FORM 10-K
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

|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

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File Number 0-28674

                                CADUS CORPORATION
                                -----------------
             (Exact name of registrant as specified in its charter)

                DELAWARE                                  13-3660391
    -------------------------------         ------------------------------------
    (State or other jurisdiction of         (I.R.S. Employer Identification No.)
     incorporation or organization)

           767 Fifth Avenue
          NEW YORK, NEW YORK                                 10153
----------------------------------------                  ----------
(Address of principal executive offices)                  (Zip Code)

Company's telephone number, including area code: (212) 702-4351

Securities registered pursuant to Section 12(b) of the Act: None

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

                          COMMON STOCK, $0.01 PER SHARE
                          -----------------------------
                                (Title of Class)

      Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act of 1933. Yes: |_| No: |X|

      Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934.
Yes: |_| No: |X|

      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes: |X| No: |_|

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|

      Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes: |_| No: |X|

      Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes: |_| No: |X|

      As of June 30, 2005, the aggregate market value of the registrant's voting
common equity held by non-affiliates was $11,345,514.86.

      Number of shares outstanding of each class of Common Stock, as of March
15, 2006: 13,144,040 shares.

<PAGE>

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

Certain   statements   in  this   Annual   Report   on  Form   10-K   constitute
"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, as amended.
All statements  other than  statements of historical  fact are  "forward-looking
statements" for purposes of federal and stated  securities  laws,  including any
projections  or  expectations  of  earnings,   revenue,  financial  performance,
liquidity and capital  resources or other financial  items; any statement of the
Company's plans,  strategies and objectives for the Company's future operations;
any  statements  regarding  future  economic  conditions  or  performance;   any
statements of belief;  and any  statements of assumption  underlying  any of the
foregoing.  Forward-looking  statements  may  include the words  "may,"  "will,"
"should,"  "could," "would,"  "predicts,"  "potential,"  "continue,"  "expects,"
"anticipates,"  "future," "intends," "plans," "believes,"  "estimates" and other
similar words. Although the Company believes that the expectations  reflected in
the Company's  forward-looking  statements are reasonable,  such forward-looking
statements  involve known and unknown  risks,  uncertainties,  and other factors
which may cause the actual results,  performance, or achievements of the Company
to be materially different from any future results,  performance or achievements
expressed  or implied by such  forward-looking  statements.  Factors  that could
cause or contribute to such differences  include,  but are not limited to, risks
and uncertainties  relating to the Company's ability to license its technologies
to  third  parties,  the  Company's  inability  to  acquire  and  operate  other
companies,  the Company's  capital needs and uncertainty of future funding,  the
Company's  history  of  operating  losses,   the   unpredictability   of  patent
protection, risk of obsolescence of the Company's technologies, as well as other
risks and uncertainties discussed in the Risk Factors section in Item 1A of this
Annual Report on Form 10-K. The  forward-looking  statements made in this Annual
Report on Form 10-K are made only as of the date hereof and the Company does not
have  or  undertake  any  obligation  to  publicly  update  any  forward-looking
statements  to  reflect  subsequent  events or  circumstances  unless  otherwise
required by law.

                                     PART I

ITEM 1. BUSINESS.

GENERAL

      Cadus Corporation  ("Cadus") was incorporated  under the laws of the State
of Delaware in January 1992 and until July 30, 1999 devoted substantially all of
its resources to the development and application of novel  yeast-based and other
drug  discovery  technologies.  On July 30, 1999,  Cadus sold its drug discovery
assets to OSI  Pharmaceuticals,  Inc.  ("OSI")  and  ceased  its  internal  drug
discovery operations and research efforts for collaborative partners.


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<PAGE>

Cadus  has  a  wholly  owned   subsidiary,   Cadus   Technologies,   Inc.   (the
"Subsidiary"),  which holds all patents, patent applications, know how, licenses
and drug discovery technologies of the Company.

      Cadus and the Subsidiary  (collectively,  the "Company") currently have no
employees  and  limited  operations.  The  Company is  presently  seeking to (i)
license  the  Subsidiary's  drug  discovery  technologies,  (ii) engage in joint
ventures that will utilize the  Subsidiary's  drug  discovery  technologies  and
(iii) use a portion of their available cash to acquire or invest in companies or
income  producing  assets.  While  such  companies  or  assets  might  be in the
biotechnology   or   pharmaceutical   industries,   the  Company  will  consider
acquisitions or investments in other industries as well.

      Prior to July 30, 1999, Cadus developed several  proprietary  technologies
that exploit the  similarities  between yeast and human genes to elucidate  gene
function  and cell  signaling  pathways.  On July 30,  1999,  Cadus sold to OSI,
pursuant to an asset purchase agreement,  its drug discovery programs focused on
G Protein-coupled receptors, its directed library of approximately 150,000 small
molecule   compounds   specifically   designed  for  drug  discovery  in  the  G
Protein-coupled  receptor arena, its collaboration  with Solvay  Pharmaceuticals
B.V. ("Solvay Pharmaceuticals").  Pursuant to such sale transaction, Cadus would
be entitled to royalties  and up to $3.0  million in  milestone  payments on the
first product derived from compounds sold to OSI or from the collaboration  with
Solvay  Pharmaceuticals.  To date no such  payments have been received and there
can be no  assurance  that Cadus will be  entitled  to any such  payments in the
future.  Cadus  retained  ownership of all its other assets,  including its core
yeast  technology for developing drug discovery  assays,  its collection of over
25,000  proprietary  yeast strains,  human and mammalian cell lines, and genetic
engineering  tools  and its  genomics  databases  related  to G  Protein-coupled
receptors.  Cadus ceased its drug discovery  operations and research efforts for
collaborators  as a result of this  transaction.  The  Company's  current  Chief
Executive Officer is a consultant. See Item 10. Directors and Executive Officers
of the Company.

      In  February  2000,   Cadus  licensed  its  yeast   technologies  and  its
bioinformatics software to OSI on a non-exclusive basis. In December 2001, Cadus
transferred all of its patents, patent applications, know how, licenses and drug
discovery  technologies  to the  Subsidiary.  In December  2001,  the Subsidiary
licensed  its  yeast  technologies  to  a  major  pharmaceutical  company  on  a
non-exclusive  basis. The Subsidiary is seeking to license these technologies to
other third parties on a non-exclusive  basis.  Three of these  technologies are
used to identify  small  molecules  that act as agonists or  antagonists to cell
surface  receptors:  (i)  a  hybrid  yeast  cell  technology  that  expresses  a
functioning  human  receptor and a portion of its  signaling  pathway in a yeast
cell, (ii) the Autocrine Peptide Expression  ("Apex(TM)")  system that expresses
in a hybrid  yeast  cell both a known  human  ligand  and the  receptor  that is
activated by that ligand and (iii) the Company's  Self  Selecting  Combinatorial
Library  ("SSCL(TM)")  technologies,  which are used to  identify a ligand  that
activates a targeted orphan receptor (a receptor whose function is not known).


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<PAGE>

THE COMPANY'S PROPRIETARY DRUG DISCOVERY TECHNOLOGIES

The following relates to the Company's existing  proprietary  technology.  Since
Cadus sold its drug  discovery  assets to OSI in 1999,  the  Company  has had no
internal drug discovery  operations  nor has it engaged in research  efforts for
collaborative partners.

BACKGROUND

      The human body is comprised  primarily of  specialized  cells that perform
different  physiological  functions  and  that are  organized  into  organs  and
tissues.  All human cells contain DNA, which is arranged in a series of subunits
known as genes.  It is  estimated  that there are at least  25,000  genes in the
human genome.  Genes are  responsible  for the production of proteins.  Proteins
such as hormones, enzymes and receptors are responsible for managing most of the
physiological  functions  of humans,  including  regulating  the  body's  immune
system.

      Cell  surface  receptors  are an important  class of proteins  involved in
cellular  functioning  because  they are the primary  mediators  of cell to cell
communication.  Their  location  on the cell  surface  also  makes them the most
accessible targets for drug discovery.  Cellular  communication  occurs when one
cell releases a chemical  messenger,  called a "ligand," which communicates with
another  cell by binding to and  activating  the receptor on the exterior of the
second  cell.  Typically,  a ligand  binds only with one  specific  receptor  or
families  of related  receptors.  This  binding  event  activates  the  receptor
triggering  the  transmission  of a  message  through  a  cascade  of  signaling
molecules from the exterior to the interior of the cell.  This process is called
signal  transduction.  When the signal is  transmitted  into the interior of the
cell,  it may,  among other  things,  activate or suppress  specific  genes that
switch  on or  switch  off  specific  biological  functions  of  the  cell.  The
biological  response of the cell,  such as the  secretion of a protein,  depends
primarily on the specific ligand and receptor involved in the communication.

      Many diseases,  such as cancer,  stem from the  malfunctioning of cellular
communication.  Efforts  to treat a  particular  disease  often  concentrate  on
developing  drugs that interact with the receptor or signaling  pathway believed
to be  associated  with the  malfunction.  These  drugs  work by  inhibiting  or
enhancing  the  transmission  of a  signal  through  the  cascade  of  signaling
molecules  triggered by the receptor.  Drugs that inhibit signal transduction by
blocking a receptor or the intracellular  proteins that carry the signal sent by
a receptor are called antagonists and those that enhance signal  transduction by
stimulating a receptor or associated intracellular proteins are called agonists.

      The  majority of cell  surface  receptors  encoded by the human genome are
structurally  and  functionally   related  proteins  called  G   protein-coupled
receptors (GPCRs). The importance of G Protein-coupled receptors is demonstrated
by the fact that a large number of currently  available  prescription drugs work
by interacting with known G Protein-coupled  receptors.  These drugs include the
anti-ulcer agents Zantac and Tagamet, the anti-depressants Prozac and Zoloft,


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<PAGE>

and the anti-histamine  Claritin. Many of these drugs were developed through the
application of time consuming and expensive  trial and error methods  without an
understanding of the chemistry and structure of the G Protein-coupled  receptors
with which they interact.  More  efficient drug discovery  methods are available
once the gene sequence, biological function and role in disease processes of a G
Protein-coupled receptor have been determined.

TRADITIONAL DRUG DISCOVERY

      Drug discovery consists of three key elements:  (i) the target,  such as a
receptor, on which the drug will act, (ii) the potential drug candidates,  which
include organic chemicals,  proteins or peptides,  and (iii) the assays or tests
to screen these compounds to determine their effect on the target.

      Historically,  drug  discovery  has  been  an  inefficient  and  expensive
process.  However,  scientific  advances have created new and improved tools for
drug discovery.  For example,  molecular biology is identifying a growing number
of targets and their gene sequences. There have been significant developments in
turning these gene  sequences into drug  discovery  candidates.  Cells have been
genetically  engineered to produce  assays that more  effectively  replicate the
physiological  environment  of a living  organism.  Robotics  have  enabled  the
creation of  high-throughput  screening  systems.  Combinatorial  chemistry  has
enhanced  the  ability  to  optimize   lead   compounds   by   improving   their
pharmacological   characteristics.   However,   due  to  the   complexity  of  G
Protein-coupled  receptors,  these advances do not offer a comprehensive,  rapid
and cost effective approach to the  identification of drug discovery  candidates
targeted at G Protein-coupled receptors.

YEAST

      The Company has developed  technologies  based on yeast that are useful in
identifying drug discovery  candidates targeted at G Protein-coupled  receptors.
Yeast is a single-celled microorganism that is commonly used to make bread, beer
and  wine.  In the  1980's,  scientists  discovered  structural  and  functional
similarities  between  yeast cells and human  cells.  Both yeast and human cells
consist of a membrane,  an intracellular  region and a nucleus containing genes.
Basic cellular  processes,  including  metabolism,  cell  division,  DNA and RNA
synthesis and signal  transduction,  are the same in both human and yeast cells.
Yeast also have signal  transduction  pathways that function  similarly to human
cell  pathways.  More than 40 percent of all human gene classes have  functional
equivalents  in  yeast.   The  genes  in  yeast  express   proteins,   including
cell-surface  receptors  such  as  G  Protein-coupled  receptors  and  signaling
molecules such as protein kinases, that are similar to human proteins.

      The Company has developed several proprietary drug discovery  technologies
that address many of the  limitations  of traditional  drug  discovery  methods,
including tools used to screen for compounds that act as agonists or antagonists
to cell surface receptors and tools used to identify


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<PAGE>

ligands to targeted  orphan  receptors.  The Subsidiary is currently  seeking to
license these technologies on a non-exclusive basis to third parties.

HYBRID YEAST CELLS

      The Company developed a proprietary  technology to insert human genes into
yeast cells to create  hybrid yeast cells.  The Company's  scientists  typically
created hybrid yeast cells by replacing yeast G  Protein-coupled  receptor genes
and certain signaling molecules with their human equivalents. As a result, these
hybrid yeast cells express a human G  Protein-coupled  receptor and a portion of
its signaling  pathway.  These hybrid yeast cells can be used to identify  those
compounds  that act as agonists or  antagonists  to that  receptor or a molecule
that is in its signaling  pathway.  The Company designed and developed more than
twenty-five  thousand  genetically  different  yeast strains that can be used to
build novel hybrid yeast cells (the "Yeast System").

APPLICATIONS OF THE YEAST SYSTEM.

HIGH THROUGHPUT SCREENING.

      The Yeast System  provides a facile means of  identifying  molecules  that
alter the  activity  of G protein  coupled  receptors  through  high  throughput
screening.  Screens using the Yeast System have been run in the high  throughput
screening  facilities  of  several  different  companies.   These  studies  have
confirmed the various  attributes of the Yeast System as a means of  identifying
modulators of receptor function.

o     Functional  readout:  Since the Yeast  System  reports the activity of the
      target GPCR, one can screen compounds directly for agonists or antagonists
      of the target receptor.

o     Low cost:  Receptor  bearing yeast grow in  inexpensive  microbial  media,
      provide  a  limitless  source  of  material  and  require  no  biochemical
      extraction or purification.  In addition, assays have been performed in as
      small a volume as 80 nanoliters.

o     Accurate response:  Extensive comparisons of the pharmacologic response of
      several human GPCRs have demonstrated that the response of a human GPCR in
      yeast accurately reflects the properties of the GPCR in human cells.

o     Highly  reproducible:  High throughput assays using the Yeast System yield
      extremely low  coefficient  of variation,  comparable to the most reliable
      high throughput assays.

IDENTIFICATION OF LIGANDS FOR ORPHAN GPCRS.

      The Yeast System also  provides a procedure  for  identifying  natural and
artificial  ligands  for  orphan G protein  coupled  receptors,  i.e.,  proteins
predicted to be GPCRs but whose function


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<PAGE>

in the  organism is not known.  The most  valuable  reagent  for  characterizing
orphan receptors is the natural ligand. Screening methods using the Yeast System
in conjunction  with natural extracts  provide an avenue for  identification  of
natural ligands.  However, even artificial ligands,  which can be recovered from
high throughput  screens of orphan  receptors  expressed in yeast,  can open the
door to functional  characterization  of an orphan receptor to determine whether
the receptor  would be a reasonable  target for  therapeutic  intervention  in a
disease.

      Using an  agar-based  screening  platform in a multiplexed  format,  Cadus
scientists were able to screen large numbers of discrete small molecules against
many human orphan receptors. Other formats - high density microtiter plates, for
example - also have been  successfully used with the Yeast System to interrogate
orphan  receptors.  A number of natural and  surrogate  ligands to human  orphan
receptors have been identified using the Yeast System.

RESOURCES

      The Company  maintains  all its strains as well as a  biological  database
that catalogues the Company's collection of proprietary cells, cell lines, yeast
strains and genetic engineering tools. This database currently has approximately
30,000  entries,  which  include the  phenotype  and the genotype of the cell or
yeast strain and its storage site.

COLLABORATIVE ARRANGEMENTS

      The  Company  no  longer  has  any  collaborations   with   pharmaceutical
companies.  The Bristol-Myers Squibb Company collaboration expired in July 1999,
the Solvay  Pharmaceuticals  collaboration  was assigned to OSI in July 1999 and
the  Company  and   SmithKline   Beecham  p.l.c.   agreed  to  terminate   their
collaboration  in  September  1999.  Each of  Bristol-Myers  Squibb  Company and
SmithKline  Beecham p.l.c.  is required to make payments to the Company upon the
achievement by it of certain pre-clinical and drug development milestones and to
pay the Company  royalties on the sale of any drugs developed as a result of the
research collaboration with the Company or through the use of the Company's drug
discovery technologies.  There can be no assurance that any such milestones will
be achieved or any such drugs developed.

LICENSING ARRANGEMENTS

      In February 2000,  Cadus licensed to OSI, on a  non-exclusive  basis,  its
yeast  technologies,  including  various reagents and its library of over 25,000
yeast strains, and its bioinformatics  software. OSI paid to Cadus a license fee
of  $100,000  and an access fee of  $600,000.  OSI is also  obligated  to pay an
annual  maintenance fee of $100,000 until the earlier of 2010 or the termination
of the  license.  OSI may  terminate  the  license  at any time on 30 days prior
written notice.  In December 2001, Cadus transferred its license with OSI to the
Subsidiary.

      In  December  2001,  the  Subsidiary  licensed  to a major  pharmaceutical
company,  on a non-exclusive  basis, its yeast  technologies,  including various
reagents and its library of over


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<PAGE>

25,000  yeast  strains.   The  licensee  paid  to  the  Subsidiary  an  up-front
non-refundable  fee of  $500,000.  In October  2002,  the  licensee  paid to the
Subsidiary  an  additional  $1,000,000  when the  licensee  achieved  a research
milestone.  On September 12, 2003,  the parties  entered into an addendum to the
agreement  pursuant to which the Company extended the license to an affiliate of
the licensee in consideration  for the licensee  agreeing to pay $120,000 to the
Company.  The license  terminates on December 31, 2006; however the licensee may
extend the term for  additional  one-year  periods  by paying to the  Subsidiary
$250,000 for each one-year  extension.  The Subsidiary is seeking to license its
yeast technologies to other third parties on a non-exclusive basis.

PATENTS, PROPRIETARY TECHNOLOGY AND TRADE SECRETS

      The  Subsidiary  relies  upon  patents  and trade  secrets to protect  its
proprietary  technologies.  As of March 15, 2006, the Subsidiary is the assignee
of 11 issued  U.S.  patents  and 31 related  granted  foreign  patents  covering
aspects of its yeast technology and is the exclusive  worldwide licensee of four
issued  U.S.  patents  and 17 related  granted  foreign  patents for use in drug
discovery.  In  addition,  as of such  date,  the  Subsidiary  has filed or held
licenses to 17 other U.S.  patent  applications,  as well as 13 related  foreign
patent applications.

      The Company has  obtained  from Duke  University  an  exclusive  worldwide
license to four issued U.S.  patents and 17 related  granted  foreign patents as
well as U.S. and international  patent  applications  covering hybrid yeast cell
technologies. These patents and patent applications are directed to hybrid yeast
cells engineered to express human G Protein-coupled  receptors and to methods of
their use. In  consideration  for such license,  the  Subsidiary  pays a minimum
annual  royalty and is required to make  payments  upon the  achievement  by the
Subsidiary of certain drug  development  milestones and to pay royalties (net of
minimum  royalties) on the sale of drugs by the Subsidiary  which were initially
identified by the Subsidiary through the use of the licensed technology. In lieu
of milestones and royalty  payments on sales of drugs by sublicensees  initially
identified  by  sublicensees  through the use of the  licensed  technology,  the
Subsidiary  pays an annual  fee (net of the  minimum  annual  royalty)  for each
sublicense granted by it to such technology.

      The Company has also filed  patent  applications  based on  inventions  by
Cadus's scientists  directed to hybrid yeast cells and yeast cells engineered to
produce both peptide  libraries and human  proteins that can function in certain
signal  transduction  pathways of the engineered yeast cell. These  applications
seek to protect aspects of the Apex(TM) and SSCL(TM)  technologies.  The Company
has also filed patent applications directed to methods, constructs and reagents,
including  engineered  cells,  for  discovering  ligands  to  orphan  receptors.
Peptides,  and mimetics  thereof,  which have been discovered using the SSCL(TM)
technology are also covered in these patent  applications  both as  compositions
and for their therapeutic use.


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<PAGE>

      The  Company  has  granted a  non-exclusive  license to use several of its
patents and patent applications relating to its yeast-based  technologies to OSI
and, for certain limited purposes, to a major pharmaceutical  company and Solvay
Pharmaceuticals.

      In addition to patent  protection,  the Company  relies upon trade secrets
and proprietary know-how to maintain its competitive  position.  To maintain the
confidentiality  of its trade secrets and proprietary  information,  the Company
has generally required its employees and consultants to execute  confidentiality
agreements upon the commencement of their relationships with the Company.

      Patent law as it relates to inventions in the biotechnology field is still
evolving,  and  involves  complex  legal and factual  questions  for which legal
principles are not firmly established.  Accordingly,  no predictions can be made
regarding the breadth or  enforceability  of claims  allowed in the patents that
have been  issued to the  Company or its  licensors  or in  patents  that may be
issued to the Company or its licensors in the future.  Accordingly, no assurance
can be given that the claims in such patents, either as initially allowed by the
United States Patent and Trademark Office or any of its foreign  counterparts or
as may be  subsequently  interpreted  by courts  inside or  outside  the  United
States, will be sufficiently broad to protect the Company's  proprietary rights,
will be  commercially  valuable or will provide  competitive  advantages  to the
Company and its present or future collaborative partners or licensees.  Further,
there can be no  assurance  that  patents will be granted with respect to any of
the  Company's  pending  patent  applications  or  with  respect  to any  patent
applications filed by the Company in the future.  There can be no assurance that
any of the Company's  issued or licensed  patents would ultimately be held valid
or that efforts to defend any of its patents,  trade secrets,  know-how or other
intellectual property rights would be successful.

      The field of gene discovery has become intensely competitive.  A number of
pharmaceutical  companies,  biotechnology  companies,  universities and research
institutions  have filed patent  applications or received patents covering their
gene discoveries.  Some of these applications or patents may be competitive with
the  Company's  applications  or conflict in certain  respects  with claims made
under the Company's applications.  Moreover,  because patent applications in the
United States and abroad are  published  not earlier than  eighteen  months from
their earliest  effective  filing date and because  publication of technological
developments in the scientific or patent  literature  often lags behind the date
of such  developments,  the Company  cannot be certain  that it was the first to
invent the subject matter covered by its patents or patent  applications or that
it was the first to file patent  applications for such  inventions.  If an issue
regarding  priority  of  inventions  were to arise  with  respect  to any of the
patents or patent  applications  of the  Company or its  licensors,  the Company
might have to participate in litigation or interference  proceedings declared by
the United  States  Patent and  Trademark  Office or similar  agencies  in other
countries to  determine  priority of  invention.  Any such  participation  could
result in  substantial  cost to the Company,  even if the eventual  outcome were
favorable to the Company.


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<PAGE>

      In some cases,  litigation or other proceedings may be necessary to defend
against  or assert  claims of  infringement,  to enforce  patents  issued to the
Company  or  its  licensors,  to  protect  trade  secrets,   know-how  or  other
intellectual property rights owned by the Company, or to determine the scope and
validity of the  proprietary  rights of third  parties.  Such  litigation  could
result in  substantial  cost to and  diversion of  resources by the Company.  An
adverse outcome in any such  litigation or proceeding  could subject the Company
to significant liabilities.

COMPETITION

      The biotechnology and pharmaceutical industries are intensely competitive.
The Company's  technologies consist principally of genetically  engineered yeast
cells. The Company is aware of companies,  such as Glaxo Smith Kline,  Plc, that
may use yeast as a drug discovery  medium.  In addition,  many smaller companies
are pursuing  these areas of research.  Many of the Company's  competitors  have
greater  financial  and  human  resources  than  the  Company.  There  can be no
assurance  that  competitors  of the  Company  will not develop  competing  drug
discovery  technologies  that are more  effective  than those  developed  by the
Company thereby rendering the Company's drug discovery  technologies obsolete or
noncompetitive.   Moreover,  there  can  be  no  assurance  that  the  Company's
competitors  will not obtain patent  protection or other  intellectual  property
rights  that  would  limit the  Company's  ability  to use or  license  its drug
discovery  technologies,  which  could  have a  material  adverse  effect on the
Company's business, financial condition and results of operations.

      In order to compete  successfully,  the Company's goal is to obtain patent
protection for its drug discovery  technologies  and to make these  technologies
available  to  pharmaceutical  and  biotechnology  companies  through  licensing
arrangements for use in discovering drugs.  There can be no assurance,  however,
that the Company will obtain patents covering its  technologies  that protect it
against  competitors.  Moreover,  there can be no assurance  that the  Company's
competitors  will not succeed in developing  technologies  that  circumvent  the
Company's  technologies or that such  competitors will not succeed in developing
technologies that are more effective than those developed by the Company or that
would render technology of the Company less competitive or obsolete.

EMPLOYEES

      As of March 15,  2006,  the Company had no  employees.  David  Blitz,  the
acting Chief Executive  Officer of Cadus and the Subsidiary,  is not an employee
of Cadus or the Subsidiary, and is serving under a consulting arrangement as the
acting  Chief  Executive  Officer  of Cadus  and the  Subsidiary  at the rate of
$25,000 per annum.

ITEM 1A. RISK FACTORS.

      AN INVESTMENT IN THE SHARES OF CADUS' COMMON STOCK  INVOLVES A HIGH DEGREE
OF RISK.  ACCORDINGLY,  INVESTORS  AND  PROSPECTIVE  INVESTORS  SHOULD  CONSIDER
CAREFULLY THE FOLLOWING RISK


                                       10
<PAGE>

FACTORS,  AS WELL AS ALL OTHER  INFORMATION  CONTAINED IN THIS ANNUAL  REPORT ON
FORM 10-K, IN CONNECTION WITH INVESTMENTS IN SHARES OF CADUS' COMMON STOCK.

THE COMPANY MAY BE UNABLE TO DERIVE REVENUES FROM ITS TECHNOLOGIES

      The  Company  has  licensed  its  yeast  technologies  to OSI  and a major
pharmaceutical  company.  Under its  license,  OSI is obligated to pay an annual
maintenance  fee of $100,000 until the earlier of 2010 or the termination of the
license.  OSI may terminate the license at any time on 30 days prior notice. The
major pharmaceutical company has fully paid for its license, which terminates on
December 31, 2006,  but may extend the term for additional  one-year  periods by
paying the Company $250,000 for each one-year extension.  The Company is seeking
to  license  its yeast  technologies  to other  third  parties.  There can be no
assurance that the existing  licensing  arrangements will be extended or renewed
or will not be  terminated  or that the  Company  will enter into new  licensing
arrangements with other third parties.

      Certain of the  Company's  former  collaborative  partners are required to
make  payments  to  the  Company  upon  the   achievement  by  them  of  certain
pre-clinical and drug development milestones and to pay the Company royalties on
the sale of any drugs developed as a result of past research  collaboration with
the Company or through the use of the Company's drug discovery technologies. The
Company's  receipt of revenues from drug development  milestones or royalties on
sales under agreements with its former collaborative  partners is dependent upon
the activities and the development, manufacturing and marketing resources of its
former  collaborative  partners.  Development of new pharmaceutical  products is
highly  uncertain,  and no  assurance  can be  given  that  the  Company's  drug
discovery  technologies  will  result in any  commercially  successful  products
developed  by the  Company's  former  collaborative  partners.  There  can be no
assurance that such former  collaborative  partners will pursue the  development
and   commercialization   of  such  products,   that  any  such  development  or
commercialization  would be  successful  or that the  Company  will  derive  any
additional  revenue  from such  arrangements.  While  the  Company  pursuant  to
arrangements with its former  collaborative  partners may be entitled to receive
milestone  payments and royalties with respect to drugs developed from compounds
identified  or  confirmed  using  the  Company's  technologies,  there can be no
assurance  that disputes  will not arise over whether or not specific  compounds
were  identified  or  confirmed  using  the  Company's   technologies  and  are,
therefore, covered by such royalty and milestone provisions.  Furthermore, there
can be no assurance that the Company's  former  collaborative  partners will not
pursue alternative  technologies in preference to those of the Company. To date,
the Company has not received  revenues  from its former  collaborative  partners
from drug development milestones or royalties.

HISTORY OF OPERATING LOSSES

      The Company has incurred operating losses in each year since its inception
with the exception of 2002. At December 31, 2005, the Company had an accumulated
deficit of  approximately  $33.6  million.  The  Company's  losses have resulted
principally from costs incurred


                                       11
<PAGE>

in connection  with its previous  research and  development  activities and from
general and administrative costs associated with the Company's operations. These
costs have  exceeded the  Company's  revenues and interest  income.  The Company
expects to incur additional operating losses over the next several years.

UNCERTAINTY OF UTILIZATION OF OPERATING LOSS AND RESEARCH AND DEVELOPMENT CREDIT
CARRYFORWARDS.

      The Company had a net operating loss  carryforward  of  $29,260,000  and a
research and development credit carryforward of $2,535,000 at December 31, 2005.
These net operating loss  carryforwards and the research and development  credit
carryforward expire in various years from 2007 to 2025. The Company's ability to
utilize  such  net   operating   loss  and  research  and   development   credit
carryforwards is subject to certain  limitations,  and there can be no assurance
that the Company will be able to utilize such carryforwards.

UNCERTAINTY OF FUTURE PROFITABILITY

      The  Company's  ability to  generate  revenues  and become  profitable  is
dependent  in large part on the ability of the Company to enter into  additional
licensing arrangements.  There can be no assurance that the Company will be able
to do so or that the Company will ever achieve profitability.

UNCERTAINTY OF PROTECTION OF PATENTS AND PROPRIETARY RIGHTS

      Patent law as it relates to inventions in the biotechnology field is still
evolving,  and  involves  complex  legal and factual  questions  for which legal
principles are not firmly established.  Accordingly,  no predictions can be made
regarding the breadth or  enforceability  of claims  allowed in the patents that
have been  issued to the  Company or its  licensors  or in  patents  that may be
issued to the Company or its licensors in the future.  Accordingly, no assurance
can be given that the claims in such patents, either as initially allowed by the
United States Patent and Trademark Office or any of its foreign  counterparts or
as may be  subsequently  interpreted  by courts  inside or  outside  the  United
States, will be sufficiently broad to protect the Company's  proprietary rights,
will be  commercially  valuable or will provide  competitive  advantages  to the
Company and its present or future licensees.  Further, there can be no assurance
that patents will be granted with respect to any of the Company's pending patent
applications or with respect to any patent  applications filed by the Company in
the  future.  There  can be no  assurance  that any of the  Company's  issued or
licensed patents would ultimately be held valid or that efforts to defend any of
its patents, trade secrets, know-how or other intellectual property rights would
be successful.

      The field of gene discovery has become intensely competitive.  A number of
pharmaceutical  companies,  biotechnology  companies,  universities and research
institutions  have filed patent  applications or received patents covering their
gene discoveries. Some of these


                                       12
<PAGE>

applications  or patents may be competitive  with the Company's  applications or
conflict in certain respects with claims made under the Company's  applications.
Moreover,  because  patent  applications  in the United States are maintained in
secrecy  until patents issue and because  patent  applications  in certain other
countries generally are not published until more than eighteen months after they
are  filed  and  because  publication  of  technological   developments  in  the
scientific or patent literature often lags behind the date of such developments,
the Company cannot be certain that it was the first to invent the subject matter
covered by its patents or patent  applications  or that it was the first to file
patent  applications  for such  inventions.  If an issue  regarding  priority of
inventions  were  to  arise  with  respect  to  any  of the  patents  or  patent
applications  of the  Company  or its  licensors,  the  Company  might  have  to
participate  in litigation or  interference  proceedings  declared by the United
States Patent and  Trademark  Office or similar  agencies in other  countries to
determine  priority  of  invention.  Any  such  participation  could  result  in
substantial cost to the Company,  even if the eventual outcome were favorable to
the Company.

      In some cases,  litigation or other proceedings may be necessary to defend
against  or assert  claims of  infringement,  to enforce  patents  issued to the
Company  or  its  licensors,  to  protect  trade  secrets,   know-how  or  other
intellectual property rights owned by the Company, or to determine the scope and
validity of the  proprietary  rights of third  parties.  Such  litigation  could
result in  substantial  cost to and  diversion of  resources by the Company.  An
adverse outcome in any such  litigation or proceeding  could subject the Company
to significant liabilities.

RISK OF OBSOLESCENCE OR LIMITATIONS ON THE COMPANY'S TECHNOLOGIES

      The Company's  technologies consist principally of genetically  engineered
yeast cells. The Company is aware of companies,  such as Glaxo Smith Kline, Plc,
that  may use  yeast as a drug  discovery  medium.  In  addition,  many  smaller
companies are pursuing  these areas of research.  There can be no assurance that
competitors   of  the  Company  will  not  develop   competing   drug  discovery
technologies that are more effective than those developed by the Company thereby
rendering the Company's drug discovery  technologies obsolete or noncompetitive.
Moreover,  there can be no assurance  that the  Company's  competitors  will not
obtain patent protection or other intellectual  property rights that would limit
the Company's ability to use or license its drug discovery  technologies,  which
could  have a  material  adverse  effect on the  Company's  business,  financial
condition and results of operations.

      The Company's  goal is to obtain patent  protection for its drug discovery
technologies  and to make these  technologies  available to  pharmaceutical  and
biotechnology  companies through  licensing  arrangements for use in discovering
drugs. There can be no assurance,  however, that the Company will obtain patents
covering its technologies that protect it against competitors.  Moreover,  there
can  be no  assurance  that  the  Company's  competitors  will  not  succeed  in
developing  technologies that circumvent the Company's technologies or that such
competitors will not succeed in developing  technologies that are more effective
than those  developed  by the  Company or that would  render  technology  of the
Company less competitive or obsolete.


                                       13
<PAGE>

INABILITY TO IDENTIFY ACQUISITIONS OR INVESTMENTS

      At December 31,  2005,  the Company had cash and cash  equivalents  of $24
million. The Company is presently seeking to use a portion of its available cash
to  acquire  or invest in  companies  or income  producing  assets.  To date the
Company has not been able to identify an  appropriate  acquisition or investment
and there can be no assurance that it will do so. There also can be no assurance
that acquisitions or investments by the Company will be profitable.

UNCERTAINTY OF ACCESS TO CAPITAL

      There can be no assurance that additional funding,  if necessary,  will be
available on favorable terms, if at all.

CONTROL BY EXISTING STOCKHOLDERS; CONCENTRATION OF STOCK OWNERSHIP

      Carl C.  Icahn  beneficially  owns  approximately  38% of the  outstanding
shares of Common Stock. As a result,  Mr. Icahn,  acting alone,  will be able to
control  most matters  requiring  approval by the  stockholders  of the Company,
including the election of directors, the adoption of charter amendments, and the
approval  of mergers  and other  extraordinary  corporate  transactions.  Such a
concentration  of  ownership  may have the effect of  delaying or  preventing  a
change in control of the Company,  including  transactions in which stockholders
might  otherwise  receive a premium for their  shares over then  current  market
prices.

POSSIBLE VOLATILITY OF STOCK PRICE

      The market prices for  securities  of  biotechnology  companies  have been
highly  volatile  and the market has  experienced  significant  price and volume
fluctuations  that are  unrelated to the  operating  performance  of  particular
companies. Announcements of technological innovations or new commercial products
by  the  Company's  licensees  or  its  competitors,   developments   concerning
proprietary  rights,   including  patents  and  litigation  matters,   publicity
regarding  actual or  potential  results  with  respect to products or compounds
under development by the Company's licensees or former  collaborative  partners,
regulatory developments in both the United States and foreign countries, changes
in  reimbursement  policies,  developments  in the Company's  relationship  with
current  or future  licensees,  if any,  public  concern  as to the  safety  and
efficacy of drugs developed by the Company's  licensees or former  collaborative
partners using the Company's technologies,  public concern as to the efficacy of
new technologies,  general market conditions,  as well as quarterly fluctuations
in the Company's revenues,  if any, and financial results and other factors, may
have  a  significant  effect  on  the  market  price  of the  Common  Stock.  In
particular,  the  realization  of any of the  risks  described  in  these  "Risk
Factors"  could have an  adverse  effect on the  market  price of the  Company's
Common Stock.


                                       14
<PAGE>

ANTI-TAKEOVER EFFECT OF DELAWARE CORPORATE LAW

      Certain  provisions  of the Delaware  corporate law may have the effect of
deterring hostile takeovers or delaying or preventing  changes in the control or
management of the Company,  including  transactions in which  stockholders might
otherwise  receive  a premium  for their  shares  over the then  current  market
prices.

ABSENCE OF DIVIDENDS

      The Company has not paid any  dividends  on its Common  Stock and does not
anticipate paying dividends in the foreseeable future.

ITEM 2. PROPERTIES.

      Cadus leases  storage space on a  month-to-month  basis in Tarrytown,  New
York.

ITEM 3. LEGAL PROCEEDINGS.

      The Company is not a party to any legal proceedings.

ITEM 4. SUBMISSION TO A VOTE OF SECURITY HOLDERS.

      No matter was  submitted  to a vote of  security  holders  of the  Company
during the fourth quarter of the fiscal year covered by this report.

                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S  COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.

      Cadus's common stock,  $.01 par value per share (the "Common Stock"),  was
traded on the Nasdaq  National  Market under the symbol KDUS until September 27,
1999 when it was delisted.  Since  September 27, 1999,  Cadus's Common Stock has
traded on the  over-the-counter  bulletin  board under the symbol  KDUS.OB.  The
table  below  sets  forth the high and low sales  price per share of the  Common
Stock for the periods indicated,  as reported by the  over-the-counter  bulletin
board.


                                       15
<PAGE>

      FISCAL YEAR 2005                                         HIGH         LOW
      First quarter ended March 31, 2005                      $1.58        $1.46
      Second quarter ended June 30, 2005                      $1.59        $1.47
      Third quarter ended September 30, 2005                  $1.67        $1.51
      Fourth quarter ended December 31, 2005                  $1.65        $1.56

      FISCAL YEAR 2004                                         HIGH         LOW
      First quarter ended March 31, 2004                      $1.73        $1.44
      Second quarter ended June 30, 2004                      $1.68        $1.56
      Third quarter ended September 30, 2004                  $1.66        $1.53
      Fourth quarter ended December 31, 2004                  $1.61        $1.54

      As of March 15,  2006,  there were  approximately  76 holders of record of
Cadus's Common Stock.

      Cadus has not  declared  or paid any cash  dividends  on its Common  Stock
during  the past two  fiscal  years  and does  not  anticipate  paying  any such
dividends in the  foreseeable  future.  Cadus intends to retain any earnings for
the growth of and for use in its business.

RECENT SALES OF UNREGISTERED SECURITIES.

      Within the past three years, Cadus has not issued and sold securities that
were not registered under the Securities Act of 1933, as amended (the "Act").

ITEM 6. SELECTED FINANCIAL DATA.

      The selected  financial data presented below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations"  and the  Company's  consolidated  financial  statements  and  notes
thereto included elsewhere in this report.


                                       16
<PAGE>

<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31,
                                                                          -----------------------
                                                   2005              2004          2003             2002            2001
                                                   ----              ----          ----             ----            ----
STATEMENT OF OPERATIONS DATA:                             (dollars in thousands, except share and per share data)
<S>                                                <C>               <C>           <C>             <C>              <C>
Revenues                                           $  100            $  100        $  220          $ 1,100          $  600
                                                  -------           -------       -------          -------         -------
Operating costs and expenses:
    Total costs and expenses                          808               778           837              886           1,077
                                                   ------           -------       -------          -------         -------
    Operating (loss) income                          (708)             (678)         (617)             214            (477)
Net (loss) income                                 ($   41)          ($  394)      ($  190)(1)      $ 1,316(2)      ($  317)(3)
                                                  =======           =======       =======          =======         =======
Basic and diluted net (loss) income per
share                                              $ 0.00           ($ 0.03)      ($ 0.01)         $  0.10         ($ 0.02)
                                                  =======           =======       =======          =======         =======
Shares used in calculation of basic and
diluted net (loss) income per share            13,144,040        13,144,040    13,144,040       13,144,040      13,144,040
</TABLE>

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                                  ------------
                                    2005             2004             2003             2002             2001
                                    ----             ----             ----             ----             ----
BALANCE SHEET DATA:                                              (in thousands)
<S>                              <C>              <C>              <C>              <C>              <C>
Cash and cash equivalents        $ 24,045         $ 24,046         $ 24,369         $ 24,923         $ 24,469
Total assets                       25,212           25,546           26,807           26,870           26,201
Accumulated deficit               (33,630)         (33,589)         (33,196)         (33,006)         (34,322)
Stockholders' equity               25,185           25,532           26,758           26,458           25,356
</TABLE>

Cadus has not paid any dividends  since its  inception  and does not  anticipate
paying any dividends on its common stock in the foreseeable future.

      (1)   The net  loss of  $190,000  for the year  ended  December  31,  2003
            includes a realized  gain of  $313,189  related to common  shares of
            Sequenom  released from escrow which had been received in connection
            with the  merger of Axiom (in  which  Cadus had an equity  interest)
            with Sequenom.

      (2)   The net income of  $1,316,000  for the year ended  December 31, 2002
            includes a realized  gain of  $823,189  related to common  shares of
            Sequenom  received in connection  with the merger of Axiom (in which
            Cadus had an equity interest) with Sequenom.

      (3)   The net  loss of  $317,000  for the year  ended  December  31,  2001
            includes an arbitration  award cost of  approximately  $750,000 to a
            former  employee and a $155,402  reimbursement  of SIBIA  litigation
            costs offset by legal costs of $29,786.

RECENTLY ISSUED ACCOUNTING STANDARDS

      In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement  of  Financial  Accounting  Standards  ("SFAS")  No. 123R "SHARE BASED
PAYMENT." This


                                       17
<PAGE>

statement is a revision to SFAS No. 123, supersedes  Accounting Principles Board
("APB") No. 25,  "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and amends SFAS No.
95,  "STATEMENT  OF CASH  FLOWS."  This  statement  will  require the Company to
expense the cost of  employee  services  received  in  exchange  for an award of
equity  instruments.  This  statement  also  provides  guidance  on valuing  and
expensing these awards, as well as disclosure requirements, and is effective for
the first interim reporting period that begins after December 31, 2005.

      SFAS No. 123R permits public companies to choose between the following two
adoption methods:

      1.  A  "modified   prospective"  method  in  which  compensation  cost  is
recognized  beginning with the effective date (a) based on the  requirements  of
SFAS No. 123R for all share-based  payments granted after the effective date and
(b)  based  on the  requirements  of SFAS  No.  123 for all  awards  granted  to
employees  prior to the effective date of SFAS No. 123R that remain  unvested on
the effective date, or

      2. A "modified  retrospective"  method which includes the  requirements of
the modified  prospective  method  described above, but also permits entities to
restate  based on the  amounts  previously  recognized  under  SFAS No.  123 for
purposes of pro forma disclosures  either (a) all prior periods presented or (b)
prior interim periods of the year of adoption.

      As  permitted  by  SFAS  No.  123,  the  Company  currently  accounts  for
share-based  payments to employees  using the APB No. 25 intrinsic  value method
and recognizes no  compensation  cost for employee stock options.  The impact of
the  adoption of SFAS No. 123R cannot be  predicted at this time because it will
depend  on  levels of  share-based  payments  granted  in the  future.  However,
valuation of employee  stock  options under SFAS No. 123R is similar to SFAS No.
123, with some exceptions. The adoption of SFAS No. 123R's fair value method may
have an impact on the Company's results of operations,  although it will have no
impact on its overall financial position. The Company has not yet determined the
method of adoption for this new standard.

      In December 2004,  the FASB issued SFAS No. 153,  EXCHANGES OF NONMONETARY
ASSETS,  AN AMENDMENT OF APB NO. 29,  ACCOUNTING FOR  NONMONETARY  TRANSACTIONS.
SFAS No. 153 requires exchanges of productive assets to be accounted for at fair
value, rather than at carryover basis, unless (1) neither the asset received nor
the asset  surrendered has a fair value that is determinable  within  reasonable
limits  or (2) the  transactions  lack  commercial  substance.  SFAS No.  153 is
effective for nonmonetary asset exchanges  occurring in fiscal periods beginning
after June 15, 2005.  The Company does not expect the adoption of this  standard
to have a material  effect on its financial  position,  results of operations or
cash flows.

      In March 2004, the FASB Emerging  Issues Task Force (EITF)  released Issue
No. 03-1, "THE MEANING OF OTHER-THAN-TEMPORARY IMPAIRMENT AND ITS APPLICATION TO
CERTAIN  INVESTMENTS."  EITF 03-1  provides  guidance  for  determining  whether
impairment for certain debt and equity investments is  other-than-temporary  and
the   measurement  of  an  impaired  loss.  The   recognition   and  measurement
requirements  of EITF  03-1  were  initially  effective  for  reporting  periods
beginning  after June 15, 2004.  In September  2004,  the FASB Staff issued FASB
Staff  Position  ("FSP") EITF 03-1-1 that delayed the effective date for certain
measurement  and recognition  guidance  contained in EITF 03-1. The FSP requires
that entities continue to apply


                                       18
<PAGE>

previously existing  "other-than-temporary"  guidance until a final consensus is
reached.  Management does not anticipate that issuance of a final consensus will
materially impact the Company's financial condition or results of operations.

ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

OVERVIEW

      Cadus  was  incorporated  in  1992  and  until  July  30,  1999,   devoted
substantially  all of its resources to the  development and application of novel
yeast-based and other drug discovery technologies.  On July 30, 1999, Cadus sold
its drug discovery  assets to OSI  Pharmaceuticals,  Inc. ("OSI") and ceased its
internal  drug  discovery  operations  and  research  efforts for  collaborative
partners. Cadus currently has limited operations, no employees and the Company's
current  Chief  Executive  Officer is a consultant.  See Item 10.  Directors and
Officers of the  Company.  The Company is  currently  seeking to (i) license the
Subsidiary's  drug  discovery  technologies  and  (ii) to use a  portion  of its
available  cash to acquire or invest in  companies or income  producing  assets.
While such companies or assets might be in the  biotechnology or  pharmaceutical
industries,  the Company will  consider  acquisitions  or  investments  in other
industries as well.

      The Company has incurred operating losses in each year since its inception
except  for an  operating  gain of  approximately  $214,000  for the year  ended
December 31, 2002. At December 31, 2005, the Company had an accumulated  deficit
of approximately $33.6 million.  The Company's losses have resulted  principally
from costs incurred in connection with its research and  development  activities
and  from  general  and  administrative  costs  associated  with  the  Company's
operations.  These costs have  exceeded  the  Company's  revenues  and  interest
income.

      As a  result  of the  sale of its  drug  discovery  assets  to OSI and the
cessation of its internal drug  discovery  operations  and research  efforts for
collaborative partners, the Company ceased to have research funding revenues and
substantially reduced its operating expenses.  Despite the fact that the Company
has no employees  and limited  operations,  it  continues  to incur  general and
administrative  expenses.  These, for the most part, relate to legal, accounting
and other costs associated with maintaining a public company and legal and other
costs relating to the  maintenance  of patents.  For the year ended December 31,
2005, such expenses  aggregated  $812,031 and included  patent costs  (including
legal fees) and license fees of approximately  $362,000,  legal fees (other than
in  connection  with  patents)  of  approximately  $114,000,   bookkeeping,  and
accounting and tax preparation fees of approximately $126,000. Since the Company
only had revenues of $100,000, it incurred an operating loss of $708,262 for the
year ended December 31, 2005.

      The  following  accounting  policies are  important to  understanding  the
Company's financial condition and results of operations and should be read as an
integral part of the  discussion  and analysis of the results of our  operations
and financial position.  For additional  accounting policies,  see note 2 to our
consolidated financial statements, "Significant Accounting Policies."


                                       19
<PAGE>

REVENUE  RECOGNITION.  The Company has entered into license  agreements with two
companies  under  which  it has  licensed  to them  its  yeast  technology  on a
non-exclusive  basis. The agreements  provide for the payment of  non-refundable
license fees to the Company.  The Company  recognizes the license fees as income
when received, as there are no continuing performance obligations of the Company
to the licensees.

ACCOUNTING  FOR INCOME TAXES.  As part of the process of preparing the Company's
consolidated  financial  statements in  conformity  with  accounting  principles
generally  accepted in the United States of America,  the Company is required to
estimate  its income  taxes in each of the  jurisdictions  in which it operates.
This process  involves the Company  estimating  its actual  current tax exposure
together with assessing temporary differences resulting from differing treatment
of items,  such as deferred  revenue,  for tax and  accounting  purposes.  These
differences  result in deferred tax assets and  liabilities,  which are included
within the Company's  consolidated  balance sheet.  The Company must then assess
the  likelihood  that its  deferred  tax assets  will be  recovered  from future
taxable  income and to the extent the  Company  believes  that  recovery  is not
likely, it must establish a valuation allowance.  To the extent it establishes a
valuation  allowance or increases this  allowance in a period,  the Company must
include an expense  within the tax  provision in the  statement  of  operations.
Significant  management  judgment  is  required  in  determining  the  Company's
provision  for income  taxes,  its deferred tax assets and  liabilities  and any
valuation allowance recorded against its net deferred tax assets.

RESULTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2005 AND 2004

      REVENUES

      Revenues for 2005 and 2004 were $100,000  which is the annual  maintenance
fee from OSI.

      OPERATING EXPENSES

      General and  administrative  expenses  increased to $812,031 for 2005 from
$772,388 in 2004. This increase was  attributable to an increase in patent costs
of $41,934  and an increase in patent  licensing  costs of $52,000,  offset by a
decrease in insurance costs of $49,378 and a decrease in sales tax of $12,960 in
connection  with the sale of assets to OSI in 1999.  There  was an  increase  of
$8,047 in sundry expenses.

      EQUITY IN OTHER VENTURES

      Equity  in other  ventures  in 2005  reflects  a gain of  $3,769  from the
Company's investment in Laurel Partners Limited Partnership.  There was a $5,168
loss in 2004 from such investment.

      INTEREST INCOME

      Interest income for 2005 increased to $751,430 from $255,913 in 2004. This
increase was  attributable  primarily to investment in money market funds with a
higher yield.  The average  interest earned on invested funds was  approximately
3.1% in 2005.


                                       20
<PAGE>

      NET (LOSS)

      The net loss for 2005 was  $41,084  compared  to net loss of  $393,503  in
2004. The decrease in net loss is  attributable  to increases in interest income
of $495,517  and in income in other  ventures of $8,937,  offset by increases in
operating expenses of $39,643 and in state taxes of $112,392.

YEARS ENDED DECEMBER 31, 2004 AND 2003

      REVENUES

      Revenues  for 2004  decreased  to $100,000  from  $220,000  in 2003.  This
decrease  is  attributable  to the  Company  having  received a one-time  fee of
$120,000 in 2003 in consideration for the Company's extension of a license to an
affiliate of the licensee and not having received such a fee in 2004.

      OPERATING EXPENSES

      General and  administrative  expenses  decreased to $772,388 for 2004 from
$834,631 in 2003.  This  decrease was  attributable  to a decrease of $48,754 in
insurance  costs, a decrease of $27,000 in patent licensing costs, a decrease of
$4,899 in patent costs and professional fees, offset by an increase in sales tax
of $12,960 in  connection  with the sale of assets to OSI in 1999.  There was an
increase of $5,450 in sundry expenses.

      EQUITY IN OTHER VENTURES

      Equity  in other  ventures  in 2004  reflects  a loss of  $5,168  from the
Company's investment in Laurel Partners Limited Partnership.  There was a $2,117
loss in 2003 from such investment.

      INTEREST INCOME

      Interest income for 2004 increased to $255,913 from $171,218 in 2003. This
increase  was  attributable  primarily  to a switch in money market funds with a
higher yield.  The average  interest earned on invested funds was  approximately
1.1% in 2004.

      NET (LOSS)

      The net loss for 2004 was  $393,503  compared to net loss of $189,696  for
2003. The increase is primarily  attributable to a $120,000  decrease in license
fees in 2004 and a  $313,189  realized  gain on  marketable  securities  in 2003
compared to no such gain in 2004,  offset by an  increase in interest  income of
$84,695 and a decrease in taxes and in total costs and expenses of $144,687.

LIQUIDITY AND CAPITAL RESOURCES

      At December 31, 2005 the Company held cash and cash  equivalents  of $24.0
million. The Company's working capital at December 31, 2005 was $24.3 million.


                                       21
<PAGE>

      In February 2000,  Cadus licensed to OSI, on a  non-exclusive  basis,  its
yeast  technologies.  OSI is also obligated to pay an annual  maintenance fee of
$100,000 until the earlier of 2010 or the  termination  of the license.  OSI may
terminate the license at any time on 30 days prior written notice.

      In December 2001, the Company licensed to a major pharmaceutical  company,
on a  non-exclusive  basis,  its yeast  technologies.  The licensee  paid to the
Subsidiary an up-front  non-refundable  fee of $500,000.  In October  2002,  the
licensee  paid to the  Subsidiary  an  additional  $1,000,000  when the licensee
achieved  a  research  milestone.  In  September  2003,  the  licensee  paid  an
additional $120,000 pursuant to an addendum to the license agreement under which
the Company  extended the license to an affiliate of the  licensee.  The license
terminates on December 31, 2006;  however,  the licensee may extend the term for
additional  one-year  periods  by paying  to the  Subsidiary  $250,000  for each
one-year extension.

      The Company believes that its existing  resources,  together with interest
income,  will be  sufficient  to  support  its  current  and  projected  funding
requirements  through  the end of 2007.  This  forecast  of the  period  of time
through which the Company's  financial resources will be adequate to support its
operation is a  forward-looking  statement  that may not prove  accurate and, as
such, actual results may vary. The Company's capital  requirements may vary as a
result of a number of factors, including the transactions,  if any, arising from
the Company's  efforts to license its technologies  and otherwise  realize value
from its assets, the transactions, if any, arising from the Company's efforts to
acquire or invest in  companies or income  producing  assets and the expenses of
pursuing such transactions.

NET OPERATING LOSS CARRYFORWARDS

      At December 31, 2005 the Company had tax net operating loss  carryforwards
of approximately $29.3 million and research and development credit carryforwards
of approximately  $2.5 million which expire in years 2007 through 2025. Such net
operating  loss  carryforwards  may be utilized  under  certain  conditions as a
deduction against future income and such development credit carryforwards may be
utilized under certain  circumstances  as an offset  against  future taxes.  The
Company's   ability  to  utilize  such  net  operating  loss  and  research  and
development  credit  carryforwards  is  subject to  certain  limitations  due to
ownership changes as defined by rules enacted with the Tax Reform Act of 1986.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The Company's  earnings and cash flows are subject to fluctuations  due to
changes in interest  rates  primarily  from its  investment  of  available  cash
balances in money market funds with portfolios of investment grade corporate and
U.S.  government  securities.  The  Company  does not  believe it is  materially
exposed to changes in interest  rates.  Under its current  policies  the Company
does not use interest rate derivative instruments to manage exposure to interest
rate changes.

ITEM 8. FINANCIAL STATEMENTS

      The financial  statements and notes thereto may be found following Item 15
of this report. For an index to the financial statements, see Item 15.


                                       22
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

      On May 4,  2004,  the Board of  Directors  of the  Company  engaged  Grant
Thornton LLP as the Company's new  independent  accountants to replace KPMG LLP.
The Board of Directors decided to solicit proposals from independent  accounting
firms during March 2004.  After  receiving  these  proposals  and  considering a
variety of factors, the Board of Directors voted to engage Grant Thornton LLP as
the Company's new independent accountants and to dismiss KPMG LLP effective upon
the engagement of Grant Thornton LLP.

      The report of KPMG LLP on the  consolidated  financial  statements  of the
Company for the fiscal year ended December 31, 2003 contained no adverse opinion
or disclaimer  of opinion and was not  qualified or modified as to  uncertainty,
audit  scope or  accounting  principles.  In  connection  with the  audit of the
consolidated  financial  statements  of the  Company  for the fiscal  year ended
December  31,  2003,  and during the period from  January 1, 2004 through May 4,
2004, the Company did not have any disagreements  with KPMG LLP on any matter of
accounting principles or practices,  financial statement disclosure, or auditing
scope or procedure,  which  disagreements if not resolved to the satisfaction of
KPMG LLP would have caused it to make  reference  to the  subject  matter of the
disagreements  in  connection  with its  report  on the  Company's  consolidated
financial  statements  as of and for the fiscal year ended  December  31,  2003.
During the period of time from January 1, 2002  through May 4, 2004,  there were
no "reportable events" as defined in Item 304(a)(1)(v) of Regulation S-K adopted
by the Securities and Exchange Commission.

      During the fiscal years ended  December 31, 2003 and 2002,  and during the
period from  January 1, 2004  through  May 4, 2004,  the Company did not consult
with Grant Thornton LLP regarding any of the matters specified in Item 304(a)(2)
of Regulation S-K.

      On June 23,  2005,  the Board of Directors  of the Company  engaged  Holtz
Rubenstein Reminick LLP as the Company's new independent  accountants to replace
Grant  Thornton LLP. The Board of Directors  decided to solicit  proposals  from
independent  accounting  firms during April and May 2005.  After receiving these
proposals and considering a variety of factors,  the Board of Directors voted to
engage  Holtz   Rubenstein   Reminick  LLP  as  the  Company's  new  independent
accountants  and to dismiss Grant  Thornton LLP effective upon the engagement of
Holtz Rubenstein Reminick LLP.

      The report of Grant Thornton LLP on the consolidated  financial statements
of the Company as of and for the fiscal year ended  December 31, 2004  contained
no adverse opinion or disclaimer of opinion and was not qualified or modified as
to  uncertainty,  audit scope or accounting  principles.  In connection with the
audit of the consolidated  financial statements of the Company as of and for the
fiscal year ended  December 31, 2004, and during the period from January 1, 2005
through June 23,  2005,  the Company did not have any  disagreements  with Grant
Thornton LLP on any matter of  accounting  principles  or  practices,  financial
statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to the  satisfaction of Grant Thornton LLP would have caused it to make
reference to the subject  matter of the  disagreements  in  connection  with its
reports on the  Company's  consolidated  financial  statements as of and for the
fiscal year ended December 31, 2004. During the period of time from May 4, 2004,
when the Company engaged Grant Thornton LLP,  through June 23, 2005,  there were
no "reportable


                                       23
<PAGE>

events"  as  defined  in Item  304(a)(1)(v)  of  Regulation  S-K  adopted by the
Securities and Exchange Commission (the "Commission").

      During the fiscal years ended December 31, 2004 and December 31, 2003, and
during the period from January 1, 2005  through  June 23, 2005,  the Company did
not consult  with Holtz  Rubenstein  Reminick LLP  regarding  any of the matters
specified in Item 304(a)(2) of Regulation S-K.

ITEM 9A. CONTROLS AND PROCEDURES

      Based  on  the  evaluation  of  the  Company's   disclosure  controls  and
procedures  as of the end of the period  covered by this  Annual  Report on Form
10-K, the Company's  President and Chief  Executive  Officer,  who also performs
functions similar to those of a principal financial officer,  concluded that the
Company's  disclosure  controls  and  procedures  are  effective  in the  timely
identification of material  information required to be included in the Company's
periodic  filings with the Securities and Exchange  Commission.  During the year
ended  December 31, 2005,  there have been no changes in the Company's  internal
control over financial  reporting  identified in connection  with the evaluation
thereof,  which have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

      None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

      Information with respect to the executive  officers and directors of Cadus
as of March 15, 2006 is set forth below:

NAME                               AGE     POSITION
----                               ---     --------

James R. Broach, Ph.D.             58      Director

Russell D. Glass                   43      Director

Carl C. Icahn                      70      Director

Peter S. Liebert, M.D. (1)         70      Director

Jack G. Wasserman (1)              69      Director

David Blitz                        74      Chief Executive Officer and President

----------
(1)  Member of the Compensation Committee.

      JAMES R.  BROACH,  PH.D.,  a  scientific  founder of Cadus and inventor of
Cadus's yeast-based drug discovery technology,  has been Director of Research of
Cadus since its inception. He has been a Professor at Princeton University since
1984 in the Department of Molecular Biology,


                                       24
<PAGE>

where he is currently Associate Chair and Associate Director of the Lewis Sigler
Institute for Integrative  Genomics.  In 1984, Dr. Broach and his  collaborators
were the first  ones to  demonstrate  that  human  genes  could be  successfully
implanted  into  yeast  cells.  He  received  his  Ph.D.  in  Biochemistry  from
University of California at Berkeley and his B.S. from Yale University.

      RUSSELL D. GLASS  became a  director  of Cadus in June 1998.  He served as
President and Chief  Executive  Officer of Cadus from April 2000 until  February
2003.  Mr. Glass is a private  investor and Managing  Member of RDG Capital LLC.
From 2002 to 2003 Mr. Glass served as Co-Chairman and Chief  Investment  Officer
of Ranger  Partners,  an investment  management  company.  From 1998 to 2002 Mr.
Glass  served as  President  and Chief  Investment  Officer of Icahn  Associates
Corp.,  a diversified  investment  firm,  and as  Vice-Chairman  and Director of
Lowestfare.com,  Inc., a travel services company. Previously, Mr. Glass had been
a  partner  in  Relational  Investors  LLC,  from 1996 to 1998,  and in  Premier
Partners  Inc.,  from 1988 to 1996,  firms  engaged in  investment  research and
management.  From 1984 to 1986 he served as an  investment  banker with  Kidder,
Peabody & Co.  Previously,  Mr. Glass  served as a Director of Automated  Travel
Systems,   Inc.,  a  software   development  firm;  Axiom   Biotechnologies,   a
pharmacology profiling company;  National Energy Group, an oil & gas exploration
and production company;  and Next Generation  Technology  Holdings, a healthcare
information  technology  company.  He currently serves as a Director of the A.G.
Spanos  Corporation,  a national real estate  developer and owner of the NFL San
Diego  Chargers  Football  Club.  Mr.  Glass  earned a B.A.  in  economics  from
Princeton  University and an M.B.A. from the Stanford University Graduate School
of Business.

      CARL C. ICAHN  became a  director  of Cadus in July  1993.  Mr.  Icahn has
served as a director of CCI Onshore Corp. and CCI Offshore Corp.  since February
2005,  and from  September  2004 to February  2005, Mr. Icahn served as the sole
member  of  their   predecessors,   CCI  Onshore  LLC  and  CCI  Offshore   LLC,
respectively. Mr. Icahn has served as a director of Starfire Holding Corporation
(formerly Icahn Holding  Corporation),  a privately-held  holding  company,  and
Chairman of the Board and a director of various subsidiaries of Starfire,  since
1984.  Mr.  Icahn  served as Chairman of the Board and  President of Icahn & Co,
Inc. a  registered  broker-dealer  and a member of the National  Association  of
Securities  Dealers,  from 1968 until  December  2005.  Mr.  Icahn has served as
Chairman of the Board of  American  Property  Investors,  Inc.  since 1990,  the
general  partner of  American  Real  Estate  Holdings,  L.P.,  a public  limited
partnership  that  invests in real  estate and holds  various  other  interests,
including  the  interests  in its  subsidiaries  that are  engaged,  among other
things, in the oil and gas business,  the casino entertainment  business and the
textile business.  Mr Icahn is, and has been since 1994, a majority shareholder,
the Chairman of the Board and a director of American Railcar  Industries,  Inc.,
or  ARI,  a  Nasdaq  listed  company   primarily  engaged  in  the  business  of
manufacturing,  managing and selling railroad freight and tank cars. From August
1998 to August 2002,  Mr.  Icahn  served as Chairman of the Board of  Maupintour
Holding LLC  (f/k/a/  Lowestfare.com,  LLC),  an  internet  travel  reservations
company.  From October 1998 through May, 2004, Mr. Icahn was the President and a
director of Stratosphere Corporation, which operates the Stratosphere Casino


                                       25
<PAGE>

Hotel & Tower. Since September 29, 2000, Mr. Icahn has served at the Chairman of
the Board of GB Holdings Inc., which owns 41.7% of Atlantic Coast, which through
its wholly-owned subsidiary owns and operates The Sands. From January 2003 until
February  2006,  Mr.  Icahn served as Chairman of the Board and a director of XO
Communications,  Inc., a telecommunications  company. Upon the consummation of a
restructuring  merger in February 2006, Mr. Icahn became a director and Chairman
of the Board of XO  Holdings,  Inc. In May 2005,  Mr. Icahn became a director of
Blockbuster  Inc,  a NYSE  listed  provider  of  in-home  mover  rental and game
entertainment. Mr. Icahn received his B.A. from Princeton University.

      PETER S.  LIEBERT,  M.D.,  became a director of Cadus in April  1995.  Dr.
Liebert  has been a  pediatric  surgeon  in private  practice  since 1968 and is
affiliated with the Children's Hospital of Columbia Presbyterian. He is Clinical
Associate  Professor of Surgery,  College of Physicians  and Surgeons,  Columbia
University. He is a past president of the Westchester County Medical Society and
is currently Chairman of its Finance Committee. He is also Chairman of the Board
of Rx Vitamins,  Inc. Dr. Liebert holds an M.D. from Harvard  University Medical
School and a B.A. from Princeton University.

      JACK G.  WASSERMAN  has served as a director of Cadus since May 1996.  Mr.
Wasserman is an attorney and a member of the Bars of New York, Florida,  and the
District of Columbia. From 1966 until 2001 he was a senior partner of Wasserman,
Schneider,  Babb & Reed, a New York-based law firm and its  predecessors.  Since
September  2001 Mr.  Wasserman has been engaged in the practice of law as a sole
practitioner.  Since 1993 he has been a director of American Property Investors,
Inc.,  the general  partner of American Real Estate  Partners,  LP and, in 2003,
became a director of its indirect subsidiaries,  American Casino & Entertainment
Properties and American  Entertainment & Casino Finance Corp. Mr.  Wasserman has
been licenced by the New Jersey State Casino  Control  Commission and the Nevada
State Gaming Control Commission.  Since December 1, 1998, Mr. Wasserman has been
a director of National Energy Group,  Inc.  which,  on December 4, 1998,  sought
protection under the federal  bankruptcy laws; a Plan of  Reorganization  became
effective  August 4, 2000,  and a final decree closing the case and settling all
matters relating to the bankruptcy  proceeding  became effective on December 13,
2001. In 2003,  National Energy Group,  Inc.,  became an indirect  subsidiary of
American  Real  Estate  Partners,  LP.  On March 11,  2004,  Mr.  Wasserman  was
appointed to the Board of Directors of Triarc Companies, Inc. and was elected by
the  stockholders  to the Board of Directors in June 2004; he serves on Triarc's
Audit and Compensation  Committees.  Mr. Wasserman  received a B.A. from Adelphi
University, a J.D. from Georgetown University Law Center, and a Graduate Diploma
from Johns Hopkins University School of Advanced International Studies.

      DAVID BLITZ  became  acting  President,  acting Chief  Executive  Officer,
Treasurer and Secretary of Cadus in May 2004.  Mr. Blitz,  a retired  partner of
Deloitte & Touche,  has been employed as a certified  public  accountant by Joel
Popkin & Co., P.C. since January 1990. Mr. Blitz,  as an employee of Joel Popkin
& Co., P.C., has been performing Cadus Corporation's


                                       26
<PAGE>

internal  accounting  since March 2000.  He earned his B.A.  in  Economics  from
Brooklyn College.

      Directors are elected by the  stockholders of Cadus at each annual meeting
of  stockholders  and serve until the next annual  meeting of  stockholders  and
until their  successors are elected and qualified or until their earlier removal
or resignation.

      The Board of Directors of Cadus has a Compensation  Committee,  consisting
of Messrs. Liebert and Wasserman, which makes recommendations regarding salaries
and incentive  compensation  for employees of and consultants to Cadus and which
administers the 1993 Stock Option Plan and the 1996 Incentive Plan.

      Each non-employee director receives $3,000 in annual compensation, payable
quarterly in arrears.

      The Company does not have a separately-designated standing audit committee
or a committee  performing similar  functions.  The entire Board of Directors of
the Company acts as the audit  committee.  The Board of Directors of the Company
has determined that it does not have an "audit  committee  financial  expert" as
such term is  defined  in the  rules  adopted  by the  Securities  and  Exchange
Commission requiring companies to disclose whether or not at least one member of
the audit  committee  is an "audit  committee  financial  expert."  The Board of
Directors  believes  that the  aggregate  technical,  commercial  and  financial
experience  of its  members,  together  with  their  knowledge  of the  Company,
provides  the Board  with the  ability  to  monitor  and direct the goals of the
Company  and to protect  the best  interests  of its  shareholders  and that its
members are fully qualified to monitor the performance of management, the public
disclosures  by the Company of its  financial  condition  and  performance,  the
Company's  internal  accounting  operations  and its  independent  auditors.  In
addition,  the Board of Directors is authorized to engage independent  financial
consultants,  auditors  and counsel  whenever it  believes it is  necessary  and
appropriate to do so.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

      Section 16(a) of the Exchange Act requires Cadus's directors and executive
officers,  and persons who own more than ten  percent of a  registered  class of
Cadus's equity securities,  to file with the Securities and Exchange  Commission
(the "SEC") initial  reports of ownership and reports of changes in ownership of
Common  Stock of Cadus.  Reporting  persons are  required by SEC  regulation  to
furnish the Company with copies of all such filed reports. To Cadus's knowledge,
based solely on a review of copies of such filed reports furnished to Cadus, all
of Cadus's  directors,  officers and greater than ten percent  beneficial owners
made all required filings during fiscal year 2005 in a timely manner.


                                       27
<PAGE>

CODE OF ETHICS

      Cadus  has not  adopted  a code of  ethics  for  its  principal  executive
officer, principal financial officer, principal accounting officer or controller
or persons  performing  similar  functions due to the fact that it does not have
any  employees,  does not have any  operations  (other than those related to the
licensing  of  its  technologies)  and  has  only  one  officer  (who  is not an
employee).

ITEM 11. EXECUTIVE COMPENSATION.

      The  following  table  sets  forth  certain  information   concerning  the
compensation  paid or accrued  by Cadus for  services  rendered  to Cadus in all
capacities for the fiscal years ended  December 31, 2005,  2004 and 2003, by its
Chief Executive  Officer and each of the Cadus's other executive  officers whose
total salary and bonus exceeded $100,000 during 2005  (collectively,  the "Named
Executive Officers"):


                                       28
<PAGE>

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                        Long-Term
                                                                                       Compensation
                                                                                          Awards
                                                                                          ------
                                                           Annual Compensation          Securities
                                                           -------------------          Underlying          All Other
Name and Principal Position                  Year       Salary ($)     Bonus ($)        Options (#)       Compensation
---------------------------                  ----       ----------     ---------        -----------       ------------
<S>                                          <C>          <C>             <C>               <C>                 <C>
David Blitz (1)                              2005         $25,000         --                --                  --
    President and Chief Executive            2004         $15,625         --                --                  --
    Officer                                  2003           --            --                --                  --
Michele A  Paige (2)                         2005           --            --                --                  --
    President and Chief Executive            2004           --            --                --                  --
    Officer                                  2003           --            --                --                  --
Russell D  Glass (3)                         2005           --            --                --                  --
    President and Chief Executive            2004           --            --                --                  --
    Officer                                  2003           --            --                --                  --
</TABLE>

----------
(1)   Mr.  David  Blitz  has been  the  Company's  acting  President  and  Chief
      Executive Officer from May 2004 and serves in such capacity at the rate of
      $25,000 per annum.
(2)   Ms.  Michele  A. Paige was the  Company's  President  and Chief  Executive
      Officer from  February  2003 until April 2004 and served in such  capacity
      without compensation.
(3)   Mr.  Russell  D. Glass was the  Company's  President  and Chief  Executive
      Officer from April 2000 until  February  2003 and served in such  capacity
      without compensation.

OPTION GRANTS

      The  following  table sets forth  certain  information  regarding  options
granted  during the fiscal  year ended  December  31, 2005 by Cadus to the Named
Executive Officers:

                      OPTION/SAR GRANTS IN LAST FISCAL YEAR

                                                    INDIVIDUAL GRANTS

<TABLE>
<CAPTION>
                               Number of         Percent of                                       Potential Realizable
                               Securities      Total Options/                                    Value At Assumed Annual
                               Underlying       SARs Granted       Exercise                       Rates of Stock Price
                                Options/        to Employees        Price         Expiration     Appreciation for Option
          Name              Sars Granted (#)   in Fiscal Year     ($/share)          Date              Terms ($)
          ----              ----------------   --------------     ---------          ----              ---------

                                                                                                    5%           10%
                                                                                                    --           ---
<S>                                <C>               <C>              <C>             <C>           <C>           <C>
David Blitz..............          --                --               --              --            --            --

Michele A. Paige.........          --                --               --              --            --            --

Russell D. Glass.........          --                --               --              --            --            --
</TABLE>


                                       29
<PAGE>

OPTION EXERCISES AND HOLDINGS

      The  following  table  sets  forth  certain  information  concerning  each
exercise of stock options, during the fiscal year ended December 31, 2005 by the
Named  Executive  Officers  and  unexercised  stock  options  held by the  Named
Executive Officers as of the end of such fiscal year.

             AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
                          FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                                           Number of
                                                                    Securities Underlying                  Value of Unexercised
                                                                    Unexercised Options at             In-The-Money Options/SARs at
                               Shares                                December 31, 2005(#)                  December 31, 2004($)
                             Acquired on    Aggregate Value          --------------------                  --------------------
          Name              Exercise (#)      Realized ($)      Exercisable       Unexercisable      Exercisable       Unexercisable
          ----              ------------      ------------      -----------       -------------      -----------       -------------
<S>                              <C>              <C>               <C>                <C>               <C>                <C>
David Blitz..............        --               --                --                 --                --                 --

Michele A. Paige.........        --               --                --                 --                --                 --

Russell D. Glass.........        --               --                --                 --                --                 --
</TABLE>

INCENTIVE PLANS

1993 STOCK OPTION PLAN

      Cadus's 1993 Stock Option Plan (the "1993 Stock Option Plan") provides for
the grant of options to purchase  shares of Common Stock to officers,  employees
and  consultants  of the Company.  The maximum  number of shares of Common Stock
that may be issued  pursuant to the 1993 Stock Option Plan is 666,667  (plus any
shares that are the subject of canceled or  forfeited  awards).  Effective as of
May 10, 1996, the 1993 Stock Option Plan was replaced by the 1996 Incentive Plan
with respect to all


                                       30
<PAGE>

future awards to the Company's  employees and consultants.  See "Incentive Plans
-- 1996 Incentive Plan."

      As of  March  15,  2006,  no  shares  of  Common  Stock  were  subject  to
outstanding stock options granted under the 1993 Stock Option Plan.

STOCK OPTION AGREEMENTS

      Cadus has granted  non-qualified  stock  options to  directors,  officers,
employees and consultants of Cadus by means of stock option agreements that were
not issued pursuant to any written  incentive plan of the Company.  During 2005,
there were no stock options granted pursuant to such stock option agreements. As
of March 15, 2006, an aggregate of 48,000 shares of Common Stock were subject to
outstanding  stock  options  granted  under such stock  option  agreements,  and
options to purchase 48,000 shares under such option  agreements were exercisable
at a price of $6.75 per share.

      Cadus has  registered  the shares  issuable upon exercise of stock options
granted under such stock option agreements pursuant to a registration  statement
on Form S-8.

1996 INCENTIVE PLAN

      Cadus's 1996 Incentive Plan (the "1996 Incentive Plan") was adopted by the
Board of Directors and approved by the  stockholders  of Cadus in May 1996.  The
1996 Incentive Plan replaced the 1993 Stock Option Plan, effective as of May 10,
1996, with respect to all future awards by Cadus to the Company's  employees and
consultants.  However,  while  all  future  awards  will be made  under the 1996
Incentive Plan, awards made under the 1993 Stock Option Plan will continue to be
administered in accordance with the 1993 Stock Option Plan. See "Incentive Plans
-- 1993 Stock Option  Plan." In December  1996,  the Board of Directors of Cadus
amended the 1996  Incentive Plan to (i) increase the maximum number of shares of
Common  Stock that may be the subject of awards  under the 1996  Incentive  Plan
from  333,334 to 833,334  (plus any shares  that are the  subject of canceled or
forfeited  awards) and (ii) provide for the grant of stock  options to directors
of the Company . The  stockholders of Cadus approved such amendments to the 1996
Incentive Plan in June 1997. In December  1997,  the Board of Directors  amended
the 1996 Incentive Plan to increase the maximum number of shares of Common Stock
that may be the subject of awards under the 1996  Incentive Plan from 833,334 to
1,833,334  (plus any  shares  that are the  subject  of  canceled  or  forfeited
awards). The stockholders of Cadus approved this amendment to the 1996 Incentive
Plan in June 1998.

      The 1996 Incentive Plan is  administered  by the  Compensation  Committee,
which has the power and  authority  under the 1996  Incentive  Plan to determine
which of Cadus's  employees,  consultants and directors will receive awards, the
time or times at which awards will be made, the nature and amount of the awards,
the exercise or purchase price, if any, of such awards, and such other terms and
conditions applicable to awards as it determines to be appropriate or advisable.


                                       31
<PAGE>

      Options granted under the 1996 Incentive Plan may be either  non-qualified
stock  options or options  intended to qualify as incentive  stock options under
Section 422 of the Code. The term of incentive  stock options  granted under the
1996  Incentive  Plan cannot  extend beyond ten years from the date of grant (or
five years in the case of a holder of more than 10% of the total combined voting
power of all classes of stock of Cadus on the date of grant).

      Shares  of Common  Stock may  either  be  awarded  or sold  under the 1996
Incentive  Plan and may be  issued  or sold with or  without  vesting  and other
restrictions, as determined by the Compensation Committee.

      Under the 1996 Incentive  Plan, the  Compensation  Committee may establish
with respect to each option or share awarded or sold such vesting  provisions as
it  determines  to  be   appropriate   or  advisable.   Unvested   options  will
automatically  terminate  within  a  specified  period  of  time  following  the
termination of the holder's  relationship  with Cadus and in no event beyond the
expiration of the term.  Cadus may either  repurchase  unvested shares of Common
Stock at their  original  purchase  price upon the  termination  of the holder's
relationship  with the  Company  or cause  the  forfeiture  of such  shares,  as
determined by the  Compensation  Committee.  All options granted and shares sold
under the 1996 Incentive Plan to employees of the Company may, in the discretion
of the  Compensation  Committee,  become  fully  vested upon the  occurrence  of
certain  corporate  transactions  if  the  holders  thereof  are  terminated  in
connection therewith.

      The exercise  price of options  granted and the  purchase  price of shares
sold under the 1996 Incentive Plan are determined by the Compensation Committee,
but may not,  in the case of  incentive  stock  options,  be less  than the fair
market  value of the  Common  Stock on the  date of  grant  (or,  in the case of
incentive  stock  options  granted  to a holder  of more  than 10% of the  total
combined  voting  power of all  classes  of stock of the  Company on the date of
grant,  110% of such fair  market  value),  as  determined  by the  Compensation
Committee.

      The   Compensation   Committee  may  also  grant,   in  combination   with
non-qualified  stock options and incentive  stock  options,  stock  appreciation
rights ("Tandem  SARs"),  or may grant Tandem SARs as an addition to outstanding
non-qualified  stock options.  A Tandem SAR permits the participant,  in lieu of
exercising the corresponding option, to elect to receive any appreciation in the
value of the shares  subject  to such  option  directly  from Cadus in shares of
Common Stock.  The amount  payable by Cadus upon the exercise of a Tandem SAR is
measured by the  difference  between the market value of such shares at the time
of  exercise  and the  option  exercise  price.  Generally,  Tandem  SARs may be
exercised at any time after the underlying  option vests. Upon the exercise of a
Tandem SAR, the corresponding  portion of the related option must be surrendered
and cannot  thereafter be exercised.  Conversely,  upon exercise of an option to
which a Tandem SAR is attached, the Tandem SAR may no longer be exercised to the
extent  that the  corresponding  option  has  been  exercised.  Nontandem  stock
appreciation  rights  ("Nontandem SARs") may also be awarded by the Compensation
Committee.  A Nontandem  SAR permits the  participant  to elect to receive  from
Cadus that number of shares of Common  Stock  having an  aggregate  market value
equal to the excess of the market value of the shares  covered by the  Nontandem
SAR on the date of exercise over the aggregate base price of such shares as


                                       32
<PAGE>

determined  by the  Compensation  Committee.  With  respect  to both  Tandem and
Nontandem  SARs,  the  Compensation  Committee  may  determine to cause Cadus to
settle its  obligations  arising out of the exercise of such rights in cash or a
combination of cash and shares, in lieu of issuing shares only.

      Under the 1996 Incentive Plan, the  Compensation  Committee may also award
tax offset  payments to assist  employees in paying  income taxes  incurred as a
result of their  participation in the 1996 Incentive Plan. The amount of the tax
offset  payments will be determined  by applying a percentage  established  from
time to time by the  Compensation  Committee  to all or a portion of the taxable
income  recognizable  by the employee upon: (i) the exercise of a  non-qualified
stock option or an SAR; (ii) the disposition of shares received upon exercise of
an incentive stock option; (iii) the lapse of restrictions on restricted shares;
or (iv) the award of unrestricted shares.

      The number and class of shares available under the 1996 Incentive Plan may
be adjusted by the Compensation  Committee to prevent dilution or enlargement of
rights in the event of various  changes in the  capitalization  of Cadus. At the
time of grant of any award,  the  Compensation  Committee  may provide  that the
number and class of shares issuable in connection with such award be adjusted in
certain circumstances to prevent dilution or enlargement of rights.

      The Board of Directors of Cadus may  suspend,  amend,  modify or terminate
the  1996  Incentive  Plan.  However,  Cadus's  stockholders  must  approve  any
amendment  that would (i)  materially  increase the  aggregate  number of shares
issuable under the 1996 Incentive Plan,  (ii)  materially  increase the benefits
accruing to employees under the 1996 Incentive Plan or (iii)  materially  modify
the  requirements  for  eligibility to  participate in the 1996 Incentive  Plan.
Awards made prior to the  termination  of the 1996 Incentive Plan shall continue
in  accordance  with their  terms  following  such  termination.  No  amendment,
suspension or termination of the 1996 Incentive Plan shall adversely  affect the
rights of an employee or consultant in awards  previously  granted  without such
employee's or consultant's consent.

      As of March 15,  2006,  an  aggregate of 9,167 shares of Common Stock were
subject to outstanding  stock options  granted under the 1996 Incentive Plan. As
of March 15, 2006,  stock options to purchase  9,167 shares were  exercisable at
prices ranging from $6.38 to $6.63 per share.

      Cadus has  registered  the shares  issuable upon exercise of stock options
granted or which may be granted  under the 1996  Incentive  Plan  pursuant  to a
registration statement on Form S-8.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

      Cadus's  Compensation  Committee is composed of Peter  Liebert and Jack G.
Wasserman.  Neither  Mr.  Liebert  nor Mr.  Wasserman  is or was an  officer  or
employee of the Company.

BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

      INTRODUCTION


                                       33
<PAGE>

      The  Compensation  Committee  of  the  Board  of  Directors  of  Cadus  is
responsible  for  determining  and  administering  the  Company's   compensation
policies for the remuneration of Cadus's  officers.  The Compensation  Committee
annually evaluates  individual and corporate  performance from both a short-term
and long-term perspective.  In 2005, Cadus had no officers other than its acting
Chief  Executive  Officer who served in a  consultative  capacity at the rate of
$25,000 per annum for the interim period during which the Company  continued its
search for a new Chief Executive Officer.  Accordingly,  the following report of
the Compensation  Committee is not entirely applicable to calendar year 2005 but
is presented for an historical perspective.

      PHILOSOPHY

      Cadus's  executive   compensation   program  historically  has  sought  to
encourage  the  achievement  of  business   objectives  and  superior  corporate
performance by the Cadus's  executives.  The program enables Cadus to reward and
retain  highly  qualified  executives  and  to  foster  a   performance-oriented
environment wherein  management's  long-term focus is on maximizing  stockholder
value through  equity-based  incentives.  The program calls for consideration of
the   nature   of  each   executive's   work   and   responsibilities,   unusual
accomplishments or achievements on the Company's behalf,  years of service,  the
executive's total compensation and the Company's financial condition generally.

      COMPONENTS OF EXECUTIVE COMPENSATION

      Historically,  Cadus's  executive  employees have received  cash-based and
equity-based compensation.

      CASH-BASED COMPENSATION. Base salary represents the primary cash component
of an executive  employee's  compensation,  and is determined by evaluating  the
responsibilities  associated with an employee's  position at the Company and the
employee's  overall level of  experience.  In addition,  the  Committee,  in its
discretion,  may award bonuses. The Compensation Committee and the Board believe
that the Company's  management  and employees are best  motivated  through stock
option awards and cash incentives.

      EQUITY-BASED COMPENSATION.  Equity-based compensation principally has been
in the form of stock options.  The Compensation  Committee and the Board believe
that  stock  options  represent  an  important   component  of  a  well-balanced
compensation  program.  Because  stock option  awards  provide value only in the
event of share price appreciation,  stock options enhance  management's focus on
maximizing  long-term  stockholder value and thus provide a direct  relationship
between an executive's compensation and the stockholders' interests. No specific
formula  is used to  determine  stock  option  awards for an  employee.  Rather,
individual  award  levels  are  based  upon the  subjective  evaluation  of each
employee's overall past and expected future  contributions to the success of the
Company.


                                       34
<PAGE>

COMPENSATION OF THE CHIEF EXECUTIVE OFFICER

      The  philosophy,  factors  and  criteria  of  the  Compensation  Committee
generally applicable to the Company's officers have historically been applicable
to the Chief  Executive  Officer.  However,  the current acting Chief  Executive
Officer,  David Blitz, is serving on a consultative basis at the rate of $25,000
per annum for the interim  period during which the Company  continues its search
for a new Chief Executive Officer.

            Peter Liebert
            Jack G. Wasserman


                                       35
<PAGE>

COMPARATIVE STOCK PERFORMANCE GRAPH

      The following graph provides a comparison of the cumulative  total return*
for Cadus, the Nasdaq Stock Market (US) Index and the Nasdaq Biotechnology Index
since December 31, 2000.

                              [PERFORMANCE CHART]

              Corresponding index values and Cadus's Common Stock
                         price values are given below:

<TABLE>
<CAPTION>
                                           12/31/00    12/31/01    12/31/02    12/31/03     12/31/04    12/31/05
                                           --------    --------    --------    --------     --------    --------
<S>                                         <C>         <C>         <C>         <C>          <C>         <C>
Cadus                                       100.00      162.77      151.64      207.29       212.85      222.59
Nasdaq Stock Market (U.S.) Index            100.00       79.08       55.95       83.35        90.64       92.73
Nasdaq Biotechnology Index                  100.00       80.72       44.83       62.82        65.43       83.51
Cadus Closing Stock Price                    $0.72        1.17        1.09        1.49         1.53        1.60
</TABLE>


                                       36
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS.

      The  following  table  sets  forth  certain   information   regarding  the
beneficial  ownership  of the Common  Stock as of March 15, 2006 with respect to
(i) each person known by the Company to be the beneficial  owner of more than 5%
of the Common  Stock,  (ii) each of the Company's  directors,  (iii) each of the
Named  Executive  Officers and (iv) all directors  and officers as a group.  All
information  is based  upon  ownership  filings  made by such  persons  with the
Securities and Exchange Commission or upon information  provided by such persons
to the Company.

<TABLE>
<CAPTION>
                                                 NUMBER OF SHARES AMOUNT AND        PERCENTAGE OF COMMON
NAME AND ADDRESS OF BENEFICIAL OWNER (1)       NATURE OF BENEFICIAL OWNERSHIP           STOCK OWNED(2)
----------------------------------------       ------------------------------           --------------
<S>                                                     <C>                                 <C>
Carl C. Icahn ...........................               4,973,158(3)                        37.80%
    767 Fifth Avenue
    New York, New York 10153

GlaxoSmithKline plc .....................                 660,962(4)                         5.03%
    980 Great West Road
    Brentford, Middlesex TW89GS
    England

James R. Broach .........................                      --                               *

Russell D. Glass ........................                  37,500                               *

Peter S. Liebert, M.D ...................                  20,334(5)                            *

Michele A. Paige ........................                      --                               *

Jack G. Wasserman .......................                  14,500(6)                            *

David Blitz .............................                      --                               *
    c/o Joel Popkin & Company, P.C.
    1430 Broadway (Suite 1805)
    New York, NY 10018

All executive officers and directors as a
group (6 persons) .......................               5,045,492(7)                        38.09%
</TABLE>


                                       37
<PAGE>

* Less than one percent

(1)   Except as  otherwise  indicated  above,  the  address of each  stockholder
      identified above is c/o the Company, 767 Fifth Avenue, New York, NY 10153.
      Except as  indicated  in the other  footnotes  to this table,  the persons
      named in this table have sole voting and investment  power with respect to
      all shares of Common Stock.

(2)   Share  ownership in the case of each person listed above  includes  shares
      issuable  upon the exercise of options held by such person as of March 15,
      2006, that may be exercised within 60 days after such date for purposes of
      computing the percentage of Common Stock owned by such person, but not for
      purposes of computing  the  percentage  of Common Stock owned by any other
      person.

(3)   Includes  2,258,790  shares of Common  Stock  held by High  River  Limited
      Partnership  and 1,599,942  shares of Common Stock held by Barberry  Corp.
      Mr. Icahn is the sole  shareholder of Barberry Corp. and Barberry Corp. is
      the sole general partner of High River Limited Partnership.  Also includes
      12,000  shares of Common Stock that Mr. Icahn  currently  has the right to
      acquire upon the exercise of stock options.

(4)   Includes 330,481 shares of Common Stock held by SmithKline Beecham p.l.c.,
      an affiliate of GlaxoSmithKline plc.

(5)   Includes 12,000 shares of Common Stock which Dr. Liebert currently has the
      right to acquire upon the exercise of stock options.

(6)   Consists of 14,500  shares of Common Stock which Mr.  Wasserman  currently
      has the right to acquire upon the exercise of stock options.

(7)   Includes  38,500 shares of Common Stock issuable upon exercise of options.
      See footnotes (3), (5) and (6).

EQUITY COMPENSATION PLAN INFORMATION.

      The  following  table  sets  forth  certain  information  with  respect to
compensation plans (including individual compensation  arrangements) under which
equity securities of Cadus were authorized for issuance as of December 31, 2005:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
                                               (a)                         (b)                            (c)
--------------------------------------------------------------------------------------------------------------------------
Plan Category                        Number of securities to    Weighted-average exercise        Number of securities
                                     be issued upon exercise       price of outstanding         remaining available for
                                     of outstanding options,   options, warrants and rights  future issuance under equity
                                       warrants and rights                                        compensation plans
                                                                                                 (excluding securities
                                                                                               reflected in column (a))
--------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                            <C>                         <C>
Equity compensation plans                            9,167                          $6.56                       1,736,221
approved by security holders
--------------------------------------------------------------------------------------------------------------------------
Equity compensation plans not                        48,000                         $6.75                               0
approved by security holders
--------------------------------------------------------------------------------------------------------------------------
Total                                                57,167                         $6.72                       1,736,221
--------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       38
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

      James Broach  provides  consulting  services to the Company for patent and
license  related  matters for which he was paid $17,000,  $13,000 and $13,000 in
calendar years 2005, 2004 and 2003, respectively.

      In May 2004, the Board of Directors appointed David Blitz the acting Chief
Executive  Officer  of the  Company  at the rate of  $25,000  per  annum for the
interim period during which the Company is continuing its search for a new Chief
Executive  Officer.  In 2005,  the  Company  paid  $25,000 to Mr.  Blitz in such
capacity.  Mr. Blitz  remains an employee of Joel Popkin & Co.,  P.C.,  in which
capacity he will continue to perform the Company's internal accounting as he has
done since March  2000.  The  Company  paid Joel  Popkin & Co.  $52,261 for such
accounting  services and $8,000 for tax preparation  services  performed in 2005
and anticipates that it will pay similar amounts for such services in 2006.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

      On May 4,  2004,  the Board of  Directors  of the  Company  engaged  Grant
Thornton LLP as the Company's new  independent  accountants  to replace KPMG LLP
and, on June 23,  2005,  the Board of  Directors  of the Company  engaged  Holtz
Rubenstein Reminick LLP as the Company's new independent  accountants to replace
Grant  Thornton LLP. The following  table sets forth the aggregate fees incurred
by the Company for the services of its principal accountants in 2005 and 2004:

                                                           2005          2004
                                                           ----          ----
      Audit Fees....................................     $55,045       $51,500
      Audit-Related Fees............................     $    --       $    --
      Tax Fees......................................     $    --       $    --
      All Other Fees................................     $    --       $    --

      Audit fees  consist of  services  rendered to the Company for the audit of
the Company's annual consolidated financial statements, reviews of the Company's
quarterly financial statements and related services.

      The  Company's  policy is that,  before  accountants  are  engaged  by the
Company to render audit or non-audit  services,  the  engagement  is approved by
Cadus's Board of


                                       39
<PAGE>

Directors.  Cadus's Board of Directors approved Holtz Rubenstein  Reminick LLP's
engagement  as the  Company's  independent  auditors  for the fiscal year ending
December 31, 2005 before Holtz  Rubenstein  Reminick LLP was so engaged.  All of
the 2005 services described above were approved by the Board of Directors.

      Cadus Corporation has agreed to indemnify and hold KPMG LLP, the Company's
former  accountants,  harmless  against  and from any and all  legal  costs  and
expenses  incurred  by KPMG LLP in  successful  defense  of any legal  action or
proceeding that arises as a result of KPMG LLP's consent to the incorporation by
reference  of its  audit  report  on the  Company's  past  financial  statements
included herein and incorporated by reference in registration statements on Form
S-8 (Nos. 333-58151 and 333-21871).


                                       40
<PAGE>

                                     PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(1)   Documents Filed as Part of this Annual Report on Form 10-K

(a)   FINANCIAL STATEMENTS                                                  PAGE
      --------------------                                                  ----

      Index to Financial Statements                                          F-1

      Report of Independent Registered Public Accounting
      Firm: Holtz Rubenstein Reminick LLP                                    F-2

      Report of Independent Registered Public Accounting
      Firm: Grant Thornton LLP                                               F-3

      Report of Independent Registered Public Accounting
      Firm: KPMG LLP                                                         F-4

      Consolidated Financial Statements:
        Consolidated Balance Sheets                                          F-5
        Consolidated Statements of Operations                                F-6
        Consolidated Statements of Stockholders' Equity and Comprehensive
        (Loss) Income                                                        F-7
        Consolidated Statements of Cash Flows                                F-8
        Notes to Consolidated Financial Statements                           F-9


                                       41
<PAGE>

(b)   FINANCIAL STATEMENT SCHEDULES

There are no financial  statement  schedules filed as part of this annual report
since  the  required  information  is  included  in the  consolidated  financial
statements,   including  the  notes  thereto,  or  the  circumstances  requiring
inclusion of such schedules are not present.

(c)   EXHIBITS

The Exhibits listed below are filed or incorporated by reference as part of this
annual report.

EXHIBIT NO.       DESCRIPTION OF DOCUMENT
-----------       -----------------------

3.1               Certificate  of Amendment of Amended and Restated  Certificate
                  of   Incorporation   of   Cadus   Pharmaceutical   Corporation
                  ("Cadus"), as filed with the Secretary of State of Delaware on
                  June  20,  2003,  and  Amended  and  Restated  Certificate  of
                  Incorporation  of Cadus,  as filed with the Secretary of State
                  of Delaware on July 22, 1996.(8)

3.2               By-laws of Cadus. (2)

4.1               Specimen of Common Stock Certificate of Cadus. (2)

4.2               1993 Cadus Pharmaceutical Corporation Stock Option Plan. (2)

4.3               Cadus Pharmaceutical Corporation 1996 Incentive Plan. (2)

4.4               Amendment to Cadus  Pharmaceutical  Corporation 1996 Incentive
                  Plan. (1)

4.5               Form  of  Incentive   Stock  Option   Agreement   utilized  in
                  connection  with  issuances of stock  options  under the Cadus
                  Pharmaceutical Corporation 1996 Incentive Plan. (1)

4.6               Form of Stock Option  Agreement  between Cadus and each of the
                  following  employees  of  Cadus:   Philip  N.  Sussman,   John
                  Manfredi, Andrew Murphy, Jeremy Paul, Lauren Silverman, Joshua
                  Trueheart,  James  S.  Rielly,  Thomas  F.  Deuel,  Norman  R.
                  Klinman,  Elliott M. Ross, Jeremy Thorner, Arnold Levine, John
                  Ransom,  Christine  Klein,  Suzanne K.  Wakamoto,  Christopher
                  Pleiman,  Algis  Anilionis,   Anupama  K.  Nadkarni,  Mitchell
                  Silverstein, Michael A. Spruyt and David Fruhling. (1)

4.7               Form of Stock Option  Agreement  between Cadus and each of the
                  following  non-employee  directors of Cadus:  Theodore Altman,
                  Harold First, Carl Icahn, Peter Liebert, Robert Mitchell, Mark
                  Rachesky,  William Scott, Jack Wasserman and Samuel D. Waksal.
                  (1)

4.8               Stock Purchase  Agreement between Cadus and SmithKline Beecham
                  Corporation, dated as of February 25, 1997. (3)


                                       42
<PAGE>

4.9               Registration  Rights  Agreement  between Cadus and  SmithKline
                  Beecham Corporation, dated as of February 25, 1997. (3)

10.1              Form of  Indemnification  Agreement entered into between Cadus
                  and its directors and officers. (2)

10.2              Form  of  Agreement   Regarding   Assignment  of   Inventions,
                  Confidentiality and Non-Competition. (2)

10.3              The 401(k) Plan of the Cadus Pharmaceutical Corporation. (2)

10.4              Employment Agreement between Jeremy M. Levin and Cadus. (2)

10.5              Preferred  Stock Purchase  Agreement dated as of July 30, 1993
                  between Cadus and the purchasers of Series A Preferred  Stock,
                  together with the First and Second Amendments thereto dated as
                  of July 26, 1994 and October 31, 1995, respectively. (2)

10.6              Preferred  Stock Purchase  Agreement dated as of July 26, 1994
                  between    Cadus    and    Bristol-Myers     Squibb    Company
                  ("Bristol-Myers")   concerning   Series  B  Preferred   Stock,
                  together with the First Amendment  thereto dated as of October
                  31, 1995. (2)

10.7              Preferred  Stock  Purchase  Agreement  dated as of November 1,
                  1995  between  Cadus  and  Physica  B.V.  concerning  Series B
                  Preferred Stock. (2)

10.8              Research Collaboration and License Agreement, dated as of July
                  26, 1994, between Cadus and Bristol-Myers. (2)

10.9              Screening  and Option  Agreement,  dated as of July 26,  1994,
                  between Cadus and Bristol-Myers. (2)

10.10             Research  Collaboration  and  License  Agreement,  dated as of
                  November 1, 1995 between Cadus and Solvay Pharmaceuticals B.V.
                  (2)

10.11             Sublease  Agreement,  dated as of October  19,  1994,  between
                  Cadus and Union Carbide Corporation. (2)

10.12             Lease,  dated as of June 20,  1995  between  Cadus  and  Keren
                  Limited Partnership. (2)

10.13             Consulting  Agreement between Cadus and James R. Broach, dated
                  February 1, 1994. (2)


                                       43
<PAGE>

10.14             Amended and Restated License  Agreement between Cadus and Duke
                  University, dated May 10, 1994. (2)

10.15             License Agreement between Cadus and National Jewish Center for
                  Immunology  and  Respiratory  Medicine dated November 1, 1994.
                  (2)

10.16             Stock Option Agreement,  dated as of November 1, 1994, between
                  Cadus and John C. Cambier. (2)

10.17             Stock Option Agreement,  dated as of November 1, 1994, between
                  Cadus and Gary L. Johnson. (2)

10.18             Consulting  Agreement,  dated as of November 1, 1994,  between
                  Cadus and John C. Cambier. (2)

10.19             Consulting  Agreement,  dated as of November 1, 1994,  between
                  Cadus and Gary L. Johnson. (2)

10.20             Research Collaboration Agreement, dated as of January 9, 1995,
                  between  Cadus and Houghten  Pharmaceuticals,  Inc.,  together
                  with the Amendment thereto dated as of March 1996. (2)

10.21             Stock Option Agreement, dated as of December 18, 1995, between
                  Cadus and James R. Broach. (2)

10.22             Waiver,  dated May 17, 1996,  of Section 1.05 of the Preferred
                  Stock  Purchase  Agreement  dated as of July 26, 1994  between
                  Cadus and  Bristol-Myers,  as amended  by the First  Amendment
                  thereto dated as of October 31, 1995. (2)

10.23             Waiver,  dated May 17, 1996,  of Section 1.04 of the Preferred
                  Stock Purchase  Agreement dated as of November 1, 1995 between
                  Cadus and Physica B.V. (2)

10.24             Research  Collaboration  and License  Agreement  among  Cadus,
                  SmithKline Beecham  Corporation and SmithKline Beecham p.l.c.,
                  dated as of February 25, 1997. (3)

10.25             Employment Agreement, dated as of June 30, 1998, between Cadus
                  and Charles Woler. (4)

10.26             Employment Agreement,  dated as of September 10, 1998, between
                  Cadus and Philip N. Sussman. (4)


                                       44
<PAGE>

10.27             Agreement and Instructions to Stakeholder  among Cadus,  SIBIA
                  and Security Trust Company entered into in March 1999. (5)

10.28             Asset Purchase  Agreement,  dated as of July 30, 1999, between
                  Cadus and OSI  Pharmaceuticals,  Inc.  (Schedules to the Asset
                  Purchase  Agreement  have been  intentionally  omitted.  Cadus
                  hereby undertakes to furnish  supplementally to the Securities
                  and  Exchange  Commission  upon  request a copy of the omitted
                  schedules.) (6)

10.29             Yeast Technology License  Agreement,  dated as of February 15,
                  2000, between Cadus and OSI Pharmaceuticals, Inc. (Exhibits to
                  the  Yeast  Technology   Agreement  have  been   intentionally
                  omitted.  Cadus hereby undertakes to furnish supplementally to
                  the Securities and Exchange  Commission upon request a copy of
                  the omitted exhibits.) (7)

23.1              Consent of Holtz Rubenstein Reminick LLP

23.2              Consent of Grant Thornton LLP

23.3              Consent of KPMG LLP

24                Power of Attorney (filed as part of the signature page to this
                  Report).

31                Certifications

32                Certification  Pursuant to 18 U.S.C.  Section 1350, as Adopted
                  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

----------

(1)   Filed with Cadus's  Registration  Statement on Form S-8  (Registration No.
      333-21871), dated February 14, 1997, and incorporated by reference.

(2)   Filed with Cadus's  Registration  Statement on Form S-1  (Registration No.
      333-4441), declared effective by the Securities and Exchange Commission on
      July 17, 1996, and incorporated by reference.

(3)   Filed with Cadus's  Current  Report on Form 8-K,  dated March 7, 1997, and
      incorporated by reference.

(4)   Filed with Cadus's  Quarterly Report on Form 10-Q for the quarterly period
      ended September 30, 1998, and incorporated by reference.


                                       45
<PAGE>

(5)   Filed with  Cadus's  Annual  Report on Form 10-K for the fiscal year ended
      December 31, 1998, and incorporated by reference.

(6)   Filed with Cadus's  Quarterly Report on Form 10-Q for the quarterly period
      ended June 30, 1999, and incorporated by reference.

(7)   Filed with Cadus's  Quarterly Report on Form 10-Q for the quarterly period
      ended March 31, 2000, and incorporated by reference.

(8)   Filed with Cadus's  Quarterly Report on Form 10-Q for the quarterly period
      ended June 30, 2003, and incorporated by reference.


                                       46
<PAGE>

                                   SIGNATURES

      Pursuant to the requirements of Section 13 of the Securities  Exchange Act
of 1934,  the  Company has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.

                                                CADUS CORPORATION


                                                By: /s/ David Blitz
                                                    ----------------------------
                                                    David Blitz, Chief Executive
                                                    Officer and President

Date: March 30, 2006

      Each person whose signature  appears below  constitutes and appoints David
Blitz  and Jack G.  Wasserman,  or  either  of  them,  each  with  the  power of
substitution,  his true and lawful  attorney-in-fact  to sign any  amendments to
this report and to file the same,  with exhibits  thereto and other documents in
connection  therewith,  with the  Securities  and  Exchange  Commission,  hereby
ratifying and confirming all that each said attorney-in-fact, or his substitute,
may do or choose to be done by virtue hereof.

      Pursuant to the requirements of the Securities  Exchange Act of 1934, this
report has been signed below by the  following  persons on behalf of the Company
and in the capacities and on the dates indicated below.

      NAME                               TITLE                        DATE
      ----                               -----                        ----


/s/ David Blitz          Chief Executive Officer and President   March 30, 2006
----------------------   (Principal Executive Officer and
David Blitz              Principal Accounting Officer)


/s/ James R. Broach      Director                                March 30, 2006
----------------------
James R. Broach


/s/ Russell D. Glass     Director                                March 30, 2006
----------------------
Russell D. Glass



----------------------   Director                                March __, 2006
Carl C. Icahn


/s/ Peter S. Liebert
----------------------   Director                                March 30, 2006
Peter S. Liebert


/s/ Jack G. Wasserman    Director                                March 30, 2006
----------------------
Jack G. Wasserman


                                       47
<PAGE>

                        CADUS CORPORATION AND SUBSIDIARY

                                      INDEX

                                                                        Page No.

Report of Independent Registered Public Accounting Firm:
Holtz Rubenstein Reminick LLP                                             F-2

Report of Independent Registered Public Accounting Firm:
Grant Thornton LLP                                                        F-3

Report of Independent Registered Public Accounting Firm:
KPMG LLP                                                                  F-4

Consolidated Financial Statements:

    Consolidated Balance Sheets - December 31, 2005 and 2004              F-5

    Consolidated Statements of Operations - For the years ended
      December 31, 2005, 2004 and 2003                                    F-6

    Consolidated Statements of Stockholders' Equity and Comprehensive
      Income - For the years ended December 31, 2005, 2004 and 2003       F-7

    Consolidated Statements of Cash Flows - For the years ended
      December 31, 2005, 2004 and 2003                                    F-8

    Notes to Consolidated Financial Statements                            F-9


                                      F-1
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Cadus Corporation:

We have audited the accompanying consolidated balance sheet of Cadus Corporation
and  subsidiary  (the  "Company")  as of  December  31,  2005,  and the  related
consolidated  statements of operations,  stockholders'  equity and comprehensive
income (loss),  and cash flows for year 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  auditing  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,   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 consolidated  financial  statements  present fairly, in all
material  respects,  the  financial  position of the Company as of December  31,
2005,  and the results of its  operations  and its cash flows for the year ended
December 31, 2005 in conformity with accounting principles generally accepted in
the United States of America.


/s/ HOLTZ RUBENSTEIN REMINICK LLP

New York, New York
March 7, 2006


                                      F-2
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Cadus Corporation:

We have audited the accompanying consolidated balance sheet of Cadus Corporation
and  subsidiary  (the  "Company")  as of  December  31,  2004,  and the  related
consolidated  statements of operations,  stockholders'  equity and comprehensive
income (loss) and cash flows for year 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  auditing  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.  The  Company is not
required  to have,  nor were we  engaged  to  perform  an audit of its  internal
control over financial reporting.  Our audit included  consideration of internal
control over financial  reporting as a basis for designing audit procedures that
are appropriate in the  circumstances,  but not for the purpose of expressing an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   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 consolidated  financial  statements  present fairly, in all
material  respects,  the  financial  position of the Company as of December  31,
2004,  and the results of its  operations  and its cash flows for the year ended
December 31, 2004 in conformity with accounting principles generally accepted in
the United States of America.


/s/ GRANT THORNTON LLP

New York, New York
February 18, 2005


                                      F-3
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Cadus Corporation:

We  have  audited  the  accompanying   consolidated  statements  of  operations,
stockholders'  equity and comprehensive  (loss) income,  and cash flows of Cadus
Corporation  and  subsidiary  for  the  year  ended  December  31,  2003.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our 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 consolidated  financial statements referred to above present
fairly,  in all material  respects,  the results of the  operations and the cash
flows of Cadus  Corporation and subsidiary for the year ended December 31, 2003,
in conformity with accounting principles generally accepted in the United States
of America.


Melville, New York
March 19, 2004                                                /s/ KPMG LLP


                                      F-4
<PAGE>

                        CADUS CORPORATION AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                     ASSETS
                                                                 December 31,     December 31,
                                                                     2005             2004
                                                                 ------------     ------------
<S>                                                              <C>              <C>
Current assets:
      Cash and cash equivalents                                  $ 24,044,619     $ 24,045,800
      Prepaid and other current assets                                  8,170           15,550
      Investment in marketable securities                             273,999          580,232
                                                                 ------------     ------------
                                                                   24,326,788       24,641,582
           Total current assets

Investment in other ventures                                          161,406          157,637
Other assets, net                                                     723,700          747,029
                                                                 ------------     ------------
           Total assets                                          $ 25,211,894     $ 25,546,248
                                                                 ============     ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
      Accrued expenses and other current liabilities             $     27,290     $     14,327
                                                                 ------------     ------------

           Total current liabilities                                   27,290           14,327
                                                                 ------------     ------------

Commitments and contingencies
Stockholders' equity:
      Common stock,  $.01 par  value. Authorized 35,000,000
      shares at December 31, 2005 and 2004; issued 13,285,707
      shares at December 31, 2005 and 2004; outstanding
      13,144,040 shares at December 31, 2005 and 2004                 132,857          132,857
      Additional paid-in capital                                   59,844,355       59,844,355
      Accumulated deficit                                         (33,630,154)     (33,589,070)
      Accumulated other comprehensive (loss) income                  (862,379)        (556,146)
      Treasury stock                                                 (300,075)        (300,075)
                                                                 ------------     ------------
                 Total stockholders' equity                        25,184,604       25,531,921
                                                                 ------------     ------------
                 Total liabilities and stockholder's equity      $ 25,211,894     $ 25,546,248
                                                                 ============     ============
</TABLE>

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


                                      F-5
<PAGE>

                        CADUS CORPORATION AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                         For the Years Ended December 31,
                                                        2005             2004             2003
                                                   ------------     ------------     ------------
<S>                                                <C>              <C>              <C>
License and maintenance fees                       $    100,000     $    100,000     $    220,000
                                                   ------------     ------------     ------------
           Total revenues                               100,000          100,000          220,000
                                                   ------------     ------------     ------------
Costs and expenses:
      General and administrative expenses               812,031          772,388          834,631
      (Gain) loss from equity in other ventures          (3,769)           5,168            2,117
                                                   ------------     ------------     ------------
           Total costs and expenses                     808,262          777,556          836,748
                                                   ------------     ------------     ------------
Operating (loss)                                       (708,262)        (677,556)        (616,748)
                                                   ------------     ------------     ------------
Other income:
      Interest income                                   751,430          255,913          171,218
      Realized gain on marketable securities                 --               --          313,189
                                                   ------------     ------------     ------------
           Total other income                           751,430          255,913          484,407
                                                   ------------     ------------     ------------
Income (loss) before income tax provision                43,168         (421,643)        (132,341)
State tax                                                84,252          (28,140)          57,355
                                                   ------------     ------------     ------------
           Net (loss)                              ($    41,084)    ($   393,503)    ($   189,696)
                                                   ============     ============     ============
Basic and diluted net (loss) per share             ($      0.00)    ($      0.03)    ($      0.01)
                                                   ============     ============     ============
Weighted average shares of common stock
outstanding - basic and diluted                      13,144,040       13,144,040       13,144,040
                                                   ============     ============     ============
</TABLE>

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


                                      F-6
<PAGE>

                        CADUS CORPORATION AND SUBSIDIARY
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE (LOSS) INCOME

<TABLE>
<CAPTION>

                                             Common Stock
                                                                     Additional      Accumulated
                                        Shares          Amount     Paid-in Capital     Deficit
                                        ------          ------     ---------------     -------
<S>                                   <C>           <C>             <C>             <C>
Balance at December 31, 2002          13,285,707    $    132,857    $ 59,844,355    ($33,005,871)

Net loss for the year ended
December 31, 2003                             --              --              --        (189,696)

Unrealized gain on investment in
marketable securities                         --              --              --              --

Comprehensive income
                                      ----------    ------------    ------------    ------------

Balance at December 31, 2003          13,285,707         132,857      59,844,355     (33,195,567)

Net loss for the year ended
December 31, 2004                             --              --              --        (393,503)

Unrealized loss on investment in
marketable securities                         --              --              --              --

Comprehensive loss
                                      ----------    ------------    ------------    ------------

Balance at December 31, 2004          13,285,707         132,857      59,844,355     (33,589,070)

Net loss for the year ended
December 31, 2005                             --              --              --         (41,084)

Unrealized loss on investment in
marketable securities                         --              --              --              --

Comprehensive loss
                                      ----------    ------------    ------------    ------------

Balance at December 31, 2005          13,285,707    $    132,857    $ 59,844,355    ($33,630,154)
                                      ==========    ============    ============    ============

<CAPTION>
                                       Accumulated
                                          Other               Treasury Stock
                                      Comprehensive
                                      (Loss) Income       Shares          Amount            Total
                                      -------------       ------          ------            -----
<S>                                   <C>                 <C>          <C>              <C>
Balance at December 31, 2002            ($213,419)        (141,667)    ($   300,075)    $ 26,457,847

Net loss for the year ended
December 31, 2003                              --               --               --         (189,696)

Unrealized gain on investment in
marketable securities                     489,668               --               --          489,668

Comprehensive income                                                                         299,972
                                     ------------         --------     ------------     ------------

Balance at December 31, 2003              276,249         (141,667)        (300,075)      26,757,819

Net loss for the year ended
December 31, 2004                              --               --               --         (393,503)

Unrealized loss on investment in
marketable securities                    (832,395)              --               --         (832,395)

Comprehensive loss                                                                        (1,225,898)
                                     ------------         --------     ------------     ------------

Balance at December 31, 2004             (556,146)        (141,667)        (300,075)      25,531,921

Net loss for the year ended
December 31, 2005                              --               --               --          (41,084)

Unrealized loss on investment in
marketable securities                    (306,233)              --               --         (306,233)

Comprehensive loss                                                                          (347,317)
                                     ------------         --------     ------------     ------------

Balance at December 31, 2005         ($   862,379)        (141,667)    ($   300,075)    $ 25,184,604
                                     ============         ========     ============     ============
</TABLE>

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


                                      F-7
<PAGE>

                        CADUS CORPORATION AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                             For the Years Ended December 31,
                                                           2005             2004             2003
                                                      ------------     ------------     ------------
<S>                                                   <C>              <C>              <C>
Cash flows from operating activities:

      Net (loss)                                      ($    41,084)    ($   393,503)    ($   189,696)

      Adjustments to reconcile net (loss) to net
      cash provided by (used in) operating
      activities:

         Amortization                                       84,130           80,906           80,906

         (Gain) loss from equity in other ventures          (3,769)           5,168            2,117

         Realized gain on marketable securities                 --               --         (313,189)

      Changes in assets and liabilities:

         Prepaid and other current assets                    7,380           18,843           44,660

         Accrued expenses and other current
         liabilities                                        12,963          (34,837)        (178,646)
                                                      ------------     ------------     ------------
Net cash provided by (used in)  operating
activities                                                  59,620         (323,423)        (553,848)
                                                      ------------     ------------     ------------
Cash flows from investing activities: Patent
acquisitions                                               (60,801)              --               --
                                                      ------------     ------------     ------------

Net cash used in investment activities                     (60,801)              --               --
                                                      ------------     ------------     ------------
Net (decrease) in cash and cash equivalents                 (1,181)        (323,423)        (553,848)

Cash and cash equivalents - beginning of period         24,045,800       24,369,223       24,923,071
                                                      ------------     ------------     ------------
Cash and cash equivalents - end of period             $ 24,044,619     $ 24,045,800     $ 24,369,223
                                                      ============     ============     ============
</TABLE>

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


                                      F-8
<PAGE>

                        CADUS CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005, 2004 AND 2003

                                 ---------------

(1)   Organization and Basis of Preparation

      Cadus  Corporation  ("Cadus") was  incorporated on January 23, 1992, under
      the  laws of the  State  of  Delaware.  Cadus  changed  its  name to Cadus
      Corporation  from Cadus  Pharmaceutical  Corporation on June 20, 2003. The
      change in name was approved by the stockholders of Cadus at Cadus's annual
      meeting of stockholders held on June 18, 2003.

      Until July 30, 1999, Cadus devoted  substantially  all of its resources to
      the  development  and  application  of novel  yeast-based  and other  drug
      discovery technologies.  As further discussed in Note 3, on July 30, 1999,
      Cadus sold its drug discovery assets to OSI Pharmaceuticals,  Inc. ("OSI")
      and ceased its internal drug discovery operations and research efforts for
      collaborative partners.  Cadus is seeking to license its technologies,  to
      otherwise  realize  value  from its  assets  and to use a  portion  of its
      available cash to acquire technologies or products or to acquire or invest
      in companies.

      In  December  2001,  Cadus  organized  a wholly  owned  subsidiary,  Cadus
      Technologies,  Inc. (the  "Subsidiary"),  and  transferred its yeast-based
      drug discovery technologies to the Subsidiary.

(2)   Significant Accounting Policies

      (a)   Principles of Consolidation

            The consolidated  financial statements include the accounts of Cadus
            and its  wholly  owned  subsidiary,  Cadus  Technologies,  Inc.  All
            intercompany  balances  and  transactions  have been  eliminated  in
            consolidation.  The Company  operates  in one  segment and  licenses
            novel yeast-based and other drug discovery technologies.

      (b)   Cash Equivalents

            The  Company   includes  as  cash   equivalents  all  highly  liquid
            investments  with  original  maturities of three months or less when
            purchased  to  be  cash  equivalents.  Included  in  cash  and  cash
            equivalents  at December 31, 2005 and 2004 were cash  equivalents of
            $23,912,020 and $23,171,572, respectively.

      (c)   Other Assets

            Other  non-current  assets  represent  the costs of  developing  the
            patents that are amortized on a straight-line basis principally over
            seventeen   years.  At  December  31,  2005  and  2004   accumulated
            amortization  is $716,120 and $631,990,


                                      F-9
<PAGE>

                        CADUS CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005, 2004 AND 2003

                                 ---------------

            respectively.   Amortization   expense   recorded   in  general  and
            administrative  expenses amounted to approximately $84,000,  $81,000
            and $81,000 for each of the years ended  December 31 2005,  2004 and
            2003.  The  annual  amortization  for the next  five  years  will be
            approximately  $84,000 per year.  The Company  reviews the  carrying
            value of its  patents  whenever  events or changes in  circumstances
            indicate that the historical  cost carrying value of the patents may
            no longer be  appropriate.  The  amortizable  patents are tested for
            impairment  based on  undiscounted  cash  flows  and,  if  impaired,
            written down to fair value based on either  discounted cash flows or
            appraised values.

      (d)   Income Taxes

            Income taxes are accounted for under the asset and liability method.
            Deferred tax assets and  liabilities  are  recognized for the future
            tax consequences  attributable to differences  between the financial
            statements  carrying  amounts of existing assets and liabilities and
            their  respective  tax  bases  and  operating  loss  and tax  credit
            carryforwards.  Deferred  tax assets and  liabilities  are  measured
            using enacted tax rates  expected to apply to taxable  income in the
            years  in which  those  temporary  differences  are  expected  to be
            recovered  or  settled.  The  effect  on  deferred  tax  assets  and
            liabilities  of a change in tax rates is recognized in income in the
            period that includes the enactment date.

      (e)   Revenue Recognition

            The Company has entered into license  agreements  with two companies
            to use its yeast technology on a non-exclusive basis. The agreements
            provide  for  the  payment  of  non-refundable  license  fees to the
            Company.  The Company  recognizes  the  license  fees as income when
            received, as there are no continuing performance  obligations of the
            Company to the licensees.

      (f)   Net (Loss) Per Share

            Basic net (loss) per share is computed by dividing the net (loss) by
            the weighted  average number of common shares  outstanding.  Diluted
            earnings per share is  calculated  based on the weighted  average of
            common shares  outstanding  plus the effect of dilutive common stock
            equivalents  (stock  options).  The effect of stock options totaling
            57,167,  79,236 and 434,307 for the years ended  December  31, 2005,
            2004 and 2003, respectively, were not included in the net (loss) per
            share   calculation   because   their   effect   would   have   been
            anti-dilutive.

      (g)   Use of Estimates


                                      F-10
<PAGE>

                        CADUS CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005, 2004 AND 2003

                                 ---------------

            The   preparation  of  financial   statements  in  conformity   with
            accounting  principles  generally  accepted in the United  States of
            America  requires  management to make estimates and assumptions that
            affect the reported amounts of assets and liabilities and disclosure
            of contingent assets and liabilities at the date of the consolidated
            financial  statements  and the  reported  amounts  of  revenues  and
            expenses  during the reporting  period.  Actual results could differ
            from those estimates.

      (h)   Fair Value of Financial Instruments

            Management of the Company  believes  that the carrying  value of its
            monetary assets and liabilities  approximates fair value as a result
            of the short term nature of such assets and liabilities.

            Financial  instruments  which  potentially  subject  the  Company to
            concentrations of credit risk consist  principally of temporary cash
            investments. From time to time, the cash balances exceed the Federal
            Depository  Insurance Coverage Limit. At December 31, 2005, the cash
            balance approximated  $23,911,000.  The Company places its temporary
            cash investments with high credit quality financial institutions.

      (i)   Stock-Based Compensation

            As  permitted by the  provisions  of SFAS No. 123,  "ACCOUNTING  FOR
            STOCK-BASED   COMPENSATION,"  the  Company  has  elected  to  follow
            Accounting  Principles  Board,  APB, No. 25,  "ACCOUNTING  FOR STOCK
            ISSUED TO  EMPLOYEES,"  which uses the  intrinsic  value  method and
            generally  recognizes no compensation cost for employee stock option
            grants. The Company does not recognize any compensation  expense for
            options  granted to employees  because it grants all options at fair
            market value on the date of grant.  The adoption of SFAS No. 123R in
            2006 will require the Company to expense stock option grants.

            Pro forma net (loss)  would be the same as the  reported  net (loss)
            for each of the years in the  three-year  period ended  December 31,
            2005 had the fair-value-based method been applied to all outstanding
            awards, which were fully vested as of December 31, 1999.

      (j)   Comprehensive (Loss) Income

            Comprehensive  (loss)  income is comprised of net (loss)  income and
            other  comprehensive  (losses) income (or OCI). OCI includes certain
            changes in


                                      F-11
<PAGE>

                        CADUS CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005, 2004 AND 2003

                                 ---------------

            stockholders'  equity  that are  excluded  from net  (loss)  income.
            Specifically,  the Company  includes  in OCI  changes in  unrealized
            gains and losses on its available-for-sale securities. Comprehensive
            (loss) income for the years ended  December 31, 2005,  2004 and 2003
            has been reflected in the  consolidated  statements of stockholders'
            equity.  The  Company's  operations in 2005 and 2004 gave rise to an
            unrealized loss on marketable securities classified as available for
            sale.  The  Company's  operations in 2003 gave rise to an unrealized
            gain on marketable securities classified as available for sale.

      (k)   Recently Issued Accounting Standards

            In  December  2004,  the FASB  issued  SFAS No.  123R  "SHARE  BASED
            PAYMENT." This  statement is a revision to SFAS No. 123,  supersedes
            APB No. 25,  "ACCOUNTING  FOR STOCK ISSUED TO EMPLOYEES," and amends
            SFAS No. 95,  "STATEMENT OF CASH FLOWS." This statement will require
            the  Company to expense the cost of  employee  services  received in
            exchange for an award of equity  instruments.  This  statement  also
            provides  guidance on valuing and expensing these awards, as well as
            disclosure  requirements,  and is  effective  for the first  interim
            reporting period that begins after December 15, 2005.

            SFAS No.  123R  permits  public  companies  to  choose  between  the
            following two adoption methods:

            1. A "modified  prospective"  method in which  compensation  cost is
            recognized  beginning  with  the  effective  date  (a)  based on the
            requirements of SFAS No. 123R for all share-based  payments  granted
            after the effective date and (b) based on the  requirements  of SFAS
            No. 123 for all awards  granted to employees  prior to the effective
            date of SFAS No. 123R that remain unvested on the effective date, or

            2. A "modified retrospective" method which includes the requirements
            of the modified prospective method described above, but also permits
            entities to restate based on the amounts previously recognized under
            SFAS No. 123 for  purposes of pro forma  disclosures  either (a) all
            prior periods  presented or (b) prior interim periods of the year of
            adoption.

            As  permitted by SFAS No. 123,  the Company  currently  accounts for
            share-based  payments to  employees  using the APB No. 25  intrinsic
            value method and recognizes no compensation  cost for employee stock
            options.  The  impact of the  adoption  of SFAS No.  123R  cannot be
            predicted  at  this  time  because  it  will  depend  on  levels  of
            share-based payments granted in the future. However,


                                      F-12
<PAGE>

                        CADUS CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005, 2004 AND 2003

                                 ---------------

            valuation of employee  stock  options under SFAS No. 123R is similar
            to SFAS No. 123, with some  exceptions.  For information  about what
            the Company's  reported results of operations and earnings per share
            would  have been had it adopted  SFAS No.  123,  see the  discussion
            under the  heading  "Stock-Based  Compensation"  in this  note.  The
            adoption of SFAS No.  123R's fair value method may have an impact on
            the Company's results of operations, although it will have no impact
            on its  overall  financial  position.  The  Company  will  apply the
            modified  prospective  method when  adopted in the first  quarter of
            2006.

            In  December  2004,  the FASB  issued  SFAS No.  153,  EXCHANGES  OF
            NONMONETARY  ASSETS,  AN  AMENDMENT  of APB No. 29,  ACCOUNTING  FOR
            NONMONETARY  TRANSACTIONS.   SFAS  No.  153  requires  exchanges  of
            productive assets to be accounted for at fair value,  rather than at
            carryover basis, unless (1) neither the asset received nor the asset
            surrendered has a fair value that is determinable  within reasonable
            limits or (2) the transactions lack commercial  substance.  SFAS No.
            153 is effective for nonmonetary asset exchanges occurring in fiscal
            periods  beginning  after June 15, 2005. The Company does not expect
            the  adoption  of this  standard  to have a  material  effect on its
            financial position, results of operations or cash flows.

            In May 2005, the FASB issued SFAS No. 154,  "ACCOUNTING  CHANGES AND
            ERROR  CORRECTIONS"  ("SFAS No. 154"),  a replacement of APB Opinion
            No. 20 and FASB Statement No. 3, which changes the  requirements for
            the   accounting  for  and  reporting  of  a  change  in  accounting
            principle.  SFAS  No.  154  applies  to  all  voluntary  changes  in
            accounting  principle.  It also  applies to changes  required  by an
            accounting   pronouncement   in  the  unusual   instance   that  the
            pronouncement  does  not  include  specific  transition  provisions.
            Opinion  20  previously  required  that most  voluntary  changes  in
            accounting principle be recognized by including in net income of the
            period of the change the  cumulative  effect of  changing to the new
            accounting   principle.   SFAS  No.   154   requires   retrospective
            application  to prior  periods'  financial  statements of changes in
            accounting principle, unless it is impracticable to determine either
            the period-specific  effects or the cumulative effect of the change.
            SFAS  No.  154  also  requires   that  a  change  in   depreciation,
            amortization,  or  depletion  method  for  long-lived,  nonfinancial
            assets be accounted for as a change in accounting  estimate effected
            by a change in accounting  principle.  SFAS No. 154 is effective for
            accounting  changes and  corrections  of errors made in fiscal years
            beginning after December 15, 2005.

            In March 2004,  the EITF  released  Issue No. 03-1,  "THE MEANING OF
            OTHER-THAN-TEMPORARY  IMPAIRMENT  AND  ITS  APPLICATION  TO  CERTAIN
            INVESTMENTS."  EITF 03-1 provides  guidance for determining  whether
            impairment   for   certain   debt   and   equity    investments   is
            other-than-temporary and the measurement of an impaired loss.


                                      F-13
<PAGE>

                        CADUS CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005, 2004 AND 2003

                                 ---------------

            The  recognition  and  measurement  requirements  of EITF  03-1 were
            initially  effective for reporting  periods beginning after June 15,
            2004. In September  2004,  the FASB Staff issued FASB Staff Position
            EITF 03-1-1 that delayed the effective date for certain  measurement
            and  recognition  guidance  contained in EITF 03-1. The FSP requires
            that    entities    continue    to   apply    previously    existing
            "other-than-temporary"  guidance until a final consensus is reached.
            Management  does not anticipate  that issuance of a final  consensus
            will materially impact the Company's  financial condition or results
            of operations.

(3)   Asset Sale to OSI Pharmaceuticals, Inc.

      On July  30,  1999,  Cadus  sold to OSI,  pursuant  to an  asset  purchase
      agreement,  its  drug  discovery  programs  focused  on G  protein-coupled
      receptors,  its directed library of  approximately  150,000 small molecule
      compounds   specifically   designed   for   drug   discovery   in   the  G
      protein-coupled    receptor   arena,   its   collaboration   with   Solvay
      Pharmaceuticals B.V. ("Solvay Pharmaceuticals"), and certain other assets.
      Cadus  is  entitled  to  royalties  and up to $3.0  million  in  milestone
      payments on the first product  derived from  compounds sold to OSI or from
      the collaboration with Solvay Pharmaceuticals.  Cadus licensed to OSI on a
      non-exclusive basis certain technology solely to enable OSI to fulfill its
      obligations under the  collaboration  with Solvay  Pharmaceuticals.  Cadus
      also licensed to OSI on a non-exclusive basis certain proprietary software
      and technology relating to chemical resins in order to enable OSI to fully
      benefit  from  the  compounds  it  acquired  from  Cadus.  Cadus  retained
      ownership of all its other assets, including its core yeast technology for
      developing   drug  discovery   assays,   its  collection  of  over  25,000
      proprietary  yeast  strains,  human  and  mammalian  cell  lines,  genetic
      engineering tools, and its genomics databases related to G protein-coupled
      receptors.

(4)   Investments in Other Ventures

      In December 1996, Cadus issued a $150,000 promissory note bearing interest
      at 7% per annum in  exchange  for a 42%  limited  partnership  interest in
      Laurel Partners Limited Partnership  ("Laurel"),  a limited partnership of
      which a shareholder of Cadus is the general partner.  The principal amount
      and  interest  thereon  was paid in  December  1998.  In  addition,  Cadus
      purchased  for  $160,660 in cash,  a 47% limited  partnership  interest in
      Laurel  from  Tortoise  Corporation,  a  corporation  wholly-owned  by the
      shareholder.  Laurel's  purpose is to invest,  directly or indirectly,  in
      securities of biotechnology  companies.  Cadus is not required to make any
      additional investment in Laurel. As of and for the year ended December 31,
      2005,  Laurel's  assets  and  net  income  totaled  $278,861  and  $4,225,
      respectively. The investment is accounted for under the equity method with
      the  recognition of losses limited to Cadus's capital  contributions.  For
      the


                                      F-14
<PAGE>

                        CADUS CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005, 2004 AND 2003

                                 ---------------

      years ended  December  31,  2005,  2004 and 2003 Cadus  recognized  income
      (losses) of $3,769,  ($5,168) and ($2,117),  respectively,  related to the
      investment. The Company's investment in Laurel of $161,406 and $157,637 at
      December 31, 2005 and 2004,  respectively,  is reflected as investments in
      other ventures in the accompanying consolidated balance sheets.

(5)   Investment In Marketable Securities

      Cadus had an equity interest in Axiom Biotechnologies, Inc. ("Axiom"). Due
      to Axiom's operating losses,  Cadus's  investment was written down to zero
      as of December  31, 2000.  On August 30, 2002 Axiom  entered into a merger
      agreement with a wholly owned  subsidiary of Sequenom,  Inc.  ("Sequenom")
      whose shares of common stock are  publicly  traded on the Nasdaq  National
      Market.  Pursuant to the merger,  Cadus received  441,446 common shares of
      Sequenom with a fair market value of $2.43 per share,  in exchange for its
      shares of Axiom. Pursuant to the merger, 102,685 of Cadus's 441,446 common
      shares of  Sequenom  were  held in  escrow  (the  "Escrow  Shares")  for a
      one-year  period.  The  Escrow  Shares  were  held  to  secure  rights  to
      indemnification,  compensation  and  reimbursement  of Sequenom  and other
      indemnitees as provided in the merger  agreement.  Upon the closing of the
      transaction,  Cadus  recorded a realized  gain of $823,189  related to the
      338,761 common shares received in the consolidated statement of operations
      for the year ended  December 31,  2002.  The Company was  restricted  from
      selling  the shares for a period of one year from  August  30,  2002.  The
      value of the Escrow  Shares  received was  recorded as a deferred  gain on
      marketable securities on the December 31, 2002 consolidated balance sheet.
      On August 30, 2003, the Escrow Shares were released and  accordingly,  the
      Company  recorded a realized gain on marketable  securities of $313,189 in
      the  consolidated  statement of operations for the year ended December 31,
      2003.

      In May 2004,  the Company  became aware that 38,507  shares of the 102,685
      Escrow Shares were forfeited pursuant to the indemnification provisions of
      the  merger  agreement  and  therefore  were not  issued  to the  Company.
      Accordingly,  to reflect this  reduction of the Escrow Shares  received by
      the  Company,  the  investment  in  marketable  securities  was reduced by
      $123,222.

      Pursuant to the provisions of SFAS No. 115,  "ACCOUNTING  FOR CERTAIN DEBT
      AND EQUITY SECURITIES,"  management deems its investment in Sequenom to be
      available  for sale and  reports  its  investment  at fair  value with net
      unrealized  gains or losses  reported  within  stockholders'  equity.  The
      Company's  unrealized  (loss)  of  ($862,379)  and  ($556,146)  on  shares
      received is reflected in accumulated other comprehensive  income (loss) at
      December 31, 2005 and December 31, 2004, respectively.


                                      F-15
<PAGE>

                        CADUS CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005, 2004 AND 2003

                                 ---------------

(6)   Licensing Agreements

      In  December  2001,  Cadus   Technologies,   Inc.,  Cadus's  wholly  owned
      subsidiary,  licensed its  yeast-based  drug discovery  technologies  on a
      non-exclusive  basis to a major  pharmaceutical  company. On September 12,
      2003,  the parties  entered into an addendum to the agreement  pursuant to
      which the Company  extended the license to an affiliate of the licensee in
      consideration  for the  licensee  agreeing to pay $120,000 to the Company.
      The  licensee  is  entitled  to use the  technologies  for five years from
      December  2001.  Following  the initial  five year term,  the licensee may
      renew the license  annually  upon  payment of an annual  licensing  fee of
      $250,000.  For the years  ended  December  31,  2005,  2004 and 2003,  the
      Company recognized $0, $0 and $120,000,  respectively,  in license revenue
      from the licensee.

      In February 2000,  Cadus licensed to OSI, on a  non-exclusive  basis,  its
      yeast-based drug discovery  technologies,  including  various reagents and
      its library of over 30,000 yeast strains, and its bioinformatics software.
      OSI is obligated to pay an annual  maintenance  fee of $100,000  until the
      earlier of 2010 or the  termination of the license.  OSI may terminate the
      license at any time on 30 days prior written  notice.  For the years ended
      December 31, 2005,  2004 and 2003,  the Company  recognized  $100,000 each
      year in license and maintenance fees from OSI.

(7)   Research Collaboration and License Agreements

      Cadus no longer has any collaborations with pharmaceutical  companies. The
      Bristol-Myers  Squibb  Company  collaboration  expired in July  1999,  the
      Solvay  Pharmaceutical  collaboration was assigned to OSI in July 1999 and
      Cadus  and   SmithKline   Beecham   p.l.c.   agreed  to  terminate   their
      collaboration in September 1999. Each of Bristol-Myers  Squibb Company and
      SmithKline  Beecham p.l.c.  is required to make payments to Cadus upon the
      achievement by it of certain pre-clinical and drug development  milestones
      and to pay Cadus  royalties on the sale of any drugs developed as a result
      of the  research  collaboration  with Cadus or through  the use of Cadus's
      drug  discovery  technologies.  There  can be no  assurance  that any such
      milestones will be achieved or any such drugs developed.

      The  Company  has entered  into  license  agreements  with  various  third
      parties.  Generally,  the  agreements  provide  that the Company  will pay
      license  fees  and/or  maintenance  payments,  in  return  for  the use of
      technology  and  information  and the right to  manufacture,  use and sell
      future  products.  These  agreements  provide  for  payments  based on the
      completion of milestone  events,  as well as royalty payments based upon a
      percentage  of  product  or assay  sales.  License  fees  and  maintenance
      payments  for the  years  ended  December  31,  2005,  2004 and 2003  were
      $52,000, $0 and $27,000, respectively.


                                      F-16
<PAGE>

                        CADUS CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005, 2004 AND 2003

                                 ---------------

(8)   Income Taxes

      Deferred  tax  assets of  approximately  $15,610,000  and  $15,588,000  at
      December  31,  2005 and  2004,  respectively,  relate  principally  to net
      operating loss carryforwards of $29,260,000 and $29,204,000,  research and
      development credit carryforwards of $2,535,000 and $2,535,000,  and equity
      losses on  investments  of $2,864,000  and $2,864,000 at December 31, 2005
      and  2004,  respectively.  An  offsetting  valuation  allowance  has  been
      established  for the full amount of the deferred tax assets to reduce such
      assets to zero, as a result of the significant uncertainty regarding their
      ultimate realization.  The aggregate valuation allowance increased $22,000
      and  $449,000   during  the  years  ended  December  31,  2005  and  2004,
      respectively.

      The  Company's  net  operating   loss   carryforwards   and  research  and
      development credit  carryforwards noted above expire in various years from
      2007 to 2025. The Company's ability to utilize such net operating loss and
      research  and  development  credit  carryforwards  is  subject  to certain
      limitations due to ownership changes, as defined by rules enacted with the
      Tax Reform Act of 1986. The Company's tax  provision/benefit for each year
      represents an amount for New York state tax on capital.  There has been no
      provision for federal income taxes in 2005, 2004 and 2003, due to the loss
      in each year.

(9)   Stock Options

      (a)   The 1993 Stock  Option Plan ("the 1993 Plan") was adopted in January
            1993.  The 1993 Plan  provides  for the grant of  options  to reward
            executives,  consultants  and  employees  in order to foster in such
            personnel an increased  personal  interest in the future  growth and
            prosperity of Cadus.  The options granted under the 1993 Plan may be
            either incentive stock options or nonqualified options. An aggregate
            of 666,667  common shares were reserved for issuance  under the 1993
            Plan.

            Options  granted  under the 1993 Plan expire no later than ten years
            from the date of grant.  The option price is required to be at least
            100%  and 85% of the  fair  market  value  on the  date of  grant as
            determined by the Board of Directors for incentive stock options and
            nonqualified  options,  respectively.  The options  generally become
            exercisable  according to a schedule of vesting as determined by the
            Compensation  Committee  of the  Board of  Directors.  The  schedule
            prescribes   the  date  or  dates  on  which  the   options   become
            exercisable, and may provide that the option rights accrue or become
            exercisable in installments over a period of months or years.


                                      F-17
<PAGE>

                        CADUS CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005, 2004 AND 2003

                                 ---------------

            Activity under the 1993 Plan is as follows:

                                                     Options Outstanding
                                                                Weighted Average
                                            Number of Shares     Exercise Price
                                            ----------------    ----------------
Balance at December 31, 2002                         276,739              $1.52

2003 activity
    Canceled                                        (175,002)                --
                                                 -----------
Balance at December 31, 2003                         101,737              $1.50
2004 activity
    Canceled                                        (101,737)                --
                                                 -----------
Balance at December 31, 2004 and 2005                  -0-                   --
                                                 ===========

      (b)   Cadus entered into stock option  agreements not pursuant to any plan
            with certain directors,  employees, founders and consultants.  These
            options  generally  become  exercisable  according  to a schedule of
            vesting as determined by the Compensation  Committee of the Board of
            Directors.  The options become  exercisable in  installments  over a
            period of months or years.  As of December 31, 2005, an aggregate of
            48,000  common  shares was reserved  for  issuance  pursuant to such
            stock option agreements.

            In November  1996,  the  Compensation  Committee  granted to certain
            directors  then in office an option  to  purchase  12,000  shares of
            common  stock at an  exercise  price of $6.75 per share.  Each stock
            option grant is fully  exercisable  and expires in November 2006 and
            is included in the table below.


                                      F-18
<PAGE>

                        CADUS CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005, 2004 AND 2003

                                 ---------------

            Activity for all the above grants not issued pursuant to any plan is
            as follows:

                                                   Options Outstanding
                                                                Weighted Average
                                           Number of Shares      Exercise Price
                                           ----------------     ----------------

Balance at December 31, 2002                        323,403                $2.42

2003 activity                                            --                   --
                                                -----------
Balance at December 31, 2003                        323,403                $2.42

2004 activity

    Cancelled                                      (253,334)                  --
                                                -----------
Balance at December 31, 2004                         70,069                $5.76

2005 activity

    Cancelled                                       (22,069)                  --
                                                -----------

Balance at December 31, 2005                         48,000                $6.75
                                                ===========

            The following table summarizes  stock option  information for grants
            not subject to any plan as of December 31, 2005:

<TABLE>
<CAPTION>
                                                 Options Outstanding                     Options Exercisable
                                                 -------------------                     -------------------
                                         Weighted Average
 Range of Exercise         Number            Remaining       Weighted Average                       Weighted Average
       Prices           Outstanding      Contractual Life     Exercise Price    Number Exercisable   Exercise Price
       ------           -----------      ----------------     --------------    ------------------   --------------
       <S>                 <C>                 <C>                 <C>                <C>                 <C>
       $6.75               48,000              0.88                $6.75              48,000              $6.75
</TABLE>

      (c)   Effective  May 10,  1996,  the 1993  Plan was  replaced  by the 1996
            Incentive  Plan ("the 1996 Plan") with respect to all future  awards
            to Cadus's employees and consultants.  The options granted under the
            1996 Plan may be either  incentive  stock  options  or  nonqualified
            options.  In December  1996,  the maximum number of shares of common
            stock  that may be the  subject of awards  under the 1996  Incentive
            Plan was increased from 333,334 to 833,334 (plus any shares that are
            the  subject  of  canceled  or  forfeited  awards)  by the  Board of
            Directors  and such  increase  was approved by the  stockholders  of
            Cadus in June 1997. In December  1997,  the maximum number of shares
            of common  stock that may be the  subject  of awards  under the 1996
            Incentive Plan was increased to 1,833,334  (plus any shares that are
            the  subject  of  canceled  or  forfeited  awards)  by the  Board of
            Directors and approved by the stockholders of Cadus in June 1998. On
            December 31, 2005,  1,736,221 shares of stock remained available for
            awards under the 1996 Plan.


                                      F-19
<PAGE>

                        CADUS CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005, 2004 AND 2003

                                 ---------------

            Options  granted  under the 1996 Plan expire no later than ten years
            from the date of grant.  The option price is required to be at least
            100% of the fair  value on the  date of grant as  determined  by the
            Board of Directors for incentive and nonqualified stock options. The
            options  generally  become  exercisable  according  to a schedule of
            vesting as determined by the Compensation  Committee of the Board of
            Directors.  The schedule  prescribes  the date or dates on which the
            options become  exercisable in installments  over a period of months
            or years.

            Activity under the 1996 Plan is as follows:

                                                     Options Outstanding
                                                                Weighted Average
                                            Number of Shares     Exercise Price
                                            ----------------
Balance at December 31, 2002                           9,167               $6.56
2003 activity                                            --                  --
                                                  ----------
Balance at December 31, 2003                           9,167               $6.56
2004 activity                                             --                  --
                                                  ----------
Balance at December 31, 2004                           9,167               $6.56
2005 activity                                             --                  --
                                                  ----------
Balance at December 31, 2005                           9,167               $6.56
                                                  ==========

            The following table summarizes stock option information for the 1996
            Plan as of December 31, 2005:

<TABLE>
<CAPTION>
                                                  Options Outstanding                    Options Exercisable
                                                  -------------------                    -------------------
                                          Weighted Average
 Range of Exercise         Number            Remaining       Weighted Average                       Weighted Average
       Prices            Outstanding      Contractual Life    Exercise Price    Number Exercisable   Exercise Price
       ------            -----------      ----------------    --------------    ------------------   --------------
   <S>                      <C>                 <C>                <C>                <C>                 <C>
   $6.38 to $6.63           9,167               1.24               $6.56              9,167               $6.56
</TABLE>


                                      F-20
<PAGE>

                        CADUS CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005, 2004 AND 2003

                                 ---------------

(10)  Accrued Expenses and Other Current Liabilities

      Accrued  expenses  and other  current  liabilities  are  comprised  of the
      following:

                                                              2005          2004
                                                              ----          ----

Accrued professional fees                                 $ 27,290      $ 14,327
Other accrued expenses                                          --            --
                                                          --------      --------
Total                                                     $ 27,290      $ 14,327
                                                          ========      ========

(11)  Related Party Transactions

      James Broach, a member of Cadus' Board of Directors,  provides  consulting
      services to the Company for patent and license related matters,  for which
      he was paid $17,000,  $13,000 and $13,000 in calendar years 2005, 2004 and
      2003, respectively. These consulting services were recorded as a component
      of general  and  administrative  expenses  during  each of the  respective
      periods.  No amounts were included in accrued  expenses as of December 31,
      2005, 2004 and 2003.

      In May 2004, the Board of Directors appointed David Blitz the acting Chief
      Executive  Officer of the Company at the rate of $25,000 per annum for the
      interim period during which the Company is continuing its search for a new
      Chief  Executive  Officer.  In 2005 and 2004, the Company paid $25,000 and
      $15,625, respectively, to Mr. Blitz in such capacity. Mr. Blitz remains an
      employee of Joel Popkin & Co.,  P.C.,  in which  capacity he has performed
      the Company's internal  accounting since March 2000. The Company paid Joel
      Popkin & Co. $52,261 and $54,687 for such accounting  services in 2005 and
      2004,  respectively,  and  $8,000  in  each  of  2005  and  2004  for  tax
      preparation services performed in 2005 and 2004.

(12)  Commitments and Contingencies

      Lease Commitments

      Cadus  currently  leases  storage space on a  month-to-month  basis.  Rent
      expense,  excluding  utility  and  operating  costs,  for the years  ended
      December  31,  2005,  2004 and 2003  amounted  to  approximately  $11,550,
      $12,708 and $13,400, respectively.


                                      F-21
<PAGE>

                        CADUS CORPORATION AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        DECEMBER 31, 2005, 2004 AND 2003

                                 ---------------

(13)  Condensed Quarterly Financial Data (Unaudited)

<TABLE>
<CAPTION>
Fiscal 2005 Quarter Ended        December 31     September 30      June 30         March 31
<S>                               <C>             <C>             <C>             <C>
License and maintenance fees      $      --       $      --       $      --       $ 100,000
Operating (loss)                   (104,774)       (186,836)       (314,907)       (101,745)
Net income (loss)                    45,629          14,856        (142,258)         40,689
Net income (loss) per share:
    Basic and diluted                  0.00            0.00           (0.01)           0.00
</TABLE>

<TABLE>
<CAPTION>
Fiscal 2004 Quarter Ended        December 31     September 30      June 30         March 31
<S>                               <C>             <C>             <C>             <C>
License and maintenance fees      $      --       $      --       $      --       $ 100,000
Operating (loss)                   (201,628)       (188,319)       (159,756)       (127,853)
Net (loss)                          (59,313)       (117,023)       (123,691)        (93,476)
Net (loss) per share:
    Basic and diluted                 (0.00)          (0.01)          (0.01)          (0.01)
</TABLE>


                                      F-22