**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**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,
                2005


.


or





o
            Transition
                report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934 for
                the transition period from __________________to
                _________________




Commission
      File Number O-8092





OXIS
      International, Inc.


A
      Delaware corporation


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


323
      Vintage Park Drive, Suite B


Foster
      City, CA 94404


Telephone:
      (650) 212-2568





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





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or 15(d) of the Exchange Act. o





Check
      whether the issuer (1) 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
o





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of Registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB. x





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act) YES oNO
x





The
      issuer’s revenues for its fiscal year ended December 31, 2005 were
      $2,497,000.





Aggregate
      market value of the common equity held by non-affiliates of the issuer as of
      March 24, 2006 was $8,575,419.





Number
      of
      shares outstanding of the issuer’s common stock as of March 24, 2006: 42,538,397 shares.









**TABLE
      OF CONTENTS**


**PART
                I**
            
            
            **Page**Item
                1.
            Description
                of Business
            3Item
                2.
            Description
                of Property
            15Item
                3.
            Legal
                Proceedings
            15Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            15**PART
                II**Item
                5.
            Market
                for Common Equity and Related Stockholder
                Matters
            16Item
                6.
            Management’s
                Discussion and Analysis or Plan of Operation
            17Item
                6.
            Risk
                Factors
            26Item
                7.
            Financial
                Statements
            35Item
                8.
            Changes
                in and Disagreements With Accountants on
                Accounting and Financial Disclosure
            35Item
                8A.
            Controls
                and Procedures
            35Item
                8B.
            Other
                Information
            35**PART
                III**Item
                9.
            Directors,
                Executive Officers, Promoters and Control Persons; Compliance
                with Section 16 (a) of the Securities Exchange Act
            36Item
                10.
            Executive
                Compensation
            39Item
                11.
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters
            43Item
                12.
            Certain
                Relationships and Related Transactions
            46Item
                13.
            Exhibits
            48Item
                14.
            Principal
                Accountant Fees and Services
            48**SIGNATURES**
            
            49**EXHIBIT
                INDEX**
            
            50











**P** **ART
      I**


**


*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 our expectations,
        objectives, anticipations, plans, hopes, beliefs, intentions or strategies
        regarding the future. Forward-looking statements include, without limitation,
        statements regarding: (* *i* *) our
        intention to use the EBITDA of BioCheck, if any, to purchase the remaining
        outstanding BioCheck shares at one or more additional closings;
        (* *ii* *) our
        plan to continue to derive revenues from the sale of the anti-oxidant compound
        Ergothioneine to the cosmetics industry; (* *iii* *) our
        intention to pursue development of* *our* *myeloperoxidase
        assay (“MPO”), for sale into the diagnostic clinical market; (* *iv* *) our
        intention to pursue development of Ergothioneine for marketing as a
        nutraceutical supplement; and our belief that our Ergothioneine compound
        may be
        well suited for development as a nutraceutical supplement that can be sold
        over
        the counter and our intent to pursue the development of Ergothioneine for
        use in
        such markets; and our plan to expand the outsourced manufacturing of the
        raw
        material for Ergothioneine; (v) our estimate that employee incentive package
        severance benefits will cost approximately $119,000; (vi) our expectation
        to
        strengthen our position in the clinical diagnostics market by allocating
        resources toward achieving the following primary goals and objectives: (a)
        develop high-quality and cost-effective diagnostic reagents (antibodies,
        hormones, proteins, and biochemical markers of disease), (b) capitalize on
        our
        commercialization expertise by securing profitable licensing and contract
        services agreements with diagnostic and pharmaceutical companies for the
        development, assembly and manufacturing of innovative immunoassays, (c)
        capitalize on our expertise in the filing and registration of intellectual
        property and regulatory approvals, (d) continue to invest in our own human
        capital by expanding our team of in-house business development professionals,
        and scientists and researchers dedicated to the development of new reagents;
        and
        (e) grow our business organically and through acquisitions of complementary
        assets, including the expansion of our manufacturing capacity in emerging
        markets, such as China;* *(* *v* *ii) our
        intention to focus on and intensify our efforts to consummate diagnostic,
        pharmaceutical and nutraceutical relationships and/or strategic partnerships
        with larger companies for the purpose of further developing and exploiting
        our
        antioxidant molecules; (* *vi* *ii) our
        intention to shift manufacturing under contract to BioCheck; (ix) our
        belief that we could readily find alternative suppliers, or that we could
        readily market alternative products with adequate raw material supply, if
        necessary; (x) our intention to continue to strengthen our international
        distribution network by adding new distributors around the world; (xi) our
        intention to establish and implement a plan to recruit distributors for
        Ergothioneine; (xii) our expectation that revenues from sales to EMD
        Biosciences, Inc. for fiscal year 2006 will be similar to those in 2005;
        (xiii) our belief that blood plasma MPO levels, as measured by our MPO kit
        with our own monoclonal antibody, appear to be a better predictor of patients
        at
        risk for cardiac events before they occur; (* *vii* *iv) our
        intention that in the future all of our diagnostic and therapeutic developments
        will be in compliance with FDA and other regulations; (xv) our estimate
        that the costs expected to be incurred in connection with the relocation
        plan
        will be approximately $100,000 for relocating operations, (* *viii* *i)  our* *aim
        of entering into a services agreement with BioCheck, with each company providing
        specific expertise;* *(xvii)* *our
        intention to* *use
        reasonable best efforts to consummate a follow-on financing transaction to
        raise
        additional capital with which to purchase the remaining outstanding shares
        of
        BioCheck; (* *ix* *xviii) our
        plan to leverage BioCheck and our respective expertise to focus on the growing
        clinical diagnostic biomarker market; (xix)* *BioCheck’s
        belief that its antibody purification services and antibody conjugates meet
        higher than industry average standards for stability and purity;* *(xx)* *BioCheck
        plans for ongoing development of proprietary clinical diagnostics tests for
        launch in late 2006, or early 2007;* *(xxi)* *BioCheck’s
        belief that interfering with the action of the Id proteins may prove to be
        very
        effective in preventing the growth and metastases of both early and established
        tumors;* *(xxii)* *BioCheck’s
        goal to clinically validate an Id-based diagnostic/prognostic product in
        collaboration with AngioGenex;* *(xxiii)
        our plans to seek debt financing that may have related warrants and that
        such a
        financing may result in large non-cash financing charges that could delay
        profitability; (xxiv) our plan to increase revenues to generate sufficient
        gross
        profit in excess of selling, general and administrative, and research and
        development expenses in order to achieve profitability; (xxv) our current
        plans in the areas of clinical cardiac predictor testing, biomarker research
        and
        the nutraceutical marketplace; (xxvi) our plan to pursue the development of
        a cardiovascular predictor product intended to provide a more effective
        diagnostic predictor test for patients at risk of cardiac events before they
        occur;*




1


*(xxvii) our
        expectation that revenues and expense will increase substantially from 2005
        to
        2006 with the consolidation of BioCheck’s results of operations over the entire
        year in 2006; (xxviii) our expectations that OXIS and BioCheck will incur
        similar revenues and costs in 2006 as they incurred in 2005 as individual
        companies; (xxix) our expectation that product revenues will increase by
        approximately $4.0 million from 2005 to 2006 and may increase by more than
        $4.0 million; (xxx) our expectation that product costs will increase
        by approximately $2.0 million from 2005 to 2006; (xxxi) our
        expectation that gross profit as a percentage of product revenues is expected
        to
        increase towards 50%; (xxxii) our expectation to spend approximately $750,000
        on
        research and development in 2006 primarily at BioCheck; (xxxiii) our expectation
        that selling, general and administrative expenses will increase by approximately
        $0.8 million from 2005 to 2006; (xxxiv) our plan to implement a
        marketing campaign to increase revenues; (xxxv) our expectation not to
        incur expenses for foreign legal proceedings or for restructuring charges
        in
        2006; (xxxvi) our belief that BioCheck’s cash will be sufficient to sustain
        operating activities since BioCheck has been and is expected to continue
        to be
        cash flow positive; (xxxvii) that we are seeking additional loan and equity
        financings to obtain sufficient funds to sustain operations, implement our
        marketing campaign and purchase the remaining 49% of BioCheck;
        (xxxviii) our* *anticipation
        that beef liver will not be available again within the foreseeable future
        and
        that we do not anticipate any revenues from sales of bSOD in the foreseeable
        future; (xxxix)* ** *our
        belief that w* *ith
        the BioCheck acquisition, over fifty percent of the Company’s revenues will be
        derived from sales of clinical diagnostic assays in 2006* *;
        (xxxx) our belief that the 2005 expense of $1.5 million for purchased in-process
        research and development will not reoccur in 2006; (xxxxi) our plan to increase
        revenues to generate sufficient gross profit in excess of selling, general
        and
        administrative, and research and development expenses in order to achieve
        profitability; (xxxxii) our plan to increase revenues by our marketing campaign
        and the introduction of new products; and (xxxxiii) our belief that the
        implementation effect of SFAS 123R on our financial statements will be similar
        to that disclosed in footnote 1 of our financial statements.* *All
        forward-looking statements included in this document are based on information
        available to us on the date hereof, and we assume no obligation to update
        any
        such forward-looking statements. It is important to note that our actual
        results
        could differ materially from those included in such forward-looking statements
        due to a variety of factors including (1) failure to complete our acquisition
        of
        BioCheck or to adequately integrate the operations of the two companies;
        (2)
        failure to achieve any benefits in connection with the recent changes in
        management or personnel; (3) disruption in operations due to the relocation
        plan, reduction in workforce; (4) inability to hire employees or management;
        (5)
        failure to find alternative suppliers; (6) incorrect expectations regarding
        revenues from sales to EMD Biosciences, Inc.; (7) failure to develop or market
        products successfully; (8) failure to obtain necessary financing; (9) the
        cost
        of complying with the regulatory requirements; (10) uncertainties exist relating
        to issuance, validity and ability to enforce and protect patents, other
        intellectual property and certain proprietary information; (11) our products
        may
        not meet product performance specifications; (12) new products may be unable
        to
        compete successfully in either existing or new markets; (13) availability
        and
        future costs of materials and other operating expenses; and (14) weakness
        in the
        global economy and changing market conditions, together with general economic
        conditions affecting our target industries, could cause the our operating
        results to fluctuate. These and other factors could cause actual results
        to
        differ materially from the forward looking statements. For a detailed
        explanation of such risks, please see the section entitled “Risk Factors”
beginning on page 26 of this Report on Form 10-KSB. Such risks, as well as
        such
        other risks and uncertainties as are detailed in our SEC reports and filings
        for
        a discussion of the factors that could cause actual results to differ materially
        from the forward- looking statements. Given these uncertainties, readers
        are
        cautioned not to place undue reliance on the forward-looking
        statements.*
  *The
        following discussion should be read in conjunction with the audited consolidated
        financial statements and the notes included in this Report on Form 10-KSB
        and
        the section entitled “Management’s Discussion and Analysis of Financial
        Condition and Results of Operations” included in this Report on Form
        10-KSB.*




2


**ITEM
      1.** **DESCRIPTION
      OF BUSINESS**





**Recent
      Events**





On
      September 19, 2005, we entered into a stock purchase agreement with BioCheck,
      Inc., a privately held California corporation, or BioCheck, and its stockholders
      to purchase all of its common stock for $6.0 million in cash. BioCheck is a
      leading producer of enzyme immunoassay diagnostic kits for clinical
      laboratories. On December 6, 2005, we purchased 51% of the shares of BioCheck’s
      common stock from each of its shareholders on a pro rata basis for $3,060,000
      in
      cash. Pursuant to the stock purchase agreement, we will use our reasonable
      best
      efforts to consummate a follow-on financing transaction to raise additional
      capital with which to purchase the remaining outstanding shares of BioCheck
      in
      one or more additional closings. The purchase price will be increased by an
      additional 8% per annum from December 6, 2005. If we have not purchased all
      of the outstanding shares of BioCheck by December 6, 2006, the earnings
      before interest, taxes, depreciation and amortization expenses, if any, of
      BioCheck, may be used by us as partial or complete payment for the remaining
      outstanding BioCheck shares at one or more additional closings.





On
      December 6, 2005, we entered into a non-revolving one-year loan agreement with
      KeyBank, N.A., or KeyBank, and received funds of $3,060,000 to purchase 51%
      of
      BioCheck’s common stock. As security for our repayment obligations, we granted a
      security interest to KeyBank in our $3,060,000 certificate of deposit at
      KeyBank. This loan was repaid during February 2006 and a new one-year loan
      agreement for $3,060,000 was entered into at Bridge Bank. As part of the loan
      arrangement with Bridge Bank, we granted a security interest in a $3,060,000
      certificate of deposit moved from KeyBank to Bridge Bank. The Bridge Bank loan
      bears interest at 3.0% and the certificate of deposit bears interest at
      1.0%.





Also
      effective December 6, 2005, prior to the closing of the initial closing of
      our acquisition of BioCheck, we entered into an executive employment agreement
      with BioCheck and Dr. John Chen, BioCheck’s President and Chief Executive
      Officer, under which Dr. Chen will be employed as President of BioCheck. Dr.
      Chen has agreed to devote not less than 90% of his business time and efforts
      to
      the primary business of BioCheck. In the event that BioCheck terminates the
      employment of Dr. Chen at any time other than for cause, Dr. Chen will be
      eligible to receive an amount equal to 12 months of his base salary.





On
      December 6, 2005, we also initiated a relocation plan to cease our operations
      in
      Portland, Oregon and relocate to Foster City, California at premises adjacent
      to
      those of BioCheck, effective February 15, 2006. We decided to relocate after
      reviewing and evaluating all aspects of our operations to determine the
      profitability and viability of continuing in the Portland, Oregon location.
      On
      February 8, 2006, we signed a Lease Agreement with Westcore
      Peninsula Vintage LLC for approximately
      4,136 square feet of space located at 323 Vintage Park Drive, Suite B, Foster
      City, California 94404 for 36 months. These premises are immediately adjacent
      to
      those of BioCheck.  We
      plan
      to occupy this new space in April 2006 and are currently operating from
      temporary facilities. On
      February 15, 2006, we ceased operations at the Portland, Oregon facility and
      most of the Portland, Oregon employees were terminated. Severance benefits
      are
      being paid to terminated employees.





During
      2005 and 2006, we have been building our management team and enhancing our
      Board
      of Directors to lead OXIS. On February 28, 2005, Steve T. Guillen was appointed
      as our President and Chief Executive Officer. Mr. Guillen replaced Marvin S.
      Hausman, M.D., as acting Chief Executive Officer and Dr. Hausman remained as
      Chairman of the Board of Directors. During October 2005 John Repine, M.D.,
      Chief
      Executive Officer, President and Scientific Director of the Webb-Waring
      Institute for Cancer, Aging and Antioxidant Research joined our Board of
      Directors. Effective December 6, 2005, Dr. John Chen entered into an
      executive employment agreement with us as President of BioCheck. Michael D.
      Centron was appointed as our Vice President and Chief Financial Officer during
      January 2006, replacing Dr. Hausman as acting Chief Financial Officer. During
      February 2006 Randall Moeckli was appointed as our Senior Director of Sales
      and
      Marketing. On March 15, 2006, Gary M. Post, Managing Director of Ambient
      Advisors, LLC, joined our Board of Directors.





3


On
      March
      10, 2006, we received $200,000 in exchange for a note with Steven T. Guillen,
      our President and Chief Executive Officer. The note bears interest at 7%.
      Interest and principal are due on September 10, 2006 or, at the option of Mr.
      Guillen, the date we receive net proceeds in the amount of $500,000 or more
      from
      a debt or equity financing. In addition, if, at any time on or before the
      maturity date, we enter into an agreement to incur debt, Mr. Guillen has the
      right to rollover this note into such debt arrangement, on the same terms and
      conditions offered to such future lenders. The purpose of this loan was to
      provide us with short term financing as we seek longer term
      financing.





**OXIS
      Business Summary**





We
      are
      presenting the business summaries of the parent company OXIS International,
      Inc., or OXIS, and BioCheck separately because we do not yet own 100% of
      BioCheck.





**OXIS
      Introduction**





OXIS
      International, Inc. develops technologies and products to research, diagnose,
      treat and prevent diseases of oxidative stress associated with damage from
      free
      radical and reactive oxygen species. We hold the rights to three therapeutic
      classes of compounds in the area of oxidative stress, and has focused
      commercialization programs in clinical cardiovascular markers, including
      myeloperoxidase, or MPO, glutathionione peroxidase, or GPx, and a highly potent
      antioxidant, Ergothioneine, that may be sold over-the-counter, or OTC, as a
      dietary supplement.





Oxidative
      stress is associated with an excess of free radicals, reactive oxygen species
      and a decrease in antioxidant levels resulting in the development of tissue
      or
      organ damage. Oxidative stress can cause tissue injury by triggering cell death
      or inciting a tissue-damaging inflammatory response. We have invested
      significant resources to build a substantial patent position on both our
      antioxidant therapeutic technologies and selected oxidative stress assays.





In
      1965,
      the corporate predecessor of OXIS, Diagnostic Data, Inc. was incorporated in
      the
      State of California. Diagnostic Data changed its incorporation to the State
      of
      Delaware in 1972; and changed its name to DDI Pharmaceuticals, Inc. in 1985.
      In
      1994, DDI Pharmaceuticals merged with International BioClinical, Inc. and
      Bioxytech S.A. and changed its name to OXIS International, Inc. Our principal
      executive offices were relocated to 323 Vintage Park Drive, Suite B, Foster
      City, California 94404 on February 15, 2006.





We
      derive
      our revenues primarily from sales of research diagnostic assays to research
      laboratories. We also derive revenues from the sale of the antioxidant compound
      Ergothioneine to the cosmetics industry. Our diagnostic products include 25
      research assays to measure markers of oxidative stress.





Our
      lead
      therapeutic antioxidant drug candidate, BXT-51072, completed a Phase IIA
      clinical trial in inflammatory bowel disease in 1999, but due to the lack of
      financial resources, we ceased further testing of BXT-51072.  In
      September 2004, we entered into an Exclusive Licensing Agreement relating to
      BXT-51072 and related compounds with HaptoGuard, Inc. Under the agreement,
      we
      granted HaptoGuard exclusive worldwide rights, in certain defined areas of
      cardiovascular indications, to develop, manufacture and market BXT-51072 and
      related compounds from our library of such antioxidant compounds. Under the
      license agreement, HaptoGuard is responsible for worldwide product development
      programs with respect to the licensed compounds.





We
      intend
      to pursue development of our MPO,
      a
      research assay, for sale either alone or in combination with other assays into
      the clinical diagnostic market. We are also pursuing development of
      Ergothioneine for marketing as a nutraceutical supplement.





As
      discussed above, our therapeutic and nutraceutical product portfolio includes
      three classes of small molecular weight antioxidant molecules: glutathione
      peroxidase mimics including BXT-51072, Ergothioneine analogs and lipid soluble
      antioxidants. We intend to focus on and intensify our efforts to consummate
      diagnostic, pharmaceutical and nutraceutical relationships and strategic
      partnerships with larger companies for the purpose of further developing and
      exploiting our antioxidant molecules. No assurance can be given that our efforts
      will generate the results anticipated by our management or will in the future
      be
      favorable to us.





4


**Marketed
      Products**





We
      have
      developed, commercialized and marketed an extensive product line that provides
      several types of tools for researchers to identify and measure the balance
      between oxidative, nitrosative, antioxidant and inflammatory biomarkers in
      biological samples. We offer more than 60 research products for sale, including
      25 research diagnostic assay test kits for markers of oxidative and nitrosative
      stress. We also market antibodies, enzymes and controls for use primarily in
      research laboratories. The antibodies provide detection of oxidative,
      nitrosative, antioxidant and inflammatory markers different from those measured
      by assay test kits. The enzymes have been shown in early *in
      vitro* studies
      and preclinical animal studies to allow manipulation and control of oxidative
      biomarkers of protein and DNA, nitric oxide, antioxidant enzymes and
      inflammatory neutrophils. Controls have been shown in controlled *in
      vitro* studies
      and *in
      vivo* preclinical studies to allow regulation and monitoring of oxidative biomarkers
      of lipids, proteins and DNA, and nitrosative and antioxidant biomarkers. In
      addition, we have marketed the antioxidant Ergothioneine to selected customers
      in the cosmetics industry.





**Research
      Diagnostic Assays**





Our
      primary research diagnostic assay product line is comprised of 25 assay test
      kits which measure key markers in free radical biochemistry for oxidative and
      nitrosative 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.
      Fifteen of our research assays have been manufactured at our facility in
      Portland, Oregon and with the closing of the Portland facility, the
      manufacturing of our research assays has been transferred to BioCheck’s Foster
      City facility during the first quarter of 2006. As of the date of this Report,
      BioCheck is manufacturing our research assays without having entered into a
      formal agreement with OXIS. We intend to negotiate and enter into a formal
      agreement with BioCheck in the near future. If BioCheck ceased manufacturing
      our
      research assays before we engaged an alternative manufacturer, our business
      would be adversely affected. Ten other research assays are manufactured by
      third
      party suppliers pursuant to private label arrangements.





Our
      research diagnostic assay test kits utilize either chemical (colorimetric)
      or
      immunoenzymatic reactions that can be read using laboratory spectrophotometers
      and microplate readers, respectively. We believe our assays offer advantages
      over conventional laboratory methods, including ease of use, speed, specificity
      and accuracy. Our
      research diagnostic assays for markers of oxidative stress are generally
      protected by trade secrets, and to some extent, patents. Five U.S. patents
      and
      eight international patents have been issued with respect to these assays.
      The
      oxidative stress assays are sold under the registered trademark
“Bioxytech Ò .” We
      continue to offer a few proprietary antioxidants and specialty chemicals but
      our
      product development focus and support are directed at assays, antibodies and
      enzymes in the area of oxidative and nitrosative stress.





Revenues
      from sales of our research diagnostic assays and Ergothioneine comprised 95%
      and
      81% of total revenues in 2005 and 2004, respectively.





**Ergothioneine**





Ergothioneine
      is a naturally occurring, water soluble, antioxidant amino acid molecule found
      in most animals and plants. It is considered one of the most powerful
      antioxidants available. Ergothioneine neutralizes hydroxyl free radicals and
      selectively increases the activity of the special antioxidant enzymes. It
      increases respiration and oxidation of fat, protects the mitochondria from
      damage due to environmental ultraviolet radiation and aids in the detoxification
      of the liver. We have developed a proprietary method for producing synthetically
      derived L-Ergothioneine in commercial quantities. We hold the patents and patent
      applications for the protective effect of Ergothioneine on mitochondria, the
      commercial preparation process and the neuroprotectant methods and compositions
      of Ergothioneine.





We
      sell
      Ergothioneine to selected customers as an anti-aging product in skin care
      products sold in the cosmetics industry. Sales of Ergothioneine were $18,000
      in
      2005 and $87,000 in 2004. Sales during 2005 and 2004 were to one customer in
      the
      cosmetics industry in
      connection with such customer’s marketing campaign of a formulation of cosmetics
      which included, among other things, Ergothioneine. We have not received any
      indication that additional orders are expected. We can give no assurances that
      sales of Ergothioneine to this customer or other cosmetics industry customers
      will resume.





5


**Raw
      Material Suppliers**





During
      2005 we purchased raw materials from several suppliers, of whom the top three
      comprised 34%, 13% and 12% of our raw materials costs. We believe we could
      readily find alternative suppliers, or that we could readily market alternative
      products with adequate raw material supply, if necessary. Accordingly, we
      believe there is limited risk of over reliance on any supplier.





**Marketing**





We
      market
      products and technologies related to oxidative stress. Oxidative stress occurs
      as a result of an imbalance between damaging free-radicals and related molecules
      and their inactivation by antioxidants. Oxidative stress can cause tissue injury
      by triggering cell death or inciting a tissue-damaging inflammatory
      response.





During
      2005, we continued to market our research diagnostic assay products to
      professional scientists in academia, industry and government through our *OXIS* Research
      catalog. Our marketing program is centered on targeting medical, environmental
      and various industry audiences interested in oxidative and nitrosative stress.
      Nitrosative stress occurs when the generation of reactive nitrogen species
      in a
      system exceeds the system’s ability to neutralize and eliminate them. Primary
      vehicles for this marketing program include printed literature, the *OXIS* Research
      website and attendance at conferences targeting neuroscience, cancer, cardiac
      and nutritional researchers.





Our
      assays for markers of oxidative stress are currently being sold both directly
      by
      us and through a network of distributors to researchers primarily in the United
      States, Europe and the Pacific Rim. We estimate 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 diagnostic
      assays. We
      continue to seek to strengthen our international distribution network by adding
      new distributors around the world. These distributors are primarily focused
      on
      sales of research products in the life science market. In 2005, 20 distributors
      accounted for approximately 53% of our total revenues. Although we have not
      recruited distributors for Ergothioneine, we intend to establish and implement
      a
      plan to do so in the future.





During
      2005, approximately 15% of our total revenues were from EMD Biosciences, Inc.,
      a
      distributor customer located in the United States. We expect revenues from
      sales
      to EMD Biosciences, Inc. for fiscal year 2006 to be similar to those in 2005.





**Foreign
      Operations and Export Sales**





Revenues
      attributed to countries outside the United States based on the location of
      customers were:





******2005**
            
            ******2004**Japan
            
            $
            163,000
            
            $
            221,000France
            
            
            94,000
            
            
            145,000Korea
            
            
            76,000
            
            
            43,000Poland
            
            
            54,000
            
            
            28,000Canada
            
            
            47,000
            
            
            31,000United
                Kingdom
            
            
            47,000
            
            
            55,000Other
                foreign countries
            
            
            275,000
            
            
            282,000





Revenues
      to other foreign countries included sales in more than 30 countries, with no
      single country the site of more than $40,000 in annual sales.





6


**Ergothioneine
      as a Nutraceutical Supplement**





We
      believe that our Ergothioneine compound may be well suited for development
      as a
      nutraceutical supplement that can be sold over the counter and we intend to
      pursue the development of Ergothioneine for use in such markets. Currently
      we
      have outsourced the manufacturing of the raw material and we are working to
      expand this manufacturing capacity.





**Myeloperoxidase
      Assay/Cardiovascular Predictor Product**





We
      intend
      to pursue development of our myeloperoxidase
      assay, or MPO, a research assay, which could be utilized either alone or in
      combination with other assays in the clinical diagnostic market. 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 our MPO kit using our proprietary monoclonal antibody, appear
      to
      be a better predictor of patients at risk for cardiac events before they occur,
      according to a report in the October 23, 2003 New England Journal of Medicine.
      Our MPO assay kit was used in that study to evaluate myeloperoxidase levels
      in
      604 hospital emergency room patients with chest pain. A single measurement
      of
      plasma myeloperoxidase using our MPO assay kit was able to identify patients
      at
      early risk for a heart attack, even when no tissue damage to the heart was
      evident. Furthermore, the test independently predicted the risk of a major
      cardiac event following the initial visit to the emergency room.





We
      have
      been undertaking collaborative research with selected research scientists on
      the
      development of a cardiovascular predictor product using our MPO
      assay
      combined with other assays currently in-house or under development. **** We
      are
      reassessing this development program in the context of our partial acquisition
      of BioCheck.





**Out-Licensed
      Technology**





Our
      lead
      therapeutic drug candidate, BXT-51072, is a low molecular weight oral drug
      that
      mimics the antioxidant enzyme glutathione peroxidase. It directly neutralizes
      hydrogen peroxide and appears to protect cells from peroxide mediated damage.
      It
      also inhibits nucleic transcription and prevents the activation of cytokines,
      adhesion molecules and inflammatory enzymes, which are all mediators of
      inflammation. We completed a Phase IIA clinical trial in inflammatory bowel
      disease with BXT-51072 in 1999. This Phase IIA trial was a multi-center,
      nonrandomized, open-label, two-arm study which assessed the safety,
      pharmacokinetics, and efficacy of BXT-51072. Due to the lack of financial
      resources, we ceased further testing of BXT-51072.





In
      September 2004, we entered into an Exclusive License and Supply Agreement
      relating to BXT-51072 and related compounds with HaptoGuard, Inc., a New York
      based biopharmaceutical company. Under the agreement, we granted HaptoGuard
      exclusive worldwide rights, in certain defined areas of cardiovascular
      indications, to develop, manufacture and market BXT-51072 and related compounds
      from our library **** of
      such
      antioxidant compounds. Under the license agreement, HaptoGuard is responsible
      for worldwide product development programs with respect to the licensed
      compounds. We received an upfront license fee of $450,000, and HaptoGuard is
      obligated to pay royalties on net sales of certain licensed products, as well
      as
      additional fees for the achievement of development milestones in excess of
      $21
      million if all milestones are met and regulatory approvals are granted. There
      can be no assurances that royalty payments will result or that milestone
      payments will be realized.





We
      have
      the right to terminate the license agreement if HaptoGuard fails to pay us
      any
      required payments under the license agreement or if HaptoGuard fails to comply
      with certain development plan and timeline requirements relating to the
      development of the licensed compounds. In December 2005, HaptoGuard elected
      to
      take a one-time six month extension of their obligation to begin Phase II
      clinical studies of a licensed product in cardiovascular disease pursuant to
      the
      development plan timeline. As provided in the license agreement, HaptoGuard
      paid
      a fee of $100,000 for the extension.





HaptoGuard
      may terminate the agreement by providing us with 180 days’ written notice.
      Either party may terminate the agreement upon 30 days’ written notice upon
      certain events relating to the other party’s bankruptcy, insolvency,
      dissolution, winding up or assignment for the benefit of creditors, or upon
      the
      other party’s uncured breach of any material provision of the agreement.
      Otherwise, the license agreement terminates upon the expiration of the
      underlying patents relating to the licensed compounds.





7


**Government
      Regulation**




In
      the
      United States, our current products and manufacturing practices are not subject
      to regulation by the United States Food and Drug Administration, or FDA,
      pursuant to the Federal Food, Drug and Cosmetic Act as it relates to research
      products. Development, manufacture and marketing of clinical diagnostic products
      which we are currently pursuing and therapeutic compounds are regulated by
      the
      FDA. We believe that we currently are in compliance with all such regulations
      and intend that in the future all of our diagnostic and therapeutic developments
      will be in compliance with these regulations.




**Patents
      and Trademarks**




We
      are
      substantially dependent on our ability to obtain and maintain patents and
      proprietary rights for our marketed products and to avoid infringing the
      proprietary rights of others. We have an extensive portfolio of patents for
      diagnostic assays and several series of small molecular weight molecules to
      detect, treat and monitor diseases associated with damage from free radicals
      and
      reactive oxygen species. This portfolio provides opportunities to apply our
      technologies to a wide range of diseases and conditions of oxidative
      stress.





Currently,
      we have 82 currently issued patents or patent applications filed
      internationally. We have 51 patents issued by the United States Patent and
      Trademark Office and 31 pending patent applications. Patent coverage includes
      aspects of all three of our classes of small molecular weight antioxidant
      molecules. We
      hold
      the patents and patent applications for the protective effect of Ergothioneine
      on mitochondria, the commercial preparation process and the neuroprotectant
      methods and compositions of Ergothioneine. **** We
      have
      sublicensed to HaptoGuard, Inc. three patents and one patent application related
      to BXT-51072. Our assays for markers of oxidative stress are generally protected
      by trade secrets, and to some extent, patents. Five U.S. patents and eight
      international patents have been issued with respect to these assays. The
      oxidative stress assays are sold under the registered trademark
      Bioxytech Ò .
      Associated foreign patents have been issued in most cases and foreign patent
      applications have been filed associated with the listed patents and patent
      applications.





Below
      we
      have listed selected patents and patent applications relating to our core
      business including marketed products and sublicenses.





*Research
      Assay Patents*





U.S.
      Patent 5,726,063 issued March 10, 1998 for “Method of Colorimetric Analysis of
      Malonic Dialdehyde and 4-Hydroxy-2-Enaldehydes as Indexes of Lipid Peroxidation,
      Kits for Carrying Out Said Method, Substituted Indoles for Use in Said Method
      and their Preparation” will expire on May 6, 2014.





U.S.
      Patent 5,543,298 issued August 6, 1996 for “Method for Assaying the SOD Activity
      by Using a Self-Oxidizable Compound Necessary for its Implementation,
      Self-Oxidizable Compounds and Preparation Thereof” will expire on August 6,
      2013.





U.S.
      Patent 6,235,495 issued May 1, 2001 for “Methods for the Quantiation of In Vivo
      Levels of Oxidzed Glutathione” will expire on November 12, 2019.





U.S.
      Patent 5,861,262 issued January 19, 1999 for “Method of the Specific Immunoassay
      of Human Plasma Glutotathione Peroxidase, Kit for its Implementation,
      Oligopeptides and Antibodies Specific for the Method” will expire on January 19,
      2016.





U.S.
      Patent 5,817, 520 issued October 6, 1998 for “Spectrophotometric Methods for
      Assaying Total Mercaptans, Reduced Gultathione (GSH) and Mercaptans other than
      GSH in an Aqueous Medium, Reagents and Kits for Implementing Same” will expire
      on December 15, 2012.





8


*Ergothioneine
      Patents*





U.S.
      Patent 5,438,151 issued August 1, 1995 entitled “Process for the Preparation of
      Ergothioneine” will expire on February 8, 2014.





U.S.
      Patent 6,103,746 issued August 8, 2000 entitled “Methods and Compositions for
      the Protection of Mitochondria” will expire on February 19, 2018.





Patent
      Application Serial No. 60/367,845 filed March 26, 2002 entitled “Neuroprotectant
      Methods, Compositions and Screening Methods Thereof”.





*Selected
      Licensed BXT-51072 Patents*





U.S.
      Patent 5,968,920 issued October 19, 1999 entitled “Novel Compounds having a
      Benzoisoelen-Azoline and -Azine Structure, Method for Preparing Same and
      Therapeutic Uses Thereof” will expire on April 7, 2015.





U.S.
      Patent 6,093,532 issued July 25, 2000 entitled “Method for Storing a Biological
      Organ Transplant Graft Using a Benzisoelen-Azoline or -Azine Compound” will
      expire on April 7, 2015.





U.S.
      Patent 5,973,009 issued October 26, 1999 entitled “Aromatic Diselenides and
      Selenosulfides, their Preparation and their Uses, more Particularly their
      Therapeutic Use” will expire on December 23, 2017.





U.S.
      Patent 6,525,040 issued February 25, 2003 entitled “Cyclic Organoselenium
      Compounds, their Preparation and their Uses” will expire on December 23,
      2017.





These
      patents can expire earlier if they are abandoned or are not adequately
      maintained. We cannot assure you that corresponding patents will be issued
      or
      that the scope of the coverage claimed in our patent applications will not
      be
      significantly reduced prior to any patent being issued.





**Competition**




The
      diagnostic, pharmaceutical and nutraceutical industries are highly competitive.
      Competition in most of our primary current and potential market areas is intense
      and expected to increase. There can be no assurance that we can compete
      successfully.




Presently
      the main commercial competition in our research assay business is represented
      by, but not limited to Cayman Chemical Company, Assay Designs and Randox
      Laboratories, Ltd. In addition, our competitors and potential competitors
      include large pharmaceutical and nutraceutical companies, universities and
      research institutions. These competitors may have substantially greater capital
      resources, research and development staffs, facilities and manufacturing
      expertise than us. In addition, our competitors may develop new technologies
      or
      use existing technologies that may be the basis for competitive products.





**Employees**





As
      of
      December 31, 2005, we had 11 full time employees. On March 24, 2006, we had
      four
      full time employees. On December 6, 2005, we initiated a relocation plan to
      cease our operations in Portland, Oregon and relocate to Foster City, California
      at premises adjacent to those of BioCheck. We decided to relocate after
      reviewing and evaluating all aspects of our operations to determine the
      profitability and viability of continuing in the Portland, Oregon
      location.  As
      part
      of the relocation that was effective February 15, 2006, we offered all regular
      full-time employees who were not relocated to Foster City, California severance
      benefits under an employee incentive package estimated to cost approximately
      $119,000. Certain employees will continue for a transitional period in a
      consulting capacity.





9


After
      we
      have completed our relocation to Foster City, California, we plan to provide
      for
      operations by entering into services agreements and employing new personnel. No
      assurance can be given that we will be able to locate and hire such personnel. We
      are in
      discussions with BioCheck with the aim of entering into a services agreement
      between the two companies, with each company providing specific
      expertise.





None
      of
      our employees are subject to a collective bargaining agreement. We believe
      our
      relationship with our employees is good, and we have never experienced an
      employee-related work stoppage.





**BioCheck
      Business Summary**





On
      September 19, 2005, we entered into a stock purchase agreement with
      BioCheck and its stockholders to purchase all of its common stock for
      $6.0 million in cash. BioCheck is a leading producer of enzyme immunoassay
      diagnostic kits for clinical laboratories. On December 6, 2005, we
      purchased 51% of the shares of BioCheck’s common stock from each of its
      shareholders on a pro rata basis for $3,060,000 in cash. Pursuant to the stock
      purchase agreement, we will use our reasonable best efforts to consummate a
      follow-on financing transaction to raise additional capital with which to
      purchase the remaining outstanding shares of BioCheck in one or more additional
      closings.





We
      are
      presenting the business summaries of the OXIS parent company and BioCheck
      separately because we do not yet own 100% of BioCheck. Upon the successful
      acquisition of the remaining 49% equity interest in BioCheck by OXIS, the
      combined company plans to leverage its expertise to focus on the growing
      clinical diagnostic biomarker market and to develop diagnostic assays designed
      to help physicians provide more timely and accurate diagnoses and treatment
      plans for their patients.





BioCheck is a
      leading producer of clinical diagnostic assays, including high quality enzyme
      immunoassay research services and products offering immunoassay kits designed
      to
      improve the accuracy, efficiency, and cost-effectiveness of *in
      vitro* (outside
      the body) diagnostic testing in clinical laboratories. BioCheck’s mission is to
      develop unique, proprietary immunoassays designed to help physicians provide
      more timely and accurate diagnoses, prognoses and treatment plans for their
      patients.





The
      clinical diagnostics market consists of companies that develop and manufacture
      a
      wide array of instruments, immunoassays reagents and data analysis tools.
      Diagnostic instruments are the key hardware components, such as automated
      immunoassay analyzers, used in the automatic processing of the diagnostic tests.
      Reagents are the bioactive test ingredients which, when combined with the
      biologically derived samples, provide the diagnostic test results. The analysis
      tools, such as software programs and applications, assist the researchers and
      clinicians in the interpretation of data collected from high-volume analyzers
      and reagents.





BioCheck
      focuses primarily on the immunoassay segment of the clinical diagnostics market.
      The simplified, basic components of any immunoassay system are: an antigen,
      an
      antibody specific to this antigen, and a system to measure the amount of the
      antigen in a given sample. The commonly used immunoassays share four common
      components required to produce a high quality immunoassay product: a supply
      of
      high-purity antigens, a supply of high quality, specific monoclonal or
      polyclonal antibodies, a stable detection system, and a precise method for
      separating the bound detection system at the end of the reaction. The ability
      to
      develop, isolate and maintain the antibodies is a critical component of
      immunoassay technology.





The
      senior management of BioCheck has several decades of combined research and
      development, clinical and operational experience in the biotechnology and
      pharmaceutical industries. BioCheck’s management has a core competency and a
      proven scientific and business development track record in developing and
      manufacturing high-quality immunoassay products.





Customers
      of BioCheck consist of small and medium-sized laboratories, and larger volume
      clinical diagnostics laboratories that outsource or license their reagent
      assembly to BioCheck under research services agreements. BioCheck’s products are
      also sold through its global distribution network of third-party distributors
      and re-sellers.





10


BioCheck’s
      clinical immunoassays are applicable to the diagnosis and management of
      infectious diseases; detection of certain types of cancer, and cardiac,
      reproductive, and thyroid disorders; and the measurement of the effects of
      therapeutic drug administration. The testing process is performed *in
      vitro* in
      samples of blood, urine, and other bodily fluids.





**Products
      and Services**





***Clinical
      Diagnostics*** ***Immunoassay
      Kits***





BioCheck
      offers its clinical laboratory and *in
      vitro* diagnostics customers over 40 clinical diagnostic assays manufactured in its
      15,000 square-foot, U.S. Food and Drug Administration, or FDA, certified Good
      Manufacturing Practices device-manufacturing facility in Foster City,
      California. Of the 40 total clinical diagnostic assays offered by BioCheck,
      17
      clinical diagnostic assays have been cleared by the FDA for marketing and sales
      and a number of its products have FDA certificates to foreign governments and
      certificates of exportability. BioCheck's clinical diagnostic kits have been
      registered in Brazil, China, India, Italy, Taiwan, Turkey, and the United
      Kingdom, and BioCheck’s distributors deliver its products to countries in
      Central and South America, Europe, the Middle East, and Asia.





BioCheck’s
      primary product line consists of enzyme linked immunoassay, or ELISA, kits
      that
      are widely used in medical laboratory settings. An ELISA test consists of
      linking an antibody or antigen to an enzyme in order to detect a match between
      the antibody and antigen. An ELISA test is used to detect specific antigens
      in a
      biological sample and the presence of antibodies attached to specific antigenic
      sites on proteins or other molecules in a biological sample.





The
      primary antibody development platform of BioCheck utilizes hybridoma technology.
      This process creates monoclonal antibodies to precisely measure very low
      concentrations of proteins in blood and plasma. The ability to express, isolate
      and maintain high-quality antibodies is a critical component of immunoassay
      test
      kit technology. BioCheck uses standard chromatography technology and its
      proprietary antibody conjugation methods for its antibody purification services
      and antibody conjugates. We believe that BioCheck’s products and services exceed
      industry average standards for stability and purity.





Test
      kits
      manufactured by BioCheck identify
      the existence, and in some cases the amount, of a specific molecule, or marker,
      that is an indicator of a condition or disease state. These test kits are
      applicable to cardiac markers; tumor markers for liver, ovarian, breast,
      prostate and gastrointestinal conditions; infectious diseases including
      pregnancy-related panel screens for toxoplasmosis, rubella, cytomegalovirus,
      and
      the herpes virus; thyroid function; steroids ** including
      Estradiol, Progesterone, Testosterone, and Estriol; ** and ** fertility
      hormones. **





BioCheck’s
      revenues from product shipments were $3.5 million in 2005, $3.9 million in
      2004,
      and $3.3 million in 2003.





***Research
      Services***





In
      addition to clinical and research assay products, BioCheck provides various
      research services to pharmaceutical and diagnostic companies worldwide. Research
      services consist primarily of highly specialized laboratory testing that
      enhances the speed, and lowers the clinical risk, of the pharmaceutical
      development process. The services include custom immunoassay development,
      antibody purification and conjugation, and immunoassay ** assembly.





*Custom
      Immunoassay Development* - With
      over 30 years of experience and the development over 40 immunoassay products,
      BioCheck’s in-house research and development team provides antibodies and
      antigens, and assists biotechnology and pharmaceutical customers with the
      development of their immunoassay test kits.





*Antibody
      Purification and Conjugation* - Using
      chromatography technology and proprietary antibody conjugation methods, BioCheck
      offers antibody purification services and antibody conjugates. Stability testing
      has indicated that BioCheck’s conjugates remain active for five
      years.





*Immunoassay
      Assembly Services* - Having
      developed over 40 immunoassay products, BioCheck has exceptional test kit
      packaging experience and can provide custom immunoassay assembly services for
      our customers.





11


*Cardiovascular
      Markers*





Coronary
      heart disease, or CHD, is the most common form of heart disease caused by a
      narrowing of the coronary arteries that feed the heart. It is the number one
      cause of mortality for both men and women in the U.S. Approximately seven
      million Americans suffer from CHD and more than 500,000 Americans die of heart
      attacks caused by CHD every year.





The
      National Heart, Lung, and Blood Institute sponsored a multi-center epidemiologic
      study in 2003. Increased levels of lipoprotein-associated phospholipase, or
      Lp-PLA2, in patients followed in this study have been linked to increased risk
      of CHD. In collaboration with diaDexus, BioCheck has developed and manufactures
      an FDA cleared clinical diagnostic test for Lp-PLA2 called the PLAC test. While
      the PLAC test is not a stand-alone test for predicting CHD, it provides
      supportive evidence when used with clinical evaluation and other tools for
      patient risk assessment. An elevated PLAC level with an LDL-cholesterol level
      of
      less than 130 mg/dL suggests that patients have two to three times the risk
      of
      having coronary heart disease when compared with patients having lower PLAC
      test
      results. BioCheck manufactures the PLAC test and diaDexus promotes and sells
      it
      to the medical community.





BioCheck’s
      revenues from PLAC test manufacturing and services were approximately $340,000
      in 2005, $580,000 in 2004, and $470,000 in 2003.





**Senior
      Management**





John
      Chen, Ph.D., co-founded BioCheck in January 1997 and has since served as Chief
      Executive Officer and Chairman of the Board. He is a biochemist and clinical
      chemist with thirty years of research and development and assay development
      expertise. Dr. Chen has developed over 50 enzyme immunoassay and rapid tests,
      a
      number of which have been approved for marketing by the FDA. His technical
      expertise in immunology and biochemistry is complemented by his ability to
      facilitate technology transfer from research and development to
      manufacturing.





Dr.
      Chen
      co-founded Rapid Diagnostics, Inc. in 1998, specializing in the development
      of
      rapid diagnostic test kits for the drugs of abuse. The company was acquired
      by
      ICN Pharmaceuticals, Inc. in 2002.





Prior
      to
      co-founding BioCheck, Dr. Chen co-founded Medix Biotech, Inc. in 1983,
      specializing in monoclonal/polyclonal antibodies, enzyme immunoassay test kits,
      and rapid test kits. Following Medix Biotech’s acquisition by Genzyme
      Corporation in 1992, Dr. Chen remained as Vice President of Research and
      Development until 1995. Between 1981 and 1983, he co-founded Pacific Biotech
      Inc. that was subsequently acquired by Eli Lilly and Company in 1990. At Pacific
      Biotech, Dr. Chen was instrumental in the development of the first rapid
      pregnancy test. He also previously served research scientist roles at Sigma
      Chemical, Mallinckrodt, and Beckman Instruments. Dr. Chen holds a B.S. in
      Chemistry from Tunghai University in Taiwan and a Ph.D. in Biochemistry from
      the
      University of Alberta, Edmonton, Canada.





Effective
      December 6, 2005 and in connection with our acquisition of a 51% majority
      stake in BioCheck, Dr. Chen entered into an executive employment agreement,
      under which Dr. Chen became employed as President of BioCheck. Dr. Chen has
      agreed to devote not less than 90% of his business time and efforts to the
      primary business of BioCheck. In the event that BioCheck terminates the
      employment of Dr. Chen at any time other than for cause, Dr. Chen will receive
      an amount equal to 12 months of his then-current base salary.





**Patents
      and Trademarks**





As
      of
      December 31, 2005, BioCheck had filed two patent applications covering research
      and diagnostic assays to detect molecules and proteins related to tumor
      angiogenesis and certain cardiac conditions. Angiogenesis is the formation
      of
      blood vessels in tumors.





In
      April
      2004, AngioGenex,
      Inc., or AngioGenex, based in New York City, and
      BioCheck entered into an agreement to develop cancer diagnostic and prognostic
      products based on the Id-gene platform technology licensed exclusively to
      AngioGenex by the Albert Einstein College of Medicine and the Memorial Sloan
      Kettering Cancer Center. The
      agreement assigns to BioCheck exclusive rights to develop and market diagnostics
      based on AngioGenex’s Id technology in return for royalties.





12


A
      critical component of the clinical validation of an Id-protein based
      diagnostic/prognostic product is the development of monoclonal antibodies,
      or
      mAbs, to the Id proteins. Id proteins play a significant role in the process
      of
      tumor related angiogenesis and other functions related to blood vessel
      formation. BioCheck has developed rabbit monoclonal anti-Id1, Id2 and Id3
      antibodies for Western Blot analyses and immunohistochemistry staining, and
      ELISA tests for measuring Id1, Id2 and Id3 in cell culture supernatants, and
      cell and tissue extracts.





AngioGenex
      and BioCheck have filed joint patent applications for the mAbs to the
      Id-proteins. Under
      the joint patent application, BioCheck has the exclusive rights to the
      diagnostic applications of the Id proteins while AngioGenex owns the rights
      for
      the therapeutic drug applications. U.S. Provisional Application Serial No.
      60/691,060 was filed on June 16, 2005 related to the Id1 protein, titled “Novel
      Rabbit Monoclonal Antibodies to Id1”. The patent application related to the Id3
      protein, titled “Rabbit Monoclonal Antibody Against Human Id3 Protein” was filed
      on January 27, 2006.





BioCheck
      has filed a patent application for a clinical diagnostic related to the *troponin*  protein
      complex. Certain types of troponin including cardiac troponin I and T are highly
      sensitive and specific indicators of damage to the heart muscle. Myocardial
      infarction, or a heart attack, can be differentiated from unstable angina,
      or
      pain, by measuring troponin in the blood in patients with chest pain. Patent
      application serial number 11/116,290 was filed April 28, 2005 titled
“Immunoassay for Cardiac Troponin-I in Non-Human Mammalian Species.” John Chen
      is a co-inventor of the invention that is the subject of this patent
      application.





**Sales
      and Marketing**





BioCheck
      develops, manufactures and markets high quality immunoassay products and
      technologies designed to improve the accuracy, efficiency, and
      cost-effectiveness of *in
      vitro* diagnostic testing in clinical laboratories. The company also provides research
      services to pharmaceutical and diagnostic companies worldwide. These services
      consist primarily of highly specialized laboratory testing that enhances the
      speed and lowers the clinical risk of the pharmaceutical development process.





During
      2005, BioCheck marketed its products and research services to professional
      clinicians and researchers primarily through the company’s product catalog,
      printed materials, website and attendance at key industry tradeshows and
      conferences. A portion of BioCheck’s 2005 sales volume was also generated
      through referrals from existing customers. BioCheck’s products are sold directly
      to customers and through a network of international distributors, who deliver
      its products to purchasers in North, Central and South America, Europe, the
      Middle East, and Asia. BioCheck does not plan to establish an in-house sales
      force to distribute its products.





In
      2005,
      the top twenty direct customers accounted for approximately 67% of BioCheck’s
      gross sales revenue and no single customer accounted for more than 15% of total
      gross sales revenue. BioCheck is seeking to identify and secure additional
      opportunities for research services agreements.





**Competition**





According
      to Boston Biomedical Consultants and Morgan Stanley Research Estimates, the
      worldwide clinical diagnostics market including instruments, immunoassays,
      rapid
      diagnostic tests and data analysis tools was approximately $22
      billion **** in
      sales
      revenue in 2004 and increased approximately 9% from the previous year.
      Competition in the clinical diagnostics market is intense and highly fragmented,
      with the largest competitor, Roche Diagnostics, holding a 16% market share.





BioCheck’s
      direct competitors are developers and manufacturers of research and clinical
      diagnostic products and include, but are not limited to, Adaltis Inc., BioSource
      International, Inc., Diagnostic Products Corporation, Monobind, Inc. and
      BioClone Australia Pty Ltd.





In
      order
      to continue to successfully market BioCheck’s products and services, the company
      will be required to demonstrate that its immunoassay products meet or exceed
      the
      industry standards for quality as measured by high levels of purity, stability,
      precision of measurement and cost effectiveness. The company’s competitors may
      succeed in developing or marketing products that are more effective or
      commercially attractive. The launch of these competitive products may adversely
      impact the market pricing for BioCheck’s products as some of these competitors
      have substantially greater financial, technical, research and development
      resources and more established marketing, sales, distribution and service
      organizations.





13


**Raw
      Material Suppliers**





The
      development and production of BioCheck’s products requires the company to
      purchase bulk quantities of antibodies,
      enzymes, microtiter plates and serum from outside vendors. BioCheck does not
      rely on any single supplier for its raw material purchases.





**Research
      and Development**





BioCheck
      invested $726,000 and $839,000 in research and development in 2005 and 2004,
      respectively. As of December 31, 2005, BioCheck employed seven employees in
      research and development. During 2005, BioCheck’s research staff was primarily
      used to produce compounds for diagnostic use and optimize methods for binding
      these compounds to biological reagents such as antibodies. BioCheck employs
      a
      proprietary process for antibody conjugation resulting in highly stable
      products. BioCheck is also developing proprietary clinical diagnostics tests
      for
      launch in late 2006 or early 2007 that include promising new angiogenesis tumor
      markers and an aggressive breast cancer marker.





*Angiogenesis
      Tumor Markers*





In
      April
      2004, BioCheck entered into a development and marketing agreement with
      AngioGenex for the diagnostic/prognostic applications of Id proteins in
      angiogenesis, which is the formation of blood vessels. The therapeutic and
      diagnostic applications of this process were patented by Memorial
      Sloan-Kettering Cancer Center and Albert Einstein Medical College and licensed
      to AngioGenex. The diagnostic application was subsequently licensed to BioCheck.





Id
      genes
      are expressed at high levels to produce Id proteins in many tissues during
      human
      embryonic development, but are generally not expressed, or expressed at very
      low
      levels, in adults except in some tumor cell types and tumor blood vessels.
      Id1,
      Id2 and Id3 proteins have been closely implicated in tumor-associated
      angiogenesis. Interfering with the action of the Id proteins may prove to be
      very effective in preventing the growth and metastases of both early and
      established tumors. The effectiveness of this approach has been demonstrated
      in
      commercially available therapeutic drugs, such as AvastinTM, which targets the
      vascular endothelial growth factor. Such therapeutics have been modestly
      effective, suggesting the need for research and development to identify more
      powerful and specific agents for cancer therapy.





BioCheck’s
      goal is to clinically validate an Id-based diagnostic/prognostic product in
      collaboration with AngioGenex. During
      2005, BioCheck’s research staff continued to work on the clinical validation of
      potential diagnostic products based on Id proteins related to tumor
      angiogenesis. Monoclonal
      antibodies to the Id proteins are required in order
      to develop highly
      sensitive ELISA diagnostic and prognostic tests. BioCheck has developed rabbit
      monoclonal anti-Id1, Id2 and Id3 antibodies that can be used in cell and tissue
      extracts through commonly utilized detection methods including Western Blot
      analysis, immunohistochemistry staining and ELISA tests. Western Blot
      analysis is a
      method of separating proteins by mass through a gel based process. Immunohistochemistry staining is a process
      of localizing proteins in cells by tagging their respective antibodies with
      color producing tags. ELISA
      tests are used for measuring the amount of Id1, Id2 and Id3 proteins in cell
      culture supernatants, and cell and tissue extracts.





*Aggressive
      Breast Cancer Marker*





In
      2005,
      BioCheck entered into a development and marketing agreement with HMGene, Inc.,
      or HMGene, based in Piscataway, New Jersey for the development and manufacturing
      of an ELISA test for the HMGA2 gene. The HMGA2 gene has been implicated in
      aggressive forms of breast cancer. The detection technology for tissue staining
      and peripheral blood samples related to the HMGA2 gene has been patented by
      HMGene and licensed to BioCheck for the development of rabbit polyclonal and
      monoclonal anti-HMGA2 antibodies. These antibodies can be used for Western
      Blot
      analyses, immunohistochemistry staining and ELISA assays.





While
      we
      believe that these are potentially promising diagnostic products, no assurances
      can be given that the company will have sufficient funding and resources to
      continue research, development and commercialization of these technologies.





14


**Employees**





As
      of
      December 31, 2005, BioCheck employed twenty-five full-time employees, including
      thirteen technicians in manufacturing, seven scientists and research associates
      in research and development, two specialists in quality control functions,
      and
      three professionals in administrative and operational support.





**ITEM
      2.** **DESCRIPTION
      OF PROPERTY**





OXIS
      occupies office, laboratory and manufacturing space in Portland, Oregon expiring
      in April of 2006. We are currently utilizing the Portland premises only for
      storage purposes and we have moved our operations to Foster City,
      California.





On
      December 6, 2005 we purchased 51% of BioCheck and initiated a transition plan
      to
      consolidate all operations at BioCheck’s manufacturing facility. Consequently,
      during 2006, we entered into a three-year lease agreement commencing
      on April 1, 2006 for
      4,136
      square feet of space immediately adjacent to BioCheck at 323 Vintage Park Drive,
      Suite B, Foster City, CA 94404. These
      premises will serve to accommodate the relocation and consolidation of our
      corporate headquarters and operations.





BioCheck
      occupies approximately 15,000 square feet of administrative, laboratory and
      manufacturing space located at Vintage Park, 323 Vintage Park Drive, Foster
      City, CA 94404, pursuant to a lease expiring in December 2008. The facility
      has
      been certified according to the U.S. Food and Drug Administration, or FDA,
      Good
      Manufacturing Practice standards, which are subject to annual audits by the
      FDA.
      In addition, the facility has been certified to meet the highest international
      manufacturing standard (ISO 13485) generally accepted in Europe and Asia,
      according to the International Organization for Standardization, or ISO.
      BioCheck believes that it is in compliance with all other regulatory
      certifications applicable to its line of business, including Device
      Manufacturing License for the state of California, Registration of Device
      Establishment, Certificate of Foreign Government and Certificate of
      Exportability **.**





We
      do not
      have a real estate investment policy as we do not make any such
      investments.





**ITEM
      3.** **LEGAL
      PROCEEDINGS**




None.





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





No
      matter
      was submitted during the fourth quarter of 2005 to a vote of security holders,
      through solicitation or proxies or otherwise.


15


**PART
      II**





**ITEM
      5.** **MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**





Our
      common stock continues to be traded in the Over-The-Counter Bulletin Board
      and
      remains listed in France on the Nouveau Marché and in Germany on the Frankfurt
      Stock Exchange.





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 our common stock on the over-the-counter
      board are as follows:





**2005**
            
            **2004****4****th**
            **3****rd**
            **2****nd**
            **1****st**
            
            **4****th**
            **3****rd**
            **2****nd**
            **1****st**High
            $0.39
            $0.48
            $0.45
            $0.57
            
            $0.65
            $0.69
            $0.84
            $0.90Low
            $0.24
            $0.28
            $0.25
            $0.34
            
            $0.41
            $0.32
            $0.45
            $0.52





We
      have
      an estimated 5,500 shareholders, including approximately 3,000 shareholders
      who
      hold their shares in street name. We have never paid a dividend and do not
      expect to pay dividends in the foreseeable future.





**Recent
      Sales of Unregistered Securities**





On
      January 14, 2004, we completed a private placement of securities pursuant to
      which (i) certain investors paid us $570,000 in the aggregate, (ii) we 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 our common stock or into up to 3,800,000 shares of common
      stock in the event of a default by OXIS and if notified of such by the note
      holders (to which no notice was received) and (iii) we issued warrants to the
      investors exercisable for up to 712,500 shares of common stock at an
      exercise price of $0.50 per share. We received notice on December 30, 2004,
      that
      all investors had signed irrevocable letters of intent to convert their
      promissory notes and accrued interest into common stock. As a result, we issued
      1,520,932 shares of common stock to the note holders. In connection with the
      note holders converting their notes to common stock, we issued 760,469 new
      warrants having a $1.00 exercise price and a five-year life. The private
      placement was exempt from registration under Section 4(2) of the Securities
      Act
      of 1933.





On
      December 30, 2004, we entered into definitive agreements with investors relating
      to the private placement of $6.5 million of our securities through the sale
      of
      12,264,158 shares of our common stock at $0.53 per share. On January 6, 2005,
      we
      closed the private placement transaction with the investors. The transaction
      resulted in the issuance on or about January 10, 2005 of 12,264,158 shares
      of
      our common stock for which we received gross proceeds of $0.53 per share. In
      addition, on January 6, 2005, we issued to the purchasers in the private
      placement transaction warrants to purchase an additional 12,264,158 shares
      of
      our common stock, 50% at an exercise price of $0.66 per share and 50% at an
      exercise price of $1.00 per share. Upon the closing of the private placement
      transaction, as partial consideration for services rendered as the placement
      agent for the private placement transaction, we issued to Rodman & Renshaw,
      LLC a warrant to purchase 306,604 shares of our common stock at an exercise
      price of $0.66 per share and a warrant to purchase 306,604 shares of our common
      stock at an exercise price of $1.00 per share. The offer, sale and issuance
      of
      securities to the purchasers in the private placement were exempt from
      registration under the Securities Act, pursuant to Section 4(2) thereof, and
      Rule 506 promulgated by the SEC under the Securities Act. The 12,264,158 shares
      of common stock issuable on December 30, 2004 and the 12,877,366 shares of
      common stock to be issued upon exercise of warrants were registered under a
      Form
      SB-2 registration statement that was declared effective on May 27,
      2005.





16


During
      April 2005, 459,355 shares of common stock were issued for cancellation of
      a
      note payable for $160,000 and accrued interest of $84,000. The private placement
      was exempt from registration under Section 4(2) of the Securities Act of
      1933.





During
      the third quarter of 2005, 428,389 outstanding shares of Series B preferred
      stock were converted into 85,678 shares of common stock. The Series B preferred
      stock had certain preferential rights with respect to liquidation and dividends.
      Holders of Series B preferred stock were entitled to noncumulative annual
      dividends at the rate of $0.115 per share if and when declared by our board
      of
      directors. No dividends to Series B preferred stockholders were issued or unpaid
      during 2005. The private placement was exempt from registration under Section
      4(2) of the Securities Act of 1933.




**ITEM
          6.** **MANAGEMENT’S
          DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**





The
      following discussion of our financial condition and results of operations should
      be read in conjunction with our audited consolidated financial statements and
      related notes included in Item 7 of this Report. This discussion contains
      forward-looking statements based upon our current expectations and involves
      risks and uncertainties. Our actual results and the timing of certain events
      could differ materially from those anticipated in these forward-looking
      statements as a result of certain factors, including those set forth in “Risks
      Related to Our Business,” “Description of Business” and elsewhere in this
      document. See the paragraphs following the heading “Part I” for additional
      discussion.





Management’s
      Discussion and Analysis or Plan of Operation are based on our consolidated
      financial statements, which have been prepared in accordance with accounting
      principles generally accepted in the United States.





**Introduction**





We
      incurred net losses of $3.1 million in 2005 and $2.7 million in 2004.
      BioCheck generated a net profit of $0.2 million in 2005. This amount of
      profit would not be enough to offset our current losses. Our 2005 net loss
      includes an expense of $1.5 million for purchased in-process research and
      development that is not anticipated to reoccur in 2006. However, we are seeking
      debt financing that may require us to issue stock purchase warrants or other
      similar derivative securities. Such a financing may result in large non-cash
      financing charges that could delay profitability. Our plan is to increase
      revenues to generate sufficient gross profit in excess of selling, general
      and
      administrative, and research and development expenses in order to achieve
      profitability. However, we can not assure you that we will accomplish this
      task
      and there are many factors that may prevent us from reaching our goal of
      profitability.





On
      a
      consolidated basis, we had cash and cash equivalents of $614,000 at December
      31,
      2005 of which $282,000 was held by BioCheck. Since BioCheck has been, and is
      expected to continue to be, cash flow positive, we believe that its cash will
      be
      sufficient to sustain its operating activities during the next twelve months.
      The cash held by OXIS of $332,000 at December 31, 2005 was not sufficient to
      sustain its operations through the first quarter of 2006 without additional
      financings. During March 2006, we received $200,000 from Steven T. Guillen,
      our
      President and Chief Executive Officer in exchange for a promissory
      note **.** We
      are
      seeking additional loan and equity financings to obtain sufficient funds to
      sustain operations, implement our marketing campaign and purchase the remaining
      49% of BioCheck. We plan to increase revenues through our marketing campaign
      and
      the introduction of anticipated new products. However, we cannot assure you
      that
      we will successfully obtain debt or equity financing, if any, sufficient to
      finance our goals or that we will increase product related revenues as such
      events are subject to factors beyond our control. The financial statements
      do
      not include any adjustments relating to the recoverability and classification
      of
      recorded assets, or the amounts and classification of liabilities that might
      be
      necessary in the event the Company cannot continue in existence.





**Overview**





OXIS
      International, Inc. develops technologies and products to research, diagnose,
      treat and prevent diseases of oxidative stress associated with damage from
      free
      radical and reactive oxygen species. We derive our revenues primarily from
      sales
      of research diagnostic assays to research laboratories. Our diagnostic products
      include twenty-five research assays to measure markers of oxidative
      stress.





17


Current
      significant financial and operating events and strategies are summarized as
      follows:





*Product
      Development*





Our
      current plans include a focus on the areas of clinical diagnostic products.
      We
      are pursuing the development of a cardiovascular predictor product intended
      to
      provide a more effective diagnostic predictor test for patients at risk of
      cardiac events before they occur. We are developing this product through the
      combination of our MPO assay with other in-house assays. We also believe that
      our Ergothioneine compound may be well suited for development as a nutraceutical
      supplement that can be sold over the counter. Given the availability of
      sufficient capital resources, we intend to pursue the development of
      Ergothioneine for use in such markets.





*Bank
      Loan*





On
      December 6, 2005, we entered into a non-revolving one-year loan agreement with
      KeyBank, N.A., or KeyBank, and received funds of $3,060,000 to purchase 51%
      of
      BioCheck’s common stock. As security for our repayment obligations, we granted a
      security interest to KeyBank in our $3,060,000 certificate of deposit at
      KeyBank. This loan was repaid during February 2006 and a new one-year loan
      agreement for $3,060,000 was entered into at Bridge Bank. As part of the loan
      arrangement with Bridge Bank, we granted a security interest in a $3,060,000
      certificate of deposit moved from KeyBank to Bridge Bank. The loan bears
      interest at 3.0% and the certificate of deposit bears interest at
      1.0%.





*Relocation
      of Operations*





On
      December 6, 2005, we initiated a relocation plan to cease our operations in
      Portland, Oregon and relocate to Foster City, California. We decided to relocate
      after reviewing and evaluating all aspects of our operations to determine the
      profitability and viability of continuing in the Portland, Oregon location.
      During February 2006, we signed a lease agreement for approximately
      4,000 square feet of space located immediately adjacent to those of BioCheck
      and
      relocated our manufacturing operations to Foster City, California. On
      February 15, 2006, we ceased operations at the Portland, Oregon facility and
      most of the Portland, Oregon employees were terminated. Severance benefits
      are
      being paid to terminated employees.





*Loan*





On
      March
      10, 2006, we received $200,000 in exchange for a note with Steven T. Guillen,
      our President and Chief Executive Officer due on September 10, 2006 or, at
      the
      option of Mr. Guillen, the date we receive net proceeds in the amount of
      $500,000 or more from a debt or equity financing. The purpose of this loan
      was
      to provide the corporation with short term financing as it seeks longer term
      financing.





*Preferred
      Stock Conversion*





During
      the third quarter of 2005, 85,678 shares of common stock were issued for the
      conversion and cancellation of all 428,389 outstanding shares of Series B
      Preferred Stock that were valued at $4,000.





*Note
      Conversion*





During
      April 2005, 459,355 shares of common stock were issued for cancellation of
      a
      note payable for $160,000 and accrued interest of $84,000.





18


*Management
      Team and Board of Directors*





During
      2005 and 2006, we have been building the management team and enhancing our
      Board
      of Directors to lead OXIS. On February 28, 2005, Steve T. Guillen was appointed
      as our President and Chief Executive Officer. Mr. Guillen replaced Marvin S.
      Hausman, M.D., as acting Chief Executive Officer and Dr. Hausman remained as
      Chairman of the Board of Directors. During October 2005 John Repine, M.D.,
      Chief
      Executive Officer, President and Scientific Director of the Webb-Waring
      Institute for Cancer, Aging and Antioxidant Research joined our Board of
      Directors. Effective December 6, 2005, Dr. John Chen entered into an
      executive employment agreement with us as President of BioCheck. Michael D.
      Centron was appointed as our Vice President and Chief Financial Officer during
      January 2006, replacing Dr. Hausman as acting Chief Financial Officer. During
      February 2006, Randall Moeckli was appointed as our Senior Director of Sales
      and
      Marketing. On March 15, 2006, Gary M. Post, Managing Director of Ambient
      Advisors, LLC, joined our Board of Directors.





*Loan
      Repayment*





On
      June 1, 2004, we received $1,200,000 in exchange for a note and entered
      into a loan agreement with our majority shareholder, Axonyx, Inc. We repaid
      the
      note on January 6, 2005.





*Common
      Stock Issuance*





On
      December 30, 2004, we sold 12,264,158 shares of common stock and issued
      warrants to purchase 12,877,366 shares of common stock for $6,500,000 in a
      private placement with net proceeds of $5,818,000 received in December 2004
      and
      January 2005 after expenses and the cost of the related registration statement.
      The warrants were issued for the purchase of 6,438,685 shares of common stock
      at
      an exercise price of $0.66 per share and 6,438,681 shares of common stock at
      an
      exercise price of $1.00 per share.





**Acquisition
      of BioCheck**





On
      September 19, 2005, we entered into a stock purchase agreement with BioCheck
      and
      its stockholders to purchase all of its common stock for $6.0 million in
      cash. BioCheck is a leading producer of enzyme immunoassay diagnostic kits
      for
      clinical laboratories. On December 6, 2005, we purchased 51% of the
      shares of BioCheck’s common stock from each of its shareholders on a pro rata
      basis for $3,060,000 in cash. This acquisition was accounted for by the purchase
      method of accounting according to Statement of Financial Accounting Standards
      No. 141, “Business Combinations.” The consolidated statement of operations for
      the year ended December 31, 2005 includes the results of operations of BioCheck
      from December 6, 2005 and the consolidated balance sheet includes the assets
      and
      liabilities of BioCheck at December 31, 2005. The purchase price of
      $3,337,000 was based on cash paid to BioCheck’s shareholders of $3,060,000,
      legal expense of $155,000 and a finder’s fee of $122,000. Pursuant to the stock
      purchase agreement, OXIS will use its reasonable best efforts to consummate
      a
      follow-on financing transaction to raise additional capital with which to
      purchase the remaining outstanding shares of BioCheck in one or more additional
      closings.





The
      Company has previously disclosed on Form 8-K filed with the SEC the allocation
      of acquisition costs and pro forma financials statements related to the
      acquisition of BioCheck that were based on the information available at that
      date. The disclosures contained within this Report have been presented with
      the
      information and using estimates currently available. The Company may obtain
      additional independent valuations of BioCheck’s assets related to the
      acquisition of the remaining 49% of BioCheck and additional acquisition costs
      may be incurred. Such information and costs may affect the disclosures as
      presented herein. See note 2 of the audited consolidated financial statements
      for the allocation of the purchase price and other information related to the
      BioCheck acquisition.





19


**Results
      of Operations**





We
      expect
      revenues and expense to increase substantially as described below from 2005
      to
      2006 with the consolidation of BioCheck’s results of operations over the entire
      year in 2006. Our projections for 2006 are based upon our expectations that
      OXIS
      and BioCheck will incur similar revenues and costs in 2006 as a combined company
      that they incurred in 2005 as individual companies, adjusted for our plans
      to
      increase marketing expenses and combine operations in Foster City, California
      as
      described below. We can give no assurances that we will be able to successfully
      merge manufacturing operations without adversely affecting revenues and costs,
      implement an effective marketing campaign that will increase revenues, develop
      new products, finance our expansion plans and purchase the remaining 49% of
      the
      BioCheck common stock we do not own.





*Revenues*





The
      following table presents the changes in revenues from 2004 to 2005:





**Increase
                (Decrease) from 2004****2005**
            
            **2004**
            
            **Amount**
            ****
            **%**Product
                revenues
            
            $
            2,397,000
            
            $
            1,914,000
            
            
            483,000
            
            
            25
            %License
                revenues
            
            
            100,000
            
            
            450,000
            
            
            (350,000
            )
            
            (78
            %)Total
                revenues
            
            $
            2,497,000
            
            $
            2,364,000
            
            $
            133,000
            
            
            6
            %





The increase in product revenues was primarily attributed to increased sales
        volume and was comprised of a $272,000 increase for OXIS to customers within
        North America and $275,000 of revenues from the operations of BioCheck since
        December 6, 2005, the date of our acquisition of 51% of BioCheck’s
        common stock, that was partially offset by a $64,000 decrease in sales to
        customers outside of North America. We expect revenues, excluding license
        revenues, to increase by approximately $4.0 million from 2005 to 2006 with
        the consolidation of BioCheck’s revenues in 2006 over the entire
        year.
 ****


License
      revenues are attributed to an exclusive license agreement with HaptoGuard Inc.
      during the third quarter of 2004 and an extension of the license agreement
      during the fourth quarter of 2005. See Note 12 to the audited consolidated
      financial statements. We are unable to predict when we will receive additional
      license revenues, if any, because such revenues are dependent upon HaptoGuard
      Inc. successfully receiving regulatory approval and marketing the licensed
      product.





*Cost
      of product revenues*





The
      following table presents the changes in cost of product revenues from 2004
      to
      2005:




**Increase
                from 2004****2005**
            
            **2004**
            
            **Amount**
            ****
            **%**Cost
                of product revenues
            
            $
            1,345,000
            
            $
            1,216,000
            
            $
            129,000
            
            
            11
            %





The
      increase in cost of product revenues is attributed to $136,000 of costs from
      the
      operations of BioCheck since December 6, 2005, the date of our
      acquisition of 51% of BioCheck’s common stock. Product costs, other than those
      for BioCheck, essentially remained the same as our manufacturing facility and
      personnel were more efficiently utilized in 2005 than in 2004 which offset
      increased material costs. We expect product costs to increase by approximately
      $2.0 million from 2005 to 2006 with the consolidation of BioCheck’s cost of
      product revenues in 2006 over the entire year. Product costs may increase by
      more than $2.0 million if we successfully increase revenues by an amount
      greater than the revenues recorded by each individual company in
      2005.





20


Gross
      profit of $1,152,000 in 2005 was essentially the same as the gross profit of
      $1,148,000 in 2004 because the additional profits from increased product sales
      and higher gross profit margins were offset by a $350,000 decrease in license
      revenues. Excluding license fee revenues, gross profit as a percentage of
      product revenues increased from 36% in 2004 to 44% in 2005 primarily due to
      increased sales from 2004 to 2005 with a smaller corresponding increase in
      costs
      and higher gross profit margins for BioCheck’s clinical products. With the
      addition of BioCheck’s revenues in 2006 of $4.0 million that are expected to be
      approximately 170% of 2005 revenues, gross profit as a percentage of product
      revenues is expected to increase towards 50% as experienced by BioCheck in
      2005.





*Research
      and development expenses*





The
      following table presents the changes in research and development expenses from
      2004 to 2005:




**Increase
                from 2004****2005**
            
            **2004**
            
            **Amount%**
            ****
            **%**Research
                and development expenses
            
            $
            499,000
            
            $
            278,000
            
            $
            221,000
            
            
            79
            %





The
      increase in research and development expenses from 2004 to 2005 is primarily
      attributed to increased patent amortization expense of $49,000, write-off of
      abandoned patents of $105,000 and $49,000 of costs from the operations of
      BioCheck since December 6, 2005, the date of our acquisition of 51% of
      BioCheck’s common stock. We expect to spend approximately $750,000 on research
      and development in 2006 primarily at BioCheck. However, the actual amount of
      research and development expenses will fluctuate with the availability of
      funding.





*Selling,
      general and administrative expenses*





The
      following table presents the changes in selling, general and administrative
      expenses from 2004 to 2005:




**Increase
                from 2004****2005**
            
            **2004**
            
            **Amount**
            ****
            **%**Selling,
                general and administrative expenses
            
            $
            2,342,000
            
            $
            1,843,000
            
            $
            499,000
            
            
            27
            %





From
      2004
      to 2005, selling, general and administrative expenses increased approximately
      $150,000 for accounting and legal activities, $150,000 for marketing
      consultants, $90,000 for administrative consultants, $70,000 for advertising
      and
      promotional literature and $80,000 of costs from the operations of BioCheck
      since December 6, 2005, the date of our acquisition of 51% of
      BioCheck’s common stock. These increased costs were partially offset by
      approximately $40,000 of decreased insurance costs and other cost decreases.
      We
      expect selling, general and administrative expenses to increase by approximately
      $0.8 million from 2005 to 2006 with the consolidation of BioCheck’s
      selling, general and administrative expenses in 2006 over the entire
      year. **** In
      addition, we plan to implement a marketing campaign to increase revenues. The
      amount spent on this campaign will depend on the availability of
      funds.





*Purchased
      in-process research and development*





In
      connection with our acquisition of 51% of the outstanding shares of BioCheck
      on
      December 6, 2005, $1.5 million of purchased in-process research and development
      was identified as an intangible asset. The applicable research projects were
      subsequently deemed not to have future uses or markets. As such, this identified
      intangible asset was expensed in 2005 at the date of acquisition.





*Foreign
      legal proceedings*





Foreign
      legal proceedings during 2004 of $183,000 were related to proceedings of the
      Autorité des Marchés Financiers, or AMF, and were comprised of legal expenses of
      $121,000 and fines imposed by the AMF of $62,000 as described in Note 8 to
      the
      audited consolidated financial statements contained in this Report. We did
      not
      incur such expenses in 2005 and do not expect such expenses in
      2006.





21


*Restructuring
      charges*





Restructuring
      charges during 2004 of $605,000 related to the Axonyx change of control are
      comprised of legal fees of $196,000, management consulting fees of $34,000,
      travel expense of $8,000, executive search costs of $22,000 and severance
      expenses of $345,000. Related to our relocation of operations from Portland,
      Oregon to Foster City, California, we recorded severance benefits of $119,000
      in
      2005 that were included in selling, general and administrative expenses, and
      we
      expect to incur relocation expenses of approximately $100,000 in 2006.





*Financing
      Fees*





In
      connection with the $570,000 convertible loan financing on January 14, 2004
      and
      the conversion of it into common stock on December 30, 2004, we paid finders’
fees and professional fees of approximately $84,000 and we incurred non-cash
      financing charges of $411,000 related to the conversion feature of the notes,
      $159,000 related to initial warrants issued with the notes and $202,000 related
      to the incentive warrants issued upon conversion of the notes into common stock
      during 2004.





*Interest
      Income*





Interest
      income was $110,000 in 2005, primarily due to cash available for investment
      activities obtained in the $6,500,000 equity financing received during December
      2004 and January 2005.





*Interest
      Expense*





Interest
      expense of $26,000 in 2005 was primarily due to the one-year loan with KeyBank
      incurred in connection with the BioCheck acquisition. Interest expense of
      $101,000 for 2004 was primarily due to the short-term financing and the Axonyx
      loan.





**Liquidity
      and Capital Resources**





On
      a
      consolidated basis, we had cash and cash equivalents of $614,000 at December
      31,
      2005 of which $282,000 was held by BioCheck. Since BioCheck recently has been
      and is expected to continue to be cash flow positive, we believe that its cash
      will be sufficient to sustain its operating activities. The cash held by OXIS
      of
      $332,000 at December 31, 2005 was not sufficient to sustain its operations
      through the first quarter of 2006 without additional financings. During March
      2006, we received $200,000 from Steven T. Guillen, our President and Chief
      Executive Officer in exchange for a promissory note **.** We
      are
      seeking additional loan and equity financings to obtain sufficient funds to
      sustain operations, implement our marketing campaign and purchase the remaining
      49% of BioCheck we do not own. We plan to increase revenues through our
      marketing campaign and the introduction of anticipated new products. However,
      we
      cannot assure you that we will successfully obtain debt or equity financing,
      if
      any, sufficient to sustain our business plan or that we will increase product
      related revenues as such events are subject to factors beyond our control.
      If we
      are unable to raise additional capital in the second quarter of 2006 we will
      have to curtail or cease operations.





*Net
      cash used in operating activities*





The
      following table presents annual cash flows from operating activities from 2004
      and 2005:





**Year
                Ended December 31,****2005**
            
            **2004**Cash
                paid to employees including benefits
            
            $
            (1,153,000
            )
            $
            (1,067,000
            )Cash
                paid to suppliers
            
            
            (3,514,000
            )
            
            (2,353,000
            )Total
                cash paid to employees and suppliers
            
            
            (4,667,000
            )
            
            (3,420,000
            )Cash
                received from customers
            
            
            2,471,000
            
            
            2,386,000Interest
                received
            
            
            114,000
            
            
            20,000Interest
                paid
            
            
            (11,000
            )
            
            (28,000
            )Net
                cash used in operating activities
            
            $
            (2,093,000
            )
            $
            (1,042,000
            )









22


The
      increase in cash paid to employees is primarily attributed to cash paid by
      BioCheck for payroll and benefits since December 6, 2005, the date of
      our acquisition of 51% of BioCheck’s common stock.





The
      increase in cash paid to suppliers is primarily attributed to increases in
      selling, general and administrative expenses of approximately $150,000 for
      accounting and legal activities, $150,000 for marketing consultants, $90,000
      for
      administrative consultants and $70,000 for advertising and promotional
      literature. In addition, $583,000 of 2004 expenses recorded as liabilities
      at
      December 31, 2004 were paid in 2005 and cash expenditures for inventory
      increased by $108,000.





The
      increase in cash received from customers is attributed to the $133,000 increase
      in revenues reduced by the change in accounts receivable.





Interest
      received increased in 2005 primarily due to cash available for investment
      activities obtained in the $6,500,000 equity financing received during December
      2004 and January 2005.





*Cash
      used in investing activities*





During
      2005 we spent $3.2 million on the acquisition of 51% of BioCheck’s common
      stock and $3.1 million on a restricted certificate of deposit at KeyBank,
      which was used as collateral under the loan agreement with KeyBank. Capital
      expenditures were $33,000 and $47,000 in 2005, and 2004 respectively. We had
      no
      commitments for capital expenditure at December 31, 2005. We
      anticipate that in 2006 the BioCheck manufacturing facility in Foster City,
      California will require expenditures to support our business objective. We
      spent
      $172,000 and $262,000 to file patents in 2005 and 2004,
      respectively.





*Net
      cash provided by financing activities*





On
      December 2, 2005, we entered into non-revolving one-year loan agreement
      with KeyBank in the amount of $3,060,000, for the purpose of completing the
      initial closing of the BioCheck acquisition. This loan was repaid during
      February 2006 and a new one-year loan agreement for $3,060,000 was entered
      into
      at Bridge Bank. Steven T. Guillen, our President and Chief Executive Officer,
      purchased 600,000 shares of common stock for $240,000, pursuant to the terms
      of
      an employment agreement on February 28, 2005.





On
      June 1, 2004, we received $1,200,000 in exchange for a note and entered
      into a loan agreement with our majority shareholder at the time, Axonyx, Inc.
      We
      repaid the note on January 6, 2005. In a $6,500,000 private placement of our
      common stock on December 30, 2004, we received net proceeds of $5,818,000 in
      exchange for 12,264,158 shares of common stock which were issuable at December
      31, 2004.





The
      cash
      held by OXIS of $332,000 at December 31, 2005 was not sufficient to sustain
      its
      operations through the first quarter of 2006 without additional financings.
      During March 2006, we received $200,000 from Steven T. Guillen, our President
      and Chief Executive Officer in exchange for a promissory note **.** We
      are
      seeking additional loan and equity financings to obtain sufficient funds to
      sustain operations, implement our marketing campaign and purchase the remaining
      49% of BioCheck. However, we cannot assure you that we will successfully obtain
      debt or equity financing.





**Commitments
      and Contingencies**





We
      lease
      facilities in Oregon under an operating lease that expires in April 2006. Our
      subsidiary, BioCheck, leases facilities under operating leases in Foster City,
      California that expire in December 2008. During 2004, BioCheck entered into
      a
      sublease of an unused Foster City, California facility to the end of the lease
      term in 2008 that reduced our operating lease commitments. Net minimum lease
      payments to which we are committed under these leases at December 31, 2005
      are
      $227,000 in 2006, $201,000 in 2007 and $208,000 in 2008. In addition, we entered
      into an operating lease for 4,136 square feet of space adjacent to space
      occupied by our BioCheck subsidiary in Foster City, California starting on
      April
      1, 2006 and ending on March 31, 2009. The annual base rent under the Lease
      Agreement begins at $62,000 per year and increases incrementally to $66,000
      by
      the end of the lease term.





23


We
      estimate that relocating operations from Portland, Oregon to Foster City,
      California will cost approximately $100,000. As part of the relocation of
      operations, we offered all affected regular full-time employees whose employment
      was terminated severance benefits estimated in total to be
      $119,000.





At
      December 31, 2005, we had a commitment to purchase Ergothioneine manufactured
      by
      Cambridge Major Labs for $179,000 and we have a contract with them to purchase
      additional Ergothioneine as needed.





On
      September 19, 2005, we entered into a stock purchase agreement with BioCheck
      and
      its stockholders to purchase all of its common stock for $6.0 million in
      cash. On December 6, 2005, we purchased 51% of the common stock of
      BioCheck. Pursuant to the stock purchase agreement, we will use our reasonable
      best efforts to consummate a follow-on financing transaction to raise additional
      capital with which to purchase the remaining outstanding shares of BioCheck
      in
      one or more additional closings. The purchase price will be increased by an
      additional 8% per annum from December 6, 2005. If we have not purchased all
      of the outstanding shares of BioCheck within twelve months of December 6,
      2005, the earnings before interest, taxes, depreciation and amortization
      expenses, if any, of BioCheck, will be used to repurchase the remaining
      outstanding BioCheck shares at one or more additional closings.





**Critical
      Accounting Policies**





Our
      accounting policies are explained in Note 1 to the audited consolidated
      financial statements included in this Report. We consider the following
      accounting policies to be critical given they involve estimates and judgments
      made by management and are important for our investors’ understanding of our
      operating results and financial condition.





*Basis
      of Consolidation*





The
      consolidated financial statements contained in this Report include the accounts
      of OXIS International, Inc. and its subsidiaries. All intercompany balances
      and
      transactions have been eliminated. On December 6, 2005, we purchased 51% of
      the common stock of BioCheck. This acquisition was accounted for by the purchase
      method of accounting according to Statement of Financial Accounting Standards,
      or SFAS, No. 141, “Business Combinations.” The consolidated statement of
      operations for the year ended December 31, 2005 includes the results of
      operations of BioCheck from December 6, 2005, the date of acquisition, and
      the
      consolidated balance sheet at December 31, 2005 includes the assets and
      liabilities of BioCheck.





*Revenue
      Recognition*





We
      manufacture, or have manufactured on a contract basis, research and diagnostic
      assays and fine chemicals, which are our primary products sold to customers.
      Revenue from the sale of our products, including shipping fees, is recognized
      when title to the products is transferred to the customer which usually occurs
      upon shipment or delivery, depending upon the terms of the sales order and
      when
      collectibility is reasonably assured. Revenue from sales to distributors of
      our
      products is recognized, net of allowances, upon delivery of product to the
      distributors. According to the terms of individual distributor contracts, a
      distributor may return product up to a maximum amount and under certain
      conditions contained in its contract. Allowances are calculated based upon
      historical data, current economic conditions and the underlying contractual
      terms. Our mix of product sales are substantially at risk to market conditions
      and demand, which may change at anytime.





We
      recognize license fee revenue for licenses to our intellectual property when
      earned under the terms of the agreements. Generally, revenue is recognized
      upon
      transfer of the license unless we have continuing obligations for which fair
      value cannot be established, in which case the revenue is recognized over the
      period of the obligation. We consider all arrangements with payment terms
      extending beyond twelve months not to be fixed or determinable. In certain
      licensing arrangements there is provision for a variable fee as well as a
      non-refundable minimum amount. In such arrangements, the amount of the
      non-refundable minimum guarantee is recognized upon transfer of the license
      and
      collectibility is reasonably assured or over the period of the obligation,
      as
      applicable, and the amount of the variable fee is recognized as revenue when
      it
      is fixed and determinable. We recognize royalty revenue based on reported sales
      by third party licensees of products containing our materials, software and
      intellectual property. Non-refundable royalties, for which there are no further
      performance obligations, are recognized when due under the terms of the
      agreements.





24


*Inventories*





Inventories
      are stated at the lower of cost to purchase and/or manufacture the inventory
      or
      the current estimated market value of the inventory. We regularly review our
      inventory quantities on hand and record a provision for excess and obsolete
      inventory based primarily on our estimated forecast of product demand and/or
      our
      ability to sell the products and production requirements. Demand for our
      products can fluctuate significantly. Factors which could affect demand for
      our
      products include unanticipated changes in consumer preferences, general market
      conditions or other factors, which may result in cancellations of advance orders
      or a reduction in the rate of reorders placed by customers and/or continued
      weakening of economic conditions. Additionally, our estimates of future product
      demand may be inaccurate, which could result in an understated or overstated
      provision required for excess and obsolete inventory. Our estimates are based
      upon our understanding of historical relationships which can change at
      anytime.





*Long-Lived
      Assets*





Our
      long-lived assets include property, plant and equipment, capitalized costs
      of
      filing patent applications and goodwill and other assets. See Notes 1, 4, 5
      and
      6 to the audited consolidated financial statements included in this Report
      for
      more detail regarding our long-lived assets. We evaluate our long-lived assets
      for impairment in accordance with SFAS No. 144, “Accounting for the Impairment
      or Disposal of Long-Lived Assets” whenever events or changes in circumstances
      indicate that the carrying amount of such assets may not be recoverable.
      Estimates of future cash flows and timing of events for evaluating long-lived
      assets for impairment are based upon management’s judgment. If any of our
      intangible or long-lived assets are considered to be impaired, the amount of
      impairment to be recognized is the excess of the carrying amount of the assets
      over its fair value. The net carrying values of long-lived assets at December
      31, 2005, subject to possible impairment charges in the future, are presented
      by
      location in the following table below: ****





**Foster
                City,**
              **California**
            
            **Portland,**
              **Oregon**
            
            **Total**Furniture
                and equipment
            
            $
            141,000
            
            $
            63,000
            
            $
            204,000Leasehold
                improvements
            
            
            39,000
            
            
            −
            
            
            39,000Patents
            
            
            15,000
            
            
            816,000
            
            
            831,000Goodwill
                and other assets
            
            
            1,291,000
            
            
            −
            
            
            1,291,000$
            1,486,000
            
            $
            879,000
            
            $
            2,365,000





Applicable
      long-lived assets are amortized or depreciated over the shorter of their
      estimated useful lives, the estimated period that the assets will generate
      revenue, or the statutory or contractual term in the case of patents. Estimates
      of useful lives and periods of expected revenue generation are reviewed
      periodically for appropriateness and are based upon management’s judgment.
      Goodwill and other assets are not amortized.





*Certain
      Expense and Liabilities*





On
      an
      ongoing basis, management evaluates its estimates related to certain expenses
      and accrued liabilities. We base our estimates on historical experience and
      on
      various other assumptions that we believe to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying values of liabilities that are not readily apparent from other
      sources. Actual results may differ materially from these estimates under
      different assumptions or conditions.





25


*Stock-Based
      Compensation*





Statement
      of Financial Accounting Standards, or SFAS, No. 123, “Accounting for Stock-Based
      Compensation” encourages the use of the fair value based method of accounting
      for stock-based employee compensation. Alternatively, SFAS No. 123 allows
      entities to continue to apply the intrinsic value method prescribed by
      Accounting Principles Board, or APB, Opinion 25, “Accounting for Stock Issued to
      Employees”, and related interpretations and provide pro forma disclosures of net
      income (loss) and earnings (loss) per share, as if the fair value based method
      of accounting had been applied to employee awards. We follow the fair valued
      based method for non-employee awards and have elected to continue to apply
      the
      provisions of APB Opinion 25 and provide the disclosures required by SFAS No.
      123 and SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and
      Disclosure.” During December 2004, Statement of Financial Accounting Standards
      No. 123 (revised 2004), or SFAS 123R, “Share Based Payment,” was issued
      requiring the expensing of all stock-based compensation effective January 1,
      2006. We are evaluating the effects of SFAS 123R and believe its implementation
      effect on our financial statements will be similar as disclosed in Note 1 to
      the
      audited consolidated financial statements included in this Report. Methodologies
      used for calculations such as the Black-Scholes option-pricing model and
      variables such as volatility and expected life are based upon management’s
      judgment. Such methodologies and variables are reviewed and updated periodically
      for appropriateness and affect the amount of recorded charges. See Notes 1
      and 9
      to the audited consolidated financial statements included in this Report for
      more information on the amounts, methodologies and variables related to non-cash
      stock-based compensation charges.





**Inflation**





We
      believe that inflation has not had a material adverse impact on our business
      or
      operating results during the periods presented.





**Off-balance
      Sheet Arrangements**





We
      have
      no off-balance sheet arrangements.





**RISK
      FACTORS**





**Risks
      Related to Our Business**




We
      operate in a rapidly changing environment that involves a number of risks,
      some
      of which are beyond our control. The following discussion highlights some of
      these risks and others are discussed elsewhere in this Report.




*We
      will need to raise additional capital to fund our general and administrative
      expenses, and if we are unable to raise them, we will have to curtail or cease
      operations.*





The
      cash
      held by the OXIS parent company of $332,000 at December 31, 2005, and, the
      $200,000 debt financing arrangement that we entered into with our Chief
      Executive Officer, Steve Guillen during March 2006, is not sufficient to
      continue operations through the second quarter of 2006 without additional
      financings. We are seeking loan and equity financings to obtain sufficient
      funds
      to sustain operations, including our development and commercialization programs,
      to implement our marketing campaign and purchase the remaining 49% of BioCheck
      common stock we do not own. We have incurred significant obligations in relation
      to our relocation to Foster City, California and our integration of operations
      with BioCheck, including severance benefits for terminated employees, the hiring
      of new personnel, our contractual obligations to consultants and moving
      expenses. We have also incurred debt in the amount of $200,000 to our Chief
      Executive Officer which we will need to repay on or before September 10, 2006.
      If we are unable to raise additional capital in the second quarter of 2006
      we
      will have to curtail or cease operations. If we raise short term capital by
      incurring additional debt, we will have to obtain equity financing sufficient
      to
      repay such debt and accrued interest. Further, incurring additional debt may
      make it more difficult for us to successfully consummate future equity
      financings.





26


*We
      will need to raise additional capital in order to complete our acquisition
      of
      the outstanding shares of BioCheck, Inc.*





On
      September 19, 2005 we entered into a Stock Purchase Agreement with BioCheck
      and
      the stockholders of BioCheck pursuant to which OXIS undertook to purchase up
      to
      all of the outstanding shares of common stock of BioCheck for an aggregate
      purchase price of $6.0 million in cash. On December 6, 2005, pursuant to
      the terms of the Stock Purchase Agreement with BioCheck, at the initial closing,
      we purchased an aggregate of fifty-one percent (51%) of the outstanding shares
      of common stock of BioCheck from each of the shareholders of BioCheck on a
      pro
      rata basis, for an aggregate of $3,060,000 in cash. Pursuant to the Stock
      Purchase Agreement, OXIS will use its reasonable best efforts to consummate
      a
      follow-on financing transaction to raise additional capital with which to
      purchase the remaining outstanding shares of BioCheck in one or more additional
      closings. The purchase price for any BioCheck shares purchased after the initial
      closing will be increased by an additional 8% per annum from the date of the
      initial closing through the date of such purchase. If OXIS has not purchased
      all
      of the outstanding shares of BioCheck within twelve months of the initial
      closing, the earnings before interest, taxes, depreciation and amortization
      expenses, or EBITDA, if any, of BioCheck will be used to repurchase the
      remaining outstanding BioCheck shares at one or more additional closings. There
      can be no assurance that there will be any EBITDA of BioCheck in the next
      several years which could be utilized to purchase additional shares of BioCheck
      pursuant to the Stock Purchase Agreement. Even if there is some amount of
      BioCheck EBITDA available to purchase additional shares of BioCheck, there
      can
      be no assurance that such EBITDA would be sufficient to complete our acquisition
      of the remaining 49% of BioCheck outstanding shares.





To
      avoid
      an increase in the purchase price of the remaining shares of BioCheck at the
      rate of 8% per annum, we will need to consummate a financing transaction to
      complete the acquisition of the remaining 49% of the outstanding shares of
      BioCheck. The successful completion of our acquisition of BioCheck is dependent
      upon obtaining financing on acceptable terms. No assurances can be given that
      we
      will be able to complete such a financing sufficient to undertake our
      acquisition of the outstanding shares of BioCheck on terms favorable to us,
      or
      at all. Any financing that we do undertake to finance the acquisition of
      BioCheck will likely involve dilution of our common stock if it is an equity
      financing or will involve the assumption of significant debt by
      OXIS.





*We
      will need additional financing in order to complete our development and
      commercialization programs.*





As
      of
      December 31, 2005, we had an accumulated deficit of approximately $65,379,000.
      We currently do not have sufficient capital resources to complete the
      development and commercialization of our antioxidant therapeutic technologies
      and oxidative stress assays, and no assurances can be given that we will be
      able
      to raise such capital in the future on terms favorable to us, or at all. The
      unavailability of additional capital could cause us to cease or curtail our
      operations and/or delay or prevent the development and marketing of our
      potential products. In addition, we may choose to abandon certain issued United
      States and international patents that we deem to be of lesser importance to
      our
      strategic direction, in an effort to preserve our financial resources.





Our
      future capital requirements will depend on many factors including the following:




•
              
              continued
                  scientific progress in our 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;•
              
              the
                  acquisition of additional technologies or businesses;•
              
              technological
                  competition and market developments; and•
              
              the
                  cost of complying with the requirements of the AMF in
                  France




27


We
      will
      need to raise additional capital to fund our development and commercialization
      programs. Our current capital resources are not sufficient to sustain operations
      and our development programs with respect to our cardiovascular predictor
      product and Ergothioneine as a nutraceutical supplement. We have granted a
      licensee exclusive worldwide rights, in certain defined areas of cardiovascular
      indications, to develop, manufacture and market BXT-51072 and related compounds
      from our library of such antioxidant compounds. The licensee is responsible
      for
      worldwide product development programs with respect to the licensed compounds.
      Due to the lack of financial resources, we ceased further testing of BXT-51072
      but continue to review the possibility of further developing applications for
      BXT-51072 and related compounds outside of the areas defined in the license.
      However, further development and commercialization of antioxidant therapeutic
      technologies, oxidative stress assays or currently unidentified opportunities,
      or the acquisition of additional technologies or businesses, may require
      additional capital. The fact that further development and commercialization
      of a
      product or technology would require us to raise additional capital, would be
      an
      important factor in our decision to engage in such further development or
      commercialization. No assurances can be given that we will be able to raise
      such
      funds in the future on terms favorable to us, or at all.





*If
      we
      complete our acquisition of BioCheck, our business could be materially and
      adversely affected if we fail to adequately integrate the operations of the
      two
      companies.*





If
      we
      complete the acquisition, or the Acquisition, of BioCheck as planned and we
      do
      not successfully integrate the operations of the two companies, or if the
      benefits of the transaction do not meet the expectations of financial or
      industry analysts, the market price of our common stock may decline. The
      Acquisition could result in the use of significant amounts of cash, dilutive
      issuances of equity securities, or the incurrence of debt or expenses related
      to
      goodwill and other intangible assets, any of which could materially adversely
      affect our business, operating results and financial condition.





We
      may
      not be able to successfully integrate the BioCheck business into our existing
      business in a timely and non-disruptive manner, or at all. In addition, the
      Acquisition may could
      result in, among other things, substantial charges
      associated with acquired in-process research and development, future write-offs
      of goodwill that is deemed to be impaired, restructuring charges related to
      consolidation of operations, charges associated with unknown or unforeseen
      liabilities of acquired businesses and increased general and administrative
      expenses. Furthermore, the Acquisition may not produce revenues, earnings or
      business synergies that we anticipate. In
      addition, we depend **** on
      BioCheck for the manufacturing of research assay test kits without the
      benefit of a formal agreement with BioCheck. There can be no assurance that
      BioCheck will continue to manufacture our research assay test kits.





In
      addition, acquisitions in general involve numerous risks, including:




•
              
              difficulties
                  in assimilating the operations, technologies, products and personnel
                  of an
                  acquired company;•
              
              risks
                  of entering markets in which we have either no or limited prior
                  experiences;•
              
              the
                  diversion of management’s attention from other business concerns; and•
              
              the
                  potential loss of key employees of an acquired company.


The
      time,
      capital management and other resources spent on the Acquisition, if it fails
      to
      meet our expectations, could cause our business and financial condition to
      be
      materially and adversely affected.





*Our
      relocation plan could adversely affect our operations.*





As
      part
      of our decision to acquire BioCheck we are implementing a relocation and
      integration plan, including implementing a strategy to reduce our cost
      structure. In doing so, we have significantly reduced our employee workforce
      from fifteen full time employees to four, outsourced certain company functions
      and have taken other steps intended to reduce costs and improve
      efficiencies.  **** Our
      business may be disrupted and adversely affected by this reduction in work
      force
      and our need to replace certain positions. Our business may also be disrupted
      due to our move to new facilities. Employee
      terminations, including the payment of severance benefits and other cost
      reduction steps will cause us to incur upfront costs and expenses that may
      be
      significant. There can be no assurances that we will be able to improve
      efficiencies and function properly following such reductions.





28


*We
      may experience disruption or may fail to achieve any benefits in connection
      with
      the recent changes in executive management and in Board membership.*





During
      the second quarter of 2004, our former chief executive officer retired, and
      during the third quarter of 2004 our chief operating and financial officer
      left
      the employment of our company. As a result, others who had limited experience
      with OXIS were appointed to serve as acting chief executive officer, acting
      chief operating officer and acting chief financial officer.
      On February 28, 2005, the Board appointed Mr. Steven T. Guillen to the
      positions of president and chief executive officer of OXIS, and as a member
      of
      our board. On January 6, 2006, we hired Michael D. Centron as our vice president
      and chief financial officer. In addition, during 2004 and early 2005, following
      the acquisition of a then-majority interest in OXIS by Axonyx, eight directors
      resigned from the board resulting in a four person board. During 2005 we added
      independent director John E. Repine, M.D., and on March 15, 2006 Gary M. Post
      joined our Board of Directors, resulting in a six person board. Five out of
      the
      six directors currently serving on the board commenced their service on the
      board during the period of 2004 through the date hereof.





One
      impact of such changes has been to delay our sales promotions in the research
      assay market and in the development of Ergothioneine market opportunities.
      Further, we narrowed our strategic focus to concentrate resources, including
      discontinuing our Animal Health Profiling program. There can be no assurances
      that these changes will not cause further disruptions in, or otherwise adversely
      affect, our business and results of operations.





*If
      we
      fail to attract and retain key personnel, our business could suffer.*





Our
      future depends, in part, on our ability to attract and retain key personnel.
      We
      may not be able to hire and retain such personnel at compensation levels
      consistent with our existing compensation and salary structure. We deferred
      the
      hiring of senior management personnel in order to allow our newly-engaged full
      time chief executive officer to select such key personnel. While we have
      succeeded in engaging Mr. Steven T. Guillen as our president and chief executive
      officer, and Michael D. Centron as our chief financial officer, we cannot
      predict whether we will be successful in finding suitable new candidates for
      key
      management positions within OXIS. While we have entered into letter agreements
      of employment with Mr. Guillen, and Mr. Centron, they are free to terminate
      their employment “at will.” Further, we cannot predict whether Mr.
      Guillen or Mr. Centron will
      be
      successful in their new roles as our president and chief executive officer,
      and
      chief financial officer, or whether senior management personnel hires will
      be
      effective. The loss of services of executive officers or key personnel, any
      transitional difficulties with our new chief executive officer or the inability
      to attract qualified personnel could have a material adverse effect on our
      financial condition and business. We
      do not
      have any key employee life insurance policies with respect to any of our
      officers.





*The
      success of our business depends upon our ability to successfully develop and
      commercialize products.*





We
      cannot
      assure you that our efforts to develop and commercialize a cardiac predictor
      product, an Ergothioneine
      nutraceutical product or any other products will be successful. The cost of
      such
      development and commercialization efforts can be significant and the likelihood
      of success of any such programs is difficult to predict. The failure to develop
      or commercialize such new products could be materially harmful to us and our
      financial condition.





*Our
      future profitability is uncertain.*





We
      cannot
      predict our ability to reduce our costs or achieve profitability. Our research
      and development expenses are expected to increase as we attempt to develop
      potential products. As evidenced by the substantial net losses during 2004
      and
      2005, losses and expenses may increase and fluctuate from quarter to quarter.
      There can be no assurance that we will ever achieve profitable operations.





29


*We
      have no biopharmaceutical or clinical diagnostic products available for sale
      and
      we may never be successful in developing products suitable for
      commercialization.*





All
      of
      our biopharmaceutical and clinical diagnostic candidates are at an early stage
      of development and all of such therapeutic and clinical diagnostic candidates
      will require expensive and lengthy testing and regulatory clearances. None
      of
      our therapeutic or clinical diagnostic candidates have been approved by
      regulatory authorities. We have no therapeutic or clinical diagnostic products
      available for sale and we may not have any products commercially available
      for
      several years, if at all. There are many reasons we may fail in our efforts
      to
      develop our therapeutic and clinical diagnostic candidates,
      including:


•
              
              our
                  therapeutic and clinical diagnostic candidates may be ineffective,
                  toxic
                  or may not receive regulatory clearances,•
              
              our
                  therapeutic and clinical diagnostic candidates may be too expensive
                  to
                  manufacture or market or may not achieve broad market
                  acceptance,•
              
              third
                  parties may hold proprietary rights that may preclude us from developing
                  or marketing our therapeutic and clinical diagnostic candidates,
                  or•
              
              third
                  parties may market equivalent or superior
                  products.


.


*Clinical
      development is inherently uncertain and expense levels may fluctuate
      unexpectedly because we cannot accurately predict the timing and level of such
      expenses.*





Our
      future success may depend in part upon the results of clinical trials undertaken
      by us or our licensees designed to assess the safety and efficacy of our
      potential products. We do not have substantial experience in developing and
      running clinical trials. The completion of clinical trials often depends
      significantly upon the rate of patient enrollment, and our expense levels will
      vary depending upon the rate of enrollment. In addition, the length of time
      necessary to complete clinical trials and submit an application for marketing
      and manufacturing approvals varies significantly and is difficult to predict.
      The expenses associated with each phase of development depend upon the design
      of
      the trial. The design of each phase of trials depends in part upon results
      of
      prior phases, and additional trials may be needed at each phase. As a result,
      the expense associated with future phases cannot be predicted in advance.
      Further, if we undertake clinical trials, we may decide to terminate or suspend
      ongoing trials. Failure to comply with extensive FDA regulations may result
      in
      unanticipated delay, suspension or cancellation of a trial or the FDA's refusal
      to accept test results. The FDA may also suspend our clinical trials at any
      time
      if it concludes that the participants are being exposed to unacceptable risks.
      As a result of these factors, we cannot predict the actual expenses that we
      will
      incur with respect to clinical trials for any of our potential products, and
      we
      expect that our expense levels will fluctuate unexpectedly in the future.





*Competition
      in most of our primary current and potential market areas is intense and
      expected to increase.*





The
      diagnostic, pharmaceutical and nutraceutical industries are highly competitive.
      The main commercial competition at present in our research assay business is
      represented by, but not limited to, the following companies: Cayman Chemical
      Company, Assay Designs and Randox Laboratories Ltd. In addition, our competitors
      and potential competitors include large pharmaceutical/nutraceutical companies,
      universities and research institutions. Relative to OXIS, these competitors
      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. There can be no assurance that we can compete
      successfully.





In
      addition, current and potential competitors may make strategic acquisitions
      or
      establish cooperative relationships among themselves or with third parties,
      thereby increasing the ability of their products to address the needs of our
      current and prospective customers. Accordingly, it is possible that new
      competitors or alliances among current and new competitors may emerge and
      rapidly gain significant market share. Such competition could materially
      adversely affect our ability to commercialize existing technologies or new
      technologies on terms favorable to us. Further, competitive pressures could
      require us to reduce the price of our products and technologies, which could
      materially adversely affect our business, operating results and financial
      condition. We may not be able to compete successfully against current and future
      competitors and any failure to do so would have a material adverse effect upon
      our business, operating results and financial condition.





30


*Axonyx
      holds the voting power to influence matters affecting us.*





Axonyx
      currently owns approximately 33% of our issued and outstanding stock. In
      addition, Dr. Marvin Hausman is a member of the board of directors of Axonyx
      and
      is the chairman of our board of directors, and Mr. S. Colin Neill, the chief
      financial officer of Axonyx, is a member of our board of directors and secretary
      of OXIS. Given these circumstances, Axonyx may influence our business direction
      and policies, and, thus, may have the ability to control certain material
      decisions affecting us. 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 our
      shareholders. 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 our assets. These provisions
      could complicate or prohibit certain transactions (including a financing
      transaction between OXIS and Axonyx), or limit the price that other investors
      might be willing to pay in the future for shares of our common
      stock.





*If
      we
      are unable to develop and maintain alliances with collaborative partners, we
      may
      have difficulty developing and selling our products and services.*





Our
      ability to realize significant revenues from new products and technologies
      is
      dependent upon, among other things, our success in developing business alliances
      and licensing arrangements with nutraceutical/biopharmaceutical and/or health
      related companies to develop and market these products. To date, we have had
      limited success in establishing foundations for such business alliances and
      licensing arrangements and there can be no assurance that our efforts to develop
      such business relationships will progress to mature relationships or that any
      such relationships will be successful. Further, relying on these or other
      alliances is risky to our future success because:




•
              
              our
                  partners may develop products or technologies competitive with
                  our
                  products and technologies;•
              
              our
                  partners may not devote sufficient resources to the development
                  and sale
                  of our products and technologies;•
              
              our
                  collaborations may be unsuccessful; or•
              
              we
                  may not be able to negotiate future alliances on acceptable terms.




*Our
      revenues and quarterly results have fluctuated historically and may continue
      to
      fluctuate, which could cause our stock price to decrease.*





Our
      revenues and operating results may fluctuate due in part to factors that are
      beyond our control and which we cannot predict. Material shortfalls in revenues
      will materially adversely affect our results and may cause us to experience
      losses. In particular, our revenue growth and profitability depend on sales
      of
      our research assays and fine chemicals. 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;•
              
              an
                  inability to obtain sufficient raw materials;•
              
              the
                  loss of or reduction in orders from key customers;•
              
              variable
                  or decreased demand from our customers;•
              
              the
                  receipt of relatively large orders with short lead times;•
              
              our
                  customers' expectations as to how long it takes us to fill future
                  orders;•
              
              customers'
                  budgetary constraints and internal acceptance review procedures;•
              
              there
                  may be only a limited number of customers that are willing to purchase
                  our
                  research assays and fine chemicals;•
              
              a
                  long sales cycle that involves substantial human and capital resources;
                  and•
              
              potential
                  downturns in general or in industry specific economic
                  conditions.


31


Each
      of
      these factors has impacted, and may in the future impact, the demand for and
      availability of our products and our quarterly operating results. For example,
      due to the unavailability of beef liver as a source for bSOD we were unable
      to
      sell any bSOD during 2005 and 2004, as compared to sales of $562,000 in 2003. We
      do not
      anticipate this source becoming available again within the foreseeable future
      and do not anticipate any revenues from sales of this product in the foreseeable
      future. In addition, a decrease in the demand for our Ergothioneine product
      resulted in a reduction of sales of Ergothioneine to $18,000 in 2005 and $87,000
      in 2004, compared to $333,000 in 2003. We cannot predict with any certainty
      our
      future sales of Ergothioneine.





If
      the
      sales or development cycles for research assays and fine chemicals lengthen
      unexpectedly, our revenues may decline or not grow as anticipated and our
      results from operations may be harmed.





*Changes
      in accounting standards regarding stock option plans could increase our reported
      losses, cause our stock price to decline and limit the desirability of granting
      stock options.*





The
      Financial Accounting Standards Board has issued regulations that eliminate
      the
      ability to account for share-based compensation transactions using the intrinsic
      method that we currently use and would require that such transactions be
      accounted for using a fair-value-based method and recognized as an expense
      in
      our consolidated statement of operations. As currently contemplated, we are
      now
      required to expense stock options after January 1, 2006. Currently, we
      generally only disclose such expenses on a pro forma basis in the notes to
      our
      consolidated financial statements in accordance with accounting principles
      generally accepted in the United States. Expensing such stock options will
      add
      to our losses or reduce our profits, if any. In addition, stock options are
      an
      important employee recruitment and retention tool, and we may not be able to
      attract and retain key personnel if we reduce the scope of our employee stock
      option program.





*Our
      income may suffer if we receive relatively large orders with short lead times,
      or our manufacturing capacity does not otherwise match our demand.*





Because
      we cannot immediately adapt our production capacity and related cost structures
      to rapidly changing market conditions, when demand does not meet our
      expectations, our manufacturing capacity will likely exceed our production
      requirements. Fixed costs associated with excess manufacturing capacity could
      adversely affect our income. Similarly, if we receive relatively large orders
      with short lead times, we may not be able to increase our manufacturing capacity
      to meet product demand, and, accordingly, we will not be able to fulfill orders
      in a timely manner. During a market upturn, we may not be able to purchase
      sufficient supplies to meet increasing product demand. In addition, suppliers
      may extend lead times, limit supplies or increase prices due to capacity
      constraints or other factors. These factors could materially and adversely
      affect our results.





*Our
      success will require that we establish a strong intellectual property position
      and that we can defend ourselves against intellectual property claims from
      others.*





Maintaining
      a strong patent position is important to our competitive advantage. We currently
      have 82 patents either granted or applied for in 15 countries with expiration
      dates ranging from 2006 to 2024. Litigation on patent-related matters has been
      prevalent in our industry and we expect that this will continue. Patent law
      relating to the scope of claims in the technology fields in which we operate
      is
      still evolving and the extent of future protection is highly uncertain, so
      there
      can be no assurance that the patent rights we have or may obtain will be
      valuable. Others may have filed, or may in the future file, patent applications
      that are similar or identical to ours. To determine the priority of inventions,
      we may have to 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 our patent protection.
      We
      cannot assure investors that any such patent applications will not have priority
      over our patent applications. Further, we may choose to abandon certain issued
      United States and international patents that we deem to be of lesser importance
      to our strategic direction, in an effort to preserve our financial resources.
      Abandonment of patents could substantially affect the scope of our patent
      protection. In addition, we may in future periods incur substantial costs in
      litigation to defend against patent suits brought by third parties or if we
      initiate such suits.





32


In
      addition to patent protection, we also rely upon trade secret protection for
      our
      confidential and proprietary information. There can be no assurance, however,
      that such measures will provide adequate protection for our 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 our trade secrets and
      other proprietary information. If we cannot obtain, maintain or enforce
      intellectual property rights, competitors can design and commercialize competing
      technologies.





We
      may
      face challenges from third parties regarding the validity of our patents and
      proprietary rights, or from third parties asserting that we are infringing
      their
      patents or proprietary rights, which could result in litigation that would
      be
      costly to defend and could deprive us 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 we own or license;•
              
              protect
                  trade secrets or know-how that we own or license; or•
              
              determine
                  the enforceability, scope and validity of the proprietary rights
                  of
                  others.




Our
      involvement in any litigation, interference or other administrative proceedings
      could cause us to incur substantial expense and could significantly divert
      the
      efforts of our technical and management personnel. An adverse determination
      may
      subject us to loss of our proprietary position or to significant liabilities,
      or
      require us 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 us from manufacturing
      and
      selling our products. Costs associated with these arrangements may be
      substantial and may include ongoing royalties. Furthermore, we may not be able
      to obtain the necessary licenses on satisfactory terms, if at all. These
      outcomes could materially harm our business, financial condition and results
      of
      operations.





*We
      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 our products. We may seek to acquire additional insurance for
      liability risks. We 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 our business,
      financial condition and results of operations.





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





Although
      we have an extensive operating history, resources are limited for the
      development and maintenance of our control environment. We have a very limited
      number of personnel and therefore segregation of duties can be somewhat limited
      as to their scope and effectiveness. We believe, however, that we are in
      reasonable compliance with the best practices given the environment in which
      we
      operate. Although existing controls in place are deemed appropriate for the
      prevention, detection and minimization of fraud, theft, and errors, they may
      result in only limited assurances, at best, that the total objectives of the
      control system are met. 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, can be detected and/or prevented
      and as such this is a risk area for investors to consider.





33


**Risks
      Related to Our Common Stock**




*Our
      common stock is traded on the OTCBB, our stock price is highly volatile, and
      you
      may not be able to sell your shares of our common stock at a price greater
      than
      or equal to the price you paid for such shares.*





Our
      shares of common stock are currently traded on the Over the Counter Bulletin
      Board, or OTCBB. Stocks traded on the OTCBB generally have limited trading
      volume and exhibit a wide spread between the bid/ask quotation. The market
      price
      of our common stock is extremely volatile. To demonstrate the volatility of
      our
      stock price, during the twelve-month period ending on December 31, 2005, the
      volume of our common stock traded on any given day ranged from 0 to 1,855,000
      shares. Moreover, during that period, our common stock traded as low as
      $0.24 **** per
      share
      and as high as $0.57 per share, a 237.50% difference. This may impact an
      investor’s decision to buy or sell our common stock. As of December 31, 2005
      there were approximately 5,500 holders of our common stock. Factors affecting
      our stock price include:


•
              
              our
                  financial results;•
              
              fluctuations
                  in our operating results;•
              
              announcements
                  of technological innovations or new commercial health care products
                  or
                  therapeutic products by us or our competitors;•
              
              government
                  regulation;•
              
              developments
                  in patents or other intellectual property rights;•
              
              developments
                  in our relationships with customers and potential 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 us could result in substantial costs and divert management's attention
      and resources, which could seriously harm our business and financial
      condition.





In
      addition, the 12,264,158 shares of our common stock, and the 12,877,366 shares
      of our common stock that are issuable upon exercise of warrants that we issued
      in the private placement of equity that closed on January 6, 2005 have been
      registered with the United States Securities & Exchange Commission, or SEC,
      and may be sold into the market. We cannot control when and in what quantities
      the selling shareholders will choose to sell shares of our common stock and
      such
      sales may cause the price of our common stock to decline.





*Our
      common stock may be subject to “penny stock” rules which may be detrimental to
      investors.*





Our
      common stock may be, or may become, subject to the regulations promulgated
      by
      the SEC for “penny stock”. SEC regulation relating to penny stock is presently
      evolving, and the OTCBB may react to such evolving regulation in a way that
      adversely affects the market liquidity of our common stock. Penny stock
      currently includes any non-NASDAQ equity security that has a market price of
      less than $5.00 per share, subject to certain exceptions. The regulations
      require that prior to any non-exempt buy/sell transaction in a penny stock,
      a
      disclosure schedule set forth by the SEC relating to the penny stock market
      must
      be delivered to the purchaser of such penny stock. This disclosure must include
      the amount of commissions payable to both the broker-dealer and the registered
      representative and current price quotations for the common stock. The
      regulations also require that monthly statements be sent to holders of penny
      stock that disclose recent price information for the penny stock and information
      of the limited market for penny stocks. These requirements may adversely affect
      the market liquidity of our common stock.





34


*Sales
      of our common stock may require broker-dealers to make special suitability
      determinations regarding prospective purchasers.*





Our
      common stock may be, or may become, subject to Rule 15g-1 through 15g-9 under
      the Securities Exchange Act of 1934, as amended, or the Exchange Act, which
      imposes certain sales practice requirements on broker-dealers which sell our
      common stock to persons other than established customers and “accredited
      investors” (generally, individuals with a net worth in excess of $1,000,000 or
      an annual income exceeding $200,000 (or $300,000 together with their spouses)).
      For transactions covered by this rule, a broker-dealer must make a special
      suitability determination for the purchaser and have received the purchaser’s
      written consent to the transaction prior to the sale. Applicability of this
      rule
      would adversely affect the ability of broker-dealers to sell our common stock
      and purchasers of our common stock to sell their shares of such common stock.
      Accordingly, the market for our common stock may be limited and the value
      negatively impacted.





*We
      will incur expenses in connection with registration of our shares which may
      be
      significant.*





We
      are
      required to pay fees and expenses incident to the registration with the SEC
      of
      the shares issued in the private placement of equity which closed on January
      6,
      2005 and maintain adequate disclosure in connection with such registration,
      including updating prospectuses and under certain circumstances, filing amended
      registration statements. These expenses were $302,000 in 2005, and we may incur
      significant additional expenses in the future related to maintaining effective
      registration statements for prior financings and any additional registrations
      related to future financings. We have also agreed to indemnify such selling
      shareholders against losses, claims, damages and liabilities arising out of
      relating to any misstatements or omissions in our registration statement and
      related prospectuses, including liabilities under the Securities Act. In the
      event such a claim is made in the future, such losses, claims, damages and
      liabilities arising therefrom could be significant in relation to our
      revenues.





**ITEM
      7.**  **FINANCIAL
      STATEMENTS**





The
      Audited Financial Statements for this Form 10-KSB appear on pages F-1 through
      F-28 following the signature page below.





**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, we carried out an evaluation, under
      the supervision and with the participation of our 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.





**ITEM
      8B. OTHER INFORMATION**





None.


35


**PART
      III**





**ITEM
      9.** **DIRECTORS,
      EXECUTIVE OFFICERS** **,
      PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF** **THE
      EXCHANGE ACT** ****





The
      following table sets forth certain information with respect to each of our
      directors and executive officers as of March 24, 2006.




**Name**
            
            **Age**
            
            **Position**Marvin Hausman, M.D.
            
            64
            
            Chairman
                of the Board (1)Steven T. Guillen
            
            54
            
            President,
                Chief Executive Officer and DirectorS.
                Colin Neill
            
            59
            
            Secretary
                and Director (2)Gary
                M. Post
            
            57
            
            Director
                (3)John
                E. Repine, M.D.
            
            61
            
            Director
                (3)Timothy C. Rodell, M.D.
            
            55
            
            Director
                (4)Michael
                D. Centron
            
            50
            
            Vice
                President, Chief Financial Officer






(1)
            Chairman
                of the Compensation Committee(2)
            Member
                of the Nominating Committee, and Chairman of the Audit Committee,
                serves
                as our designated audit committee financial expert.(3)
            Member
                of the Audit Committee(4)
            Chairman
                of the Nominating Committee and member of the Compensation
                Committee.




**Marvin
      S. Hausman, M.D.**




*Chairman
      of the Board.* Dr.
      Hausman was appointed to the Board of Directors on August 20, 2004. Previously,
      Dr. Hausman served on the Board of Directors from March 2002 to November 2003.
      On December 10, 2004, the Board of Directors appointed Marvin S. Hausman, M.D.
      to serve as Chairman of the Board, acting Chief Executive Officer and acting
      Chief Financial Officer of OXIS. On February 28, 2005, Dr. Hausman ceased to
      be
      the Company’s Chief Executive Officer. Dr. Hausman has served as a director and
      as Chairman of the Board of Axonyx since 1997, and had served as President
      and
      Chief Executive Officer of Axonyx from 1997 until September 2003 and March
      2005,
      respectively. Dr. Hausman served as our Acting Chief Financial Officer until
      January 6, 2006 when Michael D. Centron was appointed as our full time Chief
      Financial Officer. Dr. Hausman currently owns approximately 2.8% of the
      outstanding common stock of OXIS, and Axonyx currently owns approximately 33%
      of
      the outstanding common stock of OXIS. Dr. Hausman was a co-founder of Medco
      Research Inc., a pharmaceutical biotechnology company specializing in adenosine
      products. He has thirty years’ experience in drug development and clinical care.
      Dr. Hausman received his medical degree from New York University School of
      Medicine in 1967 and has done residencies in General Surgery at Mt. Sinai
      Hospital in New York, and in Urological Surgery at U.C.L.A. Medical Center
      in
      Los Angeles. He also worked as a Research Associate at the National Institutes
      of Health, Bethesda, Maryland. He has been a Lecturer, Clinical Instructor
      and
      Attending Surgeon at the U.C.L.A. Medical Center Division of Urology and
      Cedars-Sinai Medical Center, Los Angeles. He has been a Consultant on
      Clinical/Pharmaceutical Research to various pharmaceutical companies, including
      Bristol-Meyers International, Mead-Johnson Pharmaceutical Company, Medco
      Research, Inc., and E.R. Squibb. Since October 1995, Dr. Hausman has been the
      President of Northwest Medical Research Partners, Inc., a medical technology
      and
      transfer company. He was a member of the Board of Directors of Medco Research,
      Inc. from inception (1978) through 1992 and from May 1996 to July 1998. Dr.
      Hausman was a member of the Board of Directors of Regent Assisted Living, Inc.,
      a company specializing in building assisted living centers including care of
      senile dementia residents, from March 1996 to April 2001.




36


**Steven
      T. Guillen**




*President,
      Chief Executive Officer and Director.* On
      February 28, 2005, Steven T. Guillen was appointed the Company’s President,
      Chief Executive Officer and a member of the Company’s Board of Directors. Prior
      to joining the Company, from 2001 to 2004, Mr. Guillen served as Vice President,
      Sales and Marketing for Amarin Pharmaceuticals, Inc., a neuroscience company
      focused on the development and commercialization of drugs for the treatment
      of
      neurological disorders affecting the central nervous system. From 1996 to 2001,
      Mr. Guillen served as the Vice President, Sales and Marketing for Athena
      Diagnostics, a company involved with the development and commercialization
      of
      diagnostic testing for neurological diseases. From 1991 until joining Amarin
      Pharmaceuticals, Inc., Mr. Guillen held several senior level sales and marketing
      positions with Elan Pharmaceuticals, an affiliate of Elan Corporation, PLC,
      including from 1996 to 2001 as Vice President of Sales and Marketing for Athena
      Diagnostics (Division of Elan), a reference laboratory dedicated to the
      development and commercialization of diagnostic testing for neurological
      disorders. Prior to joining Elan Pharmaceuticals, Mr. Guillen spent 17 years
      at
      Merck & Co., Inc., where he held a number of positions of increasing
      responsibility, including responsibility for the training and development of
      a
      350 member sales management team. Mr. Guillen holds a B.S. in Zoology, with
      a
      minor in Chemistry, from the University of California, Davis, and MBA from
      the
      University of California, Riverside.




**S.
      Colin Neill**




*Secretary
      and Director.* Mr.
      Neill
      was appointed to the Board of Directors in April 2004. Mr. Neill joined Axonyx
      in September 2003 as Chief Financial Officer and Treasurer and was named
      Secretary in January 2004. From April 2001 to September 2003, Mr. Neill had
      been
      an independent consultant assisting small development stage companies raise
      capital. Previously, Mr. Neill served as Senior Vice President, Chief Financial
      Officer, Secretary and Treasurer of ClinTrials Research Inc., a publicly traded
      global contract research organization in the drug development business, from
      1998 until its sale in April 2001. Prior to that, Mr. Neill served as Vice
      President and Chief Financial Officer of Continental Health Affiliates Inc.
      and
      its majority owned subsidiary Infu-Tech Inc. Mr. Neill’s experience has included
      that of Acting Vice President Finance and Chief Financial Officer of Pharmos
      Corporation, a biopharmaceutical company in the business of developing novel
      drug technologies. Earlier experience was gained as Vice President Finance
      and
      Chief Financial Officer of BTR Inc., a U.S. subsidiary of BTR plc, a British
      diversified manufacturing company, and Vice President Financial Services of
      The
      BOC Group Inc., a British owned industrial gas company with substantial
      operations in the health care field. Mr. Neill served for four years with
      American Express Travel Related Services, first as chief internal auditor for
      worldwide operations and then as head of business planning and financial
      analysis. Mr. Neill began his career in public accounting with Arthur Andersen
      LLP in Ireland and later with Price Waterhouse LLP as a senior manager in New
      York City. He also served with Price Waterhouse for two years in Paris, France.





**Gary
      M. Post**





*Director.* Mr.
      Post
      has served as a director of OXIS since March 15, 2006. Since 1999 Mr. Post
      has
      been the Managing Director and Investment Principal of Ambient Advisors, LLC.
      Ambient Advisors primarily invests its own and its partners’ capital in private
      and public companies with a particular interest in the health care and life
      sciences sector and certain other special situations. Ambient Advisors also
      actively advises these companies, sometimes taking interim management roles.
      In
      his capacity as Managing Director at Ambient Advisors, Mr. Post has acted as
      an
      interim Chief Executive Officer in two private early to mid stage companies
      that
      Ambient had invested in, Opticon Medical, Inc., a medical device company and
      OccMeds Billing Services, Inc., a worker’s compensation pharmacy payment
      processing company. Mr. Post holds a MBA from the U.C.L.A. Graduate School
      of
      Management and an A.B. in Economics from Stanford University.





37


**John
      E. Repine, M.D.**





*Director.* Dr.
      Repine has served as a director of OXIS since October 2005. Since 1996, Dr.
      Repine has been the James J. Waring Professor of Medicine and Pediatrics at
      the
      University of Colorado Health Sciences Center. Since 1993, Dr. Repine has been
      the Chief Executive Officer and President of the Webb-Waring Institute for
      Cancer, Aging and Antioxidant Research.  Dr.
      Repine graduated from the School of Medicine and completed training in internal
      medicine and pulmonary medicine at the University of Minnesota.  Dr. Repine
      has received many national awards for his research including an Established
      Investigator Award from the American Heart Association, the Alton Ochsner Award
      Relating Smoking and Health and the Senior Scholar in Aging Award from the
      Ellison Medical Foundation. Dr. Repine was the Principal Investigator for 10
      years for one of six National Specialized Centers of Research (SCOR) of the
      National Institutes of Health for the Study of Acute Lung Injury.  Dr.
      Repine is a recognized expert in the study of vascular disorders, inflammation,
      oxidants and antioxidants.  Dr. Repine has served in various capacities
      with a number of biotechnology companies.





**Timothy
      C. Rodell, M.D.**




*Director.* Since
      2002, Dr. Rodell has served as Chief Executive Officer of GlobeImmune, Inc.,
      a
      development stage immunotherapy company focused on chronic viral diseases and
      cancer. Dr. Rodell has also served as Managing Partner of MTR, Inc., a
      consulting company specializing in clinical drug development and regulatory
      strategy, corporate development and financing and healthcare information
      technology since its inception in late 1995. Board-certified in Internal
      Medicine and Pulmonary Medicine, Dr. Rodell earned his M.D. from the University
      of North Carolina School of Medicine in 1980. He has completed post-doctoral
      fellowships in molecular and cell biology and is a Fellow of the American
      College of Chest Physicians. From 1999 until 2002, Dr. Rodell was President
      and
      Chief Executive Officer of RxKinetix, Inc., a private drug delivery company.
      From 1996 until 2000, Dr. Rodell held various positions at OXIS, including
      Chief
      Technology Officer and President of OXIS International, SA, our French
      subsidiary. Prior to that, Dr. Rodell was Executive Vice President of Operations
      and Product Development for Cortech, Inc. Before joining Cortech, Dr. Rodell
      practiced and taught emergency medicine, internal medicine and pulmonary and
      critical care medicine at the University of Colorado Health Sciences Center
      and
      Denver General Hospital, now Denver Health.




**Michael
      D. Centron**





*Vice
      President and Chief Financial Officer.* Michael
      Centron has served as Vice President and Chief Financial Officer since January
      2006. Prior to joining OXIS, Mr. Centron served in various positions at Large
      Scale Biology Corporation from 1988 to 2005 including Vice President of Finance
      and Administration, Treasurer and Controller. On
      January 9, 2006, Large Scale Biology Corporation filed a voluntary petition
      for
      protection under Chapter 11 of the United States Bankruptcy Code in the United
      States Bankruptcy Court for the Eastern District of California.  Mr.
      Centron is a certified public accountant and received his B.S. in economics
      from
      the Wharton School of the University of Pennsylvania and his M.B.A. from the
      Haas School of the University of California, Berkeley.





There
      are
      no family relationships between the officer and directors.





None
      of
      our directors, officers or affiliates, and no owner of record or beneficial
      owner of more than five percent (5%) of our securities, or any associate of
      any
      such director, officer or security holder is a party adverse to OXIS or any
      of
      its subsidiaries or has a material interest adverse to OXIS or any of its
      subsidiaries in reference to pending litigation.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





No
      director, officer or beneficial owner of more than 10% of any class of our
      equity securities failed to file a Form 3 or Form 4 on a timely basis in
      2005.





38


**Code
      of Ethics**





The
      Board
      of Directors has adopted a Code of Ethics and Business Conduct to provide
      guidance to its directors, officers and employees regarding standards for
      conduct of the Company’s business, which code has been delivered to all
      directors, officers and employees of the Company. The full text of our Code
      of
      Ethics and Business Conduct is available on our website at
      www.oxis.com.   To
      the
      extent required by law, any amendments to, or waivers from, any provision of
      the
      code of ethics will promptly be disclosed to the public. To the extent permitted
      by such legal requirements, we intend to make such public disclosure by posting
      the relevant material on our website in accordance with SEC rules.





**ITEM
      10.**  **EXECUTIVE
      COMPENSATION**




Our
      compensation and benefits program is designed to attract, retain and motivate
      employees to operate and manage our company for the best interests of its
      constituents. Executive compensation is designed to provide incentives for
      those
      senior members of management who bear responsibility for our goals and
      achievements. The compensation philosophy is based on a base salary and a stock
      option program.





**Summary
      Compensation Table**





The
      following table summarizes the compensation earned by our Chief Executive
      Officer and our Chief Financial Officer, all acting in such capacities as of
      December 31, 2005, (collectively referred to as the “Named Executive Officers”).
      No other individuals served in any capacity as executive officers for us
      with salary and bonus in excess of $100,000 during 2005. The aggregate amount
      of
      perquisites and other personal benefits, securities or properties received
      by
      each Named Executive Officer was less than either $50,000 or 10% of the total
      annual salary and bonus reported for each respective Named Executive Officer
      in
      each year reported below.


**Long-Term****Annual
                      Compensation**
                  
                  **Compensation
                      - Awards**
                  
                  **All
                      Other********Name
                      and Principal Position**
                  
                  **Year**
                  
                  **Salary**
                  
                  **Other**
                  
                  **Securities
                      Underlying Options**
                  
                  **Compensation**Steven
                      T. Guillen  (1)
                  
                  
                  2005
                  
                  $
                  209,000
                  
                  $
                  5,000
                      (2)
                  
                  
                  1,100,000
                  
                  
                  $
                  2,000(3)President,
                      Chief Executive
                  
                  
                  2004
                  
                  
                  3⁄4
                  
                  
                  3⁄4
                  
                  
                  3⁄4
                  
                  
                  
                  3⁄4Officer
                      and Director
                  
                  
                  2003
                  
                  
                  3⁄4
                  
                  
                  3⁄4
                  
                  
                  3⁄4
                  
                  
                  
                  3⁄4Dr.
                      Marvin S. Hausman(4)
                  
                  
                  2005
                  
                  
                  3⁄4(5)
                  
                  
                  15,000
                        (6)
                  
                  
                  613,000
                  (7)
                  
                  
                  3⁄4Chairman
                      of the Board,
                  
                  
                  2004
                  
                  
                  3⁄4(5)
                  
                  
                  3⁄4
                  
                  
                  50,000
                  (7)
                  
                  
                  3⁄4Acting
                      Chief Financial Officer,
                  
                  
                  2003
                  
                  
                  3⁄4
                  
                  
                  3⁄4
                  
                  
                  16,695
                  (7)
                  
                  
                  3⁄4former
                      Acting Chief Executive Officer


(1) 
       Mr. Guillen was appointed President, Chief Executive Officer and Director
      on February 28, 2005.


(2)  
      Includes $5,000 for car allowance.


(3)
        Includes $2,000 for matching contribution under our 401(k)
      plan.


(4)  
      Dr. Hausman served as Acting Chief Executive Officer from December 8, 2004
      to
      February 28, 2005 and as Acting Chief Financial Officer from December 8, 2004
      until January 6, 2006. Dr. Hausman remains Chairman of the Board of
      Directors.


(5)  
      Dr. Hausman did not receive a cash salary for his services as Chairman and
      Acting President, Chief Executive Officer and Chief Financial Officer in either
      2004 or 2005. See Director Compensation below for Dr. Hausman’s compensation as
      a director.


(6)  
      Dr. Hausman earned $15,000 pursuant to a consulting agreement with NW Medical
      Research Partners, Inc. Dr. Hausman is the sole member and manager of NW Medical
      Research Partners.


(7)   Includes
      stock option grants as a director and consultant.




39


**Stock
      Option Grants in 2005**





The
      following table summarizes information regarding stock options granted to Named
      Executive Officers during 2005.




**Name**
            
            **Number
                of**
              **Common Shares**
              **Underlying**
              **Options
                Granted**
            
            **Percent
                of Total**
              **Options**
              **Granted
                to**
              **Employees**
              **in
                2005****(1****)**
            
            **Exercise**
              **Price****(2)**
            
            **Expiration
                Date**Steven
                T. Guillen
            
            600,000
                (3)
              500,000
                (4)
            
            
            23.0%
              19.2%
            
            
            $0.45
              $0.29
            
            
            February
                28, 2015
              December
                27, 2015Marvin
                S. Hausman, M.D.
            
            5,000
                (5)
              108,000
                (6)
              500,000
                (7)
            
            
            0.2%
              4.1%
              19.2%
            
            
            $0.34
              $0.37
              $0.29
            
            
            June
                21, 2015
              October
                4, 2015
              December
                27, 2015




(1) Based
      upon a total of 2,608,000 stock options granted to all employees in
      2005.


(2) Exercise
      prices of granted stock options are equal to the closing price of our common
      stock on the date prior to the date of grant.


(3) Common
      shares numbering 150,000 are exercisable on February 28, 2005 and 150,000 common
      shares are exercisable annually thereafter.


(4) Common
      shares numbering 200,000 are exercisable on December 28, 2005 and 75,000 common
      shares are exercisable annually thereafter.


(5) Common
      shares are exercisable on June 22, 2006.


(6) Common
      shares numbering 9,000 are exercisable on October 5, 2005 and 9,000 common
      shares are exercisable monthly thereafter.


(7) Common
      shares numbering 300,000 are exercisable on February 27, 2007, and 100,000
      common shares are exercisable on each of December 28, 2007 and December 28,
      2008.




**Aggregated
      Options Exercised during 2005 and Year-End Option Values**





The
      following table summarizes information regarding stock options exercised by
      the
      Named Executive Officers in 2005 and the value of unexercised “in-the-money”
options they held at December 31, 2005.




**Common
                Shares Acquired**
            
            **Value**
            
            **Number
                of Securities Underlying Unexercised Options****at**
              **December
                31, 2005 (1)**
            
            **Value
                of Unexercised**
              **In-the-Money
                Options at**
              **December
                31, 2004 (2)****Name**
            
            **on
                Exercise**
            
            **Realized**
            
            **Exercisable**
            
            **Unexercisable**
            
            **Exercisable**
            
            **Unexercisable**Steven
                T. Guillen
            
            —
            
            —
            
            —
            
            —
            
            —
            
            —Marvin
                S. Hausman, M.D.
            
            —
            
            —
            
            30,000
            
            —
            
            $1,200
            
            —





(1)  
      Options are currently all exercisable.


(2)  
      In-the-money options represents unexercised options having a per share exercise
      price below $0.26, the closing price of our common stock at December 31, 2005.
      The value of unexercised in-the-money options equals the number of in-the-money
      options multiplied by the excess of $0.26 over the per-share exercise prices
      of
      the options. The value of unexercised in-the-money options at December 31,
      2005,
      may never be realized by the option holders.





40


**Director
      Compensation**





We
      pay an
      annual fee of $4,000 to each non-employee director and an additional $1,000
      to
      non-employee directors for serving as committee chair. During 2005, while we
      did
      not make payments under this policy, such expenses were accrued. We do not
      pay
      meeting fees but directors are reimbursed for their expenses incurred in
      attending meetings. Employee directors receive no other compensation as
      directors.




Under
      our
      2003 Stock Incentive Plan, non-employee directors are automatically awarded
      options to purchase 30,000 shares of Common Stock upon becoming directors and
      automatically awarded options to purchase 5,000 shares of Common Stock annually
      thereafter.




The
      following table represents stock options that were granted during 2005 to
      non-employee directors.





**Name**
            
            **Automatic
                Options**
              **Issued for**
              **Service on Board**
            
            **Discretionary**
              **Options**
            
            **Total**
              **Options**
              **Granted**Marvin
                S. Hausman, M.D.
            
            5,000
            (1)
            
            608,000
            (3)
            
            613,000S.
                Colin Neill
            
            5,000
            (1)
            
            100,000
            (4)
            
            105,000Timothy
                C. Rodell, M.D.
            
            5,000
            (1)
            
            100,000
            (4)
            
            105,000John
                E. Repine, M.D.
            
            30,000
            (2)
            
            30,000
            (4)
            
            60,000








(1)
            Dr.
                Hausman, Mr. Neill and Dr. Rodell were granted 5,000 options on June
                22,
                2005 as director compensation for 2005. The exercise price is based
                on the
                closing price of $0.34 on June 22,
                2005.


(2)
            Dr.
                Repine was granted 30,000 options on October 5, 2005 upon becoming
                a
                director. The exercise price is based on the closing price of $0.37
                on
                October 5, 2005.


(3)
            Dr.
                Hausman was granted 500,000 options on December 28, 2005 for his
                services
                as Chairman of the Board, and Acting Chief Executive Officer and
                Acting
                Chief Financial Officer during 2005. These options were issued outside
                of
                the OXIS 2003 Stock Incentive Plan. Dr. Hausman was also granted
                108,000
                options pursuant to a Consulting Agreement with NW Medical Research
                Partners, Inc. Dr. Hausman is the sole member and manager of NW Medical
                Research Partners. The exercise price for an option to purchase 500,000
                shares of common stock is based on the closing price of $0.29 on
                December
                28, 2005 and an option to purchase 108,000 shares of common stock
                is based
                on the closing price of $0.37 on October 5,
                2005.


(4)
            Mr.
                Neill and Dr. Rodell were granted 100,000 options and Dr. Repine
                was
                granted 30,000 options on December 28, 2005 for their services on
                the
                Board of Directors in 2005. The exercise price is based on the closing
                price of $0.29 on December 28,
                2005.





**Employment
      Agreements**




Marvin
      S.
      Hausman, M.D. did not enter into an Employment Agreement with OXIS concerning
      his services as Acting Chief Executive Officer and Acting Chief Financial
      Officer.





41


On
      February 28, 2005, we entered into a Letter Agreement, effective as of February
      28, 2005, with Steven T. Guillen. The terms of the Letter Agreement include,
      but
      are not limited to, the following: (1) Mr. Guillen will serve as our President
      and Chief Executive Officer; (2) Mr. Guillen’s initial annual base salary will
      be $250,000, subject to annual salary and performance reviews and potential
      salary increases at the sole discretion of the Board; (3) Mr. Guillen will
      be
      eligible for a performance-based bonus determined at the discretion of the
      Board, the range of which is expected to be between 25% and 50% of Mr. Guillen’s
      annual base salary, depending upon the attainment of certain goals to be
      mutually agreed upon between Mr. Guillen and the Board; (4) Mr. Guillen has
      received irrevocable stock option grants in the aggregate amount of 600,000
      shares of our common stock under the OXIS 2003 Stock Incentive Plan, or the
      Plan, and pursuant to a standalone grant outside of the Plan; (5) The options
      have an exercise price per share equal to $0.40; (6) Mr. Guillen will be
      entitled to full vesting of the then-unvested shares subject to the irrevocable
      stock option grants upon a Change of Control (as defined in the Letter
      Agreement) to include, (i) a merger, consolidation, or reorganization approved
      by our stockholders, unless securities representing more than (50%) of the
      total
      combined voting power of the voting securities of the successor company are
      immediately thereafter beneficially owned, directly or indirectly, and in
      substantially the same proportion, by the persons who beneficially owned our
      outstanding voting securities immediately prior to such transaction, or (ii)
      any
      stockholder-approved transfer or any other disposition of all of our assets,
      or
      (iii) the acquisition, directly or indirectly, by any person or related group
      of
      persons (other than OXIS or a person that directly or indirectly controls,
      is
      controlled by, or is under common control of, OXIS), of beneficial ownership
      (within the meaning of Rule 13d of the 1934 Act) of securities possessing more
      than (50%) of the total combined voting power of our outstanding securities
      pursuant to a tender or exchange offer made directly to our stockholders, or
      (iv) a change in the composition of the Board such that (a) five or more Board
      members resign or are otherwise removed as Board members within any period
      of
      six consecutive months or less; (b) five or more Board members opt not to stand
      for re-election to the Board within any period of six consecutive months or
      less; or (c) any combination of the foregoing subsections occur such that five
      or more Board member positions are affected by a combination of resignations
      or
      removals, or the decision not to stand for re-election, within any period of
      six
      consecutive months or less, or upon Mr. Guillen’s termination of his employment
      with our company for “good reason” (as defined in the Letter Agreement)
      (collectively, the “Acceleration Events”); (7) Mr. Guillen purchased 600,000
      fully-vested shares of our common stock, at the then-current market price of
      $0.40 per share from the pool of shares reserved in the Plan; (8) Mr. Guillen
      has become a member of the Board; and (9) As further described and qualified
      in
      the Letter Agreement, Mr. Guillen will be entitled to receive certain severance
      benefits, including payments equal to one month of his base salary for a period
      of 12 months, in the event that: (i) OXIS terminates his employment without
      “cause” (as defined in the Letter Agreement), (ii) within twelve months after a
      Change of Control, Mr. Guillen terminates his employment with “good reason” (as
      defined in the Letter Agreement) or (iii) Mr. Guillen’s employment terminates as
      a result of his death or disability (each a “Severance Termination”).





42





**ITEM
      11.****SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS**





The
      following table sets forth certain information known by us with respect to
      the
      beneficial ownership of our common stock as of March 24, 2006 by (i) each person
      who is known by us to own beneficially more than 5% of common stock, (ii) each
      of the Named Executive Officers (see “Executive Compensation” above), (iii) each
      of our directors and (iv) all of our current officers and directors as a group.
      Except as otherwise listed below, the address of each person is c/o OXIS
      International, Inc**.,**323
      Vintage Park Drive, Suite B, Foster City, California 94404.





The
      percentage of shares beneficially owned is based on 42,538,397 shares of common
      stock outstanding as of March 24, 2006. Shares of common stock subject to stock
      options and warrants that are currently exercisable or exercisable within 60
      days of March 24, 2006 are deemed to be outstanding for the purpose of computing
      the percentage ownership of that person but are not treated as outstanding
      for
      the purpose of computing the percentage ownership of any other person. Unless
      indicated below, the persons and entities named in the table have sole voting
      and sole investment power with respect to all shares beneficially owned, subject
      to community property laws where applicable.




**Name
                and, as**
              **Appropriate,
                Address of Beneficial Owner**
            
            **Amount and Nature**
              **of
                Beneficial**
              **Ownership**
            
            **Percent of**
              **Common****Stock**Axonyx
                Inc.500
                7thAvenue, 10thFloorNew
                York NY 10018 (1)
            
            15,139,212
            
            35.6
            %Bristol
                Investment Fund, Ltd.Bristol
                Capital Advisors, LLC
              10990
                Wilshire Blvd., Suite 1410Los
                Angeles, CA 90024 (2)
            
            7,735,850
            
            16.7
            %Silverback
                Asset Management, LLC1414
                Raleigh Road, Suite 250
              Chapel
                Hill, NC 27517 (3)
            
            3,301,888
            
            7.4
            %Silverback
                Master Ltd.c/o
                Silverback Asset Management, LLC
              1414
                Raleigh Road, Suite 250
              Chapel
                Hill, NC 27517 (4)
            
            2,830,190
            
            6.4
            %Marvin
                S. Hausman, M.D. (5)
            
            15,295,407
            
            35.8
            %S.
                Colin Neill (6)
            
            14,087,567
            
            33.0
            %Steven
                T. Guillen (7)
            
            1,100,000
            
            2.6
            %Timothy
                C. Rodell, M.D. (8)
            
            378,737
            
            *John
                E. Repine, M.D. (9)
            
            29,400
            
            *Gary
                M. Post (10)
            
            15,000
            
            *Executive
                officers and directors as a group — 7 persons (11)
            
            16,961,044
            
            38.8
            %




*
            Less
                than one percent.





(1)
            Based
                on a Schedule 13D/A filed with the SEC on March 5, 2004,
                filed on behalf of Axonyx and Dr. Hausman. Pursuant to the Schedule
                13D/A
                Axonyx has sole voting power as to 13,982,567 and (with a correction
                to
                the number of shares reported in such Schedule 13D/A as being held
                by Dr.
                Hausman) shared voting power as to 15,139,212 shares. In addition,
                Axonyx
                has sole dispositive power as to 13,982,567 shares and (with a correction
                to the number of shares reported in such Schedule 13D/A as being
                held by
                Dr. Hausman) shared dispositive power as to 15,139,212 shares. Axonyx
                in
                the Schedule 13D/A disclaims beneficial ownership of Dr. Hausman’s shares.






43




(2)
            Bristol
                Investment Fund, Ltd.’s holdings include 3,867,925 shares of common stock,
                warrants to purchase 1,933,963 shares of common stock at a price
                of $0.66
                per share and warrants to purchase 1,933,962 shares of common stock
                at a
                purchase price of $1.00 per share. Paul Kessler, manager of Bristol
                Capital Advisors, LLC, the investment advisor to Bristol Investment
                Fund,
                Ltd., has voting and investment control over the securities held
                by
                Bristol Investment Fund, Ltd. Mr. Kessler disclaims beneficial ownership
                of these securities.(3)
            Silverback
                Asset Management, LLC Based on a Schedule 13G filed with the SEC
                on
                February 14, 2006 on behalf of Silverback Asset Management, LLC,
                Silverback Master Ltd. and Elliott Bossen. OXIS believes that the
                holdings
                of Silverback Asset Management, LLC include 1,415,095 shares of common
                stock, warrants to purchase 707,548 shares of common stock at a price
                of
                $0.66 per share and warrants to purchase 707,547 shares of common
                stock at
                a purchase price of $1.00 per share held by Silverback Master Ltd.
                and
                include warrants to purchase 235,849 shares of common stock at a
                price of
                $0.66 per share and warrants to purchase 235,849 shares of common
                stock at
                a purchase price of $1.00 per share held by Silverback Life Sciences
                Master Fund Ltd. OXIS believes that Silverback Asset Management,
                LLC has
                shared voting power as to 1,415,095 shares of common stock and 1,415,095
                shares subject to warrants held by Silverback Master Ltd. and warrants
                to
                purchase 235,849 shares of common stock at a price of $0.66 per share
                and
                warrants to purchase 235,849 shares of common stock at a purchase
                price of
                $1.00 per share held by Silverback Life Sciences Master Fund Ltd.
                Silverback Asset Management, LLC (“SAM”) serves as investment manager to
                Silverback Master Ltd. and Silverback Life Sciences Master Fund Ltd.
                In
                that capacity, SAM may be deemed to be the beneficial owner of securities
                held by Silverback Master Ltd. and Silverback Life Sciences Master
                Fund
                Ltd. SAM disclaims beneficial ownership of the securities held by
                Silverback Master Ltd. and Silverback Life Sciences Master Fund Ltd.
                Elliot Bossen is the sole Managing Member of SAM and is primarily
                responsible for the investment decisions of SAM. Elliot Bossen disclaims
                beneficial ownership of the securities held by Silverback Master
                Ltd. and
                Silverback Life Sciences Master Fund Ltd.(4)
            Silverback
                Master Ltd. Based on a Schedule 13G filed with the SEC on February
                14,
                2006 on behalf of Silverback Asset Management, LLC, Silverback Master
                Ltd.
                and Elliott Bossen. Pursuant to the Schedule 13G, Silverback Master
                Ltd.’s
                holdings include 1,415,095 shares of common stock, warrants to purchase
                707,548 shares of common stock at a price of $0.66 per share and
                warrants
                to purchase 707,547 shares of common stock at a purchase price of
                $1.00
                per share. Silverback Asset Management, LLC (“SAM”) serves as investment
                manager to Silverback Master Ltd. and Silverback Life Sciences Master
                Fund
                Ltd. In that capacity, SAM may be deemed to be the beneficial owner
                of
                securities held by Silverback Master Ltd. and Silverback Life Sciences
                Master Fund Ltd. SAM disclaims beneficial ownership of the securities
                held
                by Silverback Master Ltd. and Silverback Life Sciences Master Fund
                Ltd.
                Elliot Bossen is the sole Managing Member of SAM and is primarily
                responsible for the investment decisions of SAM. Elliot Bossen disclaims
                beneficial ownership of the securities held by Silverback Master
                Ltd. and
                Silverback Life Sciences Master Fund Ltd.(5)
            The
                holdings of Marvin S. Hausman, M.D. include 1,156,645 shares of common
                stock and 156,195 shares issuable upon exercise of options that are
                exercisable currently or within 60 days of March 24, 2006 and 13,982,567
                shares held by Axonyx Inc. Dr. Hausman has sole dispositive power
                as to
                1,156,645 shares and shared dispositive power as to 15,139,212 shares,
                including 13,982,567 shares held by Axonyx Inc. Dr. Hausman is a
                director
                of Axonyx Inc. Dr. Hausman in the Schedule 13D/A disclaims beneficial
                ownership of Axonyx’s shares.(6)
            The
                holdings of S. Colin Neill include 105,000 shares issuable upon exercise
                of options that are exercisable currently or within 60 days of March
                24,
                2006, and 13,982,567 shares held by Axonyx because of Mr. Neill’s
                continuing relationship with Axonyx. Mr. Neill is an executive officer
                of
                Axonyx. Mr. Neill disclaims beneficial ownership of the shares owned
                by
                Axonyx, except for his proportional interest therein, if any.(7)
            The
                holdings of Steven T. Guillen include 600,000 shares of common stock
                and
                500,000 shares issuable upon exercise of options that are exercisable
                currently or within 60 days of March 24, 2006.(8)
            The
                holdings of director Timothy C. Rodell include 1,000 shares of common
                stock and 377,737 shares issuable upon exercise of options that are
                exercisable currently or within 60 days of March 24,
                2006.(9)
            The
                holdings of director John E. Repine include 29,400 shares issuable
                upon
                exercise of options that are exercisable currently or within 60 days
                of
                March 24, 2006.(10)
            The
                holdings of director Gary M. Post include 15,000 shares issuable
                upon
                exercise of options that are exercisable currently or within 60 days
                of
                March 24, 2006.(11)
            The
                holdings of the executive officers and directors as a group include
                an
                aggregate 15,740,212 shares of common stock and 1,183,332 shares
                issuable
                upon exercise of options that are exercisable currently or within
                60 days
                of March 24, 2006.








44


**Series
      C Preferred Stock**





The
      following table sets forth certain information, as of March 24, 2006, with
      respect to persons known by us to be the beneficial owner of more than five
      percent (5%) of the OXIS Series C Preferred Stock.




**Name
                and Address**
            
            **Amount and Nature**
              **of Beneficial Ownership**
            
            **Percent of**
              **Class
                (1)**American
                Health Care Fund, L.P.2748
                Adeline, Suite ABerkeley,
                CA 94703 (1)
            
            77,000
            
            80
            %Megapolis
                BVJavastraaat
                102585
                The Hague, Netherlands (1)
            
            19,230
            
            20
            %




(1)
            As
                required by regulations of the SEC, the number of shares in the table
                includes shares which can be purchased within 60 days, or, shares
                with
                respect to which a person may obtain voting power or investment power
                within 60 days. Also required by such regulations, each percentage
                reported in the table for these individuals is calculated as though
                shares
                which can be purchased within 60 days have been purchased by the
                respective person or group and are outstanding.





45


**Equity
      Compensation Plan Information**





The
      following is a summary of OXIS’ equity compensation plans at December 31,
      2005:





**Plan
                Category**
            
            **Number
                of Securities to**
              **be
                Issued Upon Exercise of Outstanding Options,**
              **Warrants
                and Rights**
              **(a)**
            
            **Weighted-Average
                Exercise Price of Outstanding Options, Warrants and
                Rights**
              **(b)**
            
            **Number
                of Securities**
              **Remaining
                Available for Future Issuance Under**
              **Equity
                Compensation Plans (Excluding Securities Reflected in Column
                (a))**
              **(c)**Equity
                compensation plans
              approved
                by security holders (1)
            
            4,874,352
            
            $0.70
            
            493,270Equity
                compensation plans not
              approved
                by security holders (2)
            
            1,503,438
            
            $0.26
            
            —Total
            
            6,377,790
            
            
            
            493,270





(1)
            As
                of December 31, 2005, we have granted options to purchase 2,136,730
                shares
                of common stock under our 2003 Stock Incentive Plan and 2,737,622
                shares
                of common stock under the 1994 Stock Incentive Plan. Our 1994 Stock
                Incentive Plan terminated on April 30, 2004 and no additional grants
                may
                be made under that plan. As approved by stockholders, we may grant
                additional options to purchase up to 493,270 shares of common stock
                under
                our 2003 Stock Incentive Plan. The number of shares reserved for
                issuance
                pursuant to options under the 2003 Stock Incentive Plan was increased
                by
                300,000 shares on January 1, 2006 pursuant to an evergreen provision
                in
                the stock option plan. Those additional share reserves are not included
                in
                the above numbers.


(2)
            We
                have granted an aggregate of 1,503,438 options to officers, directors,
                consultants and advisors outside of our 1994 Stock Incentive Plan
                and our
                2003 Stock Incentive Plan on a case by case basis at the discretion
                of the
                board of directors.





**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**




*Letter
      Agreement with Vice President and Chief Financial Officer*





On
      January 6, 2006 OXIS and Michael D. Centron signed a Letter Agreement outlining
      the basic terms of his employment with OXIS as Vice President and Chief
      Financial Officer. On the same day the board of directors of OXIS ratified
      the
      Letter Agreement and granted stock options to Mr. Centron pursuant to the terms
      of the Letter Agreement.




Under
      the
      terms of the Letter Agreement, Mr. Centron will receive a base salary of
      $150,000 per year with eligibility for a twenty percent performance based annual
      bonus. In addition, Mr. Centron was granted a ten year incentive stock option
      to
      purchase 150,000 shares of common stock of OXIS at an exercise price of $0.30
      per share. The stock option grant will vest as follows: 25% vest immediately,
      25% vest on January 6, 2007, 25% vest on January 6, 2008 and 25% vest on January
      6, 2009. Mr. Centron will be entitled to receive certain severance payments
      and
      benefits in the event that OXIS terminates his employment without “cause”, as
      defined in the Letter Agreement, if Mr. Centron terminates his employment with
      “good reason”, as defined in the Letter Agreement, within twelve months after a
      change of control (as defined in OXIS’ 2003 Incentive Stock Plan), or in the
      event that Mr. Centron’s employment terminates as a result of his death or
      disability (any of the foregoing being a “Severance Termination”). In the event
      of a Severance Termination, Mr. Centron will receive a payment equal to three
      months of his then effective base salary. In addition, the exercise period
      for
      any options vested as the termination date will be extended until the later
      of
      January 6, 2011 or the third anniversary of the termination date, provided
      however that no exercise of options will be allowed after the expiration of
      their term.




46


*Consulting
      Agreement with Chairman of the Board of Directors*





On
      November 17, 2005, we entered into a Consulting Agreement with NW Medical
      Research Partners, Inc. Marvin Hausman, M.D., Chairman of the Board of Directors
      of OXIS, is the sole member and manager of NW Medical Research Partners. Dr.
      Hausman has previously been the interim Chief Executive Officer and interim
      Chief Financial Officer of OXIS. Dr. Hausman is a member of the board of
      directors and a former President and Chief Executive Officer of Axonyx Inc.
      Axonyx currently holds approximately 33% of the issued and outstanding shares
      of
      OXIS. Pursuant to the Consulting Agreement Marvin Hausman will provide certain
      consulting services pertaining to licensing of intellectual property,
      development of potential products and financing activities or other projects
      at
      the request of the Chief Executive Officer of OXIS for a one year period,
      renewable for a second year. Dr. Hausman will receive monthly compensation
      in
      the amount of $5,000. For any hours Dr. Hausman works in addition to 20 hours
      per month up to a limit of 50 hours per month, he will be paid hourly
      compensation in the amount of $500 per hour. Dr. Hausman is also compensated
      with the grant of a stock option to purchase 108,000 shares of OXIS common
      stock
      at an exercise price of $0.37 per share, with 9,000 options vesting each month
      over the term of the agreement. Dr. Hausman will be reimbursed for his
      healthcare insurance.





*Consulting
      Agreement with Acting Chief Operating Officer*





Manus
      O’Donnell, our former Acting Chief Operating Officer received monthly cash
      compensation from OXIS under a consulting agreement dated May 28, 2004 with
      the
      following principal terms: (i) an engagement of Mr. O’Donnell extending 2-3
      months subject to change as developments occur, (ii) payments to Mr. O’Donnell
      of $25,000 per month, and (iii) termination of the Agreement by either party
      on
      one week’s notice. Subsequently, on October 14, 2004, a follow on consulting
      agreement was entered into with Mr. O’Donnell under which his consulting
      services were extended until February 28, 2005 when Steve Guillen as Chief
      Executive Officer was hired, and, in addition to the continued payments of
      $25,000 per month, Mr. O’Donnell was granted a stock option to purchase 100,000
      shares of common stock at $0.59 per share. Currently, following the hiring
      of a
      full-time Chief Executive Officer, Mr. O’Donnell remains available to provide
      services to OXIS when needed.





*Letter
      Agreement with President and Chief Executive Officer*





On
      February 28, 2005, we entered into the Letter Agreement with Steven T. Guillen
      as described under “Employment Agreements.”





On
      March
      10, 2006, OXIS entered into a Promissory Note, or Note, with
      Steven T. Guillen, the President and Chief Executive Officer of OXIS. Pursuant
      to the terms of the Note, Mr. Guillen is lending OXIS $200,000 with interest
      to
      accrue at annual rate of 7.0%. No payments of interest or principal are required
      prior to the maturity date. The maturity date of the Note is the earlier of
      September 10, 2006 or, at the option of Mr. Guillen, the date OXIS
      receives net proceeds in the amount of $500,000 or more from a debt or equity
      financing. In addition, if, at any time on or before the maturity date, OXIS
      enters into an agreement to incur debt, Mr. Guillen has the right to rollover
      this Note into such debt arrangement, on the same terms and conditions offered
      to such future lenders. The obligation to pay all unpaid principal and accrued
      interest will be accelerated upon an event of default, including the bankruptcy
      of OXIS or related events. The purpose of this loan is to provide the
      corporation with short term financing as it seeks longer term
      financing.





*Understanding
      Regarding Board of Director Changes*





As
      reported in our Information Statement to Shareholders, filed with the SEC and
      mailed to Shareholders on April 15, 2004, an understanding, or Understanding,
      between OXIS and Axonyx, its controlling shareholder, resulted in three of
      our
      six directors (William G. Pryor, Ted Ford Webb and Thomas M. Wolf) agreeing
      to
      resign from the Board of Directors on March 10, 2004. On the same date, the
      Board of Directors designated four new individuals (Gosse B. Bruinsma, S. Colin
      Neill, Gerard J. Vlak and Steven H. Ferris), pursuant to Section 223(d) of
      the
      Delaware General Corporation Law, to fill the resulting resignations once they
      became effective. The change in membership of the Board of Directors became
      effective on April 25, 2004, ten (10) days after we mailed to record
      shareholders the Information Statement concerning such change.




47


*Axonyx
      Loan*





On
      June
      1, 2004, we secured a $1,200,000 loan from Axonyx, or Axonyx Loan. To evidence
      the Axonyx Loan, we issued to Axonyx a one-year secured promissory note bearing
      interest at an annual rate of 7%. Under the terms of the Axonyx Loan, OXIS
      promised to pay Axonyx $1.2 million plus accrued interest upon the receipt
      by
      OXIS of at least $2,000,000 in net proceeds from a debt or equity offering.
      The
      closing of a transaction where OXIS sold securities in a private placement,
      or
      the Private Placement Transaction, triggered repayment of its indebtedness
      under
      the Axonyx Loan. On January 6, 2005 after the closing of the Private Placement
      Transaction, OXIS repaid its indebtedness under the Axonyx Loan in full by
      paying to Axonyx $1,222,380.82.




**ITEM
      13.** **EXHIBITS**





See
      Exhibit Index that appears on page 50.





**ITEM
      14.**  **PRINCIPAL
      ACCOUNT** **ANT
      FEES AND SERVICES**





*Audit
      Fees*





We
      incurred aggregate fees and expenses of $51,000 and $59,000, respectively,
      from
      Williams & Webster, P.S. for the fiscal years 2005 and 2004 annual audit and
      for review of OXIS consolidated financial statements included in its Forms
      10-QSB for the 2005 and 2004 fiscal years. In addition, we incurred fees of
      $62,000 from Williams & Webster, P.S. for the audit and review of our
      subsidiary, BioCheck, for the years ended December 31, 2003, 2004 and
      2005.





*Audit
      Related Fees*





We
      incurred aggregate fees and expenses of approximately $16,000 from Williams
      & Webster, P.S. during 2005 related to the filing of SEC Form SB-2 and other
      SEC matters.





*Tax
      Fees*





We
      incurred aggregate fees and expenses of $6,500 from Williams & Webster, P.S.
      during each of the fiscal years 2005 and 2004 for professional services rendered
      for tax compliance, tax advice and tax planning.





*All
      Other Fees*





None.





Our
      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.





48


**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 31, 2006




**OXIS
                International, Inc.**
              **Registrant**By:
            /s/ Steven
              T.
              GuillenSteven
              T. Guillen
              President
                and Chief Executive OfficerBy:
            /s/ Michael D. CentronMichael
                D. Centron
              Principal
                Financial and Accounting Officer





**POWER
      OF ATTORNEY**





KNOW
      ALL
      PERSONS BY THESE PRESENTS, that each person whose signature appears below
      constitutes and appoints each of Steven T. Guillen and Michael D. Centron as
      his
      true and lawful attorneys-in-fact and agents, with full power of substitution
      and resubstitution, for him and in his name, place and stead, in any and all
      capacities, to sign any and all amendments (including post-effective amendments)
      to this Report on Form 10-K, and to file the same, with all exhibits thereto,
      and other documents in connection therewith, with the Securities and Exchange
      Commission, granting unto said attorneys-in-fact and agents, and each of them,
      full power and authority to do and perform each and every act and thing
      requisite and necessary to be done in connection therewith and about the
      premises, as fully to all intents and purposes as he might or could do in
      person, hereby ratifying and confirming all that said attorneys-in-fact and
      agents, or any of them, or their or his substitute or substitutes, may lawfully
      do or cause to be done by virtue hereof.





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





/s/Steven
                T. Guillen
            March
                31, 2006
            
            /s/Marvin
                S. Hausman, M.D.
            March
                31, 2006Steven
                T. Guillen
            Date
            
            Marvin
                S. Hausman, M.D.
            Date/s/S.
                Colin Neill
            March
                31, 2006
            
            /s/John
                E. Repine
            March
                31, 2006S.
                Colin Neill
            Date
            
            John
                E. Repine
            Date/s/Timothy
                C. Rodell, M.D.
            March
                31, 2006
            
            /s/Gary
                M. Post
            March
                31, 2006Timothy
                C. Rodell, M.D.
            Date
            
            Gary
                M. Post
            Date





49






**EXHIBIT
      INDEX**





**Incorporated
                by Reference****Exhibit**
              **Number**
            
            **Exhibit**
              **Description**
            
            **Form**
            
            **Date**
            
            **Number**
            
            **Filed**
              **Herewith**3.1
            
            Restated
                Certificate of Incorporation as filed in Delaware September 10, 1996
                and
                as thereafter amended through March 1, 2002
            
            10-KSB
            
            12/31/01
            
            3(a)3.2
            
            Bylaws
                of the Company as restated effective September 7, 1994 and as amended
                through April 29, 2003
            
            10-QSB
            
            6/30/03
            
            310.1
            
            Series
                C Preferred Stock Subscription and Purchase Agreement (form); dated
                April
                1996 (1,774,080 shares in total)
            
            10-KSB
            
            12/31/01
            
            10(b)10.2
            
            Subscription
                Agreement, Warrant to Purchase Common Stock and Form of Subscription
                dated
                July 2003 - August 2003
            
            10-KSB
            
            12/31/03
            
            10(d)10.3
            
            Note
                and Warrant Purchase Agreement dated January 14, 2004
            
            10-KSB
            
            12/31/03
            
            10.I10.4
            
            Form
                of Convertible Promissory Note dated January 14, 2004
            
            10-KSB
            
            12/31/03
            
            10.J10.5
            
            Form
                of Warrant to Purchase Common Stock dated January 14, 2004
            
            10-KSB
            
            12/31/03
            
            10.K10.6
            
            Form
                of Loan Agreement between OXIS International, Inc. and Axonyx, Inc.
                dated
                June 1, 2004
            
            8-K
            
            06/01/04
            
            99.210.7
            
            Form
                of Promissory Note between OXIS International, Inc. and Axonyx, Inc.
                dated
                June 1, 2004
            
            8-K
            
            06/01/04
            
            99.310.8
            
            Form
                of Security Agreement between OXIS International, Inc. and Axonyx,
                Inc.
                dated June 1, 2004
            
            8-K
            
            06/01/04
            
            99.410.9
            
            Form
                of License Agreement between OXIS International, Inc. and Haptoguard,
                dated September 29, 2004
            
            10-QSB
            
            09/30/04
            
            10.N10.10
            
            Securities
                Purchase Agreement, dated December 30, 2004
            
            8-K/A
            
            02/10/05
            
            99.110.11
            
            Registration
                Rights Agreement ,dated December 30, 2004
            
            8-K/A
            
            02/10/05
            
            99.210.12
            
            Form
                of Common Stock Warrant, dated December 30, 2004
            
            8-K/A
            
            02/10/05
            
            99.310.13
            
            Consulting
                Agreement between OXIS International, Inc. and Marvin D, Hausman,
                M.D.,
                dated October 14, 2004
            
            SB-2
            
            02/25/05
            
            10.O10.14
            
            Form
                of Indemnification Agreement between OXIS International, Inc. and
                its
                Officers and Directors
            
            SB-2
            
            02/25/05
            
            10.P10.15
            
            Letter
                Agreement between OXIS International, Inc. and Steven T. Guillen,
                dated
                February 28, 2005
            
            8-K
            
            02/28/05
            
            10.110.16
            
            Restricted
                Stock Purchase Agreement between OXIS International, Inc. and Steven
                T.
                Guillen, dated February 28, 2005
            
            8-K
            
            02/28/05
            
            10.2






50




**Incorporated
                by Reference****Exhibit**
              **Number**
            
            **Exhibit**
              **Description**
            
            **Form**
            
            **Date**
            
            **Number**
            
            **Filed**
              **Herewith**10.17
            
            Notice
                of Stock Option Award and related Stock Option Agreement between
                OXIS
                International Inc. and Steven T. Guillen, dated February 28,
                2005
            
            SB-2/A
            
            04/29/05
            
            10.(T)10.18
            
            Nonqualified
                Stock Option Agreement between OXIS International, Inc. and Steven
                T.
                Guillen, dated February 28, 2005
            
            SB-2/A
            
            04/29/05
            
            10.(U)10.19
            
            Conversion
                Agreement between OXIS International, Inc. and Equitis Entreprise,
                dated
                May 23, 2005
            
            8-K
            
            05/25/05
            
            99.110.20
            
            Agreement
                between OXIS International, Inc. and Timothy C. Rodell date July
                31,
                2005
            
            8-K
            
            08/04/05
            
            99.110.21
            
            Stock
                Purchase Agreement between OXIS International, Inc. and BioCheck
                Inc.
                dated September 19, 2005
            
            8-K
            
            09/23/05
            
            99.110.22
            
            Tenth
                Amendment to Lease between OXIS International, Inc. and Rosan, Inc.
                dated
                October 28, 2005
            
            8-K
            
            11/02/05
            
            10.110.23
            
            Consulting
                Agreement between OXIS International, Inc. and NW Medical Research
                Partners dated November 17, 2005
            
            8-K
            
            11/23/05
            
            10.110.24
            
            Executive
                Employment Agreement between OXIS International, Inc., BioCheck,
                Inc. and
                John Chen dated December 6, 2005
            
            
            
            
            
            
            
            X10.25
            
            Option
                and Reimbursement Agreement between Evernew Biotech, Inc., OXIS
                International, Inc. andthe
                shareholders of Evernew, dated December 6, 2005
            
            
            
            
            
            
            
            X10.26
            
            Letter
                Agreement between OXIS International, Inc. and Michael D. Centron
                dated
                January 6, 2006.
            
            8-K
            
            01/06/06
            
            10.110.27
            
            Lease
                Agreement between OXIS International, Inc. and Westcore Peninsula
                Vintage
                LLC dated February 8, 2006
            
            8-K
            
            02/13/06
            
            10.110.28
            
            Promissory
                Note issued by OXIS International, Inc. to Steven T. Guillen dated
                March
                10, 2006.
            
            8-K
            
            03/14/06
            
            10.121.1
            
            Subsidiaries
                of OXIS International, Inc.
            
            
            
            
            
            
            
            X31.1
            
            Certification
                pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
            
            
            
            
            
            
            
            X31.2
            
            Certification
                pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
            
            
            
            
            
            
            
            X32.1
            
            Certification
                pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002
            
            
            
            
            
            
            
            X32.2
            
            Certification
                pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002
            
            
            
            
            
            
            
            X





51





Board
      of
      Directors


OXIS
      International, Inc.


Foster
      City, California








**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**











We
      have
      audited the accompanying consolidated balance sheets of OXIS International,
      Inc.
      and subsidiaries as of December 31, 2005 and 2004 and the related consolidated
      statements of operations, shareholders’ equity and cash flows for the years then
      ended. These financial statements are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these financial
      statements based on our audit.





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





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of OXIS International, Inc., and
      subsidiaries as of December 31, 2005 and 2004 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 financial statements have been prepared assuming that the Company
      will continue as a going concern. As discussed in Note 1 to the financial
      statements, the Company’s significant and ongoing operating losses raise
      substantial doubt about its ability to continue as a going concern. Management’s
      plans regarding the resolution of this issue are also discussed in Note 1.
      The
      financial statements do not include any adjustments that might result from
      the
      outcome of this uncertainty.







Williams
&
Webster,
      P.S.


Williams
      & Webster, P.S.


Certified
      Public Accountants


Spokane,
      Washington


March
      27,
      2006





F-1





**OXIS
      INTERNATIONAL, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


**(In
      thousands of dollars)**





**December
                31,****2005**
            
            **2004**ASSETSCurrent
                assets:Cash
                and cash equivalents
            
            $
            614
            
            $
            4,687Accounts
                receivable, net of allowance of $2 and $7, respectively
            
            
            865
            
            
            229Private
                placement proceeds receivable
            
            
            —
            
            
            2,250Inventories
            
            
            650
            
            
            246Prepaid
                expenses and other current assets
            
            
            238
            
            
            128Deferred
                tax assets
            
            
            14
            
            
            —Restricted
                cash
            
            
            3,060
            
            
            —Total
                current assets
            
            
            5,441
            
            
            7,540Property,
                plant and equipment, net
            
            
            243
            
            
            61Patents,
                net
            
            
            831
            
            
            875Goodwill
                and other assets, net
            
            
            1,291
            
            
            —LIABILITIES
                AND SHAREHOLDERS’ EQUITY
            
            $
            7,806
            
            $
            8,476Current
                liabilities:Accounts
                payable
            
            $
            505
            
            $
            491Accrued
                expenses
            
            
            468
            
            
            829Accounts
                payable to related party
            
            
            194
            
            
            —Note
                payable
            
            
            3,060
            
            
            —Notes
                payable to shareholders
            
            
            —
            
            
            1,360Total
                current liabilities
            
            
            4,227
            
            
            2,680Long-term
                deferred taxes
            
            
            41
            
            
            —Total
                liabilities
            
            
            4,268
            
            
            2,680Minority
                interest
            
            
            604
            
            
            —Commitments
                and contingencies
            
            
            —
            
            
            —Shareholders’
                equity:Convertible
                preferred stock - $0.01 par value; 15,000,000 shares
                authorized:Series
                B - None and 428,389 shares issued and outstanding at December 31,
                2005
                and 2004, respectively (aggregate liquidation preference of
                $1,000)
            
            
            —
            
            
            4Series
                C - 96,230 shares issued and outstanding
            
            
            1
            
            
            1Common
                stock - $0.001 par value; 95,000,000 shares authorized; 42,538,397
                shares
                issued and outstanding at December 31, 2005 and 28,807,040 shares
                issued
                and outstanding and 12,264,158 issuable at December 31,
                2004
            
            
            43
            
            
            41Additional
                paid-in capital
            
            
            68,686
            
            
            68,437Accumulated
                deficit
            
            
            (65,379
            )
            
            (62,270
            )Accumulated
                other comprehensive loss
            
            
            (417
            )
            
            (417
            )Total
                shareholders’ equity
            
            
            2,934
            
            
            5,796$
            7,806
            
            $
            8,476





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







F-2


**OXIS
      INTERNATIONAL, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


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





**Years
                Ended December 31,****2005**
            
            **2004**Product
                revenues
            
            $
            2,397
            
            $
            1,914License
                revenues
            
            
            100
            
            
            450Total
                revenue
            
            
            2,497
            
            
            2,364Cost
                of product revenues
            
            
            1,345
            
            
            1,216Gross
                profit
            
            
            1,152
            
            
            1,148Operating
                expenses:Research
                and development
            
            
            499
            
            
            278Selling,
                general and administrative
            
            
            2,342
            
            
            1,843Purchased
                in-process research and development
            
            
            1,500
            
            
            —Foreign
                legal proceedings
            
            
            —
            
            
            183Restructuring
                charges
            
            
            —
            
            
            605Total
                operating expenses
            
            
            4,341
            
            
            2,909Loss
                from operations
            
            
            (3,189
            )
            
            (1,761
            )Other
                income (expenses):Interest
                income
            
            
            110
            
            
            1Other
                income
            
            
            4
            
            
            19Financing
                fees
            
            
            —
            
            
            (856
            )Interest
                expense
            
            
            (26
            )
            
            (101
            )Total
                other income and expenses
            
            
            88
            
            
            (937
            )Minority
                interest in subsidiary
            
            
            (6
            )
            
            —Loss
                before provision for income taxes
            
            
            (3,107
            )
            
            (2,698
            )Provision
                for income taxes
            
            
            (2
            )
            
            —Net
                loss
            
            
            (3,109
            )
            
            (2,698
            )Other
                comprehensive loss -foreign
                currency translation adjustment
            
            
            —
            
            
            (26
            )Comprehensive
                loss
            
            $
            (3,109
            )
            $
            (2,724
            )Net
                loss per share - basic and diluted
            
            $
            (0.07
            )
            $
            (0.10
            )Weighted
                average shares outstanding-
                basic and diluted
            
            
            42,213,275
            
            
            26,828,289





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







F-3





**OXIS
      INTERNATIONAL, INC.**


**CONSOLIDATED
      STATEMENT OF SHAREHOLDERS’ EQUITY**


**(in
      thousands of dollars, except Shares)**





**Accumulated****Additional**
            
            
            
            **Other**
            
            **Total****Preferred
                Stock**
            
            **Common
                Stock**
            
            **Paid-in**
            
            **Accumulated**
            
            **Comprehensive**
            
            **Shareholders'****Shares**
            
            **Amount**
            
            **Shares**
            
            **Amount**
            
            **Capital**
            
            **Deficit**
            
            **Loss**
            
            **Equity**Balance,
                December 31, 2003
            
            
            524,619
            
            $
            5
            
            
            26,427,910
            
            $
            26
            
            $
            60,724
            
            $
            (59,572
            )
            $
            (391
            )
            $
            792Exercise
                of stock options
            
            
            
            
            
            
            
            
            791,532
            
            
            1
            
            
            136
            
            
            
            
            
            
            
            
            137Issuance
                of common stock for services
            
            
            
            
            
            
            
            
            66,666
            
            
            
            
            
            46
            
            
            
            
            
            
            
            
            46Stock
                compensation expense foroptions
                issued to non-employees
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            44
            
            
            
            
            
            
            
            
            44Conversion
                of note payable intocommon
                stock and issuanceof
                related warrants
            
            
            
            
            
            
            
            
            1,520,932
            
            
            2
            
            
            1,379
            
            
            
            
            
            
            
            
            1,381Issuable
                common stock and warrantsin
                private placement
            
            
            
            
            
            
            
            
            12,264,158
            
            
            12
            
            
            6,108
            
            
            
            
            
            
            
            
            6,120Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,698
            )
            
            
            
            
            (2,698
            )Other
                comprehensive loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (26
            )
            
            (26
            )Balance,
                December 31, 2004
            
            
            524,619
            
            
            5
            
            
            41,071,198
            
            
            41
            
            
            68,437
            
            
            (62,270
            )
            
            (417
            )
            
            5,796Cost
                of registration statement relatedto
                private placement
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (302
            )
            
            
            
            
            
            
            
            (302
            )Exercise
                of stock options
            
            
            
            
            
            
            
            
            322,166
            
            
            
            
            
            45
            
            
            
            
            
            
            
            
            45Issuance
                of common stock
            
            
            
            
            
            
            
            
            600,000
            
            
            1
            
            
            239
            
            
            
            
            
            
            
            
            240Stock
                compensation expense foroptions
                issued to non-employees
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            20
            
            
            
            
            
            
            
            
            20Conversion
                of shareholder note payableinto
                common stock
            
            
            
            
            
            
            
            
            459,355
            
            
            1
            
            
            243
            
            
            
            
            
            
            
            
            244Conversion
                of Series B preferred stockinto
                common stock
            
            
            (428,389
            )
            
            (4
            )
            
            85,678
            
            
            
            
            
            4
            
            
            
            
            
            
            
            
            -Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (3,109
            )
            
            
            
            
            (3,109
            )Balance,
                December 31, 2005
            
            
            96,230
            
            $
            1
            
            
            42,538,397
            
            $
            43
            
            $
            68,686
            
            $
            (65,379
            )
            $
            (417
            )
            $
            2,934








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







F-4


**OXIS
      INTERNATIONAL, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(In
      thousands of dollars)**





**Years
                Ended December 31,****2005**
            
            **2004**Cash
                flows from operating activities:Net
                loss
            
            $
            (3,109
            )
            $
            (2,698
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                of property, plant and equipment
            
            
            28
            
            
            21Amortization
                of intangible assets
            
            
            126
            
            
            152Purchased
                in-process research and development expense
            
            
            1,500
            
            
            —Write-off
                of capitalized patent costs
            
            
            105
            
            
            —Stock
                compensation expense
            
            
            20
            
            
            90Common
                stock issued for accrued interest
            
            
            —
            
            
            38Amortization
                of deferred financing costs
            
            
            —
            
            
            654Common
                stock warrants issued for financing fees
            
            
            —
            
            
            202Minority
                interest in subsidiary
            
            
            6
            
            
            —Changes
                in assets and liabilities:Accounts
                receivable
            
            
            (26
            )
            
            22Inventories
            
            
            (108
            )
            
            49Prepaid
                expenses and other current assets
            
            
            (62
            )
            
            11Other
                assets
            
            
            —
            
            
            30Accounts
                payable
            
            
            (152
            )
            
            (118
            )Accrued
                expenses
            
            
            (431
            )
            
            505Accounts
                payable to related party
            
            
            10
            
            
            —Net
                cash used by operating activities
            
            
            (2,093
            )
            
            (1,042
            )Cash
                flows from investing activities:Acquisition
                of common shares of subsidiary
            
            
            (3,215
            )
            
            —Investment
                in restricted certificate of deposit
            
            
            (3,060
            )
            
            —Cash
                acquired in business combination
            
            
            407
            
            
            —Capital
                expenditures
            
            
            (33
            )
            
            (47
            )Increase
                in patents
            
            
            (172
            )
            
            (262
            )Net
                cash used by investing activities
            
            
            (6,073
            )
            
            (309
            )Cash
                flows from financing activities:Collection
                of private placement proceeds receivable, net of registration statement
                costs
            
            
            1,948
            
            
            —Proceeds
                from issuance of stock and related warrants, net of financing charges
            
            
            —
            
            
            3,870Proceeds
                from short-term borrowings and issuance of related warrant, net of
                financing charges
            
            
            —
            
            
            486Proceeds
                from issuance of common stock
            
            
            240
            
            
            —Proceeds
                from exercise of stock options
            
            
            45
            
            
            136Proceeds
                from short-term borrowing
            
            
            3,060
            
            
            1,200Repayment
                of short-term borrowings
            
            
            (1,200
            )
            
            —Net
                cash provided by financing activities
            
            
            4,093
            
            
            5,692Other
                comprehensive gain (loss) - foreign currency translation
            
            
            —
            
            
            (26
            )Net
                increase (decrease) in cash and cash equivalents
            
            
            (4,073
            )
            
            4,315Cash
                and cash equivalents at beginning of year
            
            
            4,687
            
            
            372Cash
                and cash equivalents at end of year
            
            $
            614
            
            $
            4,687





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





F-5


**OXIS
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**YEARS
      ENDED DECEMBER 31, 2005 AND 2004**








**1. The
      Company and Summary of Significant Accounting Policies**





OXIS
      International, Inc. and its subsidiaries (collectively, “OXIS” or the "Company")
      is a clinical diagnostics company engaged in the development of clinical and
      research assays, diagnostics, nutraceutical and therapeutic products, which
      include new technologies applicable to conditions and diseases associated with
      oxidative stress. OXIS derives its revenues primarily from sales of research
      diagnostic assays to research laboratories during 2005. The Company’s diagnostic
      products include twenty-five research assays to measure markers of oxidative
      stress.





In
      1965,
      the corporate predecessor of OXIS, Diagnostic Data, Inc. was incorporated in
      the
      State of California. Diagnostic Data changed its incorporation to the State
      of
      Delaware in 1972; and changed its name to DDI Pharmaceuticals, Inc. in 1985.
      In
      1994, DDI Pharmaceuticals merged with International BioClinical, Inc. and
      Bioxytech S.A. and changed its name to OXIS International, Inc. The Company’s
      principal executive offices were relocated to Foster City, California from
      Portland, Oregon on February 15, 2006.





On
      September 19, 2005, the Company entered into a stock purchase agreement with
      BioCheck, Inc. (“BioCheck”) and certain stockholders of BioCheck to purchase all
      of the common stock of BioCheck for $6.0 million in cash. On December 6,
      2005, the Company purchased 51% of the common stock of BioCheck from each of
      the
      shareholders of BioCheck on a pro rata basis, for $3,060,000 in cash. The
      consolidated statement of operations for the year ended December 31, 2005
      includes the results of operations of BioCheck from December 6, 2005, the date
      of acquisition, and the consolidated balance sheet at
      December 31, 2005 includes the assets and liabilities of BioCheck.
      With the BioCheck acquisition, the Company anticipates that over fifty percent
      of its revenues will be derived from sales of clinical diagnostic assays in
      2006.





The
      Company incurred net losses of $3.1 million in 2005 and $2.7 million
      in 2004. BioCheck generated a profit of $0.2 million in 2005. This amount
      of profit would not be enough to offset the Company’s current losses. The 2005
      loss includes an expense of $1.5 million for purchased in-process research
      and development that will not reoccur in 2006. However, the Company is seeking
      debt financing that may have related warrants. Such a financing may result
      in
      large non-cash financing charges that could delay profitability. The Company’s
      plan is to increase revenues to generate sufficient gross profit in excess
      of
      selling, general and administrative, and research and development expenses
      in
      order to achieve profitability. However, the Company can not assure you that
      it
      will accomplish this task and there are many factors that may prevent the
      Company from reaching its goal of profitability.





As
      shown
      in the accompanying financial statements, the Company has incurred an
      accumulated deficit of $65,379,000 through December 31, 2005. On a consolidated
      basis, the Company had cash and cash equivalents of $614,000 at December 31,
      2005 of which $282,000 was held by BioCheck. Since BioCheck has been and is
      expected to continue to be cash flow positive, management believes that its
      cash
      will be sufficient to sustain its operating activities. The cash held by the
      OXIS parent company of $332,000 at December 31, 2005 is not sufficient to
      sustain its operations through the first quarter of 2006 without additional
      financings. During March 2006, the Company received $200,000 from its president
      and chief executive officer in exchange for a promissory note **.** An
      estimated $1.0 million is believed necessary to continue operations through
      the
      next fiscal year and approximately $3.0 million is required to purchase the
      remaining 49% of BioCheck. The Company is seeking additional loan and equity
      financings to obtain sufficient funds to sustain operations, implement its
      marketing campaign and purchase the remaining 49% of BioCheck. The Company
      plans
      to increase revenues by its marketing campaign and the introduction of new
      products. However, we cannot assure you that we will successfully obtain debt
      or
      equity financing, if any, sufficient to finance our goals or that we will
      increase product related revenues as such events are subject to factors beyond
      our control. The financial statements do not include any adjustments relating
      to
      the recoverability and classification of recorded assets, or the amounts and
      classification of liabilities that might be necessary in the event the Company
      cannot continue in existence.





F-6





**OXIS
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





*Basis
      of Consolidation and Comprehensive Income*





The
      accompanying consolidated financial statements include the accounts of OXIS
      International, Inc. and its subsidiaries. All intercompany balances and
      transactions have been eliminated. The Company’s financial statements are
      prepared using the accrual method of accounting. On December 6, 2005, the
      Company purchased 51% of the common stock of BioCheck. The consolidated
      statement of operations for the year ended December 31, 2005 includes the
      results of operations of BioCheck from December 6, 2005, the date of
      acquisition, and the consolidated balance sheet at December 31, 2005 includes
      the assets and liabilities of BioCheck. 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. There were no items of other comprehensive
      income or loss in 2005 and, therefore, comprehensive loss is the same as net
      loss for 2005.





*Segment
      Reporting*





The
      Company currently manages its business on the basis of one reportable segment.
      The Company’s management uses consolidated results of the Company’s operations
      to make decisions affecting product development, manufacturing, and marketing.
      The Company determines and discloses its segments in accordance with Statement
      of Financial Accounting Standards No. 131, “Disclosures about Segments of an
      Enterprise and Related Information” (hereinafter “SFAS No. 131”) which uses a
“management” approach for determining segments. The management approach
      designates the internal organization that is used by management for making
      operating decisions and assessing performance as the source of the Company’s
      reportable segments. SFAS No. 131 also requires disclosures about products
      or
      services, geographic areas, and major customers (see Note 13). The Company’s
      management reporting structure provided for two segments prior to 2004 and
      the
      first quarter of 2004 and accordingly, separate segment information was
      presented.





*Use
      of Estimates*





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. The
      preparation of financial statements requires management to make estimates and
      assumptions that affect the reported amounts of assets, liabilities revenues
      and
      expenses and disclosures of contingent assets and liabilities at the date of
      the
      financial statements. Actual results could differ from those estimates.





*Cash
      and Cash Equivalents*





The
      Company considers all highly liquid investments with original maturities of
      three months or less to be cash equivalents.





*Concentrations
      of Credit Risk*





Revenues
      from sales to one of the Company’s distributors located outside of the United
      States were 15% and 11% of total revenues during 2005 and 2004, respectively.
      Approximately 38% of the Company’s revenues were attributed to seven customers
      in 2005 and 40% of the Company’s sales revenues were attributed to six customers
      in 2004. In addition, the Company signed an exclusive license agreement during
      the third quarter of 2004, resulting in revenues of $450,000, or 19% of total
      revenues for 2004 (see Note 12).





F-7








**OXIS
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





The
      Company’s cash and cash equivalents, marketable securities and accounts
      receivable are monitored for exposure to concentrations of credit risk. Cash
      equivalents and marketable securities consist of high quality credit instruments
      and management regularly monitors their composition and maturities. The Company
      maintains cash in money market accounts and a bank certificate of deposit.
      Management monitors the amount of credit exposure related to accounts receivable
      on an ongoing basis and generally requires no collateral from customers. The
      Company maintains allowances for estimated probable losses, when applicable.





*Derivative
      instruments*





In
      February 2006, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 155, “Accounting for Certain Hybrid Financial
      Instruments, an Amendment of FASB Standards No. 133 and 140” (hereinafter “SFAS
      No. 155”). This statement established the accounting for certain derivatives
      embedded in other instruments. It simplifies accounting for certain hybrid
      financial instruments by permitting fair value remeasurement for any hybrid
      instrument that contains an embedded derivative that otherwise would require
      bifurcation under SFAS No. 133 as well as eliminating a restriction on the
      passive derivative instruments that a qualifying special-purpose entity (“SPE”)
      may hold under SFAS No. 140. This statement allows a public entity to
      irrevocably elect to initially and subsequently measure a hybrid instrument
      that
      would be required to be separated into a host contract and derivative in its
      entirety at fair value (with changes in fair value recognized in earnings)
      so
      long as that instrument is not designated as a hedging instrument pursuant
      to
      the statement. SFAS No. 140 previously prohibited
      a qualifying special-purpose entity from holding a derivative financial
      instrument that pertains to a beneficial interest other than another derivative
      financial instrument. This
      statement is effective for fiscal years beginning after September 15, 2006,
      with
      early adoption permitted as of the beginning of an entity’s fiscal year.
      Management believes the adoption of this statement will have no impact on the
      Company’s financial condition or results of operations.





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 the changes in the fair value
      of the hedged asset or liability that are attributable to the hedged risk or
      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. The Company has not entered into derivatives contracts
      to
      hedge existing risks or for speculative purposes. During 2005 and 2004, the
      Company has not engaged in any transactions that would be considered derivative
      instruments.





*Fair
      value of Financial Instruments*





The
      carrying amount of cash and cash equivalents, restricted cash, accounts
      receivable, inventory, accounts payable and accrued expenses approximate fair
      value because of the short-term nature of these instruments. The fair value
      of
      debt is based upon current interest rates for debt instruments with comparable
      maturities and characteristics and approximates the carrying amount.





*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 following table
      summarizes the activity for the Company’s allowance for doubtful
      accounts:







F-8


**OXIS
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





**Balance
                at Beginning of****Period**
            
            **Additions**
            
            **Deductions**
            
            **Balance
                at End of****Period**Year
                ended December 31, 2004
            
            $
            4,000
            
            $
            3,000
            
            $
            —
            
            $
            7,000Year
                ended December 31, 2005
            
            
            7,000
            
            
            —
            
            
            (5,000
            )
            
            2,000





*Inventories*





Inventories
      are stated at the lower of cost or market. Cost has been determined by using
      the
      first-in, first-out method. The Company periodically reviews its reserves for
      slow moving and obsolete inventory and believes that such reserves are adequate
      at December 31, 2005 and 2004.





In
      November 2004, the Financial Accounting Standards Board (FASB) issued
      Statement of Financial Accounting Standards No. 151, “Inventory Costs— an
      amendment of ARB No. 43, Chapter 4”. This statement amends the
      guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the
      accounting for abnormal amounts of idle facility expense, freight, handling
      costs, and wasted material (spoilage). Paragraph 5 of ARB 43,
      Chapter 4, previously stated that “. . . under some circumstances, items
      such as idle facility expense, excessive spoilage, double freight, and
      rehandling costs may be so abnormal as to require treatment as current period
      charges. . . .” This statement requires that those items be recognized as
      current-period charges regardless of whether they meet the criterion of “so
      abnormal.” In addition, this statement requires that allocation of fixed
      production overheads to the costs of conversion be based on the normal capacity
      of the production facilities. This statement is effective for inventory costs
      incurred during fiscal years beginning after June 15, 2005. Management does
      not believe the adoption of this statement will have any immediate material
      impact on the Company.




Restricted
      Cash




The
        Company invested $3,060,000 of cash into a 30-day certificate of deposit
        at
        KeyBank, N.A. (“KeyBank”) and entered into a $3,060,000 non-revolving one-year
        loan agreement with KeyBank on December 2, 2005 for the purpose of
        completing the initial closing of the BioCheck acquisition. The Company granted
        a security interest in its $3,060,000 certificate of deposit to KeyBank under
        the loan agreement. Consequently, the certificate of deposit is classified
        as
        restricted cash on the consolidated balance sheet at December 31, 2005 as
        the
        cash is restricted as to use.


*Property,
      Plant and Equipment*





Property,
      plant and equipment is stated at cost. Depreciation is computed on a
      straight-line basis over the estimated useful lives of the assets, which are
      3
      to 10 years for machinery and equipment, the shorter of the lease term or
      estimated economic life for leasehold improvements. For the Company’s BioCheck
      subsidiary, depreciation has been computed on a double-declining basis over
      the
      estimated useful lives of the assets, which generally has been 7 years for
      machinery and equipment, and 39 years for leasehold improvements. BioCheck
      will
      conform to the Company’s straight-line depreciation method for assets purchased
      after 2005.








F-9


**OXIS
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**




*Patents*
  Acquired
        patents are capitalized at their acquisition cost or fair value. The legal
        costs, patent registration fees and models and drawings required for filing
        patent applications are capitalized if they relate to commercially viable
        technologies. Commercially viable technologies are those technologies that
        are
        projected to generate future positive cash flows in the near term. Legal
        costs
        associated with patent applications that are not determined to be commercially
        viable are expensed as incurred. All research and development costs incurred
        in
        developing the patentable idea are expensed as incurred. Legal fees from
        the
        costs incurred in successful defense to the extent of an evident increase
        in the
        value of the patents are capitalized.
  Capitalized
        cost for pending patents are amortized on a straight-line basis over the
        remaining twenty year legal life of each patent after the costs have been
        incurred. Once each patent is issued, capitalized costs are amortized on
        a
        straight-line basis over the shorter of the patent's remaining statutory
        life,
        estimated economic life or ten years.


*Goodwill*





In
      connection with the acquisition of BioCheck (see Note 2), the Company recorded
      goodwill equal to the excess of the fair value of the consideration given over
      the estimated fair value of the assets and liabilities received. The goodwill
      was primarily attributed to the reputation of the principals and the cGMP/ISO
      9000 compliant manufacturing facilities in Foster City, California.





*Impairment
      of Long Lived Assets*





The
      Company’s long-lived assets include capitalized patents, goodwill, property and
      equipment related to the Company’s manufacturing facilities in California and
      Oregon. The Company evaluates its long-lived assets for impairment in accordance
      with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting
      for the Impairment or Disposal of Long-Lived Assets” whenever events or changes
      in circumstances indicate that the carrying amount of such assets may not be
      recoverable. If any of the Company’s long-lived assets are considered to be
      impaired, the amount of impairment to be recognized is equal to the excess
      of
      the carrying amount of the assets over the fair value of the assets (see Notes
      4, 5 and 6).





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 relocated manufacturing
      and
      administrative functions from Portland, Oregon to Foster City, California during
      the first quarter of 2006 and closed the Portland, Oregon facility. Certain
      assets will be disposed of or sold during 2006. Since the Company has not yet
      determined those individual assets for sale or disposition at December 31,
      2005,
      no assets have been reclassified to property, plant and equipment held for
      sale
      and disposition. The Company believes that no adjustments are needed to the
      carrying value of these assets at December 31, 2005 and 2004.





In
      connection with the acquisition of BioCheck (see Note 2), the Company recorded
      goodwill equal to the excess of the fair value of the consideration given over
      the estimated fair value of the assets and liabilities received. The Company
      adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other
      Intangible Assets” (“SFAS No. 142”) that discontinued the amortization of
      goodwill and requires the testing of goodwill for impairment annually, or
      sooner, if indicators of potential impairment exist, based upon a fair value
      approach. In accordance with SFAS No. 142, OXIS performed an impairment test
      of
      goodwill as of December 6, 2005 and found no evidence of impairment. The Company
      evaluated several factors to determine the fair value of the BioCheck business
      including projected cash flows from product sales and cash receipts expected
      from those sales.


F-10





**OXIS
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**




*Revenue
        Recognition*
 
 The
        Company manufactures, or has manufactured on a contract basis, research and
        diagnostic assays and fine chemicals, which are its primary products sold
        to
        customers. Revenue from the sale of the Company’s products, including shipping
        fees, if any, is recognized when title to the products is transferred to
        the
        customer which usually occurs upon shipment or delivery, depending upon the
        terms of the sales order and when collectibility is reasonably assured. Revenue
        from sales to distributors of the Company’s products is recognized, net of
        allowances, upon delivery of product to the distributors. According to the
        terms
        of individual distributor contracts, a distributor may return product up
        to a
        maximum amount and under certain conditions contained in its contract.
        Allowances are calculated based upon historical data, current economic
        conditions and the underlying contractual terms.


The
      Company recognizes license fee revenue for licenses to its intellectual property
      when earned under the terms of the agreements. Generally, revenue is recognized
      upon transfer of the license unless the Company has continuing obligations
      for
      which fair value cannot be established, in which case the revenue is recognized
      over the period of the obligation. The Company considers all arrangements with
      payment terms extending beyond twelve months not to be fixed or determinable.
      In
      certain licensing arrangements there is provision for a variable fee as well
      as
      a non-refundable minimum amount. In such arrangements, the amount of the
      non-refundable minimum guarantee is recognized upon transfer of the license
      and
      collectibility is reasonably assured or over the period of the obligation,
      as
      applicable, and the amount of the variable fee is recognized as revenue when
      it
      is fixed and determinable. The Company recognizes royalty revenue based on
      reported sales by third party licensees of products containing its materials,
      software and intellectual property. Non-refundable royalties, for which there
      are no further performance obligations, are recognized when due under the terms
      of the agreements.





*Research
      and Development*





Research
      and development costs are expensed as incurred and reported as research and
      development expense.





*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
      $51,000 and $1,000 for the years ended December 31, 2005 and 2004,
      respectively.





*Stock-Based
      Compensation*





The
      Company has historically accounted for stock options granted to employees and
      directors and other stock-based employee compensation plans using the intrinsic
      value method of accounting in accordance with Accounting Principles Board
      Opinion No. 25 (“APB 25”), "Accounting for Stock Issued to Employees" and
      related interpretations. As such, the Company recognized compensation expense
      for stock options only if the quoted market value of the Company’s common stock
      exceeded the exercise price of the option on the grant date. Any compensation
      expense realized using this intrinsic value method is being amortized over
      the
      vesting period of the option.




F-11





**OXIS
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





In
      December 2004, the Financial Accounting Standards Board issued a revision to
      Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based
      Payments” (hereinafter “SFAS No. 123 (R)”). This statement replaces FASB
      Statement No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB
      Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS No. 123 (R)
      establishes standards for the accounting for share-based payment transactions
      in
      which an entity exchanges its equity instruments for goods or services. It
      also
      addresses transactions in which an entity incurs liabilities in exchange for
      goods or services that are based on the fair value of the entity’s equity
      instruments or that may be settled by the issuance of those equity instruments.
      This statement covers a wide range of share-based compensation arrangements
      including share options, restricted share plans, performance-based award, share
      appreciation rights and employee share purchase plans. SFAS No. 123 (R) requires
      a public entity to measure the cost of employee services received in exchange
      for an award of equity instruments based on the fair value of the award on
      the
      grant date ( with limited exceptions). That cost will be recognized in the
      entity’s financial statements over the period during which the employee is
      required to provide services in exchange for the award. Management is evaluating
      the effects of SFAS 123R and believes its implementation effect on the Company’s
      financial statements will be similar as disclosed below. The following table
      presents the effect on net loss and net loss per share if the Company had
      applied the fair value recognition provisions of SFAS 123 to stock-based awards
      to employees:





**Year
                Ended December 31,****2005**
            
            **2004**Net
                loss as reported
            
            $
            (3,109,000
            )
            $
            (2,698,000
            )Stock-based
                employee compensation expense determined using the fair value method
                for
                all awards
            
            
            (195,000
            )
            
            (324,000
            )Pro
                forma net loss
            
            $
            (3,304,000
            )
            $
            (3,022,000
            )Net
                loss per share:
              Basic
                and diluted - as reported
              Basic
                and diluted - pro forma
            
            $
              $
            (0.07
              (0.08
            )
              )
            $
              $
            (0.10
              (0.11
            )
              )





The
      fair
      values of employee stock options are estimated for the calculation of for the
      pro forma adjustments in the above table at the date of grant using the
      Black-Scholes option-pricing model with the following weighted-average
      assumptions during 2005 and 2004: expected volatility of 170% and 73%,
      respectively; average risk-free interest rate of 4.22% and 4.25%, respectively;
      initial expected life of six years and ten years, respectively; and no expected
      dividend yield and amortized over the vesting period of typically one to four
      years.





Stock
      options issued to non-employees as consideration for services provided to the
      Company have been accounted for under the fair value method in accordance with
      SFAS 123 and Emerging Issues Task Force No. 96-18, “Accounting for Equity
      Instruments That Are Issued to Other Than Employees for Acquiring, or in
      Conjunction with Selling, Goods or Services,” which requires that compensation
      expense be recognized for all such options.





*Income
      Taxes*





The
      Company accounts for income taxes using the asset and liability approach whereby
      deferred income tax assets and liabilities are recognized for the estimated
      future tax effects, based on current enacted tax laws, of temporary differences
      between financial and tax reporting for current and prior periods. Deferred
      tax
      assets are reduced, if necessary, by a valuation allowance if the corresponding
      future tax benefits may not be realized (see Note 11).


F-12





**OXIS
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





*Net
      Loss Per Share*





Basic
      net
      loss per share is computed by dividing the net loss for the period by the
      weighted average number of common shares outstanding during the period. Diluted
      net loss per share is computed by dividing the net loss for the period by the
      weighted average number of common shares outstanding during the period, plus
      the
      potential dilutive effect of common shares issuable upon exercise or conversion
      of outstanding stock options and warrants during the period. The weighted
      average number of potentially dilutive common shares are 1,217,435 in 2005
      and
      1,981,598 in 2004. These shares were excluded from diluted loss per share
      because of their anti-dilutive effect.





*Recent
      Accounting Pronouncements*





In
      March
      2006, the Financial Accounting Standards Board issued Statement of Financial
      Accounting Standards No. 156, “Accounting for Servicing of Financial Assets—an
      amendment of FASB Statement No. 140.” This statement requires an entity to
      recognize a servicing asset or servicing liability each time it undertakes
      an
      obligation to service a financial asset by entering into a servicing contract
      in
      any of the following situations: a transfer of the servicer’s financial assets
      that meets the requirements for sale accounting; a transfer of the servicer’s
      financial assets to a qualifying special-purpose entity in a guaranteed mortgage
      securitization in which the transferor retains all of the resulting securities
      and classifies them as either available-for-sale securities or trading
      securities; or an acquisition or assumption of an obligation to service a
      financial asset that does not relate to financial assets of the servicer or
      its
      consolidated affiliates. The statement also requires all separately recognized
      servicing assets and servicing liabilities to be initially measured at fair
      value, if practicable and permits an entity to choose either the amortization
      or
      fair value method for subsequent measurement of each class of servicing assets
      and liabilities. The statement further permits, at its initial adoption, a
      one-time reclassification of available for sale securities to trading securities
      by entities with recognized servicing rights, without calling into question
      the
      treatment of other available for sale securities under Statement 115, provided
      that the available for sale securities are identified in some manner as
      offsetting the entity’s exposure to changes in fair value of servicing assets or
      servicing liabilities that a servicer elects to subsequently measure at fair
      value and requires separate presentation of servicing assets and servicing
      liabilities subsequently measured at fair value in the statement of financial
      position and additional disclosures for all separately recognized servicing
      assets and servicing liabilities. This statement is effective for fiscal years
      beginning after September 15, 2006, with early adoption permitted as of the
      beginning of an entity’s fiscal year. Management believes the adoption of this
      statement will have no impact on the Company’s financial condition or results of
      operations.





In
      May
      2005, the Financial Accounting Standards Board issued Statement of Financial
      Accounting Standards No. 154, “Accounting Changes and Error Corrections,”
(hereinafter “SFAS No. 154”) which replaces Accounting Principles Board Opinion
      No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes in
      Interim Financial Statements - An Amendment of APB Opinion No. 28”. SFAS No. 154
      provides guidance on accounting for and reporting changes in accounting
      principle and error corrections. SFAS No. 154 requires that changes in
      accounting principle be applied retrospectively to prior period financial
      statements and is effective for fiscal years beginning after December 15, 2005.
      The Company does not expect SFAS No. 154 to have a material impact on its
      consolidated financial position, results of operations, or cash
      flows.





In
      December 2004, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 153. This statement addresses the measurement
      of exchanges of nonmonetary assets. The guidance in APB Opinion No. 29,
“Accounting for Nonmonetary Transactions,” is based on the principle that
      exchanges of nonmonetary assets should be measured based on the fair value
      of
      the assets exchanged. The guidance in that opinion, however, included certain
      exceptions to that principle. This statement amends Opinion 29 to eliminate
      the
      exception for nonmonetary exchanges of similar productive assets and replaces
      it
      with a general exception for exchanges of nonmonetary assets that do not have
      commercial substance. A nonmonetary exchange has commercial substance if the
      future cash flows of the entity are expected to change significantly as a result
      of the exchange. This statement is effective for financial statements for fiscal
      years beginning after June 15, 2005. Earlier application is permitted for
      nonmonetary asset exchanges incurred during fiscal years beginning after the
      date of this statement is issued. Management believes the adoption of this
      statement will have no impact on the financial statements of the Company.




F-13


**OXIS
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





In
      December 2004, the Financial Accounting Standards Board issued Statement of
      Financial Accounting Standards No. 152, which amends FASB statement No. 66,
      “Accounting for Sales of Real Estate,” to reference the financial accounting and
      reporting guidance for real estate time-sharing transactions that is provided
      in
      AICPA Statement of Position (SOP) 04-2, “Accounting for Real Estate Time-Sharing
      Transactions.” This statement also amends FASB Statement No. 67, “Accounting for
      Costs and Initial Rental Operations of Real Estate Projects,” to state that the
      guidance for (a) incidental operations and (b) costs incurred to sell real
      estate projects does not apply to real estate time-sharing transactions. The
      accounting for those operations and costs is subject to the guidance in SOP
      04-2. This statement is effective for financial statements for fiscal years
      beginning after June 15, 2005. Management believes the adoption of this
      statement will have no impact on the financial statements of the
      Company.





*Reclassifications*





Certain
      2004 amounts have been reclassified to conform to the 2005 presentation. This
      reclassification has resulted in no changes to the Company’s accumulated deficit
      or net losses presented.





**2. Acquisition
      of BioCheck**





On
      September 19, 2005, the Company entered into a stock purchase agreement with
      BioCheck and certain stockholders of BioCheck to purchase all of the common
      stock of BioCheck for $6.0 million in cash. BioCheck was a privately held
      California corporation engaged in the development of immunoassays, with a number
      of clinical diagnostic tests that have been approved by the United States Food
      and Drug Administration. On December 6, 2005, the Company purchased 51% of
      the common stock of BioCheck from each of the shareholders of BioCheck on a
      pro
      rata basis, for $3,060,000 in cash. This acquisition was accounted for by the
      purchase method of accounting according to Statement of Financial Accounting
      Standards (“SFAS”) No. 141, “Business Combinations.”





Pursuant
      to the stock purchase agreement, OXIS will use its reasonable best efforts
      to
      consummate a follow-on financing transaction to raise additional capital with
      which to purchase the remaining outstanding shares of BioCheck in one or more
      additional closings. The purchase price for any BioCheck shares purchased after
      the initial closing will be increased by an additional 8% per annum from
      December 6, 2005. If OXIS has not purchased all of the outstanding shares
      of BioCheck within twelve months of December 6, 2005, the earnings before
      interest, taxes, depreciation and amortization expenses, if any, of BioCheck,
      will be used to repurchase the remaining outstanding BioCheck shares at one
      or
      more additional closings. The purchase of the remaining outstanding shares
      of
      BioCheck acquisition will be accounted for the same as the initial purchase
      of
      51% of BioCheck using the purchase method of accounting according to SFAS No.
      141. The additional purchase price will be allocated over the purchased assets
      of BioCheck and the consolidated statement of operations will continue to
      include the results of operations of BioCheck reduced by the minority interest,
      if any, in BioCheck. The Company may obtain additional independent valuations
      of
      BioCheck’s assets related to the acquisition of the remaining 49% of BioCheck
      and additional acquisition costs may be incurred. Such information and costs
      may
      affect the disclosures as presented herein.





The
      primary reasons for the acquisition was BioCheck’s products under development,
      cGMP/ISO 9000 facilities and sales volume in growing markets. In addition, BioCheck’s
      management has a core competency and a proven scientific and business
      development track record in developing and manufacturing of high-quality
      immunoassay products. Senior management has several decades of combined research
      and development, clinical and operational experience in the biotechnology and
      pharmaceutical industries.





The
      purchase price of $3,337,000 was based on cash paid to BioCheck’s shareholders
      of $3,060,000, legal expense of $155,000 and a finder’s fee of $122,000. The
      consolidated statement of operations for the year ended December 31, 2005
      includes the results of operations of BioCheck from December 6, 2005, the date
      of acquisition.


F-14





**OXIS
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





The
      allocation of the cost of the acquisition at December 6, 2005 is as
      follows:





Cash
            
            $
            407,000Accounts
                receivable
            
            
            610,000Inventory
            
            
            296,000Other
                current assets
            
            
            62,000Property,
                plant and equipment
            
            
            177,000In-process
                research and development (expensed)
            
            
            1,500,000Patents
                and other assets
            
            
            107,000Goodwill
            
            
            1,199,000Minority
                interest
            
            
            (598,000
            )Assumed
                liabilities
            
            
            (423,000
            )Total
                acquisition costs
            
            $
            3,337,000





The
      intangibles assets include in-process research and development, patents and
      goodwill. The intangibles assets were valued using applicable costs incurred
      by
      BioCheck prior to the acquisition and an independent report prepared prior
      to
      the acquisition that valued the BioCheck business.





Purchased
      in-process research and development was expensed at the date of acquisition
      and
      presented on the statement of operations as purchased in-process research and
      development. It represents the value of purchased in-process research and
      development projects that had not reached technological feasibility at the
      date
      of acquisition. These projects relate to the development of specific
      immunoassays including the Id-protein
      based diagnostic/prognostic product and
      HMGA2 gene breast cancer marker .
      This
      technology can only be used for detection of the target protein. No alternative
      future uses or markets were identified for these projects because of the
      applicability to specific disease markers.





Patents
      were capitalized and will be amortized according to the Company’s patent
      amortization policy over 20 years for pending patents from the date of filing
      and 10 years after the patents are issued.





The
      goodwill was attributed to the reputation of the principals and the cGMP/ISO
      9000 compliant manufacturing facility in Foster City, California. Goodwill
      is
      expected to be deductible for tax purposes. Such amounts were tested for
      impairment on the date of acquisition resulting in no impairment charge and
      will
      be tested at least annually thereafter.





The
      following unaudited pro forma information gives effect to the acquisition of
      BioCheck as if the acquisition had occurred on January 1, 2004.





**2005**
            
            **2004**Revenues
            
            $
            6,299,000
            
            $
            6,441,000Net
                loss
            
            $
            (1,492,000
            )
            $
            (4,052,000
            )Net
                loss per share - basic and diluted
            
            $
            (0.04
            )
            $
            (0.15
            )





**3. Inventories**





**December
                31,****2005**
            
            **2004**Raw
                materials
            
            $
            304,000
            
            $
            121,000Work
                in process
            
            
            185,000
            
            
            23,000Finished
                goods
            
            
            161,000
            
            
            102,000$
            650,000
            
            $
            246,000





F-15





**OXIS
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





**4. Property,
      Plant and Equipment**





**December
                31,****2005**
            
            **2004**Laboratory
                and manufacturing equipment
            
            $
            1,165,000
            
            $
            655,000Furniture
                and office equipment
            
            
            408,000
            
            
            295,000Leasehold
                improvements
            
            
            105,000
            
            
            63,0001,678,000
            
            
            1,013,000Accumulated
                depreciation
            
            
            (1,435,000
            )
            
            (952,000
            )$
            243,000
            
            $
            61,000





The
      Company relocated its manufacturing and administrative functions from Portland,
      Oregon to Foster City, California during the first quarter of 2006 and closed
      its Portland, Oregon facility. Certain assets will be disposed of or sold during
      2006. Since the Company has not yet determined those individual assets that
      will
      be sold or disposed of at December 31, 2005, no assets have been
      reclassified to property, plant and equipment held for sale and disposition.
      The
      Company believes that no adjustments are needed to the carrying value of these
      assets at December 31, 2005. Depreciation expense was $28,000 and $21,000 during
      2005 and 2004, respectively.





**5. Patents**





**December
                31,****2005**
            
            **2004**Capitalized
                patent costs
            
            $
            1,114,000
            
            $
            1,039,000Accumulated
                amortization
            
            
            (283,000
            )
            
            (164,000
            )$
            831,000
            
            $
            875,000





Periodically,
      the Company reviews its patent portfolio and has determined that certain patent
      applications no longer possessed commercial viability or were abandoned since
      they were inconsistent with the Company’s business development strategy. As a
      result, research and development expense included charges of $105,000 in 2005
      for the write-off of capitalized patent costs. Research and development expense
      includes patent amortization charges of $126,000 and $77,000 in 2005 and 2004,
      respectively.





The
      following table presents expected future amortization of patent costs that
      may
      change according to the Company’s amortization policy upon additional patents
      being issued or allowed:





2006
            
            $
            126,0002007
            
            
            125,0002008
            
            
            114,0002009
            
            
            97,0002010
            
            
            94,000Thereafter
            
            
            275,000Total
                amortization
            
            $
            831,000





F-16





**OXIS
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





**6. Goodwill
      and Other Assets**





**December
                31,****2005**
            
            **2004**Goodwill
            
            $
            1,199,000
            
            $
            —Strategic
                investments
            
            
            75,000
            
            
            —Lease
                deposits
            
            
            17,000
            
            
            —$
            1,291,000
            
            $
            —





In
      connection with the acquisition of BioCheck (see Note 2), the Company recorded
      goodwill equal to the excess of the fair value of the consideration given over
      the estimated fair value of the assets and liabilities received. The goodwill
      was primarily attributed to the reputation of BioCheck’s CEO and the cGMP/ISO
      9000 compliant manufacturing facilities in Foster City, California. Strategic
      investments are investments by BioCheck in two private start-up companies.
      One
      of those companies has not yet commenced operations. The Company is aware of
      private sales in the other company’s stock that exceeded the per share purchase
      price of its investment. Lease deposits are cash deposits held as security
      for
      facility leases in Foster City, California.





**7. Debt**





**December
                31,****2005**
            
            **2004**Note
                payable to KeyBank, N.A.
            
            $
            3,060,000
            
            $
            —Note
                payable to Axonyx, Inc., shareholder
            
            
            —
            
            
            1,200,000Note
                payable to shareholder
            
            
            —
            
            
            160,000Total
                debt
            
            $
            3,060,000
            
            $
            1,360,000





On
      December 2, 2005, the Company entered into non-revolving one-year loan
      agreement with KeyBank, N.A. (“KeyBank”) in the amount of $3,060,000, for the
      purpose of completing the initial closing of the BioCheck acquisition. The
      Company has granted a security interest in its $3,060,000 certificate of deposit
      at KeyBank under the loan agreement. The loan bears interest at an annual rate
      that is 2.0% greater than the interest rate on the certificate of deposit.
      This
      loan was repaid during February 2006 and a new loan agreement similar in terms
      to this loan and a certificate of deposit were entered into at Bridge
      Bank.





On
      June 1, 2004, the Company received $1,200,000 in exchange for a note (the
“Note”) and entered into a loan agreement with its majority shareholder, Axonyx,
      Inc. The Note, with interest at 7%, was secured by the Company’s intellectual
      property and became immediately due and payable upon the Company’s completion of
      a private placement of 12,264,158 shares of its common stock for $6,500,000.
      The
      Company paid to Axonyx the full amount of the note and accrued interest on
      January 6, 2005.





The
      Company originally issued a promissory note payable for $160,000 on April 9,
      1997 to Finovelec, a French société anonyme that was subsequently transferred to
      Equitis Entreprise, a French société par actions simplifiée (“Equitis”). The
      unsecured note payable bore interest at 8%, was due in May 1997 and was,
      therefore, delinquent. On May 23, 2005, Equitis converted the note and accrued
      interest of $84,000 into 459,355 shares of common stock.


F-17





**OXIS
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





The
      Company received $570,000 in loans and issued 12 month promissory notes
      convertible into 1,425,000 shares of the Company’s common stock on January 14,
      2004. The Company also issued five-year warrants to the lenders to purchase
      712,500 shares of common stock at an exercise price of $0.50 per share. The
      Company received notice on December 30, 2004, that all lenders had irrevocably
      converted their promissory notes and accrued interest of $39,000 into common
      stock. As a result, the Company issued 1,520,932 shares of common stock to
      the
      note holders. As an incentive for the lenders to convert their notes to common
      stock, the Company issued additional five-year warrants to purchase 760,469
      shares of common stock at an exercise price of $1.00 per share. During 2004,
      financing fees included non-cash financing charges of $411,000 related to the
      conversion feature of the notes, $159,000 related to the initial warrants and
      $202,000 related to the incentive warrants. The fair values of the conversion
      feature of the notes and warrants were determined using the Black-Scholes
      pricing model.





**8. Commitments
      and Contingencies**





The
      following table presents future non-cancelable minimum payments under all of
      the
      Company’s operating leases at December 31, 2005:





**Operating
                Leases****Minimum
                Rental**
            
            **Sublease
                Rental**
            
            **Net
                Rental Payments**2006
            
            $
            265,000
            
            $
            (38,000
            )
            $
            227,0002007
            
            
            239,000
            
            
            (38,000
            )
            
            201,0002008
            
            
            246,000
            
            
            (38,000
            )
            
            208,000$
            750,000
            
            $
            (114,000
            )
            $
            636,000





The
      Company leases a facility under an operating lease in Portland, Oregon and
      incurred facility rental expenses of $138,000 and $134,000 during 2005 and
      2004,
      respectively. The Company’s subsidiary, BioCheck, leases facilities under
      operating leases in Foster City, California included in the table above. During
      2004, BioCheck entered into a sublease of an unused Foster City, California
      facility to the end of the lease term in 2008 that reduced the Company’s
      operating lease commitments.





The
      Company has agreements with various consultants who provide operating,
      administrative and marketing services to the Company. Generally these agreements
      may be terminated by the Company within 30 days. Non-cancelable minimum payments
      related to these agreements were $69,000 at December 31, 2005.





At
      December 31, 2005, the Company has a commitment to purchase Ergothioneine
      manufactured by Cambridge Major Labs for $179,000 and has a contract with them
      to purchase additional Ergothioneine as needed.





On
      December 6, 2005, the Company committed itself to a plan to cease
      operations in Portland, Oregon and relocate operations to Foster City,
      California. As part of the relocation of operations, the Company offered all
      affected regular full-time employees whose employment was terminated severance
      benefits estimated in total to be $119,000 that were included in accrued
      expenses at December 31, 2005. The Company estimates that relocating operations
      from Portland, Oregon to Foster City, California will cost approximately
      $100,000. No amounts have been accrued in 2005 related to relocating
      operations.





F-18


**OXIS
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





On
      September 19, 2005, the Company entered into a stock purchase agreement with
      BioCheck, and its stockholders to purchase all of its common stock for
      $6.0 million in cash. On December 6, 2005, the Company purchased 51%
      of the common stock of BioCheck. Pursuant to the stock purchase agreement,
      the
      Company will use its reasonable best efforts to consummate a follow-on financing
      transaction to raise additional capital with which to purchase the remaining
      outstanding shares of BioCheck in one or more additional closings. The purchase
      price will be increased by an additional 8% per annum from December 6,
      2005. If the Company has not purchased all of the outstanding shares of BioCheck
      within twelve months of December 6, 2005, the earnings before interest,
      taxes, depreciation and amortization expenses, if any, of BioCheck, will be
      used
      to repurchase the remaining outstanding BioCheck shares at one or more
      additional closings.





In
      1995,
      the Company consummated the acquisition of Therox Pharmaceuticals, Inc.
      (“Therox”) 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, 2005, 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
      acquired Therox technologies.





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 was
      notified that a Paris lower court (Tribunal de grande instance de Paris) on
      November 12, 2003, issued an order (the “Order”) requiring the Company 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 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. Following the issuance of the Order, the Company filed its 2002 Reference
      Document with the AMF and received written confirmation that its 2002 Reference
      Document has been registered and appealed the Order to the extent that it
      imposed fines on the Company. The Company has since dismissed its appeal of
      the
      Order, and during the first quarter of 2004 paid approximately $11,600 in
      settlement of any obligation to pay fines under the Order.





The
      AMF
      also engaged in a separate investigation relating to the Company’s failing to
      file financial and other disclosure information as required under French law
      from 1999 through 2002 (the “Investigation”). At a hearing before the
      Disciplinary Commission of the AMF on June 17, 2004 the Disciplinary Commission
      considered a report of the AMF investigator recommending that the Disciplinary
      Commission impose a fine of not less than 100,000 Euros. Following the hearing,
      the Disciplinary Commission ordered the Company to pay a fine of 50,000 Euros
      (approximately $62,000) with respect to the Company’s failure to file financial
      and other disclosure information as required under French law from 1999 through
      2002. The Company did not appeal this order and **** the
      fine
      has been paid. During 2004, the Company recorded expenses of approximately
      $183,000 related to the defense and settlement of this investigation, including
      foreign legal expenses of $121,000 and fines imposed by the AMF of $62,000.
      These charges were recorded as foreign legal proceedings in the consolidated
      statement of operations for 2004.





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.


F-19





**OXIS
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





**9. Stockholders’
      Equity**





*Common
      Stock*





Each
      share of common stock is entitled to one vote at the Company’s annual meeting of
      stockholders.





The
      Company’s president and chief executive officer purchased 600,000 shares of
      common stock for $240,000, pursuant to the terms of an employment agreement
      on
      February 28, 2005 at the closing price of the Company’s common stock on that
      date.  During
      April 2005, 459,355 shares of common stock were issued to a note holder for
      cancellation of a note payable and accrued interest. During the third quarter
      of
      2005, 85,678 shares of common stock were issued for the conversion and
      cancellation of all 428,389 outstanding shares of Series B preferred stock.





In
      a
      private placement of the Company’s common stock on December 30, 2004, the
      Company received $4,250,000 in cash and a receivable of $2,250,000 in exchange
      for 12,264,158 shares of common stock and warrants to purchase 12,877,366 shares
      of common stock which were issuable at December 31, 2004. After expenses of
      $380,000 in 2004 and additional expenses of $302,000 in 2005 for the related
      registration statement, net proceeds were $5,818,000. The common stock was
      subsequently issued at $0.53 per share and the receivable was collected during
      January 2005. The warrants were issued for the purchase of 6,438,685 shares
      of
      common stock at an exercise price of $0.66 per share and 6,438,681 shares of
      common stock at an exercise price of $1.00 per share. Pursuant to a registration
      rights agreement entered into in relation to the private placement, OXIS filed
      a
      registration statement on Form SB-2 covering the shares of common stock and
      the
      shares underlying the warrants issued in the private placement (the “Registrable
      Securities”). Amendment No. 2 to the registration statement on Form SB-2 was
      declared effective on May 27, 2005. OXIS undertook to use its commercially
      reasonable best efforts to keep the registration statement continuously
      effective until the earlier of the date when all the Registrable Securities
      covered by the registration statement have been sold or may be sold without
      volume restrictions pursuant to Rule 144(k) or May 27, 2007. Until May 27,
      2007,
      OXIS is obligated to pay each holder of the Registrable Securities cash
      liquidated damages, equal to 1.5% of the aggregate purchase price paid by such
      holder for any Registrable Securities then held by such holder if the
      registration statement covering the Registrable Securities ceases to remain
      continuously effective for either any period of 15 consecutive calendar days
      or
      an aggregate of 20 calendar days during any 12 month period. Such liquidated
      damages are also payable on the monthly anniversary of either previously
      mentioned violation if the registration statement is not effective during the
      period from the date of the violation to the date of its monthly
      anniversary.





On
      December 30, 2004, promissory notes in the amount of $570,000 and accrued
      interest were converted into 1,520,932 shares of common stock. Additional
      warrants were also issued as described below and in note 7.





The
      Company accounts for the registration rights agreements as separate freestanding
      instruments and accounts for the liquidated damages provisions as a derivative
      liability subject to SFAS No. 133. The estimated fair value of the derivative
      liability is based on estimates of the probability and costs of cash penalties
      expected to be incurred and such estimates are revalued at each balance sheet
      date with changes in value recorded in other income. As of December 31, 2005
      and
      2004 the Company has estimated the fair values of these derivative liabilities
      to be nominal and accordingly no liability has been recorded. There were no
      changes to the estimated fair value during the years ended December 31, 2005
      and
      2004.


F-20





**OXIS
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





*Preferred
      Stock*





During
      the third quarter of 2005, 85,678 shares of common stock were issued for the
      conversion and cancellation of all 428,389 outstanding shares of Series B
      preferred stock that were valued at $4,000. The Series B preferred stock had
      certain preferential rights with respect to liquidation and dividends. Holders
      of Series B preferred stock were entitled to noncumulative annual dividends
      at
      the rate of $0.115 per share if and when declared by the Company’s board of
      directors. No dividends to Series B preferred stockholders were issued or unpaid
      during 2005.





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
      or
      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 Company lists its shares of common
      stock on the Nasdaq National Market and 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 if and when declared
      by
      the Company’s board of directors. No dividends to Series C preferred
      stockholders were issued or unpaid during 2005 and 2004.





*Stock
      Warrants*





The
      Company reserved 1,472,969 shares of common stock for issuance upon the
      exercise of a warrants granted in connection with the Company’s January 14, 2004
      promissory convertible notes. Warrants to purchase 712,500 shares of common
      stock are currently exercisable at $0.50 per share and expire on January 14,
      2009. The exercise price is subject to adjustments for stock splits,
      combinations, reclassifications and similar events. As of December 31, 2005,
      no
      such adjustments have occurred. Certain piggy-back registration rights apply
      to
      the shares underlying these warrants.





On
      December 30, 2004, as an incentive for the seven lenders to convert their notes
      to common stock, the Company issued additional warrants that are currently
      exercisable to purchase 760,469 shares of common stock at an exercise price
      of
      $1.00 per share that expire on December 29, 2009. The exercise prices are
      subject to adjustments for stock splits, combinations, reclassifications and
      similar events. As of December 31, 2005, these warrants remain unexercised.
      The
      fair value of the shares issuable under these warrants was estimated using
      the
      Black-Scholes option-pricing model with the following weighted-average
      assumptions: expected volatility of 73%; risk-free interest rate of 4.25%;
      initial expected life of five years and no expected dividend yield. The
      resulting fair values of $159,000 related to the initial warrants and $202,000
      related to the incentive warrants were recorded during 2004 as financing fees
      in
      the consolidated statement of operations.





The
      Company reserved 12,877,366 shares of common stock for issuance upon the
      exercise of a warrants granted on January 6, 2005 in connection with the
      Company’s private placement of common stock. See description under common stock
      above. The warrants are currently exercisable at an exercise price of $0.66
      per
      share to purchase 6,438,685 shares of common stock and $1.00 per share to
      purchase 6,438,681 shares of common stock. The exercise prices are subject
      to
      adjustments for stock splits, combinations, reclassifications and similar
      events, and the warrants expire on January 6, 2010. As of December 31, 2005
      these warrants remain unexercised. The Company has granted the warrant holder
      certain registration rights with respect to the shares issuable upon exercise
      of
      the warrant.




F-21





**OXIS
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





Warrants
      to purchase 367,500 shares of common stock are currently exercisable at $1.00
      per share and expire on March 1, 2007. These warrants were issued to Meridian
      Investment on March 1, 2002 in conjunction with a debt financing. The exercise
      price of these warrants is subject to adjustments for stock splits, dividends,
      combinations, reclassifications, mergers and similar events. As of December
      31,
      2005, no such adjustments have occurred.





*Stock
      Options*





The
      Company has reserved 2,630,000 shares of its common stock at December 31, 2005
      for issuance under the 2003 Stock Incentive Plan (the “2003 Plan”). The 2003
      Plan, approved by stockholders at the 2003 annual meeting, 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, 2005, 493,270 shares of common stock were
      available for grant and options to purchase 2,136,730 shares of common stock
      are
      outstanding under the 2003 Plan.





The
      Company has reserved 2,737,622 shares of its common stock at December 31, 2005
      for issuance pursuant to the future exercise of outstanding options granted
      under the 1994 Stock Incentive Plan (the “1994 Plan”). The 1994 Plan permitted
      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. This Plan expired on April 30, 2003 and no further
      issuances will occur. Options to purchase 2,737,622 shares of common stock
      are
      outstanding at December 31, 2005 under the 1994 Plan.





In
      addition, the Company has reserved 1,503,438 shares of its common stock for
      issuance outside of its stock incentive plans. At December 31, 2005,
      options to purchase 1,503,438 shares of common stock are outstanding outside
      of
      its stock incentive plans.





The
      following table summarizes all outstanding stock options:





**Number
                of Options**
            
            **Weighted
                Average****Exercise
                Price**Outstanding,
                December 31, 2003
            
            
            4,486,079
            
            $
            0.78Granted
            
            
            1,139,720
            
            
            0.54Exercised
            
            
            (791,532
            )
            
            (0.17
            )Forfeited
            
            
            (161,404
            )
            
            (2.96
            )Outstanding,
                December 31, 2004
            
            
            4,672,863
            
            
            0.75Granted
            
            
            2,671,000
            
            
            0.33Exercised
            
            
            (322,166
            )
            
            (0.14
            )Forfeited
            
            
            (643,907
            )
            
            (0.76
            )Outstanding,
                December 31, 2005
            
            
            6,377,790
            
            $
            0.60Exercisable
                options:December 31,
                2004
            
            
            4,137,419
            
            $
            0.78December 31,
                2005
            
            
            4,040,290
            
            $
            0.75





The
      weighted-average fair value of options granted was $0.31 in 2005 and $0.46
      in
      2004. At December 31, 2005, consultants held 793,020 outstanding stock
      options.


F-22





**OXIS
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





The
      following table summarizes outstanding stock options approved and not approved
      by stockholders:





**Options
                Approved****by
                Stockholders**
            
            **Options
                Not Approved****by
                Stockholders**
            
            **Total
                Outstanding****Options**Outstanding
                options:December 31,
                2004
            
            
            4,269,425
            
            
            403,438
            
            
            4,672,863December 31,
                2005
            
            
            4,874,352
            
            
            1,503,438
            
            
            6,377,790





The
      following table summarizes information about all outstanding and exercisable
      stock options at December 31, 2005:





**Outstanding
                Options**
            
            **Exercisable
                Options****Range
                of**
              **Exercise
                Prices**
            
            **Number
                of**
              **Options**
            
            **Weighted-Average
                Remaining****Contractual
                Life**
            
            **Weighted-Average**
              **Exercise
                Price**
            
            **Number
                of**
              **Options**
            
            **Weighted-Average**
              **Exercise
                Price**$0.08
                to $0.15
            
            
            1,007,588
            
            
            6.99
            
            $
            0.13
            
            
            1,007,588
            
            $
            0.13$0.22
                to $0.53
            
            
            4,128,952
            
            
            8.70
            
            
            0.33
            
            
            1,872,702
            
            
            0.35$0.56
                to $1.38
            
            
            777,700
            
            
            8.09
            
            
            0.61
            
            
            696,450
            
            
            0.61$1.59
                to $3.44
            
            
            326,750
            
            
            3.52
            
            
            2.28
            
            
            326,750
            
            
            2.28$4.53
                to $11.41
            
            
            136,800
            
            
            0.67
            
            
            7.97
            
            
            136,800
            
            
            7.976,377,790
            
            
            7.92
            
            $
            0.60
            
            
            4,040,290
            
            $
            0.75





*Stock
      Compensation*





The
      Company granted options to consultants to purchase 63,000 and 115,000 shares
      of
      the Company’s common stock in 2005 and 2004, respectively. The exercise prices
      per share for options granted were $0.37 in 2005 and ranged from $0.41 to $0.59
      in 2004. The options have a 10-year life and vest over periods ranging from
      one
      to three years. The fair value of each option was estimated on the date of
      grant
      and revalued during the vesting period using the Black-Scholes option-pricing
      model with the following weighted-average assumptions during 2005 and 2004:
      expected volatility of 170% and 73%, respectively; average risk-free interest
      rate of 4.54% and 4.25%; initial expected life of ten years; and no expected
      dividend yield. Stock compensation expense of $20,000 and $44,000 was recorded
      in 2005 and 2004, respectively.





In
      2004
      the Company issued 66,666 shares of common stock valued at fair value of $46,000
      to a non-employee consultant in exchange for advisor services.





**10. Change
      of** **Control
      and** **Restructuring
      Charges**





During
      the first quarter of 2004, Axonyx
      Inc. (“Axonyx”) acquired approximately 52% of the Company’s common stock. Marvin
      S. Hausman, M.D., then Axonyx chairman and chief executive officer, separately
      held approximately 4.4% of the Company’s common stock. Axonyx holdings decreased
      to approximately 34% and Dr. Hausman’s holdings decreased to approximately 3%
      following the private placement of 12,264,158 shares of the Company’s common
      stock completed in January 2005. Together with shares of the Company’s common
      stock held by Dr. Hausman, the Axonyx affiliated group, controlled approximately
      36% and 37% of the Company’s voting stock at December 31, 2005 and 2004,
      respectively.


F-23





**OXIS
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





Restructuring
      charges related to the Axonyx change of control are as follows:





**2004**Legal
                fees
            
            $
            196,000Management
                consulting
            
            
            34,000Travel
            
            
            8,000Executive
                search
            
            
            22,000Severance
                expenses
            
            
            345,000$
            605,000





**11. Income
      Taxes**





OXIS
      and
      BioCheck will file separate federal and state tax returns for 2005 and will
      continue to file separate tax returns until OXIS purchases 80% or more of
      BioCheck. Deferred tax assets and liabilities as contained on the consolidated
      balance sheet at December 31, 2005 are attributed solely to BioCheck.





*Deferred
      Taxes*





Deferred
      taxes reflect the net tax effects of temporary differences between the carrying
      amounts of assets and liabilities for financial reporting purposes and the
      amounts used for income tax purposes, and operating losses and tax credit
      carryforwards. The significant components of net deferred income tax assets
      for
      OXIS excluding BioCheck are:





**December
                31,****2005**
            
            **2004**Deferred
                tax assets:Federal
                net operating loss carryforward
            
            $
            5,731,000
            
            $
            5,009,000Temporary
                deferred tax asset caused by capitalized research and development
                expenses
            
            
            5,883,000
            
            
            5,898,000Federal
                R&D tax credit carryforward
            
            
            412,000
            
            
            457,000State
                net operating loss carryforward and capitalized research and development
                expenses
            
            
            1,393,000
            
            
            1,246,000Other
            
            
            55,000
            
            
            80,000Deferred
                tax liabilities - book basis in excess and of noncurrent assets acquired
                in purchase transactions
            
            
            (142,000
            )
            
            (142,000
            )Deferred
                tax assets before valuation
            
            
            13,332,000
            
            
            12,548,000Valuation
                allowance
            
            
            (13,332,000
            )
            
            (12,548,000
            )Net
                deferred income tax assets
            
            $
            —
            
            $
            —





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.


F-24





**OXIS
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





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. The change in deferred
      tax assets and the related valuation allowance at December 31, 2005 was $784,000
      and primarily related to the net increase in net operating losses and decrease
      in capitalized research and development expense.





*Tax
      Carryforward*





At
      December 31, 2005, the Company had net operating loss carryforwards of
      approximately $16,855,000 to reduce United States federal taxable income in
      future years, and research and development tax credit carryforwards of $411,000
      to reduce United States federal taxes in future years. These carryforwards
      expire as follows:




**United
                  States**
              
              **R&D
                  Tax****Net
                  Operating**
              
              **Credit****Year
                  of Expiration**
              
              **Loss
                  Carryforward**
              
              **Carryforward**2006
              
              $
              44,000
              
              $
              176,0002007
              
              
              4,000
              
              
              18,0002008
              
              
              675,000
              
              
              6,0002009
              
              
              29,000
              
              
              30,0002010-2025
              
              
              16,103,000
              
              
              181,000$
              16,855,000
              
              $
              411,000


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. In addition, any future control change may further limit the
      extent to which the net operating loss carryforwards can be used to offset
      future taxable income.





F-25





**OXIS
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





**12. License
      Agreement**





On
      September 28, 2004, the Company and HaptoGuard Inc. (“HaptoGuard”) entered into
      a license agreement relating to the Company’s proprietary compound BXT 51072 and
      related compounds.   Under the agreement, HaptoGuard has
      exclusive worldwide rights to develop, manufacture and market BXT-51072 and
      related compounds from the Company’s library of such antioxidant
      compounds.  Further, HaptoGuard is responsible for worldwide product
      development programs with respect to licensed compounds.  HaptoGuard
      has paid the Company an upfront license fee of $450,000. The agreement
      provides that HaptoGuard must pay royalties to the Company, as well as
      additional fees for the achievement of development milestones in excess of
      $21
      million if all milestones are met and regulatory approvals are granted. 
The material milestones under the agreement which would generate future payments
      are as follows: upon initiation of Phase III clinical trials of the products;
      upon grant by the Food and Drug Administration (FDA) of marketing approval
      of
      the products; upon grant by the European Agency for the Evaluation of Medicinal
      Products (EMEA) for marketing approval of the products; and upon grant of
      marketing approval of the products for each additional regulatory territory.
      The
      royalties paid by the licensee will begin upon the first commercial sale of
      the
      licensed products and will vary based upon formulations. The Company has the
      right to terminate the agreement if the licensee fails to pay the Company any
      required payments under the agreement or if the licensee fails to comply with
      certain plan and timeline requirements relating to the development of the
      licensed compounds and such failure continues for 30 days after the Company
      has
      given notice to the licensee of such failure. Either party may terminate the
      agreement upon 30 days’ written notice upon certain events relating to the other
      party’s bankruptcy, insolvency, dissolution, winding up or assignment for the
      benefit of creditors, or upon the other party’s uncured breach of any material
      provision of the agreement. Otherwise, the agreement terminates when the
      Company’s underlying patents related to the licensed compounds
      expire.





During
      December 2005, the Company granted HaptoGuard a six-month extension to begin
      Phase II, as defined in the original license agreement in exchange for $100,000.





**13. 
      Geographical Reporting**





Revenues
      attributed to North America include shipments to customers in the United States,
      Canada and Mexico. Revenues attributed to EMEA include shipments to customers
      in
      Europe, Middle East and Africa. Revenues from shipments to customers by
      geographical region are as follows:





**Year
                Ended December 31,****2005**
            
            **2004**North
                America
            
            $
            1,553,000
            
            $
            1,142,000EMEA
            
            
            493,000
            
            
            427,000Latin
                America
            
            
            7,000
            
            
            10,000Asia
                Pacific
            
            
            344,000
            
            
            335,000Total
            
            $
            2,397,000
            
            $
            1,914,000





Revenues
      from shipments to countries outside of the United States did not exceed 10%
      of
      the Company’s consolidated total revenues in 2005 and 2004 except for revenues
      from shipments to Japan of $221,000 in 2004. None of the Company’s consolidated
      long-lived assets were located outside of the United States.


F-26


**OXIS
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**


14. Supplemental
      Cash Flow
      Disclosures




The
      Company granted options to consultants to purchase 63,000 and 115,000 shares
      of
      the Company’s common stock in 2005 and 2004, respectively. Stock compensation
      expense of $20,000 and $44,000 was recorded in 2005 and 2004, respectively.
      In
      2004 the Company issued 66,666 shares of common stock valued at fair value
      of
      $46,000 to a non-employee consultant in exchange for advisor services. Cash
      interest paid was $11,000 and $28,000 in 2005 and 2004, respectively. The
      $160,000 notes payable to shareholders and accrued interest of $84,000 were
      converted into 459,355 shares of common stock during April 2005.





The
      Company received $570,000 in loans and issued 12 month promissory notes
      convertible into 1,425,000 shares of the Company’s common stock on January 14,
      2004. The Company also issued five-year warrants to the lenders to purchase
      up
      to 712,500 shares of common stock at an exercise price of $0.50 per share.
      The
      Company received notice on December 30, 2004, that all lenders had irrevocably
      converted their promissory notes and accrued interest of $39,000 into common
      stock. As a result, the Company issued 1,520,932 shares of common stock to
      the
      note holders. As an incentive for the lenders to convert their notes to common
      stock, the Company issued additional five-year warrants to purchase 760,469
      shares of common stock at an exercise price of $1.00 per share. During 2004,
      financing fees included non-cash financing charges of $411,000 related to the
      conversion feature of the notes, $159,000 related to the initial warrants and
      $202,000 related to the incentive warrants.





**15. Related
      Party Transactions**





Effective
      December 6, 2005, the Company, BioCheck and Dr. John Chen entered into an
      executive employment agreement, under which Dr. Chen is employed as president
      of
      BioCheck. In the event that BioCheck terminates the employment of Dr. Chen
      other
      than for cause, Dr. Chen will be eligible to receive 12 months of his
      then-current base salary. The Company has granted to Dr. Chen an option to
      purchase 500,000 shares of common stock at an exercise price of $0.26 per share.
      Dr. Chen will be eligible for an additional grant of options equal to 250,000
      shares of common stock at December 6, 2006 and December 6, 2007, so
      long as BioCheck’s net sales for the then most recently completed fiscal year
      exceed the net sales of the preceding fiscal year. Stock options vest at 25%
      per
      annum subject to continued employment, and all options shall be exercisable
      for
      ten years from the date of grant. Dr. Chen shall have a period of 12 months
      following any termination of employment to exercise vested options.





Further,
      BioCheck and EverNew Biotech, Inc., a California corporation (“EverNew”),
      entered into a services agreement dated December 6, 2005 (the “Services
      Agreement”). The holders of the shares of capital stock of EverNew immediately
      prior to the Initial Closing are substantially the same set of individuals
      and
      entities who held BioCheck’s common stock immediately prior to the Initial
      Closing, including Dr. Chen as a significant shareholder. EverNew is an emerging
      point-of-care diagnostics company, with a number of products in development.
      EverNew shall render certain services to BioCheck, including assay research
      and
      development work, and BioCheck shall render certain administrative services
      to
      EverNew. In consideration of services to be provided by EverNew, BioCheck shall
      pay to EverNew $12,000 per month, provided, however, if the sum of EverNew’s
      gross revenues for a consecutive three month period during the term of the
      Services Agreement equals or exceeds $100,000, then BioCheck shall no longer
      be
      obligated to pay EverNew any amounts for the remainder of the term of the
      Services Agreement. Further, in such event, EverNew shall pay BioCheck an amount
      equal to the EverNew Service Cost per month for the remainder of the term of
      the
      Services Agreement, and the EverNew Service Cost for such month shall be reduced
      by the amount of the BioCheck compensation paid to BioCheck for such month.





In
      addition, the Company, BioCheck and EverNew entered into an option and
      reimbursement agreement dated December 6, 2005 (the “Option Agreement”).
      Pursuant to the terms of the option agreement, EverNew and its shareholders
      have
      granted to the Company a call option and a right of first refusal to purchase
      all of the assets or equity securities of EverNew.





F-27





**OXIS
      INTERNATIONAL, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS (continued)**





On
      November 17, 2005, the Company entered into a one year consulting agreement
      with
      NW Medical Research Partners, Inc. that is renewable for a second year. Marvin
      Hausman, M.D. is the sole member and manager of NW Medical Research Partners.
      Dr. Hausman had previously been the Company’s interim Chief Executive Officer
      and was the Company’s interim Chief Financial Officer at December 31, 2005. Dr.
      Hausman is the Chairman of the Company’s Board of Directors and a former
      Chairman and Chief Executive Officer of Axonyx Inc., which currently holds
      approximately 34% of the Company’s common stock. Dr. Hausman monthly
      compensation is $5,000 and $500 per hour for any hours over 20 hours per month
      up to a limit of 50 hours per month. Dr. Hausman was granted a stock option
      to
      purchase 108,000 shares of the Company’s common stock at an exercise price of
      $0.37 per share. The option vests monthly over a year. Dr. Hausman will be
      reimbursed for his healthcare insurance.





**16. Subsequent
      Events**





On
      December 6, 2005, the Company committed itself to a plan to cease
      operations in Portland, Oregon and relocate operations to Foster City,
      California (the “Relocation”). The Company decided to effect the Relocation
      after reviewing and evaluating all aspects of the Company’s operations to
      determine the profitability and viability of continuing in the Portland, Oregon
      location. During the first quarter of 2006, operations were relocated to
      California and on February 15, 2006 the Portland, Oregon facility was closed
      with the termination of employment of all Portland based employees who did
      not
      relocate to California. The Company’s subsidiary, BioCheck, has commenced
      manufacturing and shipping of the Company’s products.





As
      part
      of the Relocation, the Company offered all regular full-time employees who
      were
      not relocated to Foster City, California benefits under an employee severance
      package. The Company estimates that the Relocation will cost approximately
      $100,000 for relocating operations and $119,000 for employee severance benefits.
      The Company accrued $119,000 in 2005 for employee severance benefit payments,
      of
      which $111,000 is expected to be paid during 2006 and $8,000 is expected to
      be
      paid during 2007. The Company accrues for these benefits in the period when
      benefits are communicated to the terminated employees. Typically, terminated
      employees are not required to provide continued service to receive termination
      benefits. In general, the Company uses a formula based on the number of years
      of
      service to calculate the termination benefits to be provided to affected
      employees. No amounts have been accrued in 2005 related to relocating
      operations.





Related
      to the Relocation, the Company signed a lease agreement (the “Lease Agreement”)
      with Westcore Peninsula Vintage LLC company (“Landlord”). Under the terms of the
      Lease Agreement, the Company has the right to occupy 4,136 square feet of space
      adjacent to space occupied by its BioCheck subsidiary in Foster City,
      California. The Lease Agreement starts on April 1, 2006 and ends on March 31,
      2009. The annual base rent under the Lease Agreement begins at $62,000 per
      year
      and increases incrementally to $66,000 by the end of the lease term. In addition
      to the base rent, the Company will be responsible for its proportionate share
      of
      the building's operating expenses and real estate taxes. The
      Company has a renewal option to extend the Lease Agreement for one three-year
      period at the prevailing market rental value for rentable property in the same
      area.





The
      Company’s $3,060,000 loan with KeyBank was repaid during February 2006 and a new
      one-year loan agreement was entered into at Bridge Bank. The Company has granted
      a security interest in its $3,060,000 certificate of deposit moved from KeyBank
      to Bridge Bank. The loan bears interest at 3.0% and the certificate of deposit
      bears interest at 1.0%.





On
      March
      10, 2006, the Company received $200,000 in exchange for a note with the
      Company’s president and chief executive officer. The note bears interest at 7%.
      Interest and principal are due on September 10, 2006 or, at the option of the
      holder, the date the Company receives net proceeds in the amount of $500,000
      or
      more from a debt or equity financing. In addition, if, at any time on or before
      the maturity date, the Company enters into an agreement to incur debt, the
      holder has the right to rollover this note into such debt arrangement, on the
      same terms and conditions offered to such future lenders. The purpose of this
      loan was to provide the corporation with short term financing as it seeks longer
      term financing.




F-28




**Exhibit
        Index**
 
 
 **Exhibit**
                **Number**
              **Exhibit
                  Title or Description**10.24
              Executive
                  Employment Agreement between OXIS International, Inc., BioCheck,
                  Inc. and
                  John Chen dated December 6, 200510.25
              Option
                  and Reimbursement Agreement between Evernew Biotech, Inc., OXIS
                  International, Inc. and the shareholders of Evernew, dated December
                  6,
                  200521.1
              Subsidiaries
                  of OXIS International, Inc.31.1
              Certification
                  pursuant to Section 302 of the Sarbanes-Oxley Act of
                  200231.2
              Certification
                  pursuant to Section 302 of the Sarbanes-Oxley Act of
                  200232.1
              Certification
                  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 200232.2
              Certification
                  pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
                  906 of
                  the Sarbanes-Oxley Act of 2002