declared by the United States Patent and Trademark Office that could result in substantial costs in legal fees and
could substantially affect the scope of the Companys patent protection. The Company cannot assure investors that any such patent applications will not have priority over the Companys patent applications. Further, the Company may choose
to abandon certain issued United States and international patents that it deems to be of lesser importance to the strategic direction of the Company, in an effort to preserve its financial resources. Abandonment of patents could substantially affect
the scope of the Companys patent protection. In addition, the Company may in future periods incur substantial costs in litigation to defend against patent suits brought by third parties or if the Company initiates such suits.



In addition to patent protection, the Company also relies upon trade secret
protection for its confidential and proprietary information. There can be no assurance, however, that such measures will provide adequate protection for its trade secrets or other proprietary information. In addition, there can be no assurance that
trade secrets and other proprietary information will not be disclosed, that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to or disclose the Companys trade
secrets and other proprietary information. If the Company cannot obtain, maintain or enforce intellectual property rights, competitors can design and commercialize competing technologies.



The Company may face challenges from third parties regarding the validity of its patents and proprietary rights, or from
third parties asserting that the Company is infringing their patents or proprietary rights, which could result in litigation that would be costly to defend and could deprive the Company of valuable rights.



Extensive litigation regarding patents and other intellectual property
rights has been common in the biotechnology and pharmaceutical industries. The defense and prosecution of intellectual property suits, United States Patent and Trademark Office interference proceedings, and related legal and administrative
proceedings in the United States and internationally involve complex legal and factual questions. As a result, such proceedings are costly and time-consuming to pursue and their outcome is uncertain. Litigation may be necessary to:



| |  | enforce patents that the Company own or license;
| | - | ------------------------------------------------



| |  | protect trade secrets or know-how that the Company own or license; or
| | - | ---------------------------------------------------------------------



| |  | determine the enforceability, scope and validity of the proprietary rights of others.
| | - | -------------------------------------------------------------------------------------



The Companys involvement in any litigation, interference or other administrative proceedings could cause it to incur
substantial expense and could significantly divert the efforts of its technical and management personnel. An adverse determination may subject the Company to loss of its proprietary position or to significant liabilities, or require it to seek
licenses that may not be available from third parties. An adverse determination in a judicial or administrative proceeding, or a failure to obtain necessary licenses, may restrict or prevent the Company from manufacturing and selling its products.
Costs associated with these arrangements may be substantial and may include ongoing royalties. Furthermore, the Company may not be able to obtain the necessary licenses on satisfactory terms, if at all. These outcomes could materially harm the
Companys business, financial condition and results of operations.



The Company may be exposed to liability due to product defects.



The risk of product liability claims is inherent in the testing, manufacturing, marketing and sale of the Companys products. The Company may seek to acquire additional insurance for liability risks. The Company
may not be able to obtain such insurance or general product liability insurance on acceptable terms or in sufficient amounts. A product liability claim or recall could have a serious adverse effect on the Companys business, financial condition
and results of operations.



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##### Table of Contents

Disclosure controls are no assurance that the objectives of the control system are met.



The Companys management, including the principal
executive officer and principal financial officer, does not expect that our disclosure controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, could have been detected and/or prevented.



17



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##### Table of Contents

ITEM 7.    FINANCIAL STATEMENTS



Board of Directors and Shareholders

OXIS International, Inc.

Portland, OR



INDEPENDENT AUDITORS REPORT



We have audited the accompanying consolidated balance sheets of OXIS
International, Inc. (a Delaware corporation) and subsidiaries as of December 31, 2003, and 2002, and the related consolidated statements of operations, shareholders equity, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
of 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 consolidated financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.



In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of OXIS International, Inc. as of December 31, 2003, and 2002, and the results of its operations,
shareholders equity and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.



The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1
to the consolidated financial statements, the Company has incurred recurring losses from operations resulting in an accumulated deficit of $59,494,000 at December 31, 2003. This condition raises substantial doubt about the Companys ability to
continue as a going concern. Managements plans in regard to this issue are also discussed in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.



/s/    WILLIAMS & WEBSTER, P.S.

Certified Public Accountants



Spokane, WA

February 13, 2004



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##### Table of Contents

OXIS INTERNATIONAL, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(In thousands of dollars)



|                                                                                                                                                  |  |                  |         |   |                  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | -
|                                                                                                                                                  |  | December 31,2003 |         |   | December 31,2002 |  
|ASSETS                                                                                                                                            |  |                  |         |   |                  |   |         |  
|Current assets:                                                                                                                                   |  |                  |         |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                         |  | $                | 372     |   |                  | $ | 424     |  
|Accounts receivable, net of allowance of $4 and $5 respectively                                                                                   |  |                  | 251     |   |                  |   | 188     |  
|Inventories                                                                                                                                       |  |                  | 295     |   |                  |   | 301     |  
|Prepaid expenses and other current assets                                                                                                         |  |                  | 139     |   |                  |   | 138     |  
|                                                                                                                                                  |  |                  |         |   |                  |   |         |  
|Total current assets                                                                                                                              |  |                  | 1,057   |   |                  |   | 1,051   |  
|Property, plant and equipment, net                                                                                                                |  |                  | 42      |   |                  |   | 62      |  
|Technology for developed products, net                                                                                                            |  |                  | 101     |   |                  |   | 224     |  
|Patents and patents pending, net                                                                                                                  |  |                  | 733     |   |                  |   | 594     |  
|Other assets                                                                                                                                      |  |                  | 30      |   |                  |   | 54      |  
|                                                                                                                                                  |  |                  |         |   |                  |   |         |  
|Total assets                                                                                                                                      |  | $                | 1,963   |   |                  | $ | 1,985   |  
|                                                                                                                                                  |  |                  |         |   |                  |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                              |  |                  |         |   |                  |   |         |  
|Current liabilities:                                                                                                                              |  |                  |         |   |                  |   |         |  
|Note payable to shareholder                                                                                                                       |  | $                | 160     |   |                  | $ | 160     |  
|Accounts payable                                                                                                                                  |  |                  | 609     |   |                  |   | 321     |  
|Accrued liabilities                                                                                                                               |  |                  | 220     |   |                  |   | 166     |  
|Accrued payroll                                                                                                                                   |  |                  | 104     |   |                  |   | 107     |  
|Customer deposits                                                                                                                                 |  |                  |        |   |                  |   | 13      |  
|                                                                                                                                                  |  |                  |         |   |                  |   |         |  
|Total current liabilities                                                                                                                         |  |                  | 1,093   |   |                  |   | 767     |  
|Commitments and contingencies (Notes 1 and 10)                                                                                                    |  |                  |         |   |                  |   |         |  
|Shareholders equity:                                                                                                                             |  |                  |         |   |                  |   |         |  
|Convertible preferred stock$.01 par value; 15,000,000 shares authorized:                                                                         |  |                  |         |   |                  |   |         |  
|Series B428,389 shares issued and outstanding (aggregate liquidation preference of $1,000,000)                                                   |  |                  | 4       |   |                  |   | 4       |  
|Series C96,230 shares issued and outstanding                                                                                                     |  |                  | 1       |   |                  |   | 1       |  
|Series F0 shares issued and outstanding at December 31, 2003; 1,500,000 shares issued and outstanding at December 31,
2002                       |  |                  |        |   |                  |   | 15      |  
|Common stock$.001 par value; 95,000,000 shares authorized; 26,427,920 and 10,005,614 shares issued and outstanding at December 31, 2003
and 2002 |  |                  | 26      |   |                  |   | 10      |  
|Stock options                                                                                                                                     |  |                  | 123     |   |                  |   |        |  
|Warrants                                                                                                                                          |  |                  | 236     |   |                  |   | 2,009   |  
|Additional paid-in capital                                                                                                                        |  |                  | 60,365  |   |                  |   | 58,327  |  
|Accumulated deficit                                                                                                                               |  |                  | (59,494 | ) |                  |   | (58,703 | )
|Accumulated other comprehensive loss                                                                                                              |  |                  | (391    | ) |                  |   | (445    | )
|                                                                                                                                                  |  |                  |         |   |                  |   |         |  
|Total shareholders equity                                                                                                                        |  |                  | 870     |   |                  |   | 1,218   |  
|                                                                                                                                                  |  |                  |         |   |                  |   |         |  
|Total liabilities and shareholders equity                                                                                                        |  | $                | 1,963   |   |                  | $ | 1,985   |  
|                                                                                                                                                  |  |                  |         |   |                  |   |         |  



The accompanying notes
are an integral part of these consolidated financial statements.



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##### Table of Contents

OXIS INTERNATIONAL, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands of dollars, except earnings per share data)



|                                                                        |  |                          |            |   |      |   |           |  
|----------------------------------------------------------------------- |  | ------------------------ | ---------- | - | ---- | - | --------- | -
|                                                                        |  | Years Ended December 31, |           
|                                                                        |  | 2003                     |            |   | 2002 |  
|Revenue                                                                 |  | $                        | 2,740      |   |      | $ | 2,050     |  
|Cost of revenue                                                         |  |                          | 1,496      |   |      |   | 1,140     |  
|                                                                        |  |                          |            |   |      |   |           |  
|Gross profit                                                            |  |                          | 1,244      |   |      |   | 910       |  
|Operating expenses:                                                     |  |                          |            |   |      |   |           |  
|Research and development                                                |  |                          | 369        |   |      |   | 463       |  
|Sales, general and administrative                                       |  |                          | 1,648      |   |      |   | 1,320     |  
|                                                                        |  |                          |            |   |      |   |           |  
|Total operating expenses                                                |  |                          | 2,017      |   |      |   | 1,783     |  
|                                                                        |  |                          |            |   |      |   |           |  
|Operating loss                                                          |  |                          | (773       | ) |      |   | (873      | )
|Other income and expenses:                                              |  |                          |            |   |      |   |           |  
|Other income                                                            |  |                          | 8          |   |      |   | 62        |  
|Interest income                                                         |  |                          | 1          |   |      |   | 7         |  
|Interest expense                                                        |  |                          | (14        | ) |      |   | (18       | )
|                                                                        |  |                          |            |   |      |   |           |  
|Total other income and expenses                                         |  |                          | (5         | ) |      |   | 51        |  
|                                                                        |  |                          |            |   |      |   |           |  
|Loss before income taxes                                                |  |                          | (778       | ) |      |   | (822      | )
|Income taxes                                                            |  |                          |           |   |      |   |          |  
|                                                                        |  |                          |            |   |      |   |           |  
|Net loss from continued operations                                      |  |                          | (778       | ) |      |   | (822      | )
|Discontinued operations (net of taxes)                                  |  |                          | (13        | ) |      |   |          |  
|                                                                        |  |                          |            |   |      |   |           |  
|Net loss                                                                |  |                          | (791       | ) |      |   | (822      | )
|Other comprehensive income (loss)                                       |  |                          |            |   |      |   |           |  
|Foreign currency translation adjustment                                 |  |                          | 54         |   |      |   | (17       | )
|                                                                        |  |                          |            |   |      |   |           |  
|Comprehensive loss                                                      |  | $                        | (737       | ) |      | $ | (839      | )
|                                                                        |  |                          |            |   |      |   |           |  
|Net loss per sharebasic and diluted                                    |  | $                        | (.04       | ) |      | $ | (.08      | )
|                                                                        |  |                          |            |   |      |   |           |  
|Weighted average number of shares used in computationbasic and diluted |  |                          | 18,205,164 |   |      |   | 9,814,142 |  
|                                                                        |  |                          |            |   |      |   |           |  





The accompanying notes are an integral part of these consolidated financial statements.



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##### Table of Contents

OXIS INTERNATIONAL, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY



Years Ended December 31, 2003 and 2002



|                                                                                |  |                 |   |  |              |         |   |        |            |   |        |   |                   |  |   |                          |   |  |                    |            |   |                                   |   |             |                          |  |   |          |   |  |   |           |  
|------------------------------------------------------------------------------- |  | --------------- | - |  | ------------ | ------- | - | ------ | ---------- | - | ------ | - | ----------------- |  | - | ------------------------ | - |  | ------------------ | ---------- | - | --------------------------------- | - | ----------- | ------------------------ |  | - | -------- | - |  | - | --------- | -
|                                                                                |  | Preferred Stock |   |  | Common Stock |         |   |        |            |   |        |   |                   |  |   |                          |   |  |                    |           
|                                                                                |  | Shares          |   |  | Amount       |         |   | Shares |            |   | Amount |   | Options &Warrants |  |   | Additionalpaid-incapital |   |  | Accumulateddeficit |            |   | Accumulatedothercomprehensiveloss |   |             | Totalshareholdersequity | 
|Balances, January 1, 2002                                                       |  | 724,619         |   |  | $            | 7,000   |   |        | 9,660,458  |   |        | $ | 10,000            |  | $ | 1,670,000                |   |  | $                  | 57,155,000 |   |                                   | $ | (57,881,000 | )                        |  | $ | (428,000 | ) |  | $ | 533,000   |  
|Shares issued in connection with Sales of Series F Preferred stock and warrants |  | 1,500,000       |   |  |              | 15,000  |   |        |            |   |        |   |                   |  |   | 15,000                   |   |  |                    | 1,146,000  |   |                                   |   |             |                          |  |   |          |   |  |   | 1,500,000 |  
|Shares issued in connection with 1997 IMS business combination                  |  |                 |   |  |              |         |   |        | 100,000    |   |        |   |                   |  |   |                          |   |  |                    |            |   |                                   |   |             |                          |  |   |          |   |  |   |           |  
|Options exercised                                                               |  |                 |   |  |              |         |   |        | 1,334      |   |        |   |                   |  |   |                          |   |  |                    |            |   |                                   |   |             |                          |  |   |          |   |  |   |           |  
|Shares issued as part of non-cash Accounts payable settlement                   |  |                 |   |  |              |         |   |        | 210,491    |   |        |   |                   |  |   |                          |   |  |                    | 24,000     |   |                                   |   |             |                          |  |   |          |   |  |   | 24,000    |  
|Conversion of Series C preferred shares to common                               |  | (200,000        | ) |  |              | (2,000  | ) |        | 57,778     |   |        |   |                   |  |   |                          |   |  |                    | 2,000      |   |                                   |   |             |                          |  |   |          |   |  |   |           |  
|Cancellation of escrow shares From prior acquisition                            |  |                 |   |  |              |         |   |        | (24,447    | ) |        |   |                   |  |   |                          |   |  |                    |            |   |                                   |   |             |                          |  |   |          |   |  |   |           |  
|Reinstatement of expired warrants                                               |  |                 |   |  |              |         |   |        |            |   |        |   |                   |  |   | 324,000                  |   |  |                    |            |   |                                   |   |             |                          |  |   |          |   |  |   |           |  
|Net loss for year ended 12/31/02                                                |  |                 |   |  |              |         |   |        |            |   |        |   |                   |  |   |                          |   |  |                    |            |   |                                   |   | (822,000    | )                        |  |   |          |   |  |   | (822,000  | )
|Foreign currency translation adjustment                                         |  |                 |   |  |              |         |   |        |            |   |        |   |                   |  |   |                          |   |  |                    |            |   |                                   |   |             |                          |  |   | (17,000  | ) |  |   | (17,000   | )
|                                                                                |  |                 |   |  |              |         |   |        |            |   |        |   |                   |  |   |                          |   |  |                    |            |   |                                   |   |             |                          |  |   |          |   |  |   |           |  
|Other comprehensive loss                                                        |  |                 |   |  |              |         |   |        |            |   |        |   |                   |  |   |                          |   |  |                    |            |   |                                   |   |             |                          |  |   |          |   |  |   | (839,000  | )
|                                                                                |  |                 |   |  |              |         |   |        |            |   |        |   |                   |  |   |                          |   |  |                    |            |   |                                   |   |             |                          |  |   |          |   |  |   |           |  
|Balances, December 31, 2002                                                     |  | 2,024,619       |   |  |              | 20,000  |   |        | 10,005,614 |   |        |   | 10,000            |  |   | 2,009,000                |   |  |                    | 58,327,000 |   |                                   |   | (58,703,000 | )                        |  |   | (445,000 | ) |  |   | 1,218,000 |  
|Shares issued in connection with 1997 IMS business combination                  |  |                 |   |  |              |         |   |        | 100,000    |   |        |   |                   |  |   |                          |   |  |                    |            |   |                                   |   |             |                          |  |   |          |   |  |   |           |  
|Conversion of Series F preferred shares to common                               |  | (1,500,000      | ) |  |              | (15,000 | ) |        | 15,000,000 |   |        |   | 15,000            |  |   |                          |   |  |                    |            |   |                                   |   |             |                          |  |   |          |   |  |   |           |  
|Issuance of new warrants                                                        |  |                 |   |  |              |         |   |        |            |   |        |   |                   |  |   | 67,000                   |   |  |                    | (67,000    | ) |                                   |   |             |                          |  |   |          |   |  |   |           |  
|Exercise of warrants                                                            |  |                 |   |  |              |         |   |        | 1,133,000  |   |        |   | 1,000             |  |   | (258,000                 | ) |  |                    | 483,000    |   |                                   |   |             |                          |  |   |          |   |  |   | 226,000   |  
|Options exercised                                                               |  |                 |   |  |              |         |   |        | 155,973    |   |        |   |                   |  |   |                          |   |  |                    | 21,000     |   |                                   |   |             |                          |  |   |          |   |  |   | 21,000    |  
|Options issued for accrued expenses and services                                |  |                 |   |  |              |         |   |        |            |   |        |   |                   |  |   | 123,000                  |   |  |                    |            |   |                                   |   |             |                          |  |   |          |   |  |   | 123,000   |  
|Expiration of warrants                                                          |  |                 |   |  |              |         |   |        |            |   |        |   |                   |  |   | (1,582,000               | ) |  |                    | 1,582,000  |   |                                   |   |             |                          |  |   |          |   |  |   |           |  
|Shares issued for services                                                      |  |                 |   |  |              |         |   |        | 33,333     |   |        |   |                   |  |   |                          |   |  |                    | 19,000     |   |                                   |   |             |                          |  |   |          |   |  |   | 19,000    |  
|Net loss for year ended 12/31/03                                                |  |                 |   |  |              |         |   |        |            |   |        |   |                   |  |   |                          |   |  |                    |            |   |                                   |   | (791,000    | )                        |  |   |          |   |  |   | (791,000  | )
|Foreign currency translation adjustment                                         |  |                 |   |  |              |         |   |        |            |   |        |   |                   |  |   |                          |   |  |                    |            |   |                                   |   |             |                          |  |   | 54,000   |   |  |   | 54,000    |  
|                                                                                |  |                 |   |  |              |         |   |        |            |   |        |   |                   |  |   |                          |   |  |                    |            |   |                                   |   |             |                          |  |   |          |   |  |   |           |  
|Other comprehensive loss                                                        |  |                 |   |  |              |         |   |        |            |   |        |   |                   |  |   |                          |   |  |                    |            |   |                                   |   |             |                          |  |   |          |   |  |   | (667,000  | )
|                                                                                |  |                 |   |  |              |         |   |        |            |   |        |   |                   |  |   |                          |   |  |                    |            |   |                                   |   |             |                          |  |   |          |   |  |   |           |  
|Balance, December 31, 2003                                                      |  | 524,619         |   |  | $            | 5,000   |   |        | 26,427,920 |   |        | $ | 26,000            |  | $ | 359,000                  |   |  | $                  | 60,365,000 |   |                                   | $ | (59,494,000 | )                        |  | $ | (391,000 | ) |  | $ | 870,000   |  
|                                                                                |  |                 |   |  |              |         |   |        |            |   |        |   |                   |  |   |                          |   |  |                    |            |   |                                   |   |             |                          |  |   |          |   |  |   |           |  



The accompanying notes
are an integral part of this consolidated financial statement.





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##### Table of Contents

OXIS INTERNATIONAL, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands of dollars)



|                                                                         |  |                             |       |   |      |   |        |  
|------------------------------------------------------------------------ |  | --------------------------- | ----- | - | ---- | - | ------ | -
|                                                                         |  | For years endedDecember 31, |      
|                                                                         |  | 2003                        |       |   | 2002 |  
|Cash flows from operating activities:                                    |  |                             |       |   |      |   |        |  
|Net loss                                                                 |  | $                           | (791  | ) |      | $ | (822   | )
|Adjustments to reconcile net loss to cash used for operating activities: |  |                             |       |   |      |   |        |  
|Depreciation and amortization                                            |  |                             | 177   |   |      |   | 282    |  
|Stock and stock options issued for services                              |  |                             | 89    |   |      |   |       |  
|Gain on sale of investment                                               |  |                             | (8    | ) |      |   |       |  
|Discontinued operations                                                  |  |                             | 13    |   |      |   |       |  
|Changes in assets and liabilities:                                       |  |                             |       |   |      |   |        |  
|Accounts receivable                                                      |  |                             | (63   | ) |      |   | (39    | )
|Inventories                                                              |  |                             | 6     |   |      |   | (9     | )
|Other current assets                                                     |  |                             | (1    | ) |      |   | (94    | )
|Accounts payable                                                         |  |                             | 288   |   |      |   | (268   | )
|Customer deposits                                                        |  |                             | (13   | ) |      |   | (30    | )
|Accrued payroll, payroll taxes and other                                 |  |                             | 104   |   |      |   | (28    | )
|Other assets                                                             |  |                             | (30   | ) |      |   |       |  
|                                                                         |  |                             |       |   |      |   |        |  
|Net cash used for operating activities                                   |  |                             | (229  | ) |      |   | (1,008 | )
|Cash flows from investing activities:                                    |  |                             |       |   |      |   |        |  
|Proceeds from sale of investment                                         |  |                             | 62    |   |      |   |       |  
|Purchases of equipment                                                   |  |                             | (13   | ) |      |   | (6     | )
|Additions to other assets                                                |  |                             | (147  | ) |      |   | (174   | )
|                                                                         |  |                             |       |   |      |   |        |  
|Net cash used for investing activities                                   |  |                             | (98   | ) |      |   | (180   | )
|Cash flows from financing activities:                                    |  |                             |       |   |      |   |        |  
|Repayment of short-term borrowings                                       |  |                             |      |   |      |   | (94    | )
|Proceeds from issuance of preferred stock with warrants attached         |  |                             |      |   |      |   | 1,500  |  
|Proceeds from exercise of warrants with warrants attached                |  |                             | 226   |   |      |   |       |  
|Proceeds from exercise of stock options                                  |  |                             | 21    |   |      |   |       |  
|                                                                         |  |                             |       |   |      |   |        |  
|Net cash provided by financing activities                                |  |                             | 247   |   |      |   | 1,406  |  
|Effect of exchange rate on cash                                          |  |                             | 28    |   |      |   | (15    | )
|                                                                         |  |                             |       |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                     |  |                             | (52   | ) |      |   | 203    |  
|Cash and cash equivalentsbeginning of year                              |  |                             | 424   |   |      |   | 221    |  
|                                                                         |  |                             |       |   |      |   |        |  
|Cash and cash equivalentsend of year                                    |  | $                           | 372   |   |      | $ | 424    |  
|                                                                         |  |                             |       |   |      |   |        |  
|Cash paid for income taxes                                               |  | $                           |      |   |      | $ |       |  
|                                                                         |  |                             |       |   |      |   |        |  
|Cash paid for interest                                                   |  | $                           |      |   |      | $ | 5      |  
|                                                                         |  |                             |       |   |      |   |        |  
|Supplemental schedule of noncash operating and financing activities:     |  |                             |       |   |      |   |        |  
|Issuance of common stock for cancellation of notes and accrued interest  |  | $                           |      |   |      | $ | 24     |  
|                                                                         |  |                             |       |   |      |   |        |  
|Conversion of preferred stock into common stock                          |  | $                           | 15    |   |      | $ | 2      |  
|                                                                         |  |                             |       |   |      |   |        |  
|Expiration of warrants                                                   |  | $                           | 1,582 |   |      | $ |       |  
|                                                                         |  |                             |       |   |      |   |        |  
|Issuance of stock options for accrued expenses and services              |  | $                           | 123   |   |      | $ |       |  
|                                                                         |  |                             |       |   |      |   |        |  
|Issuance of common stock for services                                    |  | $                           | 19    |   |      | $ |       |  
|                                                                         |  |                             |       |   |      |   |        |  
|Discontinued operations                                                  |  | $                           | 13    |   |      | $ |       |  
|                                                                         |  |                             |       |   |      |   |        |  



The accompanying notes
are an integral part of these consolidated financial statements.



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OXIS INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Years Ended December 31, 2003 and 2002



1.    Description of Business and Basis of Presentation



OXIS International, Inc. (the Company)
develops, manufactures and markets selected therapeutic and diagnostic products. The Companys research and development efforts are concentrated principally in the development of products to diagnose, treat and prevent diseases associated with
free radicals and reactive oxygen species. The Company is headquartered in Portland, Oregon. The Companys fiscal year end is December 31.



Assays to measure markers of oxidative stress are manufactured by the Company in the United States and are sold directly to researchers and to
distributors for resale to researchers, primarily in Europe, the United States and Japan. The Company also sells pharmaceutical forms of superoxide dismutase (SOD) for human and research veterinary use.



The Company is structured into two wholly owned subsidiaries, OXIS Health
Products, Inc. and OXIS Therapeutics, Inc. The Companys commercial health products business, which markets research and commercial diagnostic assays and fine chemicals to research and clinical laboratories and other customers, has been carried
out by OXIS Health Products, Inc. The Companys pharmaceutical and nutraceutical discovery and research business, which is focused on new drugs and compounds to treat diseases associated with tissue damage from free radicals and ROS, is being
carried out by OXIS Therapeutics, Inc.



Consolidated within
OXIS Health Products, Inc. is OXIS Instruments, Inc., incorporated in Pennsylvania. OXIS Instruments, Inc. closed in July 2001 at which time all employees of the instruments manufacturing facility were terminated. The final transactions of the
business occurred in November 2003.



Consolidated within OXIS
Therapeutics, Inc., incorporated in Delaware is OXIS Acquisition Corporation, incorporated in Delaware; OXIS International, S.A., incorporated in France; OXIS Isle of Man Limited, incorporated in the Isle of Man and OXIS International (UK) Limited,
incorporated in the United Kingdom. OXIS Acquisition Corporation holds the remaining assets of the Therox acquisition. OXIS International S.A. holds the remaining liability of the French acquisition. OXIS Isle of Man Limited holds the technology of
the Bioxytech acquisition. OXIS International (UK) Limited was closed in July 2001, and discontinued business in December 2003. See Note 7.



Going ConcernThese financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company has incurred recurring losses and at December 31, 2003 had an accumulated deficit of $59,494,000. These factors, among others, indicate that the Company may be unable to
continue as a going concern for a reasonable period of time. These financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that
may be necessary should the Company be unable to continue as a going concern. The Companys continuation as a going concern is contingent upon its ability to obtain additional financing, and/or generate revenue and cash flow to meet its
obligations on a timely basis.



The Company expects that
additional capital will be required during 2004 to develop the programs to increase revenues. If the Company is unable to generate additional funding through an increase in revenues, additional borrowings or raising additional capital during 2004 it
intends to curtail its operations through the reduction of personnel and facility costs and by reducing its research and development efforts; however, no assurances can be given that it will be able to do so. If the Company were to be unable to
sufficiently curtail its costs in such a situation, it might be forced to seek protection of the courts through reorganization, bankruptcy or insolvency proceedings.



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OXIS INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Years Ended December 31, 2003 and 2002





2.    Significant Accounting Policies



This summary of significant accounting policies of OXIS International, Inc.
is presented to assist in understanding the Companys financial statements. The financial statements and notes are representations of the Companys management, which is responsible for their integrity and objectivity. These accounting
policies conform to accounting principles generally accepted in the United States of America, and have been consistently applied in the preparation of the financial statements.



Principles of consolidationThe accompanying financial statements include the accounts of the Company as well as
its subsidiaries. The functional currency of the Companys United Kingdom subsidiary is the British pound and the functional currency of the Companys French subsidiary is the Euro. The foreign subsidiaries assets and liabilities are
translated at the exchange rates at the end of the year, and their statements of operations are translated at the average exchange rates during each year. Gains and losses resulting from foreign currency translation are recorded as other
comprehensive income or loss and accumulated as a separate component of shareholders equity. All significant intercompany balances and transactions are eliminated in consolidation.



Cash equivalents consist of money market accounts with commercial banks.



Accounting methodThe Companys financial statements are
prepared using the accrual method of accounting.



Inventories are stated at the lower of cost or market. Cost has been determined by using the first-in, first-out method. Inventories at December 31, 2003 and 2002, consisted of the following:



|                |  |      |         |      |   |        
|--------------- |  | ---- | ------- | ---- | - | -------
|                |  | 2003 |         | 2002
|Raw materials   |  | $    | 101,000 |      | $ | 106,000
|Work in process |  |      | 65,000  |      |   | 61,000 
|Finished goods  |  |      | 129,000 |      |   | 134,000
|                |  |      |         |      |   |        
|Total           |  | $    | 295,000 |      | $ | 301,000
|                |  |      |         |      |   |        



Property, plant and
equipment is stated at cost. Depreciation of equipment is computed using the straight-line method over estimated useful lives of three to ten years. Leasehold improvements are amortized over the shorter of five years or the remaining lease term.
Depreciation expense for the years ended December 31, 2003 and 2002 was $33,000 and $81,000, respectively.



Property, plant and equipment at December 31, 2003 and 2002, consisted of the following:



|                                          |  |      |          |   |      |   |          |  
|----------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                          |  | 2003 |          |   | 2002 |  
|Furniture and office equipment            |  | $    | 242,000  |   |      | $ | 286,000  |  
|Laboratory and manufacturing equipment    |  |      | 448,000  |   |      |   | 442,000  |  
|Leasehold improvements                    |  |      | 63,000   |   |      |   | 63,000   |  
|                                          |  |      |          |   |      |   |          |  
|Property, plant and equipment, at cost    |  |      | 803,000  |   |      |   | 791,000  |  
|Accumulated depreciation and amortization |  |      | (761,000 | ) |      |   | (729,000 | )
|                                          |  |      |          |   |      |   |          |  
|Property, plant and equipment, net        |  | $    | 42,000   |   |      | $ | 62,000   |  
|                                          |  |      |          |   |      |   |          |  



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OXIS INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Years Ended December 31, 2003 and 2002





Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS No. 144) establishes a single accounting model for long-lived assets to be disposed of by sale, including discontinued operations. SFAS No. 144 requires that these long-lived assets be measured at the lower
of carrying amount or fair value less cost to sell, whether reported in continuing operations or discontinued operations. The Company does not believe any adjustments are needed to the carrying value of its assets at December 31, 2003.



Research and development costs are charged to operations as
incurred.



Patents and technology for developed
productsTechnology for developed products was acquired in business combinations and is amortized over their estimated useful lives of seven to ten years. Accumulated amortization of technology for developed products was $1,431,000 and
$1,262,000 as of December 31, 2003 and 2002, respectively. Patents are being amortized on a straight-line basis over the shorter of the remaining life of the patent or ten years. A total of $617,000 of patents pending approval is not currently being
amortized. Accumulated amortization as of December 31, 2003 and 2002 is $42,000 and $33,000, respectively. In accordance with SFAS No. 144, the Company periodically reviews net cash flows from sales of products and projections of net cash flows from
sales of products on an undiscounted basis to assess recovery of intangible assets.



Compensated absencesEmployees of the Company are entitled to paid vacation, paid sick days and personal days off, depending on job classification, length of service, and other factors. The Company accrues
vacation expense throughout the year and is reflected in accrued payroll.



Derivative instrumentsThe Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging ActivitiesDeferral of the Effective Date of FASB No. 133, SFAS No. 138, Accounting for Certain Derivative Instruments and Certain
Hedging Activities, and SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. These statements establish accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities. They require that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value.



If certain conditions are met, a derivative may be specifically designated as
a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii)
the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change.



Historically, the Company has not entered into derivatives contracts to hedge existing risks or for speculative purposes.



At December 31, 2003 and 2002, the Company has not engaged in
any transactions that would be considered derivative instruments or hedging activities.



Stock-based compensationThe Company accounts for common stock issued to employees in accordance with Accounting Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to
Employees.



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OXIS INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Years Ended December 31, 2003 and 2002





Under APB 25, the Company recognizes compensation expense as shares are earned under terms of various employment agreements based on the fair value of the
common stock. Fair value is calculated using the average cash sales price of the Companys common stock during each month in which the shares are earned.



The Company accounts for common stock issued to non-employees using Financial Accounting Standard No. 123 (FAS 123), Accounting for
Stock-Based Compensation, and the provision of Emerging Issues Task Force No. 96-18 (EITF 96-18), Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling Goods or
Services. All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument
issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the earlier of the date on which the counterpartys performance is complete or the date on which it is probable that
performance will occur.



Revenue recognitionThe
Company manufactures, or has manufactured on a contract basis, products that are sold to customers. The Company recognizes product sales upon shipment of the product to the customer. The Company also develops and acquires technology that is used in
the Companys operations or sold, licensed or assigned to third parties. The Company recognizes revenue upon the sale or assignment of technology to third parties.



Shipping and handling income is included with revenue, while the associated costs are included with cost of sales.



Accounts receivableThe Company carries its
accounts receivable at cost less an allowance for doubtful accounts. On a periodic basis, the Company evaluates its accounts receivable and establishes an allowance for doubtful accounts, based on a history of past write-offs and collections and
current credit conditions.



The Companys policy allows
the accrual of interest on trade receivables 30 days after due date. A receivable is considered past due if payments have not been received by the terms set by the Company. When all internal collection efforts have been exhausted, accounts are
written off as uncollectible and turned over for collection. Interest is assessed at the discretion of the Company.



Advertising and promotional feesAdvertising expenses consist primarily of costs incurred in the design, development, and printing of Company
literature and marketing materials. The Company expenses all advertising expenditures as incurred. The Companys advertising expenses were $14,000 and $11,000 for the years ended December 31, 2003 and 2002, respectively.



Income taxesDeferred income taxes, reflecting the net tax
effects of temporary differences between the carrying amount of assets and liabilities recognized for financial reporting purposes and the amounts recognized for income tax purposes, are based on tax laws currently enacted. A valuation allowance is
established when necessary to reduce deferred tax assets to the amount expected to be realized. See Note 6.



Net loss per shareNet loss per share is computed based upon the weighted average number of common shares outstanding (basic) and,
if dilutive, the incremental shares issuable upon the assumed exercise of stock options or warrants and the assumed conversion of preferred stock (dilutive). Due to the net losses in 2003 and 2002, the computation of dilutive net loss
per share is antidilutive and therefore is the same as basic.



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OXIS INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Years Ended December 31, 2003 and 2002





Possible common stock dilutions include the following:



|                                 |  |                 
|-------------------------------- |  | ----------------
|Preferred stock Series B         |  | 85,678 shares   
|Preferred stock Series C         |  | 27,800 shares   
|Warrants                         |  | 1,577,500 shares
|Qualified Stock Option Plans     |  | 3,707,911 shares
|Non-qualified Stock Option Plans |  | 778,168 shares  



Use of
estimatesThe preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires the use of estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities known to exist as of the date of the financial statements are published and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such
estimates and assumptions are inherent in the preparation of the Companys financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions that could have a material effect on the
reported amounts of the Companys financial position and results of operations.



Fair value of financial instrumentsThe carrying amount reported in the balance sheet for cash and cash equivalents, accounts receivable, inventories, prepaid and other current assets, notes payable,
customer deposits and accounts payable, accrued payroll and payroll taxes, and other accrued liabilities approximates fair value due to the short-term nature of the accounts.



New Accounting PronouncementsIn May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (hereinafter SFAS No. 150). SFAS No. 150 establishes standards for classifying and
measuring certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those instruments were classified
as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Companys adoption of this
statement did not have an impact on the financial statements of the Company.



In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (hereinafter
SFAS No. 149). SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 did not have an
impact on the financial statements of the Company.



In December
2002, the Financial Accounting Standards Board issued Statement No. 148 (SFAS No. 148) on Accounting for Stock-Based Compensation-Transition and Disclosure. This statement provides alternative methods of transition for
companies that choose to switch to the fair value method of accounting for stock options. SFAS No. 148 also makes changes in the disclosure requirements for stock-based compensation, regardless of which method of accounting is chosen. Under the new
standard, companies must report certain types of information more prominently and in a more understandable format in the footnotes to the financial statements, and this information must be included in interim as well as annual financial statements.
The Company has complied with the disclosure requirements of SFAS No. 148 in these financial statements.



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OXIS INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Years Ended December 31, 2003 and 2002





In October 2002, the Financial Accounting Standards Board issued Statement No. 147 (SFAS No.
147) on Acquisitions of Certain Financial Institutions. This statement provides guidance on the accounting for the acquisition of a financial institution. The Companys adoption of this standard does not have an effect on its
financial statements.



In June 2002, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS No. 146). SFAS No. 146 addresses significant issues regarding the recognition,
measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities. SFAS No. 146 also addresses recognition of certain costs related to terminating a contract that is not a capital lease, costs to
consolidate facilities or relocated employees, and termination benefits provided to employees that are involuntarily terminated under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 is effective for activities after December 31, 2002. There has been no impact on the Companys financial position or results of operations from adopting SFAS No. 146.



In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, Rescission of SFAS Statements No. 44, 4 and 64, Amendment of SFAS Statement No. 13, and Technical Corrections (SFAS No. 145), which updates, clarifies and simplifies existing accounting
pronouncements. SFAS No. 4, which required all gains and losses from the extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related tax effect, was rescinded. As a result, SFAS No. 64, which amended
SFAS No. 4, was rescinded, as it was no longer necessary. SFAS No. 44, Accounting for Intangible Assets of Motor Carriers, established the accounting requirements for the effects of transition to the provisions of the Motor Carrier Act
of 1980. Since the transition has been completed, SFAS No. 44 is no longer necessary and has been rescinded. SFAS No. 145 amended SFAS No. 13 to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The Companys adoption of SFAS No. 145 did not have an effect on its financial statements.



3.    Note Payable to Shareholder



Note payable to shareholder at December 31, 2003 and 2002 consisted of a
$160,000, 8% unsecured note which was originally due in May 1997 and is, therefore, delinquent. The amount is currently due on demand.



4.    Shareholders Equity



Common StockEach share of common stock is entitled to one vote at the Companys Annual Meeting of Stockholders.



During the year ended December 31, 2003, the final increment of 100,000
shares of common stock was issued to former shareholders of Innovative Medical Systems Corp. under the terms of the Companys 1997 acquisition agreement with that entity. A total of 15,000,000 shares of common stock was issued from the
conversion of all Series F preferred stock. A total of 155,973 shares of common stock was issued to employees and consultants upon the exercise of stock options at an average price of $0.13 per shares. A total of 33,333 shares was issued to a
consultant for services valued at $19,000, or $0.57 per share. In addition, a total of 1,133,000 shares was issued for warrants exercised at a price of $0.20 per share.



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OXIS INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Years Ended December 31, 2003 and 2002





Preferred StockTerms of the preferred stock are fixed by the Board of Directors at such
time as the preferred stock is issued. The 428,389 outstanding shares of Series B Preferred Stock are convertible into and have voting rights equivalent to 85,678 shares of common stock. The Series B Preferred Stock has certain preferential rights
with respect to liquidation and dividends. Holders of Series B Preferred Stock are entitled to noncumulative annual dividends at the rate of $0.115 per share if and when declared by the Companys Board of Directors.



The 96,230 shares of Series C Preferred Stock are convertible into 27,800
shares of the Companys common stock at the option of the holders at any time. The conversion ratio is based on the average closing bid price of the common stock for the fifteen consecutive trading days ending on the date immediately preceding
the date notice of conversion is given, but cannot be less than .20 nor more than .2889 common shares for each Series C Preferred share. The conversion ratio may be adjusted under certain circumstances such as stock splits or stock dividends. The
Company has the right to automatically convert the Series C Preferred Stock into common stock if the average closing bid price of the Companys common stock on the Nasdaq National Market for 15 consecutive trading days exceeds $13.00. Each
share of Series C Preferred Stock is entitled to the number of votes equal to .26 divided by the average closing bid price of the Companys common stock during the fifteen consecutive trading days immediately prior to the date such shares of
Series C Preferred Stock were purchased. In the event of liquidation, the holders of the Series C Preferred Stock shall participate on an equal basis with the holders of the Common Stock (as if the Series C Preferred Stock had converted into Common
Stock) in any distribution of any of the assets or surplus funds of the Company. The holders of Series C Preferred Stock are entitled to noncumulative dividends after the payment of dividends on Series B Preferred Stock if and when declared by the
Companys Board of Directors.



On March 7, 2002, the
Company consummated the sale of 1.5 million shares of its Series F preferred stock to Meridian Financial Group L.L.P. (Meridian) at a price of $1 per share, paid in cash. Each share of Series F preferred stock was initially convertible
into ten (10) shares of the Companys common stock. As part of the sale, the Company also issued a warrant granting Meridian the right to purchase up to 1.5 million shares of common stock at $1.00 per share. In June 2003, Meridian converted its
shares of Series F Preferred Stock into 15,000,000 shares of the Companys Common Stock and distributed such shares, and the 1,500,000 warrants, to its members/investors and to Triax Capital Management, Inc. (Triax) as managing
member. Triax in turn distributed its shares of the Companys Common Stock allocated to it as managing member to its shareholders.



Stock WarrantsDuring July 2003, the board of directors of the Company agreed to unilaterally offer to all holders of warrants a reduced
exercise price for a limited period of time. The exercise price for these warrants was reduced to $0.20 per share, and the maturity date for 598,449 warrants issued in 1998 was extended to August 11, 2003. The exercise price for these warrants was
previously $1.00 per share. All warrants issued prior to July 1998 had lapsed and were not affected by this board action. The decrease of exercise price did not result in any change to the outstanding value of the warrants. Pursuant to the offered
reduced exercise price, a total of 1,133,000 warrants were exercised at an aggregate purchase price of $226,600. As part of the offer, with each share of stock issued one new warrant was issued having a $1.00 exercise price and a two-year life.



Warrants to purchase 1,985,678 common shares at an exercise
price of $1.00 that were issued in connection with the sale of common shares during 1998 expired in April and May 2003.



Warrants to purchase 1,454,449 common shares at an exercise prices of $1.00 that were issued in connection with the sale of common shares during 2000
expired in May 2003.





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OXIS INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Years Ended December 31, 2003 and 2002





Stock OptionsThe Company has a stock incentive plan under which 4,250,000 shares of the
Companys common stock are reserved for issuance (the 1994 Plan). The 1994 Plan permits the Company to grant stock options to acquire shares of the Companys common stock, award stock bonuses of the Companys common stock,
and grant stock appreciation rights.



During the 2003 Annual
Meeting of Stockholders held in June 2003, the stockholders approved the adoption of the 2003 Stock Incentive Plan (2003 Plan), effective July 1, 2003. The 2003 Plan, under which 3,000,000 shares of the Companys common stock is
reserved, permits the Company to grant stock options to acquire shares of the Companys common stock, award stock bonuses of the Companys common stock, and grant stock appreciation rights.



At December 31, 2003, options issued pursuant to the 1994 Plan to acquire
3,548,442 shares of common stock at exercise prices ranging from $0.085 to $17.50, and options issued pursuant to the 2003 Plan to acquire 159,469 shares of common stock at an exercise price of $0.57 remained outstanding. Options issued outside the
Plans to acquire 778,168 shares of common stock at exercise prices of $0.085 to $8.438.



Options granted and outstanding under the plans as of December 31 are summarized as follows:



|                                                     |  |           |   |  |                              |       |   |         |           |   |                              |   |       |  
|---------------------------------------------------- |  | --------- | - |  | ---------------------------- | ----- | - | ------- | --------- | - | ---------------------------- | - | ----- | -
|                                                     |  | 2003      |   |  | 2002                         |      
|                                                     |  | Options   |   |  | Weightedaverageexerciseprice |       |   | Options |           |   | Weightedaverageexerciseprice |  
|Outstanding at beginning of year                     |  | 2,834,041 |   |  | $                            | 1.28  |   |         | 1,856,791 |   |                              | $ | 1.88  |  
|Granted                                              |  | 1,520,469 |   |  |                              | .39   |   |         | 993,000   |   |                              |   | 0.16  |  
|Exercised                                            |  | (111,465  | ) |  |                              | (.14  | ) |         | (1,334    | ) |                              |   | (.09  | )
|Forfeitures                                          |  | (535,134  | ) |  |                              | (1.68 | ) |         | (14,416   | ) |                              |   | (1.54 | )
|                                                     |  |           |   |  |                              |       |   |         |           |   |                              |   |       |  
|Outstanding at end of year                           |  | 3,707,911 |   |  | $                            | 0.89  |   |         | 2,834,041 |   |                              | $ | 1.28  |  
|                                                     |  |           |   |  |                              |       |   |         |           |   |                              |   |       |  
|Exercisable at end of year                           |  | 3,328,686 |   |  | $                            | 0.94  |   |         | 2,173,823 |   |                              | $ | 1.50  |  
|                                                     |  |           |   |  |                              |       |   |         |           |   |                              |   |       |  
|Fair market value of options granted during the year |  |           |   |  | $                            | 0.35  |   |         |           |   |                              | $ | 0.11  |  
|                                                     |  |           |   |  |                              |       |   |         |           |   |                              |   |       |  



The number of shares
under option, weighted average exercise price and weighted average remaining contractual life of all options outstanding as of December 31, 2003, by range of exercise price was as follows:



|                        |  |           |  |                                |       |                                |           
|----------------------- |  | --------- |  | ------------------------------ | ----- | ------------------------------ | ----------
|Range of exercise price |  | Shares    |  | Weighted averageexercise price |       | Weighted averageremaining life
|$  0.08$  0.88         |  | 3,201,961 |  | $                              | 0.29  |                                | 8.78 years
|$  1.31$  1.91         |  | 242,750   |  | $                              | 1.88  |                                | 7.05 years
|$  2.12$  4.53         |  | 107,400   |  | $                              | 3.22  |                                | 4.19 years
|$  5.75$  8.45         |  | 116,800   |  | $                              | 7.99  |                                | 2.38 years
|$11.25$17.50           |  | 39,000    |  | $                              | 15.91 |                                | 1.02 years



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OXIS INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Years Ended December 31, 2003 and 2002





The number of shares under option and weighted average exercise price of options exercisable as of
December 31, 2003, by range of exercise price was as follows:



|                        |  |           |  |                                 |      
|----------------------- |  | --------- |  | ------------------------------- | -----
|Range of exercise price |  | Shares    |  | Weighted average exercise price
|$  0.08$  0.88         |  | 2,862,736 |  | $                               | 0.30 
|$  1.31$  1.91         |  | 202,750   |  | $                               | 1.87 
|$  2.12$  4.53         |  | 107,400   |  | $                               | 3.22 
|$  5.75$  8.45         |  | 116,800   |  | $                               | 7.99 
|$11.25$17.50           |  | 39,000    |  | $                               | 15.91



The Company applies
the intrinsic value based method described in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, in accounting for its stock options granted to employees. Accordingly, since the exercise price of all
options issued under the plans have been greater than or equal to the fair market value of the stock at the date of issue of the options, no compensation cost has been recognized for options granted under the plans. Had compensation cost for options
granted under the plans been determined based on the fair value at the grant dates in a manner consistent with the method determined under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the
net loss and net loss per share for 2003 and 2002 would have been changed to the pro forma amounts indicated below:



|                                      |  |      |            |   |      |   |          |  
|------------------------------------- |  | ---- | ---------- | - | ---- | - | -------- | -
|                                      |  | 2003 |            |   | 2002 |  
|Net loss:                             |  |      |            |   |      |   |          |  
|As reported                           |  | $    | (791,000   | ) |      | $ | (822,000 | )
|Pro forma                             |  | $    | (1,281,000 | ) |      | $ | (930,000 | )
|Net loss per sharebasic and diluted: |  |      |            |   |      |   |          |  
|As reported                           |  | $    | (0.04      | ) |      | $ | (0.08    | )
|Pro forma                             |  | $    | (0.07      | ) |      | $ | (0.09    | )



For the purpose of
computing the pro forma expense, the fair value of each option is estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:



|                        |  |                  |   |  |          |  
|----------------------- |  | ---------------- | - |  | -------- | -
|                        |  | Grants issued in |  
|                        |  | 2003             |   |  | 2002     |  
|Dividend yield          |  | 0                | % |  | 0        | %
|Expected volatility     |  | 107              | % |  | 105      | %
|Risk-free interest rate |  | 4.7              | % |  | 4.7      | %
|Expected lives          |  | 10 years         |   |  | 10 years |  



The weighted average
fair value as of the option date was computed to be $0.35 per share for options issued during 2003, $0.11 per share for options issued during 2002.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Years Ended December 31, 2003 and 2002





The following is a summary of the Companys equity compensation plans at December 31, 2003:



|                                                          |  |                                                                                    |  |                                                                    |      |                                                                                                                                          |          
|--------------------------------------------------------- |  | ---------------------------------------------------------------------------------- |  | ------------------------------------------------------------------ | ---- | ---------------------------------------------------------------------------------------------------------------------------------------- | ---------
|                                                          |  | Number of securitiesto be issued uponexercise of outstandingoptions and
rights (a) |  | Weighted-averageexercise price ofoutstandingoptions and rights (b) |      | Number of securitiesremaining availablefor future issuanceunder equitycompensation
plans(excluding securitiesreflected incolumn (a)) (c)
|Equity compensation plan approved by security holders     |  | 3,707,911                                                                          |  | $                                                                  | 0.89 |                                                                                                                                          | 3,542,089
|Equity compensation plan not approved by security holders |  |                                                                                   |  | $                                                                  |     |                                                                                                                                          |         
|                                                          |  |                                                                                    |  |                                                                    |      |                                                                                                                                          |          
|Total                                                     |  | 3,707,911                                                                          |  |                                                                    |      |                                                                                                                                          | 3,542,089
|                                                          |  |                                                                                    |  |                                                                    |      |                                                                                                                                          |          



At December 31, 2003
the Company had the following additional stock options outstanding that were not issued pursuant to its stock incentive plans.



|             |  |          |  |                      |  |                   
|------------ |  | -------- |  | -------------------- |  | ------------------
|Year Granted |  | #Options |  | Exercise Price Range |  | Year of Expiration
|1996         |  | 7,000    |  | $8.44                |  | 2006              
|2000         |  | 25,000   |  | $1.38                |  | 2005              
|2001         |  | 78,438   |  | $0.085               |  | 2011              
|2002         |  | 57,730   |  | $0.12 to $0.22       |  | 2007              
|2002         |  | 7,500    |  | $0.25                |  | 2005              
|2002         |  | 1,500    |  | $0.15                |  | 2012              
|2003         |  | 255,000  |  | $0.15 to $0.31       |  | 2006              
|2003         |  | 300,000  |  | $0.14                |  | 2008              
|2003         |  | 46,000   |  | $0.15 to $0.53       |  | 2013              



5.    Other
Income



During the first quarter of 2003, the Company sold
its equity interest in Caprius Inc., resulting in other income of $8,000. In association with the closing of the Companys instrument manufacturing facility in 2001, during the first quarter of 2002, the Company settled certain trade payables
with creditors resulting in other income of $62,000.



6.    Income Taxes



Deferred TaxesDeferred taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b)
operating losses and tax credit carryforwards.



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OXIS INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Years Ended December 31, 2003 and 2002





The tax effects of significant items comprising the Companys deferred taxes as of December 31
were as follows:



|                                                                                                     |  |      |             |   |      |   |             |  
|---------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ---- | - | ----------- | -
|                                                                                                     |  | 2003 |             |   | 2002 |  
|Deferred tax assets:                                                                                 |  |      |             |   |      |   |             |  
|Federal net operating loss carryforward and capitalized research and development expenses            |  | $    | 9,587,000   |   |      | $ | 9,385,000   |  
|Federal R&D tax credit carryforward                                                                  |  |      | 491,000     |   |      |   | 547,000     |  
|State net operating loss carryforward and capitalized research and development expenses              |  |      | 1,127,000   |   |      |   | 1,032,000   |  
|Other                                                                                                |  |      | 55,000      |   |      |   | 55,000      |  
|Deferred tax liabilitiesbook basis in excess of noncurrent assets acquired in purchase transactions |  |      | (142,000    | ) |      |   | (142,000    | )
|                                                                                                     |  |      |             |   |      |   |             |  
|Net deferred tax assets                                                                              |  |      | 11,118,000  |   |      |   | 10,877,000  |  
|Valuation allowance                                                                                  |  |      | (11,118,000 | ) |      |   | (10,877,000 | )
|                                                                                                     |  |      |             |   |      |   |             |  
|Net deferred taxes                                                                                   |  | $    |            |   |      | $ |            |  
|                                                                                                     |  |      |             |   |      |   |             |  



The prospective tax
benefits of the net operating losses of $15,410,000 which existed at the date of acquisition (September 7, 1994) of the French subsidiary will be recorded as a reduction of income tax expense when and if realized. Due to the closure of the French
subsidiarys operations in early 1999, it is unlikely that the Company will ever realize any benefit from the French subsidiarys operating loss carryforwards.



The prospective tax benefits of the net operating losses of $1,032,000 which existed at the date of acquisition (December
31, 1997) of Innovative Medical Systems Corp. will be recorded as a reduction of the net unamortized balance of property, plant and equipment and intangible assets of $465,000 when and if realized.



Statement of Financial Accounting Standards No. 109 requires that the tax
benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is more likely than not. Realization of the future tax benefits is dependent
on the Companys ability to generate sufficient taxable income within the carryforward period. Because of the Companys history of operating losses, management has provided a valuation allowance equal to its net deferred tax assets.





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##### Table of Contents

OXIS INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Years Ended December 31, 2003 and 2002





Tax CarryforwardsAt December 31, 2003, the Company had net operating loss carryforwards
of approximately $10,737,000 to reduce United States federal taxable income in future years, and research and development tax credit carryforwards of $491,000 to reduce United States federal taxes in future years. These carryforwards expire as
follows:



|                   |  |                                              |            |                           |   |        
|------------------ |  | -------------------------------------------- | ---------- | ------------------------- | - | -------
|Year of expiration |  | United States net operatingloss carryforward |            | R&D taxcreditcarryforward
|2004               |  | $                                            | 5,000      |                           | $ | 34,000 
|2005               |  |                                              | 25,000     |                           |   | 46,000 
|2006               |  |                                              | 44,000     |                           |   | 176,000
|2007               |  |                                              | 4,000      |                           |   | 18,000 
|2008-2021          |  |                                              | 10,659,000 |                           |   | 217,000
|No expiration      |  |                                              |           |                           |   |       
|                   |  |                                              |            |                           |   |        
|                   |  | $                                            | 10,737,000 |                           | $ | 491,000
|                   |  |                                              |            |                           |   |        



During 2002, the
Company issued preferred stock with voting rights, which would be regarded as a control change under the Internal Revenue Code (IRC). Under IRC Section 382, a control change will limit the utilization of the net operating losses. The Company has not
determined the effects of any limitations on the value of net operating losses or any tax credits outstanding prior to the control change.



7.    Discontinued Operations



During December 2003, the Company made the decision to discontinue the operations of the United Kingdom subsidiary. As the result of this decision, there
is a loss of $13,000 for accumulated translation adjustments.



8.    Operating Segments



The Company is organized into two reportable segmentshealth products and therapeutic development. The two segments have different strategic goals and have been managed separately since 1997. The health products segment manufactures
and sells diagnostic products, pharmaceutical forms of SOD and other fine chemicals. The therapeutic development segment operates a drug discovery business focused on development of new drugs to treat diseases associated with tissue damage from free
radicals and reactive oxygen species.



The accounting policies
of the segments are the same as those described in the summary of significant accounting policies. The Company accounts for inter-segment sales at cost. General corporate expenses were allocated equally to the health products and therapeutics
development segments in 2003 and 2002.



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OXIS INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Years Ended December 31, 2003 and 2002





The following tables present information about the two segments for 2003 and 2002:



|                                   |  |                |           |   |                        |   |          |       |  |   |           |  
|---------------------------------- |  | -------------- | --------- | - | ---------------------- | - | -------- | ----- |  | - | --------- | -
|                                   |  | Healthproducts |           |   | Therapeuticdevelopment |   |          | Total | 
|Year ended December 31, 2003:      |  |                |           |   |                        |   |          |       |  |   |           |  
|Revenues from external customers   |  | $              | 2,740,000 |   |                        | $ |         |       |  | $ | 2,740,000 |  
|Interest income                    |  |                | 1,000     |   |                        |   |         |       |  |   | 1,000     |  
|Interest expense                   |  |                |          |   |                        |   | (14,000  | )     |  |   | (14,000   | )
|Depreciation and amortization      |  |                | 36,000    |   |                        |   | 141,000  |       |  |   | 177,000   |  
|Net loss                           |  |                | (69,000   | ) |                        |   | (722,000 | )     |  |   | (791,000  | )
|Expenditures for long-lived assets |  |                | 37,000    |   |                        |   | 123,000  |       |  |   | 160,000   |  
|As of December 31, 2003           |  |                |           |   |                        |   |          |       |  |   |           |  
|Segment assets                     |  |                | 1,156,000 |   |                        |   | 807,000  |       |  |   | 1,963,000 |  

|                                   |  |                |           |   |                        |   |          |       |  |   |           |  
|---------------------------------- |  | -------------- | --------- | - | ---------------------- | - | -------- | ----- |  | - | --------- | -
|                                   |  | Healthproducts |           |   | Therapeuticdevelopment |   |          | Total | 
|Year ended December 31, 2002:      |  |                |           |   |                        |   |          |       |  |   |           |  
|Revenues from external customers   |  | $              | 2,050,000 |   |                        | $ |         |       |  | $ | 2,050,000 |  
|Interest income                    |  |                | 4,000     |   |                        |   | 3,000    |       |  |   | 7,000     |  
|Interest expense                   |  |                | (5,000    | ) |                        |   | (13,000  | )     |  |   | (18,000   | )
|Depreciation and amortization      |  |                | 49,000    |   |                        |   | 212,000  |       |  |   | 261,000   |  
|Net loss                           |  |                | (147,000  | ) |                        |   | (675,000 | )     |  |   | (822,000  | )
|Expenditures for long-lived assets |  |                | 41,000    |   |                        |   | 127,000  |       |  |   | 168,000   |  
|As of December 31, 2002           |  |                |           |   |                        |   |          |       |  |   |           |  
|Segment assets                     |  |                | 1,121,000 |   |                        |   | 864,000  |       |  |   | 1,985,000 |  



Revenues from external
customers for the years ended December 31, 2003 and 2002 were as follows:



|                               |  |      |           |      |   |          
|------------------------------ |  | ---- | --------- | ---- | - | ---------
|                               |  | 2003 |           | 2002
|Assays and fine chemicals      |  | $    | 2,056,000 |      | $ | 1,489,000
|Medical instruments            |  |      | 12,000    |      |   | 17,000   
|SOD for human and research use |  |      | 562,000   |      |   | 380,000  
|Other                          |  |      | 110,000   |      |   | 164,000  
|                               |  |      |           |      |   |          
|Total                          |  | $    | 2,740,000 |      | $ | 2,050,000
|                               |  |      |           |      |   |          



Revenues attributed to
countries based on the location of customers:



|                        |  |      |           |      |   |          
|----------------------- |  | ---- | --------- | ---- | - | ---------
|                        |  | 2003 |           | 2002
|United States           |  | $    | 1,239,000 |      | $ | 1,110,000
|Spain                   |  |      | 596,000   |      |   | 402,000  
|Japan                   |  |      | 333,000   |      |   | 155,000  
|France                  |  |      | 259,000   |      |   | 106,000  
|Korea                   |  |      | 67,000    |      |   | 40,000   
|United Kingdom          |  |      | 39,000    |      |   | 42,000   
|Other foreign countries |  |      | 207,000   |      |   | 195,000  
|                        |  |      |           |      |   |          
|                        |  | $    | 2,740,000 |      | $ | 2,050,000
|                        |  |      |           |      |   |          



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OXIS INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Years Ended December 31, 2003 and 2002





9.    Concentrations



Bank AccountsThe Company maintains cash in money market accounts. The funds on deposit are not insured by the
FDIC, and therefore, a approximately $372,000 is at risk on December 31, 2003.



Foreign OperationsThe accompanying balance sheet includes approximately $2,000 in a foreign bank account and $106,000 of other assets relating to the Companys subsidiaries in Europe. Although the
countries are considered politically and economically stable, it is always possible that unanticipated events in foreign countries could disrupt the Companys operations.



CustomersIn 2003, three customers comprise approximately 40% of the Companys sales.



10.    Commitments and Contingencies



The Company leases their facilities in Oregon under an operating lease that
expires in November 2004. Minimum lease payments to which the Company is committed is $125,000 in 2004.



Rental and occupancy expenses included in the accompanying statements of operations was $152,000 in 2003 and $120,000 in 2002.



In 1995, the Company consummated the acquisition of Therox Pharmaceuticals,
Inc. (Therox) pursuant to a transaction wherein Therox was merged with and into a wholly owned subsidiary of the Company. In addition to the issuance of its common stock to Therox shareholders, the Company agreed to make payments of up
to $2,000,000 to the Therox stockholders based on the successful commercialization of Therox technologies. As of December 31, 2003, no additional payments have been made. The Company has not recorded a liability associated with this agreement
because the Company does not believe that it has successfully commercialized any of the Therox technologies acquired.



In 1997, the Company consummated the acquisition of Innovative Medical Systems Corp. (IMS) pursuant to a transaction whereby the Company
acquired all of the outstanding stock of IMS in exchange for 200,000 shares of the Companys common stock issued immediately and additional shares to be issued. The name of IMS was changed to OXIS Instruments, Inc. during 1998. Additional
common shares were to be issued to former IMS shareholders annually through 2003. The number of additional common shares which may have been issued to former IMS shareholders depended on, among other things, future annual revenues of OXIS
Instruments Inc. through 2002 and on the market price of the Companys common stock. During each of the years 2003 and 2002, the Company issued 100,000 shares (the minimum number of shares required under the original agreement) to the former
IMS shareholders.



French filing obligationsIn
1997, the Company completed an offering of its common stock to European investors, and listed the resulting shares on the Nouveau Marché in France. The Company has been notified that a Paris lower court (Tribunal de grande instance de Paris)
on November 12, 2003, issued an order (the Order) requiring the Company (i) to file its 2002 Document de Reference (2002 Reference Document) as required under French law and the regulations of the Autorité des
marchés financiers (the AMF), the French regulatory agency overseeing the Nouveau Marché, within eight days of the courts Order (filing deadline) and (ii) if the Company has not filed with the AMF its 2002
Reference Document by the filing deadline, to pay a fine of 1,500 Euros for each day until it files its 2002 Reference Document with the AMF. The AMF is also engaged in a separate pending investigation relating to the Companys financial
information disclosure since December 1, 1999 (the Investigation). Since issuance of the Order, the Company has since filed its 2002 Reference



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OXIS INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Years Ended December 31, 2003 and 2002





Document with the AMF and is in the process of responding to comments from the AMF regarding that filing. The Company has also appealed the Order to the
extent that it imposes fines on the Company. Meanwhile, the Company continues discussions with the AMF to resolve these filing issues and the Investigation and avoid the payment of any fines. In the event the Company fails to resolve these issues
with the AMF, the Company may incur further substantial costs and fines. No assurances can be given that the Company will be able to settle these matters with the AMF, or if it does settle these matters with the AMF, that it can do so on terms
favorable to the Company. The Company intends to seek the delisting of its stock from trading on the Nouveau Marché.



The Company and its subsidiaries are also parties to various other claims in the ordinary course of business. The Company does not believe that there will
be any material impact on the Companys financial position, results of operations or cash flows as a result of these claims.



11.    Subsequent Events



AxonyxThroughout the first ten weeks of 2004, Axonyx Inc. acquired a controlling position in the Companys outstanding voting stock.
Under the terms of the agreements with several of the Companys shareholders (including shareholders that received stock directly or indirectly from Meridian and/or Triax as referenced above), Axonyx acquired approximately 14 million shares of
the Companys common stock, representing approximately 52.4% of the Company. Together with shares of Company common stock currently held by Marvin S. Hausman, M.D., Axonyxs Chairman and CEO, the Axonyx affiliated group controls
approximately 56.8% of the Companys voting stock.



In
connection with such acquisitions of Company common stock, representatives of Axonyx expressed their intent to have discussions with management and with members of the Companys Board of Directors about possible changes in management and on the
Board and about strategies for maximizing and enhancing shareholder value. The Company and Axonyx discussed implementation of Axonyxs intent to change the composition of the Board, and reached an understanding with respect thereto (the
Understanding). On March 10, 2004, Company directors William G. Pryor, Ted Ford Webb and Thomas M. Wolf resigned from the Companys Board of Directors, effective upon the satisfaction of certain conditions and at the later of: (i)
8:00 p.m. (Pacific) on the day following the filing with the Securities and Exchange Commission of the Companys Report on Form 10-K for the year ending December 31, 2003; and (ii) 8:00 p.m. (Pacific) on the tenth day after the Company has
filed with the SEC, and transmitted to all holders of record of securities of the Company who would be entitled to vote at a meeting for election of directors (Shareholders), an information statement meeting the requirements of Rule 14f
1 (the Information Statement). Shortly after receipt of such resignations, the Companys Board of Directors on March 10, 2004 appointed each of Gosse Bruinsma, Colin Neill, Gerard Vlak and Steven Ferris to serve as a director of the
Company effective at the later of: (i) 8:01 p.m. (Pacific) on the day following the filing with the Securities and Exchange Commission of the Companys Report on Form 10-K for the year ending December 31, 2003; and (ii) 8:01 p.m. (Pacific) on
the tenth day after the Company has filed with the SEC and transmitted to all Shareholders the Information Statement.



Bridge FinancingOn January 9, 2004, the Company completed a private placement of securities, pursuant to which (i) certain investors paid to
the Company $570,000 in the aggregate, (ii) the Company issued promissory notes to the investors in principal amount of $570,000 in the aggregate, which promissory notes are convertible in due course into up to 1,425,000 shares of the Companys
common stock or into up to 3,800,000 shares of common stock in the event of a default by the Company, and (iii) the Company issued warrants to the investors exercisable for up to 1,250,000 shares of common stock at an exercise price of $0.50 per
share.



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OXIS INTERNATIONAL, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Years Ended December 31, 2003 and 2002





Other mattersAn issuance of 94,961 shares of common stock at approximately $0.20 per
share is expected to take place during 2004 in settlement of an accounts payable debt of $19,000.



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



None



ITEM 8A.    CONTROLS AND PROCEDURES



As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Companys Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in this report. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.



There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected
or is reasonably likely to materially affect our internal control over financial reporting.



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PART III



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



The information required by this item is incorporated herein by reference to
the material contained under the caption Proposal No. 1Election of Directors in the Companys definitive proxy statement for the 2004 Annual Meeting of Shareholders.



ITEM 10.    EXECUTIVE COMPENSATION.



The information required under this item is incorporated herein by reference to the material contained under the caption Compensation of Executive Officers in the Companys definitive proxy statement
for the 2004 Annual Meeting of Shareholders.



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



The information required under this item is incorporated herein by reference to the material contained under the caption Proposal No.
1Election of Directors in the Companys definitive proxy statement for the 2004 Annual Meeting of Shareholders.



ITEM 12.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



The information required under this item is incorporated herein by reference to the material contained under the caption Proposal No.
1Election of Directors in the Companys definitive proxy statement for the 2004 Annual Meeting of Shareholders.



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



| | (a) | Exhibits specified by item 601 of Regulation S-B.
| | --- | -------------------------------------------------



See Exhibit Indexpage 44.



| | (b) | Reports on Form 8-K.
| | --- | --------------------



On November 20, 2003 the Company furnished a Report on Form 8-K stating that on November 19, 2003, the Company released a public press
statement announcing its financial results for quarter ended September 30, 2003.



ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES



Audit FeesThe Company incurred aggregate fees and expenses of $44,000 and $41,000, respectively, from Williams & Webster, P.S. for the
fiscal years 2003 and 2002 annual audit and for review of the Companys consolidated financial statements included in its Forms 10-QSB for the 2003 and 2002 fiscal years.



Audit Related FeesNone.



Tax FeesThe Company incurred aggregate fee and expenses of $5,000 and $5,000, respectively, from Williams &
Webster, P.S. for the fiscal years 2003 and 2002 for professional services rendered for tax compliance, tax advice and tax planning.



All Other FeesNone.



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##### Table of Contents

The Company intends to continue using Williams & Webster, P.S. solely for audit and audit-related
services, tax consultation and tax compliance services, and, as needed, for due diligence in connection with potential acquisitions, if any.



The Companys Audit Committee is to pre-approve all audit and non-audit services provided by the independent auditors. These services may include
audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to particular service or category of services and is generally subject to a specific
budget. The Audit Committee has delegated pre-approval authority to its Chairman when expedition of services is necessary. The independent auditors and management are required to periodically report to the full Audit Committee regarding the extent
of services provided by the independent auditors in accordance with this pre-approval, and the fees for the services performed to date.



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##### Table of Contents

SIGNATURES



In accordance with
Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



Dated: March 26, 2004



OXIS International, Inc.RegistrantBy:

/s/    RAY R.
ROGERSRay R. RogersPresident, Chief Executive OfficerBy:

/s/    SHARON
ELLISSharon EllisPrincipal Financial and Accounting Officer




In accordance
with the Exchange Act, this report has been signed below by the following directors on behalf of the Registrant.



|                                          |  |  |  |               
|----------------------------------------- |  |  |  | --------------
|                                          |  | 
|/s/    RICHARD A.
DAVISRichard A.
Davis   |  |  |  | March 26, 2004
|                                          |  | 
|/s/    GERALD
PRYORGerald Pryor           |  |  |  | March 26, 2004
|                                          |  | 
|/s/    RAY R.
ROGERSRay R.
Rogers         |  |  |  | March 26, 2004
|                                          |  | 
|/s/    TED FORD
WEBTed Ford Web           |  |  |  | March 26, 2004
|                                          |  | 
|/s/    TIMOTHY C.
RODELLTimothy C.
Rodell |  |  |  | March 26, 2004
|                                          |  | 
|/s/    THOMAS M.
WOLFThomas M.
Wolf       |  |  |  | March 26, 2004



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EXHIBIT INDEX



|              |     |  |                                                                                                                                                                         |  |      |  
|------------- | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -
|ExhibitNumber |     |  | Description of Document                                                                                                                                                 |  | Page |  
|              |     | 
|2             | (a) |  | Share Exchange Agreement by and among Innovative Medical Systems Corp., OXIS International, Inc and each of the shareholders who are signatories thereto                |  | (1   | )
|              |     | 
|3             | (a) |  | Restated Certificate of Incorporation as filed in Delaware September 10, 1996 and as thereafter amended through March 1, 2002                                           |  | (2   | )
|              |     | 
|3             | (b) |  | Bylaws of the Company as restated effective September 7, 1994 and as amended through April 29, 2003                                                                     |  | (3   | )
|              |     | 
|4             | (a) |  | Forms of Common Stock and Warrant Purchase Agreement, Warrant to Purchase Common Stock, and Registration Rights Agreement Regarding Private Placement March-April, 2000 |  | (4   | )
|              |     | 
|10            | (a) |  | OXIS International, Inc. Series B Preferred Stock Purchase Agreement dated July 18, 1995                                                                                |  | (5   | )
|              |     | 
|10            | (b) |  | Series C Preferred Stock Subscription and Purchase Agreement (form); dated April 1996 (1,774,080 shares in total)                                                       |  | (6   | )
|              |     | 
|10            | (c) |  | Form of Promissory Notes dated March 27, 1997April 24, 1997                                                                                                            |  | (7   | )
|              |     | 
|10            | (d) |  | Subscription Agreement, Warrant to Purchase Common Stock and Form of Subscription dated July 2003August 2003                                                           |  |      |  
|              |     | 
|10            | (e) |  | Executive Separation and Employment Agreement dated April 3, 2000, between the Company and Ray R. Rogers                                                                |  | (8   | )
|              |     | 
|10            | (f) |  | Addendum to Executive Separation and Employment Agreement between OXIS International, Inc. and Ray R. Rogers dated August 1, 2001                                       |  | (9   | )
|              |     | 
|10            | (g) |  | Employment Agreement between OXIS International, Inc. and Ray R. Rogers dated June 1, 2003                                                                              |  |      |  
|              |     | 
|10            | (h) |  | Employment Agreement between OXIS International, Inc. and Sharon Ellis dated June 1, 2003                                                                               |  |      |  
|              |     | 
|10            | (i) |  | Note and Warrant Purchase Agreement, dated January 9, 2004                                                                                                              |  |      |  
|              |     | 
|10            | (j) |  | Form of Convertible Promissory Note, dated January 9, 2004                                                                                                              |  |      |  
|              |     | 
|10            | (k) |  | Form of Warrant to Purchase Common Stock, dated January 9, 2004                                                                                                         |  |      |  
|              |     | 
|21            | (a) |  | Subsidiaries of OXIS International, Inc.                                                                                                                                |  |      |  
|              |     | 
|23            | (b) |  | Independent Auditors Consent.                                                                                                                                          |  |      |  
|              |     | 
|31            | (a) |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                 |  |      |  
|              |     | 
|31            | (b) |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                 |  |      |  
|              |     | 
|32            | (a) |  | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                   |  |      |  
|              |     | 
|32            | (b) |  | Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                   |  |      |  

---

|(1) | Incorporated by reference to the Companys Form 8-K Current Report, dated January 15, 1998.
|--- | -------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2002.
|--- | -----------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.
|--- | -------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(4) | Incorporated by reference to the Companys Form 8-K Current Report dated March 3, 2000.
|--- | ---------------------------------------------------------------------------------------

|(5) | Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 1995.
|--- | ------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference to the Companys Annual Report on Form 10-K for the year ended December 31, 2002.
|--- | -----------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31, 1997.
|--- | --------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference to the Companys Form S-3 Registration Statement No. 333-40970 filed July 7, 2000 and effective December 22, 2000.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Incorporated by reference to the Companys Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.
|--- | ------------------------------------------------------------------------------------------------------------------



43