We also will be subject to widely varying foreign regulations governing clinical trials and pharmaceutical sales. Whether or not FDA approval has been obtained, approval of a product by the comparable regulatory authorities of foreign countries must be obtained before marketing the product in those countries. The approval process varies from country to country and the time may be longer or shorter than that required for FDA approval. We intend, to the extent possible, to rely on foreign licensees to obtain regulatory approval to market our products in foreign countries.

In October 2004, we received orphan drug designation for CLORETAZINE^™ (VNP40101M) in AML. Under the Orphan Drug Act, a sponsor may obtain designation by the FDA of a drug or biologic as an 'orphan' drug for a particular indication. Orphan drug designation is granted to drugs for rare diseases or conditions, including many cancers, with a prevalence of less than 200,000 cases in the United States. The sponsor of a drug that has obtained orphan drug designation and which is the first to obtain approval of a marketing application for such drug, which approval cannot be assured, is entitled to marketing exclusivity for a period of seven years for the designated indication. This means that no other company can market the same orphan drug for the same indication approved by the FDA for seven years after approval unless such company proves its drug is clinically superior or the approved orphan drug marketer cannot supply demand for the drug. Legislation is periodically considered that could significantly affect the Orphan Drug law. We intend to seek additional orphan drug designations for our products where appropriate. There can be no assurance that future changes to the Orphan Drug Act would not diminish the value of any orphan drug designation obtained by us.

FDA regulatory procedures established in 1988 are intended to speed further the availability of new drugs intended to treat life-threatening and severely debilitating illnesses. These procedures provide for early and continuous consultation with the FDA regarding preclinical and clinical studies necessary to gain marketing approval. This regulatory framework also provides that if Phase I results demonstrate potential, Phase II clinical trials may be designed that obviate the need for lengthy, expensive Phase III testing. Notwithstanding the foregoing, approval may be denied by the FDA or traditional Phase III studies may be required. The FDA may also seek our agreement to perform post-approval Phase IV studies, which confirm product safety and efficacy.

In addition to regulations relating to drug development, we are subject to federal, state and local environmental laws and regulations, including those promulgated by the Occupational Safety and Health Administration (OSHA), the Environmental Protection Agency (EPA) and the Nuclear Regulatory Commission (NRC), that govern activities or operations that may have adverse environmental effects, such as discharges to air and water, as well as handling and disposal practices for solid and hazardous wastes. These laws also impose strict liability for the costs of cleaning up, and for damages resulting from, sites of past spills, disposals or other releases of hazardous substances and materials for the investigation and remediation of environmental contamination at properties operated by us and at off-site locations where we have arranged for the disposal of hazardous substances.

We have made, and will continue to make, expenditures for our facilities to comply with current and future environmental laws. To date, we have not incurred significant costs and are not aware of any significant liabilities associated with our compliance with federal, state and local environmental laws and regulations. However, environmental laws have changed in recent years and we may become subject to stricter environmental standards in the future and may face large capital expenditures to comply with environmental laws. We have limited capital and are uncertain whether we will be able to pay for significantly large capital expenditures. Also, future developments, administrative actions or liabilities relating to environmental matters may have a material adverse effect on our financial condition or results of operations.

All of our operations are performed under strict environmental and health safety controls consistent with OSHA, EPA and NRC regulations. We cannot be certain that we will be able to control all health and safety problems. If we cannot control those problems, we may be held liable and may be required to pay the costs of remediation. These liabilities and costs could be material.

Manufacturing and Marketing

We do not have experience in manufacturing or marketing products and have not yet commercially introduced any products. We do not currently have the resources to manufacture or

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market on a commercial scale any products that we develop. We currently use third parties to manufacture limited quantities of our products for use in clinical activities.

If our products are approved for sale by regulatory authorities, we will need to develop manufacturing and marketing capability or make arrangements with third parties to manufacture, distribute and sell our products. In the event we decide to establish a manufacturing and distribution facility or a marketing and sales force, we will require substantial additional funds and will be required to hire and retain additional personnel.

Employees

As of December 31, 2004, we had 32 full-time employees, of which 23 were engaged in research, development and clinical activities, and 9 were in administration and finance.

Available Information

The following information can be found on our website at http://www.vionpharm.com or may be obtained free of charge by contacting our Investor Relations Department at (203) 498-4210 or by sending an e-mail message to info@vionpharm.com:

•	our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission;

•	our policies related to corporate governance, including the charter for the Nominating and Governance Committee of our Board of Directors, our code of ethics and business conduct applying to our directors, officers and employees, and our code of ethics applying to our chief executive officer and senior financial officials; and

•	the charter of the Audit Committee of our Board of Directors.

ITEM 2.    Properties

Our principal facility consists of approximately 20,000 square feet of leased laboratory and office space in New Haven, Connecticut. The lease expires in October 2006. The current annual rental rate is approximately $296,000. We believe our space is sufficient for our preclinical development, clinical and administrative activities.

ITEM 3.    Legal Proceedings

In the normal course of business, we may be subject to proceedings, lawsuits and other claims. We are not a party to any legal proceedings that may have a material adverse effect on our business.

ITEM 4.    Submission of Matters to a Vote of Security Holders

None.

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PART II

ITEM 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information for Common Stock

Our common stock has traded under the symbol "VION" on the Nasdaq SmallCap Market^SM since December 19, 2002, and on the Nasdaq National Market^® from October 25, 1999 until December 18, 2002. The following table reflects the range of high and low closing sales prices of our common stock for each of the calendar quarters in 2004 and 2003 as reported by the Nasdaq SmallCap Market.

				2004								2003
				High				Low				High				Low
First Quarter				$	4.01			$	1.59			$	0.48			$	0.30
Second Quarter				$	5.31			$	3.32				2.53				0.30
Third Quarter				$	4.46			$	2.89				2.14				1.27
Fourth Quarter				$	5.06			$	4.14				2.25				1.49

Holders

At March 10, 2005, there were 466 holders of record of our common stock, one of which is Cede & Co., a nominee for Depository Trust Company (DTC). All of the shares of common stock held by brokerage firms, banks and other financial institutions as nominees for beneficial owners are deposited into participant accounts at DTC, and are therefore considered to be held of record by Cede & Co. as one stockholder.

Dividends

We have never paid cash dividends on our common stock. We currently intend to retain all future earnings for use in the operation of our business and do not anticipate paying cash dividends in the foreseeable future.

Changes in Securities and Use of Proceeds

During the year ended December 31, 2004, we issued 730,726 shares of our common stock at $2.20 per share pursuant to exercises of warrants issued to institutional investors in a private placement in June 2003. Net proceeds from the exercises were approximately $1.6 million. We registered the resale of these shares by the investors pursuant to an effective registration statement on Form S-3.

During the year ended December 31, 2004, we issued an additional 2,135,687 shares of our common stock at $2.50 per share pursuant to exercises of warrants issued to institutional investors in a private placement in September 2003. Net proceeds from the exercises were approximately $5.3 million. We registered the resale of these shares by the investors pursuant to an effective registration statement on Form S-3.

During the year ended December 31, 2004, we issued an additional 121,154 shares of our common stock at $3.25 per share pursuant to exercises of warrants issued to institutional investors in a private placement in February 2004. Net proceeds from the exercises were approximately $394,000. We registered the resale of these shares by the investors pursuant to an effective registration statement on Form S-3.

Net proceeds from these warrant exercises have been and will be used to fund clinical and preclinical product development activities, working capital and general corporate purposes.

ITEM 6.    Selected Financial Data

The following selected financial data for each of the five years in the period ended December 31, 2004, and for the period from May 1, 1994 (inception) through December 31, 2004, are derived from

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our audited financial statements. The selected financial data should be read in conjunction with the consolidated financial statements, related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein.

				2004				2003				2002				2001				2000				For the Period From May 1, 1994 (Inception) through December 31, 2004
Statement of Operations Data:
Total revenues				$	275			$	375			$	238			$	650			$	947			$	12,919
Loss from operations					(16,501	)			(11,923	)			(13,021	)			(15,014	)			(16,131	)			(118,308	)
Net loss					(16,055	)			(11,838	)			(12,310	)			(13,810	)			(14,803	)			(113,021	)
Preferred stock dividends and accretion					—				—				—				—				(606	)			(18,489	)
Loss applicable to common shareholders					(16,055	)			(11,838	)			(12,310	)			(13,810	)			(15,409	)			(131,510	)
Basic and diluted loss applicable to common shareholders per share					(0.30	)			(0.36	)			(0.43	)			(0.51	)			(0.64	)
Balance Sheet Data:
Cash, cash equivalents and short-term investments				$	41,729			$	15,719			$	10,131			$	22,644			$	24,357
Total assets					42,644				16,376				10,923				23,601				25,660
Long-term obligations and redeemable preferred stock					—				—				—				—				—

ITEM 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a development stage company engaged in the development of novel therapeutics for the treatment of cancer. Our activities to date have consisted primarily of research and product development, obtaining regulatory approval for clinical trials, conducting clinical trials, negotiating and obtaining collaborative agreements, and obtaining financing in support of these activities. Our revenues primarily consist of contract research grants, technology license fees, and research and laboratory support fees. Since inception, we have generated minimal revenues and have incurred substantial operating losses from our activities. We expect to incur substantial operating losses for the next several years due to expenses associated with our activities.

We have five major research and development projects, which include two product candidates in clinical trials (CLORETAZINE^™ (VNP40101M) and Triapine^®), two product development programs in preclinical development (KS119 and heterocyclic hydrazones) and one product development program for which we are seeking a development partner (TAPET^®). The following table provides information on clinical trials sponsored by us that were open for accrual as of March 10, 2005.

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Product				Trial				Trial Commencement Date
CLORETAZINE™ (VNP40101M)				Phase II trial in acute myeloid leukemia and myelodysplastic syndromes				March 2004
				Phase I trial in combination with temozolomide in patients with hematologic malignancies				October 2004
Triapine®				Phase II trial of 24-hour infusion in combination with gemcitabine in pancreatic cancer				September 2004

In addition to the above-listed clinical trials for CLORETAZINE^™ (VNP40101M), a Phase II trial in primary brain tumors was initiated in May 2004 under an investigator's IND. We provide product for this trial and incur certain costs related to patient enrollment.

In addition to the above-listed clinical trial for Triapine, the National Cancer Institute (NCI) is also sponsoring several Phase I and Phase II single agent or combination clinical trials of that compound. In January 2004, we announced the first trial to open under NCI sponsorship. We provide product for the NCI trials.

Completion of clinical trials may take several years or more and the length of time can vary substantially according to the type, complexity, novelty and intended use of a product candidate. The types of costs incurred during a clinical trial vary depending upon the type of product candidate, the disease treated and the nature of the study.

If we enter into Phase III or registrational clinical trials of a product and achieve successful completion of those trials, of which there can be no certainty, we intend to submit the results to the FDA to support regulatory approval of the product. However, we cannot be certain that any of our products will prove to be safe or effective, will achieve the safety and efficacy needed to enter into Phase III or registrational clinical trials, will receive regulatory approvals, or will be successfully commercialized. Our clinical trials might prove that our product candidates may not be effective in treating the disease or have undesirable or unintended side effects, toxicities or other characteristics that require us to cease further development of the project. The cost to take a product candidate through clinical trials is dependent upon, among other things, the disease indications, the timing, the size and dosing schedule of each clinical trial, the number of patients enrolled in each trial and the speed at which patients are enrolled and treated. We could incur increased product development costs if we experience delays in trial enrollment, the evaluation of clinical trial results or regulatory approvals. Significant delays could allow our competitors to bring products to market before we do and impair our ability to commercialize our product candidates. These uncertainties and variability make it difficult to accurately predict the future cost of or timing to complete our product development projects

We budget and monitor our research and development costs by category. Significant categories of costs include personnel, clinical, third party research and development services, and laboratory supplies.

Given the uncertainties related to pharmaceutical product development, we are currently unable to reliably estimate when, if ever, our product candidates will generate revenue and cash flows. We do not expect to receive net cash inflows from any of our major research and development projects until and unless a product candidate becomes a profitable commercial product.

Critical Accounting Policies and Estimates

The accompanying discussion and analysis of our financial condition and results of operations are based upon our financial statements and the related disclosures, which have been prepared in

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accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. These estimates form the basis for making judgments about the carrying values of assets and liabilities. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates.

We believe the following policies to be the most critical to an understanding of our financial condition and results of operations because they require us to make estimates, assumptions and judgments about matters that are inherently uncertain.

Revenue Recognition

We record revenue from contract research grants as the eligible costs are incurred. We are reimbursed for eligible costs after submission of grant reports. We are subject to grant audits as required by the Department of Health and Human Services. Audits may result in adjustments to the amount of grant revenues recorded and funds received.

We record revenue under technology license agreements related to the following. Actual license fees received may vary from recorded estimated revenues.

•	Nonrefundable upfront license fees for which no further performance obligations exist are recognized as revenue on the earlier of when payments are received or collection is assured;

•	Nonrefundable upfront license fees including guaranteed, time-based payments that require continuing involvement in the form of development or other efforts by us are recognized as revenue ratably over the performance period; and

•	Milestone payments are recognized as revenue when milestones, as defined in the agreement, are achieved.

We record revenue from royalties based on licensees' sales of our products or technologies. Revenues are recognized as earned in accordance with the contract terms when royalties from licensees can be reliably measured and collectibility is reasonably assured. Royalty estimates are made in advance of amounts collected based on historical and forecasted trends.

We record revenue from research and laboratory support as the services are provided. Actual research and laboratory support fees collected may vary from revenue recognized.

The effect of any change in revenues from contract research grants, technology license agreements, or research and laboratory support would be reflected in revenues in the period such determination was made. Historically, such adjustments have been insignificant.

Research and Development Expenses

We record research and development expenses as incurred. We disclose clinical trials expenses and other research and development expenses as separate components of research and development expense in our consolidated statements of operations to provide more meaningful information to our investors. The classification of expenses into these components of research and development expense are based, in part, on estimates of certain costs when incurred. The effect of any change in the clinical trials expenses and other research and development expenses would be reflected in the period such determination was made.

Income Taxes

We provide deferred income taxes for the future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities, and on operating loss and tax credit carryforwards. Except for the sales recorded in 2002 and 2003 of certain research and development tax credits to the State of Connecticut and the provisions recorded in 2003 and 2004 for minimum state capital taxes paid, we have not recorded a provision or benefit for income

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taxes in the financial statements due to recurring historical losses and based on judgments regarding the timing of future profitability. Accordingly, we have provided a full valuation allowance for our deferred income tax asset as of December 31, 2004. In the event we were to determine that we would be able to realize deferred income tax assets in the future, an adjustment to increase income in that period of determination would be made.

Investments

Our investment securities are classified as available-for-sale and carried at fair market value. Unrealized gains or losses are recorded in other comprehensive income until the securities are sold or otherwise disposed. However, a decline in fair market value below cost that is other than temporary would be accounted for as a realized loss in the period such determination was made.

Stock-Based Compensation

We measure stock-based compensation expense under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related Interpretations ("APB 25"), and provide required pro forma disclosures under the fair value recognition provisions of Financial Accounting Standards No. 123, Accounting for Stock–Based Compensation ("SFAS 123"), as amended by Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure.

Recently Enacted Pronouncements

There may be potential new accounting pronouncements or regulatory rulings, which may have an impact on our future financial position and results of operations. In December 2004, the Financial Accounting Standards Board issued the revised Statement of Financial Accounting Standards No. 123, Share-Based Payment ("SFAS 123R"). SFAS 123R replaces SFAS 123 and supersedes APB 25. SFAS 123R requires public companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of these instruments. Companies will be required to recognize an expense for compensation cost related to share-based payment arrangements, including grants of stock options and purchases under employee stock purchase plans, for all awards granted after the effective date and to awards modified, repurchased or canceled after that date. SFAS 123R is effective for companies for reporting periods beginning after June 15, 2005. The cumulative effect of adoption, if any, will be measured and recognized on July 1, 2005. As of the required effective date, companies will apply SFAS 123R using a modified version of prospective application. For periods before the required effective date, companies may elect to apply a modified version of retrospective application. We currently measure share-based compensation expense under APB 25 and provide pro forma disclosures required by SFAS 123. We will be required to adopt SFAS 123R and recognize an expense for share-based compensation in our financial statements for the quarter ended September 30, 2005. See Note 2 in our Notes to Consolidated Financial Statements for the pro forma net loss and net loss per share amounts for the periods presented as if we had used a fair-value-based method similar to the methods required under SFAS 123R to measure compensation expense for share-based payments to employees. We are currently evaluating our option valuation methodologies and assumptions, and have not yet determined whether the adoption of SFAS 123R will result in amounts similar to the current pro forma disclosures under SFAS 123. We expect the adoption of SFAS 123R to have a significant adverse impact on our consolidated statements of operations and net loss per share.

Results of Operations

Year Ended December 31, 2004 Compared to the Year Ended December 31, 2003

Revenues.    Revenues for the year ended December 31, 2004, were $275,000 as compared to $375,000 for 2003. The decrease was due primarily to lower revenues from contract research grants. All revenues under contract research grants have been fully recognized as all grants have expired.

Research and Development.    Total research and development ("R&D") expenses were $13.8 million for the year ended December 31, 2004, compared to $9.7 million for 2003 as a result of higher

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clinical trials expenses of $3.6 million and higher other R&D expenses of $471,000. The increase in clinical trials expenses was due primarily to higher spending for CLORETAZINE^™ (VNP40101M) trials of $3.2 million primarily as a result of patient accrual to a Phase II trial in acute myeloid leukemia and myelodysplastic syndromes initiated in March 2004, as well as higher drug production expense of $645,000 for Triapine and CLORETAZINE^™ (VNP40101M), and higher clinical consulting fees of $331,000, partially offset by lower spending of $809,000 for Triapine^® trials. The increase in other R&D expenses was primarily due to costs associated with two preclinical product development programs (KS119 and heterocyclic hydrazones) and higher payroll-related costs. We expect total research and development expenses to increase over time mainly due to conducting larger clinical trials, including planned commencement of a Phase III clinical trial of CLORETAZINE^™ (VNP40101M) in the first part of 2005, and additional development of our preclinical products.

General and Administrative.    General and administrative expenses were $3.0 million for the year ended December 31, 2004, as compared to $2.6 million in 2003. The increase was primarily due to higher payroll-related costs and higher professional fees for financial services and employee recruiting as we moved into late-stage clinical trials of products, partially offset by lower legal fees as a result of non-recurring legal fees in 2003 for license agreements and assistance with other transactions.

Interest Income.     Interest income was $547,000 for the year ended December 31, 2004, compared to $136,000 for 2003. The increase was primarily due to higher levels of invested funds in 2004 as a result of net proceeds received from a private placement of our common stock in February 2004 and net proceeds from warrant exercises during 2004.

Other Expense.    Other expense related to foreign currency transaction losses was $73,000 for the year ended December 31, 2004, compared to $45,000 for 2003. The foreign currency transaction losses were related to a contract with a vendor outside the U.S. that is denominated in a foreign currency.

Income Tax Provision.    An income tax provision of $28,000 was recorded for the year ended December 31, 2004, for minimum state capital taxes paid. For the year ended December 31, 2003, an income tax provision of $4,000 was recorded for minimum state capital taxes paid net of proceeds from the sale of certain research and development tax credits to the State of Connecticut.

Net Loss.    The net loss was $16.1 million, or $0.30 per share based on weighted-average shares outstanding of 53.5 million, for the year ended December 31, 2004, as compared to $11.8 million, or $0.36 per share based on weighted-average shares outstanding of 32.8 million, for 2003.

Year Ended December 31, 2003 Compared to the Year Ended December 31, 2002

Revenues.    Revenues for the year ended December 31, 2003, were $375,000 as compared to $238,000 for 2002. The increase was due primarily to higher revenues from research support fees.

Research and Development.    Total research and development expenses (which include clinical trials expenses and other research and development expenses) were $9.7 million for the year ended December 31, 2003, compared to $10.5 million for 2002. Clinical trials expenses were $5.8 million for the year ended December 31, 2003, as compared to $4.9 million for 2002. The increase was due to higher costs associated with patient enrollment in expanded Triapine^® trials of $927,000 and CLORETAZINE^™ (VNP40101M) trials of $378,000, partially offset by lower costs for TAPET^® trials of $449,000. Other research and development expenses decreased to $3.9 million for the year ended December 31, 2003, from $5.6 million for 2002, primarily due to a decrease in employee-related expenses due to fewer research employees and, to a lesser extent, a decrease in spending for external research support.

General and Administrative.    General and administrative expenses were $2.6 million for the year ended December 31, 2003, as compared to $2.7 million in 2002. The decrease was due to lower patent and other professional fees partially offset by higher legal fees for license agreements negotiated during the year and assistance with other transactions.

Interest Income.     Interest income was $136,000 for the year ended December 31, 2003, compared to $484,000 for 2002. The decrease was due to lower interest rates and, to a lesser extent, lower levels of invested funds in 2003.

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Other Expense.    Other expense related to foreign currency transaction losses was $45,000 for the year ended December 31, 2003, compared to $0 for 2002. The foreign currency transaction losses were related to a contract with a vendor outside the U.S. that is denominated in a foreign currency.

Income Tax Provision (Benefit).    An income tax provision of $4,000 was recorded for the year ended December 31, 2003, which reflected minimum state capital taxes paid net of proceeds from the sale of certain research and development tax credits to the State of Connecticut. For the year ended December 31, 2002, an income tax benefit of $227,000 was recognized from the sale of certain research and development tax credits to the State of Connecticut.

Net Loss.    The net loss was $11.8 million, or $0.36 per share based on weighted-average shares outstanding of 32.8 million, for the year ended December 31, 2003, as compared to $12.3 million, or $0.43 per share based on weighted-average shares outstanding of 28.9 million, for 2002.

Liquidity and Capital Resources

At December 31, 2004, we had cash and cash equivalents of $41.7 million, compared to cash, cash equivalents and short-term investments of $15.7 million at December 31, 2003. The increase in 2004 was primarily due to net proceeds of $33.0 million from a private placement of securities in February 2004 and proceeds of $7.3 million from exercises of warrants, described below, offset by cash used to fund operating activities of $14.0 million and acquisitions of capital equipment of $358,000. Cash used in operations was primarily to advance our ongoing preclinical and clinical activities.

Cash Used in Operating Activities

Cash used in operating activities is primarily a result of our net loss. However, operating cash flows differ from net loss as a result of non-cash charges, changes in operating assets and liabilities, or differences in the timing of cash flows and earnings/expense recognition. Significant components of cash used in operating activities are as follows:

Receivables and prepaid expenses increased $113,000 during the year ended December 31, 2004 compared to a decrease of $45,000 for 2003. The increase in 2004 was primarily due to a deposit paid to a clinical research organization in connection with a clinical research agreement, partially offset by a reduction of prepaid insurance expense. The decrease in 2003 was primarily due to a reduction of prepaid insurance expense as the timing of insurance premium payments differs from the recognition of insurance expense.

Current liabilities increased $2.0 million during each of the years ended December 31, 2004 and 2003. The increases in 2004 and 2003 were primarily due to increases in our clinical trials liability as the timing of payments to clinical vendors differs from the recognition of clinical trials expenses.

Cash Provided by or Used in Investing Activities

Cash provided by or used in investing activities primarily relates to the purchases and maturities of investments and acquisitions of capital equipment. For the year ended December 31, 2004, purchases of marketable securities totaled $61.9 million and maturities of marketable securities totaled $76.4 million. Cash provided by the maturities of these short-term investments in marketable securities was reinvested during the second quarter of 2004 in U.S. Treasury securities classified as cash equivalents. As a result, short-term investments were reduced to $0. For the year ended December 31, 2003, purchases of marketable securities totaled $119.1 million and maturities of marketable securities totaled $114.0 million. Capital expenditures were $358,000 for the year ended December 31, 2004 and $117,000 for 2003. The increase in 2004 capital expenditures was due primarily to the purchase of laboratory equipment. Capital expenditures for fiscal 2005 are not expected to exceed $500,000.

Cash Provided by Financing Activities

Cash provided by financing activities is primarily related to capital raised, warrant exercise proceeds and proceeds from common stock issuances under our employee stock plans. For the year ended December 31, 2004, we received net proceeds of $33.0 million from a private placement of

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common stock in February 2004 and proceeds of $7.3 million from exercises of warrants, described below. For the year ended December 31, 2003, we received $14.9 million due to net proceeds from two private placements of common stock in June and September 2003, described below.

In June 2003, we completed a private placement of 3,846,150 shares of our common stock at $1.30 per share and warrants to purchase 1,923,075 shares of common stock at $2.20 per share. Net proceeds from this private placement totaled $4.5 million. The warrants expire on June 23, 2008.

In September 2003, we completed a private placement of 6,475,000 shares of our common stock at $1.75 per share. The investors also received warrants to purchase 6,475,000 shares of common stock at $2.50 per share and the placement agent received a warrant to purchase an additional 100,000 shares of our common stock at $2.50 per share. Net proceeds from this private placement totaled $10.4 million. All of these warrants expire on September 19, 2008.

In February 2004, we completed a private placement of 13,553,845 shares of our common stock at $2.60 per share. The investors also received warrants to purchase 3,388,463 shares of common stock at $3.25 per share and the placement agent received a warrant to purchase an additional 300,000 shares of common stock at $3.25 per share. All of these warrants expire on February 11, 2009. Net proceeds from this private placement totaled $33.0 million.

For the year ended December 31, 2004, we issued 2,987,567 shares of our common stock upon exercises of warrants issued in connection with private placements in 2003 and 2004, resulting in proceeds of $7.3 million.

Subsequent to year-end, we received net proceeds of $30 million from a registered direct offering in January 2005 of 10 million shares of our common stock at $3.25 per share.

Future Cash Requirements

Based on our current operating plan, we estimate that our existing cash and cash equivalents totaling $41.7 million at December 31, 2004 in addition to net proceeds of approximately $30 million from the sale of 10 million shares of our common stock in a registered direct offering completed in January 2005 will be sufficient to fund our operations into 2007. Our operating plans and cash requirements may vary materially from the foregoing due to the results of preclinical development, clinical trials, product testing, relationships with strategic partners, changes in focus and direction of our preclinical and clinical development programs, competitive and technological advances, the regulatory process in the United States and abroad, and other factors. In the future, we will need to raise substantial capital to complete our product development and clinical trials and to fund operations in 2007 and beyond, however, we cannot assure you that we will be able to raise additional capital, nor can we predict what the terms of any financing might be.

Off-Balance Sheet Financing

We have no off-balance sheet arrangements that have a material current effect or that are reasonably likely to have a material future effect on our financial position or results of operations.

Contractual Obligations

The following table summarizes our significant contractual obligations which are not recorded on the balance sheet at December 31, 2004 and the future periods in which such obligations are expected to be settled in cash. Additional details regarding these obligations are provided in footnotes to the consolidated financial statements, as referenced in the table:

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				Payments Due by Period
(In thousands)				Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Employment agreement (Note 9)				$	412			$	412			$	—			$	—			$	—
Operating lease obligations (Note 9)					633				338				295				—				—
Research and development commitment (Note 10)					250				200				50				—				—
Purchase obligations (1)					178				178
Total				$	1,473			$	1,128			$	345			$	—			$	—

	(1)    Purchase obligations include commitments related to contract drug manufacturing.

Under our executed license agreements (refer to Note 3), we are obligated to make milestone payments totaling $1,850,000 upon achieving specified milestones and to pay royalties to our licensors. These contingent milestone and royalty payment obligations are not included in the above table.

Under various agreements with contract research organizations, clinical sites and contract drug manufacturers, we expect to incur costs relating to the progress of clinical trials. These costs are expensed as incurred and are based upon patient enrollment, services rendered or other expenses as incurred. The accrual for clinical trials costs expensed but not yet paid is included on our balance sheet. In the event of termination, certain agreements provide for cancellation fees to be paid by us and for reimbursement of noncancellable commitments that may have been entered into on our behalf. These potential cancellation fees are not included in the above table.

Risk Factors

This Annual Report on Form 10-K contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results could differ materially. Factors that could cause or contribute to such differences include, but are not limited to, those discussed under "Risk Factors", as well as those discussed elsewhere in this Annual Report on Form 10-K, including the documents incorporated by reference.

An investment in our securities is risky. Prior to making a decision about investing in our securities, you should carefully consider the specific risks discussed under "Risk Factors" in both this Form 10-K and the documents incorporated by reference. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not presently known to us, or that we currently see as immaterial, may also harm our business. If any of the risks or uncertainties described below or any such additional risks and uncertainties actually occur, our business, results of operations and financial condition could be materially and adversely affected. In this case, the trading price of our securities could decline and you might lose all or part of your investment.

If we fail to obtain the capital necessary to fund our operations, we will be unable to continue or complete our product development.

We will need to raise substantial additional capital to fund operations and complete our product development. As of December 31, 2004, we had $41.7 million in cash and cash equivalents (not including the net proceeds of $30.0 million from a registered direct offering of 10 million shares of our common stock in January 2005) to fund our operations and continue our product development. We will not have an approved and marketable product for the foreseeable future. Accordingly, we will need to raise substantial additional capital to have sufficient capital to fund our operations in 2007 and beyond.

We may not get funding when we need it or on favorable terms. If we cannot raise adequate funds to satisfy our capital requirements, we may have to delay, scale-back or eliminate our research and development activities, clinical studies or future operations. We might have to license our technology to others. This could result in sharing revenues which we might otherwise retain for ourselves. Any of these actions may harm our business, financial condition and results of operations.

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The amount of capital we may need depends on many factors, including:

•	the progress, timing and scope of our product development programs;

•	the progress, timing and scope of our preclinical studies and clinical trials;

•	the time and cost necessary to obtain regulatory approvals;

•	the time and cost necessary to further develop manufacturing processes, arrange for contract manufacturing or build manufacturing facilities and obtain the necessary regulatory approvals for those facilities;

•	the time and cost necessary to develop sales, marketing and distribution capabilities;

•	our ability to enter into and maintain collaborative, licensing and other commercial relationships; and

•	our partners' commitment of time and resource to the development of our products.

We have limited access to the capital markets and, if we can raise additional funding, stockholders may experience extreme dilution.

We have limited access to the capital markets to raise capital. The capital markets have been unpredictable in the past, especially for drug development companies and unprofitable companies such as ours. In addition, it is difficult to raise capital under current market conditions. The amount of capital that a company such as ours is able to raise often depends on variables that are beyond our control, such as the share price of our stock and its trading volume. As a result, we may not be able to secure financing on terms attractive to us, or at all. If we are able to consummate a financing arrangement, the amount raised may not be sufficient to meet our future needs. If adequate funds are not available on acceptable terms, or at all, our business, including our technology licenses, relationships with key suppliers, results of operations, financial condition and our continued viability will be materially adversely affected.

To the extent we encounter additional opportunities to raise cash, we would likely sell additional equity or debt securities. Due to our current stock price and market conditions, and the amount of capital we need, any such debt or equity securities are likely to be sold at relatively low prices, including prices which are below the market prices of our stock, and may have substantial rights to control the Company. For example, in our private placement in June 2003, shares of common stock were sold at $1.30 per share which was approximately 64% of market price at the time. Stockholders are likely to experience extreme dilution as well as subordination of their rights. We do not have any contractual restrictions on our ability to incur debt. Any indebtedness could contain covenants that restrict our operations.

If we continue to incur operating losses, we may be unable to continue our operations.

We have incurred losses since inception. As of December 31, 2004, we had an accumulated deficit of approximately $131.8 million. If we continue to incur operating losses and fail to become a profitable company, we may be unable to continue our operations. Since we began our business, we have focused on research, development and clinical trials of product candidates. We expect to continue to operate at a net loss for at least the next several years as we continue our research and development efforts, continue to conduct clinical trials and develop manufacturing, sales, marketing and distribution capabilities. Our future profitability depends on our receiving regulatory approval of our product candidates and our ability to successfully manufacture and market approved drugs. The extent of our future losses and the timing of our profitability are highly uncertain.

If we do not obtain regulatory approval for our products, we will not be able to sell our products and the value of our company and our financial results will be harmed.

We cannot sell or market our drugs without regulatory approval. If we cannot obtain regulatory approval for our products, the value of our company and our financial results will be harmed. In the

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United States, we must obtain approval from the U.S. Food and Drug Administration (FDA) for each drug that we intend to sell. The current status of our potential products is as follows:

•	CLORETAZINE™ (VNP40101M) is in a Phase II clinical trial as a single agent and in a Phase I trial in combination with temozolomide;

•	Triapine® is being evaluated in a Phase II clinical trial in combination with gemcitabine in pancreatic cancer. The National Cancer Institute is also sponsoring additional Phase I and Phase II trials of Triapine as a single agent and in combination with standard chemotherapies; and

•	Heterocyclic hydrazones and KS119 are being evaluated in preclinical studies.

If and when we complete the several phases of clinical testing for each drug candidate, we will submit our test results to the FDA. FDA review may generally take up to two years and approval is not assured. Foreign governments also regulate drugs distributed outside the United States. A delay in obtaining regulatory approvals for any of our drug candidates will also have a material adverse effect on our business.

If our drug trials are delayed or achieve unfavorable results, we will not be able to obtain regulatory approvals for our products.

We must conduct extensive testing of our product candidates before we can obtain regulatory approval for our products. We need to conduct human clinical trials. These tests and trials may not achieve favorable results. We would need to reevaluate any drug that did not test favorably and either alter the drug or dose, or abandon the drug development project. In such circumstances, we would not be able to obtain regulatory approval on a timely basis, if ever.

Factors that can cause delay or termination in our clinical trials include:

•	slow patient enrollment;

•	long treatment time required to demonstrate safety and effectiveness;

•	lack of sufficient supplies of the product candidate;

•	adverse medical events or side effects in treated patients;

•	lack of effectiveness of the product candidate being tested; and

•	lack of sufficient funds.

If the testing or use of our potential products harms people, we could be subject to costly and damaging product liability claims.

Our business exposes us to potential product liability risks that are inherent in the testing, manufacturing and marketing of drug products. These risks are particularly inherent in human trials of our proposed products. Unacceptable side effects may be discovered during preclinical and clinical testing of one or more of our potential products. Side effects and other liability risks could give rise to viable product liability claims against us. While we have obtained insurance coverage for patients enrolled in clinical trials, we may not be able to maintain this insurance on acceptable terms, insurance may not provide adequate coverage against potential liabilities and we may need additional insurance coverage for expanded clinical trials and commercial activity. As a result, product liability claims, even if successfully defended, could have a material adverse effect on our business, financial condition and results of operations. If the side effects are determined to be unacceptable, we will not be able to commercialize our products.

If we are found to be infringing on patents or trade secrets owned by others, we may be forced to cease or alter our drug development efforts, obtain a license to continue the development or sale of our products, and/or pay damages.

Our manufacturing processes and potential products may conflict with patents that have been or may be granted to competitors, universities or others, or the trade secrets of those persons and

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entities. As the drug development industry expands and more patents are issued, the risk increases that our processes and potential products may give rise to claims that they infringe the patents or trade secrets of others. These other persons could bring legal actions against us claiming damages and seeking to enjoin clinical testing, manufacturing and marketing of the affected product or process. If any of these actions are successful, in addition to any potential liability for damages, we could be required to obtain a license in order to continue to conduct clinical tests, manufacture or market the affected product or use the affected process. Required licenses may not be available on acceptable terms, if at all, and the results of litigation are uncertain. If we become involved in litigation or other proceedings, it could consume a substantial portion of our financial resources and the efforts of our personnel.

We rely on confidentiality agreements to protect our trade secrets. If these agreements are breached by our employees or other parties, our trade secrets may become known to our competitors.

We rely on trade secrets that we seek to protect through confidentiality agreements with our employees and other parties. If these agreements are breached, our competitors may obtain and use our trade secrets to gain a competitive advantage over us. We may not have any remedies against our competitors and any remedies that may be available to us may not be adequate to protect our business and compensate us for the damaging disclosure. In addition, we may have to expend resources to protect our interests from possible infringement by others.

If we fail to recruit and retain key personnel, our research and development programs may be delayed.

We are highly dependent upon the efforts of our senior management and scientific personnel, particularly, Alan Kessman, our chief executive officer and director; Howard Johnson, our president and chief financial officer; Ann Lee Cahill, our vice president, clinical development and Ivan King, Ph.D., our vice president, research and development. There is intense competition in the drug development industry for qualified scientific and technical personnel. Since our business is very technical and specialized, we need to continue to attract and retain such people. We may not be able to continue to attract and retain the qualified personnel necessary for developing our business, particularly in light of our need to raise substantial additional financing in order to continue our operations in 2007 and beyond. We have no key man insurance policies on any of the officers listed above and we only have an employment agreement with Mr. Kessman. If we lose the services of our management and scientific personnel or fail to recruit other scientific and technical personnel, our research and product development programs will be significantly and detrimentally affected.

We face intense competition in the market for anticancer products, and if we are unable to compete successfully, our business will suffer.

Numerous pharmaceutical and biotechnology companies have publicly announced their intention to develop drugs that target the replication of tumor cells including, in some instances, the development of agents which are alkylating agents similar to our compound CLORETAZINE^™ (VNP40101M) and agents which target ribonucleotide reductase similar to our compound Triapine^®. These companies include, but are not limited to, Bristol-Myers Squibb Company, Pfizer Inc., Chiron Corporation, Amgen Inc., Genentech Inc., ImClone Systems Inc., OSI Pharmaceuticals, Inc., Lorus Therapeutics Inc., AstraZeneca PLC, Schering-Plough Corporation and Eli Lilly and Company. These and other large pharmaceutical companies have substantially greater financial and other resources and development capabilities than we do and have substantially greater experience in undertaking preclinical and clinical testing of products, obtaining regulatory approvals, and manufacturing and marketing pharmaceutical products. In addition, our competitors may succeed in obtaining approval for products more rapidly than us and in developing and commercializing products that are safer and more effective than those that we propose to develop. The existence of these products, other products or treatments of which we are not aware or products or treatments that may be developed in the future may adversely affect the marketability of our products by rendering them less competitive or obsolete. In addition to competing with universities and other research institutions in the development of products, technologies and processes, we may compete with other companies in acquiring rights to products or technologies from universities.

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If our corporate partners, licensors, licensees, collaborators at research institutions and others do not
conduct activities in accordance with our arrangements, our research and development efforts may be
delayed.

Our strategy for the research, development and commercialization of our products entails entering into various arrangements with corporate partners, licensors, licensees, collaborators at research institutions and others. We currently depend on the following third parties:

•	The National Cancer Institute (NCI) with respect to clinical development of Triapine in Phase I and Phase II combination trials;

•	Yale University (Yale) for collaborative research and for technologies that are licensed by them to us;

•	Beijing Pason Pharmaceuticals, Inc. for the development of Triapine in the People's Republic of China, Hong Kong, Macao and Taiwan;

•	Duke University Comprehensive Cancer Center for clinical development of CLORETAZINE™ (VNP40101M) in adult patients with recurrent gliomas (brain cancer) under an investigator's IND;

•	Healthcare facilities in the United States and other countries to perform human clinical trials of our products;

•	Clinical research organizations in the United States and other countries to monitor and collect data related to human clinical trials; and

•	Contract manufacturers to produce our products for use in preclinical and clinical activities.

If the third parties do not conduct activities in accordance with the arrangements we have with them, our research and development efforts may be delayed. We may also rely on other collaborative partners to obtain regulatory approvals and to manufacture and market our products. The amount and timing of resources to be devoted to these activities by these other parties may not be within our control.

If Yale does not conduct research relating to products we would like to pursue, we may never realize any benefits from our funding provided to Yale.

Through December 31, 2004, we have paid approximately $10.1 million to Yale for research funding. We have agreed to pay an additional $250,000 to support the research activities of one of our directors, an affiliate of Yale, through March 31, 2006. We may continue to support certain research projects at Yale. We generally do not have the right to control the research that Yale is conducting with our funding, and our funds may not be used to conduct research relating to products that we would like to pursue. Additionally, if the research being conducted by Yale results in technologies that Yale has not already licensed or agreed to license to us, we may need to negotiate additional license agreements or we may be unable to utilize those technologies.

Even if we obtain regulatory approval for our products, we currently lack the ability and resources to commercialize the products.

If our products are approved for sale by regulatory authorities, we will need to develop manufacturing and marketing capability or make arrangements with third parties to manufacture, distribute and sell our products. We do not currently have and are not seeking arrangements for manufacturing or marketing products on a commercial basis.

If environmental laws become stricter in the future, we may face large capital expenditures in order to comply with environmental laws.

We cannot accurately predict the outcome or timing of future expenditures that we may be required to expend to comply with comprehensive federal, state and local environmental laws and regulations. We must comply with environmental laws that govern, among other things, all emissions,

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waste water discharge and solid and hazardous waste disposal, and the remediation of contamination associated with generation, handling and disposal activities. To date, we have not incurred significant costs and are not aware of any significant liabilities associated with our compliance with federal, state and local laws and regulations. However, environmental laws have changed in recent years and we may become subject to stricter environmental standards in the future and may face large capital expenditures to comply with environmental laws. We have limited capital and are uncertain whether we will be able to pay for significantly large capital expenditures. Also, future developments, administrative actions or liabilities relating to environmental matters may have a material adverse effect on our financial condition or results of operations.

All of our operations are performed under strict environmental and health safety controls consistent with the Occupational Safety and Health Administration, the Environmental Protection Agency and the Nuclear Regulatory Commission regulations. We cannot be certain that we will be able to control all health and safety problems. If we cannot control those problems, we may be held liable and may be required to pay the costs of remediation. These liabilities and costs could be material.

We may expand our business through new acquisitions that could disrupt our business, harm our financial condition and may also dilute current stockholders' ownership interests in our company.

Our business strategy includes expanding our products and capabilities, and we may seek acquisitions to do so. Acquisitions involve numerous risks, including:

•	substantial cash expenditures;

•	potentially dilutive issuance of equity securities;

•	incurrence of debt and contingent liabilities, some of which may be difficult or impossible to identify at the time of acquisition;

•	difficulties in assimilating the operations of the acquired companies;

•	diverting our management's attention away from other business concerns;

•	risks of entering markets in which we have limited or no direct experience; and

•	the potential loss of our key employees or key employees of the acquired companies.

We cannot assure you that any acquisition will result in short-term or long-term benefits to us. We may incorrectly judge the value or worth of an acquired company or business. In addition, our future success would depend in part on our ability to manage the rapid growth associated with some of these acquisitions. We cannot assure you that we will be able to make the combination of our business with that of acquired businesses or companies work or be successful. Furthermore, the development or expansion of our business or any acquired business or companies may require a substantial capital investment by us. We may not have these necessary funds or they might not be available to us on acceptable terms or at all. We may also seek to raise funds by selling shares of our stock, which could dilute current stockholder's ownership interest in our company.

Our common stock could be delisted from the Nasdaq SmallCap Market^SM.

If the price of our common stock declines below $1.00 per share, we may fail to meet Nasdaq's maintenance criteria, which may result in the delisting of our common stock from the Nasdaq SmallCap Market^SM.

In January 2005, we notified The NASDAQ Stock Market that, due to one vacancy on the audit committee that resulted from the recent death of a committee member, we failed to comply with the audit committee composition requirements under Marketplace Rule 4350(d)(2)(A). We have begun our search for a qualified director to fill the vacancy on the audit committee. In January 2005, we received notice from The NASDAQ Stock Market that we will be provided a cure period, consistent with Marketplace Rule 4350(d)(4), until the earlier of our annual shareholders' meeting or January 19, 2006 in order to regain compliance with the audit committee requirements. The letter states that if we do not regain compliance within this period, Nasdaq will provide written notification that our common stock will be delisted from the Nasdaq SmallCap Market^SM.

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In such the event of delisting, trading, if any, in our common stock may then continue to be conducted in the non-Nasdaq over-the-counter market in what are commonly referred to as the electronic bulletin board and the "pink sheets". As a result, an investor may find it more difficult to dispose of or obtain accurate quotations as to the market value of our common stock. In addition, we would be subject to a Rule promulgated by the Securities and Exchange Commission that, if we fail to meet criteria set forth in such Rule, imposes various practice requirements on broker-dealers who sell securities governed by the Rule to persons other than established customers and accredited investors. For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transactions prior to the sale. Consequently, the Rule may have a materially adverse effect on the ability of broker-dealers to sell our securities, which may materially affect the ability of stockholders to sell our securities in the secondary market.

A delisting from the Nasdaq SmallCap Market^SM will also make us ineligible to use Form S-3 to register shares of our common stock with the Securities and Exchange Commission, thereby making it more difficult and expensive for us to register our common stock and raise additional capital. We would also incur additional costs under state blue-sky laws to sell equity if we are delisted.

The rights that have been and may in the future be granted to our stockholders may allow our Board and management to deter a potential acquisition in which the Board and management are to be replaced.

We have in place a stockholder rights plan, or "poison pill", which enables our board of directors to issue rights to purchase common stock when someone acquires 20% or more of the outstanding shares of our common stock. As a result of the plan, anyone wishing to take over the company would most likely be forced to negotiate a transaction with our Board and management in order not to trigger the pill. The need to negotiate with the Board or management could frustrate a proposed takeover particularly where the Board and management wish to remain entrenched. This would prevent our stockholders from participating in a takeover or tender offer, which might be of substantial value to them.

The large number of our shares that may be held in the market may depress the market price of our stock and could result in substantial dilution to the holders of our shares of common stock.

Sale or issuance of a substantial number of shares of our common stock in the future could cause the market price of our common stock to decline. It may also impair our ability to obtain additional financing. As of March 1, 2005, we had outstanding warrants to purchase 9,198,971 shares of our common stock at exercise prices ranging from $2.20 to $3.25 per share. All such shares have been registered for resale on registration statements filed with the Securities and Exchange Commission and will be freely tradable when issued upon exercise of the warrants. In addition, as of March 1, 2005, there were 5,131,449 shares of common stock issuable upon exercise of options granted by us. We may also issue options under our existing stock option plan to purchase up to an additional 781,907 shares of common stock.

ITEM 7A.    Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk, including changes to interest rates associated with our cash equivalents and investments, and foreign currency exchange rates. The following describes the nature of these risks which we do not believe to be material to us.

Our cash equivalents are generally highly liquid investments in money market funds and U.S. government securities. These investments are subject to interest rate risk and, as such, our future investment income may fall short of expectations due to changes in interest rates. However, the conservative nature of our investments mitigates our interest rate exposure. Our investments are held for purposes other than trading and we believe that we currently have no material adverse market risk exposure.

We have a contract with a vendor outside the U.S. that is denominated in a foreign currency. To date, fluctuations in this currency have not materially impacted our results of operations. We have no derivative financial instruments. We do not believe we have material exposures to changes in foreign currency exchange rates.

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ITEM 8.    Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of
Vion Pharmaceuticals, Inc.

We have audited the accompanying consolidated balance sheets of Vion Pharmaceuticals, Inc. and subsidiary as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2004 and for the period from May 1, 1994 (inception) to December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits 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 audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vion Pharmaceuticals, Inc. and subsidiary at December 31, 2004 and 2003, and the consolidated results of their operations and its their cash flows for each of the three years in the period ended December 31, 2004 and the period from May 1, 1994 (inception) to December 31, 2004, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Vion Pharmaceutical, Inc.'s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 21, 2005 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Boston, Massachusetts
February 21, 2005

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of
Vion Pharmaceuticals, Inc.

We have audited management's assessment, included in the accompanying Form 10-K, that Vion Pharmaceuticals, Inc. maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Vion Pharmaceuticals, Inc.'s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the company's internal control over financial reporting 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management's assessment that Vion Pharmaceuticals, Inc. maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Vion Pharmaceuticals, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Vion Pharmaceuticals, Inc. as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2004 and the period from May 1, 1994 (inception) to December 31, 2004 and our report dated February 21, 2005 expressed an unqualified option thereon.

/s/ Ernst & Young LLP

Boston, Massachusetts
February 21, 2005

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Vion Pharmaceuticals, Inc.
(A Development Stage Company)

Consolidated Balance Sheets

				December 31,
(In thousands, except share and per share data)				2004				2003
ASSETS
Current assets:
Cash and cash equivalents				$	41,729			$	1,219
Short-term investments					—				14,500
Total cash, cash equivalents and short-term investments					41,729				15,719
Accounts receivable					13				27
Interest receivable					—				11
Prepaid expenses					362				224
Total current assets					42,104				15,981
Property and equipment, net					515				370
Security deposits					25				25
Total assets				$	42,644			$	16,376
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accrued payroll and payroll-related expenses				$	354			$	464
Accounts payable					567				972
Accrued expenses					5,130				2,623
Deferred revenue					18				18
Total current liabilities					6,069				4,077
Deferred revenue					360				377
Total liabilities					6,429				4,454
Shareholders' equity:
Preferred stock, $0.01 par value, authorized: 5,000,000 shares; issued and outstanding: none					—				—
Common stock, $0.01 par value, authorized: 150,000,000 shares; issued and outstanding: 55,860,313 and 39,276,755 shares at December 31, 2004 and 2003, respectively					559				393
Additional paid-in capital					167,421				127,239
Deficit accumulated during the development stage					(131,765	)			(115,710	)
					36,215				11,922
Total liabilities and shareholders' equity				$	42,644			$	16,376

See Notes to Consolidated Financial Statements

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Vion Pharmaceuticals, Inc.
(A Development Stage Company)

Consolidated Statements of Operations

(In thousands, except share and per share data)				2004				For the Year Ended December 31, 2003				2002				For the Period from May 1, 1994 (Inception) through December 31, 2004
Revenues:
Research and laboratory support fees				$	149			$	136			$	31			$	5,931
Contract research grants					100				209				179				2,501
Technology license fees					26				30				28				4,487
Total revenues					275				375				238				12,919
Operating expenses:
Clinical trials					9,373				5,772				4,897				36,512
Other research and development					4,434				3,963				5,650				67,006
Total research and development					13,807				9,735				10,547				103,518
General and administrative					2,969				2,563				2,712				27,709
Total operating expenses					16,776				12,298				13,259				131,227
Loss from operations					(16,501	)			(11,923	)			(13,021	)			(118,308	)
Interest income					547				136				484				5,420
Interest expense					—				(2	)			—				(210	)
Other expense					(73	)			(45	)			—				(118	)
Loss before income taxes					(16,027	)			(11,834	)			(12,537	)			(113,216	)
Income tax provision (benefit)					28				4				(227	)			(195	)
Net loss					(16,055	)			(11,838	)			(12,310	)			(113,021	)
Preferred stock dividends and accretion					—				—				—				(18,489	)
Loss applicable to common shareholders				$	(16,055	)		$	(11,838	)		$	(12,310	)		$	(131,510	)
Basic and diluted loss applicable to common shareholders per share				$	(0.30	)		$	(0.36	)		$	(0.43	)
Weighted-average number of shares of common stock outstanding					53,464,140				32,808,228				28,888,180

See Notes to Consolidated Financial Statements

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Vion Pharmaceuticals, Inc.
(A Development Stage Company)

Consolidated Statement of Changes in Shareholders' Equity

				Class A Convertible Preferred Stock								Class B Convertible Preferred Stock								Common Stock								Treasury Stock				Additional Paid-in Capital				Deferred Compensation				Accumulated Other Comprehensive Income (Loss)				Accumulated Deficit				Total Shareholders' Equity
(In thousands, except share data)				Shares				Amount				Shares				Amount				Shares				Amount
Issuance of common stock — July and August 1994																					2,852,548			$	29																			$	(21	)		$	8
Net loss																																													(476	)			(476	)
Balance at December 31, 1994					—			$	—				—			$	—				2,852,548			$	29			$	—			$	—			$	—			$	—			$	(497	)		$	(468	)
Stock options issued for compensation – February 1995																																	540																540
Reverse acquisition of MelaRx Pharmaceuticals, Inc. — April 1995																					2,000,000				20								4,300																4,320
Shares repurchased pursuant to employment agreements — April 1995																					(274,859	)			(3	)																			2				(1	)
Private placement of common stock — April 1995																					76,349				—								205																205
Warrants issued with bridge notes — April 1995																																	200																200
Initial public offering of Unit Purchase Options — August 1995 and September 1995																					2,875,000				29								9,667																9,696
Issuance of common stock																					1,250				—								1																1
Net loss																																													(9,531	)			(9,531	)
BALANCE AT DECEMBER 31, 1995					—			$	—				—			$	—				7,530,288			$	75			$	—			$	14,913			$	—			$	—			$	(10,026	)		$	4,962
Issuance of Class A convertible preferred stock					1,250,000				13																								22,890												(11,371	)			11,532
Conversion of Class A convertible preferred stock					(164,970	)			(1	)											458,255				5								(4	)															—
Class A convertible preferred stock dividend					21,998				—																								256												(256	)			—
Issuance of common stock																					29,418				—								104																104
Compensation associated with stock option grants																																	190				(190	)											—
Amortization of deferred compensation																																					83												83
Net loss																																													(7,609	)			(7,609	)
BALANCE AT DECEMBER 31, 1996					1,107,028			$	12				—			$	—				8,017,961			$	80			$	—			$	38,349			$	(107	)		$	—			$	(29,262	)		$	9,072
Conversion of Class A convertible preferred stock					(396,988	)			(4	)											1,102,757				11								(7	)															—
Class A convertible preferred stock dividend					47,592				—																								623												(623	)			—
Issuance of Class B convertible preferred stock													4,850				—																4,852												(370	)			4,482
Conversion of Class B convertible preferred stock													(258	)			—				64,642				1								(1	)															—
Accretion of dividend payable on Class B convertible preferred stock																																	138												(138	)			—
Extension/reissuance of underwriter warrants																																	168																168
Exercise of warrants																					238				—								—																—
Issuance of common stock																					598,336				6								3,464																3,470
Exercise of stock options																					50,000				—								20																20
Compensation associated with stock option grants																																	56																56
Amortization of deferred compensation																																					35												35
Net loss																																													(5,344	)			(5,344	)
BALANCE AT DECEMBER 31, 1997					757,632			$	8				4,592			$	—				9,833,934			$	98			$	—			$	47,662			$	(72	)		$	—			$	(35,737	)		$	11,959

36

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Vion Pharmaceuticals, Inc.
(A Development Stage Company)

Consolidated Statement of Changes in Shareholders' Equity (continued)

				Class A Convertible Preferred Stock								Class B Convertible Preferred Stock								Common Stock								Treasury Stock				Additional Paid-in Capital				Deferred Compensation				Accumulated Other Comprehensive Income (Loss)				Accumulated Deficit				Total Shareholders' Equity
(In thousands, except share data)				Shares				Amount				Shares				Amount				Shares				Amount
Accretion of dividend payable on Class B convertible preferred stock																																$	287											$	(287	)		$	—
Conversion of Class B convertible preferred stock													(4,592	)		$	—				1,205,178			$	12								(12	)															—
Premium on conversion dividend on Class B convertible preferred stock																					585,898				6								2,044												(2,049	)			1
Conversion of Class A convertible preferred stock					(174,981	)		$	(2	)											486,062				5								(3	)															—
Class A convertible preferred stock dividend					34,005				—																								329												(329	)			—
Discount on Series 1998 convertible preferred stock																																	1,597												(1,597	)			—
Series 1998 convertible preferred stock accretion																																													(151	)			(151	)
Common stock issued in exchange for cancellation of outstanding warrants																					1,792,952				18								(61	)															(43	)
Exercise of stock options																					32,750				—								120																120
Exercise of warrants																					16,272				—								11																11
Compensation associated with stock option grants																																	51																51
Amortization of deferred compensation																																				$	35												35
Net loss																																													(10,478	)			(10,478	)
BALANCE AT DECEMBER 31, 1998					616,656			$	6				—			$	—				13,953,046			$	139			$	—			$	52,025			$	(37	)		$	—			$	(50,628	)		$	1,505
Conversion of Class A convertible preferred stock					(144,612	)			(1	)											401,707				4								(3	)															—
Class A convertible preferred stock dividend					26,150				—																								385												(385	)			—
Series 1998 convertible preferred stock accretion																																													(325	)			(325	)
Common stock issued in exchange for cancellation of outstanding warrants																					102				—																								—
Exercise of stock options																					470,886				5				(196	)			650												(40	)			419
Retirement of treasury stock																					(35,659	)			—				196																(196	)			—
Exercise of warrants																					26,296				—																								—
Issuance of common stock																					3,425,741				34								14,955																14,989
Amortization of deferred compensation																																					34												34
Net loss																																													(10,769	)			(10,769	)
BALANCE AT DECEMBER 31, 1999					498,194			$	5				—			$	—				18,242,119			$	182			$	—			$	68,012			$	(3	)		$	—			$	(62,343	)		$	5,853
Conversion of Class A convertible preferred stock					(502,928	)			(5	)											1,397,035				14								(9	)															—
Redemption of Class A convertible preferred stock					(545	)			—																								(5	)															(5	)
Class A convertible preferred stock dividend					5,279				—																								248												(248	)			—
Series 1998 convertible preferred stock accretion																																													(358	)			(358	)
Conversion of Series 1998 convertible preferred stock																					1,507,024				15								5,523																5,538
Exercise of stock options																					650,409				7								2,868																2,875
Exercise of warrants																					4,371,055				44								23,270																23,314
Compensation associated with stock option grants																																	120																120
Amortization of deferred compensation																																					3												3
Change in net unrealized gains and losses																																									120								120
Net loss																																													(14,803	)			(14,803	)
Comprehensive loss																																																	(14,683	)
BALANCE AT DECEMBER 31, 2000					—			$	—				—			$	—				26,167,642			$	262			$	—			$	100,027			$	—			$	120			$	(77,752	)		$	22,657

37

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Vion Pharmaceuticals, Inc.
(A Development Stage Company)

Consolidated Statement of Changes in Shareholders' Equity (continued)

				Class A Convertible Preferred Stock								Class B Convertible Preferred Stock								Common Stock								Treasury Stock				Additional Paid-in Capital				Deferred Compensation				Accumulated Other Comprehensive Income (Loss)				Accumulated Deficit				Total Shareholders' Equity
(In thousands, except share data)				Shares				Amount				Shares				Amount				Shares				Amount
Public offering of common stock — August 2001																					2,500,000			$	25							$	11,386															$	11,411
Exercise of stock options																					191,527				2								777																779
Exercise of warrants																					4,015				—								14																14
Compensation associated with stock option grants																																	111																111
Issuances under employee benefit plans																					10,189				—								62																62
Change in net unrealized gains and losses																																								$	(126	)							(126	)
Net loss																																												$	(13,810	)			(13,810	)
Comprehensive loss																																																	(13,936	)
BALANCE AT DECEMBER 31, 2001					—			$	—				—			$	—				28,873,373			$	289			$	—			$	112,377			$	—			$	(6	)		$	(91,562	)		$	21,098
Exercise of stock options																					10,395				—								32																32
Issuances under employee benefit plans																					25,104				—								38																38
Change in net unrealized gains and losses																																									6								6
Net loss																																													(12,310	)			(12,310	)
Comprehensive loss																																																	(12,304	)
BALANCE AT DECEMBER 31, 2002					—			$	—				—			$	—				28,908,872			$	289			$	—			$	112,447			$	—			$	—			$	(103,872	)		$	8,864
Private placement — June 2003																					3,846,150				38								4,436																4,474
Private placement — September 2003																					6,475,000				65								10,340																10,405
Exercise of stock options																					5,552				—								3																3
Issuances under employee benefit plans																					41,181				1								13																14
Net loss and comprehensive loss																																													(11,838	)			(11,838	)
BALANCE AT DECEMBER 31, 2003					—			$	—				—			$	—				39,276,755			$	393			$	—			$	127,239			$	—			$	—			$	(115,710	)		$	11,922
Private placement — February 2004																					13,553,845				136								32,791																32,927
Exercise of stock options																					35,454				—								71																71
Exercise of warrants																					2,987,567				30								7,311																7,341
Issuances under employee benefit plans																					6,692				—								9																9
Net loss and comprehensive loss																																													(16,055	)			(16,055	)
BALANCE AT DECEMBER 31, 2004					—			$	—				—			$	—				55,860,313			$	559			$	—			$	167,421			$	—			$	—			$	(131,765	)		$	36,215

See Notes to Consolidated Financial Statements

38

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Vion Pharmaceuticals, Inc.
(A Development Stage Company)

Consolidated Statements of Cash Flows

								For the Year Ended December 31,								For the Period From May 1, 1994 (Inception) through December 31,
(In thousands)				2004				2003				2002				2004
Cash flows from operating activities:
Net loss				$	(16,055	)		$	(11,838	)		$	(12,310	)		$	(113,021	)
Adjustments to reconcile net loss to net cash used in operating activities—
Depreciation and amortization					213				195				239				2,828
Loss on equipment disposals					—				8				—				12
(Decrease) increase in deferred revenue					(17	)			395				—				378
Purchased research and development					—				—				—				4,481
Non-cash compensation					—				—				—				1,068
Stock issued for services					—				—				—				600
Amortization of financing costs					—				—				—				346
Extension/re-issuance of placement agent warrants					—				—				—				168
Changes in operating assets and liabilities—
Receivables and prepaid expenses					(113	)			45				70				(374	)
Other assets					—				4				1				(22	)
Current liabilities					1,992				2,000				(444	)			6,016
Net cash used in operating activities					(13,980	)			(9,191	)			(12,444	)			(97,520	)
Cash flows from investing activities:
Purchases of marketable securities					(61,901	)			(119,100	)			(58,997	)			(321,052	)
Maturities of marketable securities					76,401				113,950				65,652				321,052
Acquisition of equipment					(358	)			(117	)			(145	)			(2,411	)
Net cash provided by (used in) investing activities					14,142				(5,267	)			6,510				(2,411	)
Cash flows from financing activities:
Initial public offering					—				—				—				9,696
Net proceeds from issuance of common stock					33,007				14,896				70				81,792
Net proceeds from issuance of preferred stock					—				—				—				20,716
Net proceeds from exercise of Class A Warrants					—				—				—				5,675
Net proceeds from exercise of Class B Warrants					—				—				—				17,538
Net proceeds from exercise of other warrants					7,341				—				—				7,456
Repayment of equipment capital leases					—				—				—				(927	)
Other financing activities, net					—				—				—				(286	)
Net cash provided by financing activities					40,348				14,896				70				141,660
Change in cash and cash equivalents					40,510				438				(5,864	)			41,729
Cash and cash equivalents, beginning of period					1,219				781				6,645				—
Cash and cash equivalents, end of period				$	41,729			$	1,219			$	781			$	41,729
Supplemental disclosure of cash flow information:
Cash paid for interest				$	—			$	2			$	—			$	210
Cash paid for taxes				$	7			$	17			$	—			$	24

See Notes to Consolidated Financial Statements

39

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Vion Pharmaceuticals, Inc.
(A Development Stage Company)
    
Notes to Consolidated Financial Statements

1.    The Company

Vion Pharmaceuticals, Inc. (the "Company") is a development stage company engaged in the development of novel therapeutics for the treatment of cancer. The Company was incorporated in March 1992 as a Delaware corporation and began operations on May 1, 1994.

In April 1995, the Company merged into OncoRx Research Corp., a wholly-owned subsidiary of MelaRx Pharmaceuticals Inc. ("MelaRx"), and the Company's name was changed to OncoRx, Inc. The stockholders of the Company were issued 2,654,038 common shares and 23,859 preferred shares of MelaRx in exchange for all 2,000,000 outstanding shares of common stock of the Company valued at $2.16 per share (fair value). As the shareholders of the Company obtained a majority interest in the merged company, for accounting purposes the Company is treated as the acquirer. Therefore, the transaction was recorded as a purchase in the Company's financial statements, which include the results of operations of the Company from inception and MelaRx from the date of acquisition. The $4.5 million excess of cost over the fair value of MelaRx's net tangible assets was treated as purchased research and development and expensed immediately.

In August 1995, the Company completed an initial public offering (refer to Note 4) resulting in net proceeds to the Company of $9.7 million.

In April 1996, the Company's name was changed to Vion Pharmaceuticals, Inc.

In November 2004, the Company established a wholly-owned subsidiary in the United Kingdom to act as the Company's legal representative for clinical trials sponsored by the Company in the european economic area.

2.    Summary of Significant Accounting Policies

Principals of Consolidation

The consolidated financial statements of the Company include the accounts of Vion Pharmaceuticals, Inc. and its subsidiary after elimination of intercompany accounts and transactions.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and notes thereto. Actual results may differ materially from those estimates.

Cash Equivalents

Cash equivalents include investments with maturities of three months or less when purchased.

Fair Value of Financial Instruments

The estimated fair value of amounts reported in the financial statements has been determined by using available market information and appropriate valuation methodologies. Carrying values for all financial instruments included in current assets and current liabilities approximate fair value, because of their short-term nature.

Investments

Short-term investments consist primarily of U.S. government and state agency securities. These securities generally are liquidated and repriced every 28 to 45 days, but are classified as short-term

40

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investments as they do not have a stated maturity date. These securities are classified as available-for-sale and are carried at cost, which approximates fair value. There have been no realized investment gains or losses incurred through December 31, 2004.

Property and Equipment

Property and equipment are stated at cost. Depreciation of equipment is computed under the straight-line method over the estimated useful lives of the assets ranging from three to seven years. Leasehold improvements are carried at cost and amortized on a straight-line basis over the shorter of the lease term or the estimated useful lives of the assets.

The following is a summary of property and equipment as of December 31 (in thousands):

				2004				2003
Office and computer equipment				$	412			$	357
Furniture and fixtures					210				210
Laboratory equipment					2,034				1,734
Leasehold improvements					381				378
					3,037				2,679
Accumulated depreciation and amortization					(2,522	)			(2,309	)
Property and equipment, net				$	515			$	370

Depreciation expense was approximately $213,000, $195,000 and $239,000 for the years ended December 31, 2004, 2003 and 2002, respectively, and $2.8 million for the period from May 1, 1994 (inception) through December 31, 2004.

Income Taxes

Deferred income taxes are recognized for the future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities, and for net operating loss and tax credit carryforwards. A valuation allowance is provided to reduce deferred income tax assets to an estimated realizable value.

Revenue Recognition

Research and Laboratory Support Fees.    The Company recognizes revenue from research and laboratory support as the services are performed.

Contract Research Grants.    The Company has received grants from the National Cancer Institute for various research projects. The grants provide for reimbursement of project costs. Revenues from these grants of $100,000, $209,000, $179,000 and $2.5 million have been recognized as the costs were incurred for the years ended December 31, 2004, 2003 and 2002, and for the period from May 1, 1994 (inception) to December 31, 2004, respectively.

Technology License Fees.    The Company has recognized revenue from fees, including non-refundable upfront fees, under license agreements with Beijing Pason Pharmaceuticals, Inc., San-Mar Laboratories and others (refer to Note 3) totaling $26,000, $30,000, $28,000, and $4.5 million for the years ended December 31, 2004, 2003, and 2002, and the period from May 1, 1994 (inception) through December 31, 2004, respectively. Non-refundable upfront fees are recognized as revenue ratably over the performance period.

Research and Development Expenses

The Company records research and development expenses as incurred. The Company discloses clinical trials expenses and other research and development expenses as separate components of research and development expense in its statements of operations to provide more meaningful information to investors. The classification of expenses into these components of research and development expense are based, in part, on estimates of certain costs when incurred. The effect of any change in the clinical trials expenses and other research and development expenses would be reflected in the period such determination was made.

41

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Other Expense

Other expense of $73,000, $45,000 and $118,000 for the years ended December 31, 2004 and 2003, and the period from May 1, 1994 (inception) through December 31, 2004, respectively, represents foreign currency transaction losses related to a contract that is denominated in a foreign currency with a vendor outside the U.S.

Per Share Data

The following table sets forth the computation of basic and diluted loss per share (in thousands, except per share data):

				2004				2003				2002
Net loss				$	(16,055	)		$	(11,838	)		$	(12,310	)
Weighted-average number of shares of common stock outstanding					53,464				32,808				28,888
Basic and diluted loss per share				$	(0.30	)		$	(0.36	)		$	(0.43	)

For additional disclosures regarding warrants and preferred stock, refer to Note 4. For additional disclosures regarding stock options, refer to Note 5. These potentially dilutive securities were not included in the calculation of the diluted loss per share as the effect would be antidilutive.

Stock-Based Compensation

The Company follows Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25") and related interpretations in accounting for stock-based compensation issued to employees rather than the alternative fair value accounting method provided for under Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). Under APB 25, no compensation expense is recognized if the terms of the option are fixed and the exercise price of the option granted equals the market price of the underlying stock on the date of grant. No stock-based compensation cost is reflected in the Company's reported net loss for the years ended December 31, 2004, 2003 and 2002.

The following table illustrates the assumptions used and the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS 123 to employee stock-based compensation. The Company has computed the pro forma disclosures required under SFAS 123, as amended by Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure ("SFAS 148"), for purchases under the employee stock purchase plan and for all employee stock option grants using the Black-Scholes option pricing model prescribed by SFAS 123.

				2004				2003				2002
Risk-free interest rate					3.75	%			3.73	%			4.30	%
Expected volatility					72	%			146	%			217	%
Expected life (in years)					5.95				5.88				5.76
Expected dividend yield					–				–				–
Weighted-average fair value of options granted during the year				$	2.97			$	0.33			$	1.53

The following information regarding net income and earnings per share has been determined as if we had accounted for our employee stock options under the fair value method prescribed by SFAS 123 (in thousands, except per share amounts).

42

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				2004				2003				2002				From Inception (May 1, 1994) to December 31, 2004
Reported net loss				$	(16,055	)		$	(11,838	)		$	(12,310	)		$	(113,021	)
Add: Stock-based employee compensation expense included in reported net loss					–				–				–				768
Deduct: Stock-based employee compensation expense determined under the fair value based method for all awards					(1,888	)			(3,009	)			(4,622	)			(21,002	)
Pro forma net loss					(17,943	)			(14,847	)			(16,932	)			(133,255	)
Pro forma preferred stock dividend and accretion					–				–				–				(18,489	)
Pro forma loss applicable to common shareholders				$	(17,943	)		$	(14,847	)		$	(16,932	)		$	(151,744	)
Pro forma basic and diluted loss applicable to common shareholders per share				$	(0.34	)		$	(0.45	)		$	(0.59	)

Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board issued the revised Statement of Financial Accounting Standards No. 123, Share-Based Payment ("SFAS 123R"). SFAS 123R replaces SFAS 123 and supersedes APB 25. The cumulative effect of adoption, if any, will be measured and recognized on July 1, 2005. As of the required effective date, companies will apply SFAS 123R using a modified version of prospective application. For periods before the required effective date, companies may elect to apply a modified version of retrospective application. We currently measure share-based compensation expense for grants of stock options and purchases under the employee stock purchase plan under APB 25 and provide pro forma disclosures required by SFAS 123, as amended by SFAS 148. We will be required to adopt SFAS 123R and recognize an expense for share-based compensation to employees based on the grant-date fair value of these instruments in our financial statements for the quarter ended September 30, 2005. The pro forma net loss and net loss per share amounts shown in the above table were determined as if we had used a fair-value-based method similar to the methods required under SFAS 123R to measure compensation expense for share-based payments to employees. We are currently evaluating our option valuation methodologies and assumptions, and have not yet determined whether the adoption of SFAS 123R will result in amounts similar to the current pro forma disclosures under SFAS 123. We expect the adoption of SFAS 123R to have a significant adverse impact on our consolidated statements of operations and net loss per share.

3.    Research and License Agreements

Agreements with Yale University

Since 1988, the Company or its predecessor companies have entered into a series of agreements under which the Company has funded research at Yale University ("Yale") and licensed inventions from Yale. The license agreements with Yale grant the Company exclusive licenses to make, use, sell and practice the inventions covered by various patents and patent applications. Each license agreement requires the Company to pay royalties, and in some cases milestone payments to Yale. Certain licenses are terminable in the event the Company does not exercise due diligence in commercializing the licensed technology.

License Agreement with Yale University – September 1990.    Pursuant to a license agreement entered into in September 1990 between the Company and Yale, the Company has a license to a synthetic form of melanin, which the Company has named MELASYN^®. Under the terms of the license agreement, the Company pays a license fee to Yale based on a percentage of net sales and

43

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sublicensing revenues. Through December 31, 2004, the Company has paid royalties on sublicensing revenues of $80,000 to Yale under this agreement.

In 1998, the Company agreed to be the exclusive selling agent for MELASYN and entered into a non-exclusive sublicense for the MELASYN technology with San-Mar Laboratories ("San-Mar"). Under the terms of the amended sublicense agreement, the Company received a sublicense fee for products sold by San-Mar with guaranteed minimum annual royalties of $50,000 per year. This amended sublicense agreement expired on February 28, 2003. In March 2004, the Company entered into a non-exclusive sublicense agreement for MELASYN with Johnson and Johnson Consumer Companies, Inc. The terms of the agreement do not include any upfront or milestone payments. If products including the Company's technology are developed, the Company will receive a royalty based on sales in countries where it has issued patents.

Research Agreement with Yale University – July 1992.    In July 1992, the Company entered into a research agreement with Yale, subsequently renewed in 1998, to provide funding through September 30, 2002 for certain research projects. Technology licensed by the Company from research conducted under this agreement includes the inventions collectively known as TAPET^®. In October 2000, the Company restructured the agreement to provide gifts to Yale to support the research projects through September 30, 2002.

License Agreement with Yale University – August 1994.    The Company is a party to a license agreement with Yale entered into in August 1994 and subsequently amended in five amendments, most recently in March 2003. Under this amended license, Yale granted to the Company a non-transferable worldwide exclusive license to make, have made, use, sell and practice inventions under certain patents and patent applications for therapeutic and diagnostic purposes. We also have a non-exclusive license to two patents under this amended license. The patents and patent applications under this license and its amendments cover Triapine^®, CLORETAZINE^™ (VNP40101M), KS119, and β-L-Fd4C. The term of the license is the expiration of any patents relating to any inventions or, with respect to non-patented inventions or research, 17 years. Yale is entitled to royalties on sales, if any, of resulting products and sublicensing revenues and, with regard to several patents related to Triapine and Sulfonyl Hydrazine Prodrugs (including CLORETAZINE^™ (VNP40101M) and KS119), potential milestone payments totaling $850,000 based on the completion of Phase II clinical trials, regulatory filings and regulatory approvals. No milestone payments have been paid or are due under the license agreement, as amended, through December 31, 2004.

Pursuant to the original agreement, the Company issued to Yale 159,304 shares of the Company's common stock and made a payment of $50,000. In June 1997, this license agreement and another license agreement dated December 1995 were amended pursuant to which the Company issued 150,000 shares of its common stock to Yale valued at $600,000. Through December 31, 2004, the Company has paid royalties on sublicensing revenues of approximately $107,000 to Yale under this agreement.

License Agreements with Yale University – December 1995.    In December 1995, the Company and Yale entered into a license agreement pursuant to which the Company received a non-transferable worldwide exclusive license, expiring over the lives of the patents, to three inventions relating to gene therapy for melanoma. Technology licensed under this agreement relates to TAPET^®. In June 1997, pursuant to the license agreement, the Company paid Yale a $100,000 initial fixed royalty fee.

In December 1995, the Company and Yale entered into another license agreement pursuant to which the Company received a non-transferable worldwide exclusive license, expiring over the lives of the patents, to an invention relating to whitening skin.

Under the licensing agreements, Yale is entitled to potential milestone payments totaling $1 million based on the completion of Phase II clinical trials, regulatory filings and regulatory approvals. In addition, Yale is entitled to royalties on sales, if any, of resulting products and sublicense revenues. There are no amounts due under these agreements as of December 31, 2004.

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Other Agreements

Cooperative Research and Development Agreement – April 2000.    In April 2000, the Company entered into a Cooperative Research and Development Agreement ("CRADA") with the National Institutes of Health, National Cancer Institute, Division of Clinical Sciences, Surgery Branch for "Development of TAPET-Based Immunotherapies Targeted Against Cancer." Under the terms of the CRADA, the Company provided funding for research and development projects performed by the Surgery Branch through May 2002. In June 2002, payments to the NCI were suspended by mutual agreement as initial work under the CRADA had been completed. For the year ended December 31, 2002, the Company recorded approximately $217,000 as research and development expense under the CRADA.

Research Services Agreement with Eli Lilly and Company – September 2003.    In September 2003, the Company entered into a research services agreement with Eli Lilly and Company ("Lilly") related to the Phase II trials of Triapine in combination with Lilly's anticancer agent, Gemzar^®. Under this agreement, Lilly will supply a certain amount of Gemzar^® without cost to the Company for the trials sponsored by the Company.

License Agreement with Beijing Pason Pharmaceuticals, Inc. – September 2003.    In September 2003, the Company entered into a license agreement with Beijing Pason Pharmaceuticals, Inc. ("Pason") whereby Pason obtained the exclusive rights to develop, manufacture and market Triapine^® in the People's Republic of China, Taiwan, Hong Kong and Macao (the "Territory"). Under the terms of the agreement, the Company received an initial payment in November 2003 of $500,000 and may receive $4.75 million in potential additional milestone payments and potential royalty payments of 11% of any Triapine revenues in the Pason Territory. In accordance with the Securities and Exchange Commission's Staff Accounting Bulletin No. 104, Revenue Recognition, the Company will recognize approximately $400,000, which represents the initial payment received from Pason net of royalties paid to Yale, over the life of the agreement. For the years ended December 31, 2004 and 2003, the Company recognized revenue related to this agreement of approximately $18,000 and $4,000, respectively.

Research Collaboration and Option Agreement with Austrian Inventors and Austria Wirtschaftsservice Gesellschaft m.b.H. – November 2003.    In November 2003, the Company entered into a research collaboration and option agreement for certain novel anticancer compounds, heterocyclic compounds, with a group of inventors from the Institute of Pharmacy and the Institute of Medical Chemistry and Biochemistry at the University of Innsbruck, and Austria Wirtschaftsservice Gesellschaft m.b.H. During the 17-month agreement term, the Company will investigate several heterocyclic hydrazones in preclinical research studies in order to identify a lead product candidate. During this period, the Company will also have the right to enter into an exclusive worldwide license agreement for the compounds. In December 2003, the Company recorded as research and development expense an initial payment of $25,000 to enter into the option agreement, and an additional payment of $75,000 will be required by March 2005 if the Company exercises the option to enter into the exclusive worldwide license. The form of license agreement calls for potential milestone payments totaling $775,000 based on regulatory filings, commencement of a Phase III clinical trial or pivotal registration study, and regulatory approvals, as well as royalties based on product revenues.

4.    Shareholders' Equity

In April 1995, 2,000,000 shares of common stock valued at $2.16 per share were issued in conjunction with the merger with MelaRx resulting in net proceeds to the Company of $4.3 million (refer to Note 1). Shortly prior to the consummation of the merger, the Company issued 76,349 shares of common stock for net proceeds of $0.2 million.

In August 1995, the Company completed an initial public offering ("IPO") of 2,875,000 Unit Purchase Options ("UPOs"), consisting of an aggregate of 2,875,000 shares of common stock, 2,875,000 redeemable Class A Warrants and 2,875,000 redeemable Class B Warrants at $4.00 per UPO. The net proceeds to the Company from the IPO were $9.7 million before repayment of certain bridge financing. In addition, the Company granted to the underwriter an option to purchase up to 250,000 UPOs at $5.20 per UPO, subsequently adjusted due to antidilution provisions. Each Class A Warrant

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entitled the holder to purchase one share of common stock and one Class B Warrant. Each Class B Warrant entitled the holder to purchase one share of common stock. The Class A and Class B Warrants were exercisable through August 14, 2000, and were exchanged, exercised or redeemed prior to that date, resulting in aggregate net proceeds to the Company of $23.2 million.

Commencing with its IPO through December 31, 2004, the Company has raised gross proceeds of $138.7 million through the issuance of common stock, preferred stock and warrants.

Issuance and Extension of Placement Agent Warrants

In connection with two private financings of the Company's predecessor, MelaRx, Inc., the placement agent was issued warrants to purchase 202,486 shares of common stock at prices ranging from $3.56 to $4.44 per share, expiring on July 5, 1998 (the "Expiration Date"). Through the Expiration Date, holders of warrants to purchase 94,336 shares elected a cashless exercise into 13,949 shares of common stock and the remaining warrants to purchase 108,150 shares of common stock expired.

Class A Convertible Preferred Stock

In May 1996, the Company completed a private placement of 1,250,000 shares of Class A Convertible Preferred Stock ("Class A Stock"), at $10.00 per share, resulting in net proceeds to the Company of $11.5 million. Each share of Class A Stock was convertible at the option of the holder into 2.777777 shares of the Company's common stock. The Company recorded an imputed one-time non-cash dividend of approximately $11.4 million as a result of the difference between the conversion price and the quoted market price of the Company's common stock as of the date of issuance as required by the Financial Accounting Standards Board Emerging Issues Task Force D-60, Accounting for the Issuance of Convertible Preferred Stock and Debt Securities with a Nondetachable Conversion Feature (EITF D-60). The shares of Class A Stock paid semi-annual dividends of 5% per annum, payable in additional shares of Class A Stock. The Company recorded non-cash dividends from 1996 through 2000 totaling $1.8 million based on the quoted market price of the common stock as of the dividend date. All non-cash dividends have been recognized as a charge against the accumulated deficit with a corresponding increase in additional paid-in capital. The non-cash dividends have been included in the loss applicable to common shareholders.

In connection with the foregoing transaction, the Company issued warrants to the placement agent, expiring May 22, 2001 (the "Expiration Date"), to purchase an aggregate of 546,875 shares of the Company's common stock at prices ranging from $3.96 to $12.00. As of the Expiration Date, holders of warrants to purchase 257,321 shares elected cash or cashless exercises into 174,572 shares of common stock and the remaining warrants to purchase 289,554 shares expired. The issuance of the Class A Stock at closing also triggered certain antidilution adjustment provisions of the Company's other outstanding warrants, resulting in the issuance of additional warrants.

In accordance with the terms of the Class A Stock, the Company notified the holders of outstanding shares of its intention to redeem their Class A stock on December 26, 2000 (the "Redemption Date") at a redemption price of $10.00 per share. All outstanding shares of Class A Stock were converted by the holders into shares of common stock with the exception of 545 shares of Class A Stock that were redeemed for an aggregate of $5,450 and cancelled as of the Redemption Date.

Class B Convertible Preferred Stock

In August 1997, the Company completed a private placement of 4,850 shares of non-voting Class B Convertible Preferred Stock ("Class B Stock") at $1,000 per share, resulting in net proceeds to the Company of $4.5 million. Shares of Class B Stock were immediately convertible into shares of common stock including an accretion of 8% per annum. The Company recorded an imputed one-time charge of $0.4 million as a result of the difference between the conversion price and the quoted market price of the Company's common stock at the date of issuance. Shares of the Class B Stock were eligible to receive dividends paid in Class C Convertible Preferred Stock ("Class C Stock") which were immediately convertible into shares of the Company's common stock. Conversions of

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Class B Stock in 1998 resulted in the issuance of 180,141 shares of common stock valued at $0.6 million. In addition, the Company recorded accretion of 37,168 shares of common stock valued at $0.1 million in 1997 and 61,078 shares of common stock valued at $0.3 million in 1998. All non-cash dividends were recorded as a charge against the accumulated deficit with a corresponding increase in additional paid-in capital. The non-cash dividends have been included in the loss applicable to common shareholders.

In August 1998, the Company reached agreement with the holders of its Class B Stock to convert an aggregate of 2,892 shares of Class B Stock, constituting all of the outstanding Class B Stock, into an aggregate of 1,070,423 shares of common stock. The conversions of Class B Stock resulted in the issuance of 304,188 shares of common stock valued at $1.1 million, and accretion of 6,553 shares of common stock valued at $23,000. As part of this agreement, an additional 101,569 common shares were issued to holders of the Class B Stock. In accordance with Financial Accounting Standards Board Emerging Issues Task Force D-42, The Effect on the Calculation of Earnings Per Share for the Redemption or Induced Conversion of Preferred Stock, the excess of $0.4 million of the fair value of the common stock issued upon conversion over the fair value of the common stock issuable pursuant to the original conversion terms was included in the loss applicable to common shareholders. Holders of the Class B Stock waived their antidilution rights arising from the issuance of the 5% Redeemable Convertible Preferred Stock Series 1998.

5% Redeemable Convertible Preferred Stock Series 1998

In June 1998, the Company completed a private placement of 5,000 shares of non-voting 5% Redeemable Convertible Preferred Stock Series 1998 ("Series 1998 Preferred Stock"). The Series 1998 Preferred Stock was issued at $1,000 per share, resulting in net proceeds to the Company of $4.7 million. The shares of Series 1998 Preferred Stock accrued dividends of 5% per annum payable in-kind. Each share of Series 1998 Preferred Stock was convertible into common stock based on the formula of issued price plus accrued dividends divided by $3.60. In connection with the sale of the Series 1998 Preferred Stock, the Company imputed a one-time non-cash dividend of approximately $1.6 million as a result of the difference between the conversion price and the quoted market price of the Company's common stock at the date of issuance as required by EITF D-60. Such amount was recognized upon issuance of the Series 1998 Preferred Stock as a charge against the accumulated deficit with a corresponding increase to additional paid-in capital. The imputed non-cash dividend was included in the loss applicable to common shareholders. The dividend requirement on Preferred Stock also reflects the amortization of the costs of completing the offering and the accretion of the 5% per annum dividend. The 5% accretion resulted in a charge against the accumulated deficit with a corresponding increase to additional paid-in-capital from 1998 through 2000 of $0.8 million. The issuance of the Series 1998 Preferred Stock at closing also triggered certain antidilution adjustment provisions of the Company's outstanding warrants, resulting in the issuance of additional warrants.

In accordance with the terms of the Series 1998 Preferred Stock, all of the outstanding preferred shares having a redemption value of $5.4 million were automatically converted into 1,507,024 common shares at the $3.60 conversion price, effective February 22, 2000.

Antidilution Adjustment to Class A and Class B Warrants

As a result of the sale in May 1996 of Class A Stock, an antidilution adjustment was made to the exercise price of the Class A Warrants and the Class B Warrants and there was a corresponding distribution of additional Class A Warrants and Class B Warrants. Each holder of a Class A Warrant was issued an additional 0.1 Class A Warrant and the exercise price of the Class A Warrants was reduced from $5.20 to $4.73. Each holder of a Class B Warrant was issued an additional 0.1 Class B Warrant and the exercise price of the Class B Warrants was reduced from $7.00 to $6.37.

Subsequently, as a result of the sale in June 1998 of Series 1998 Preferred Stock, an additional antidilution adjustment was made to the exercise price of the Class A Warrants and the Class B Warrants with a corresponding distribution of additional Class A Warrants and Class B Warrants. Each holder of a Class A Warrant was issued an additional 0.02 Class A Warrant and the exercise

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price of the Class A Warrants was reduced from $4.73 to $4.63. Each holder of a Class B Warrant was issued an additional 0.02 Class B Warrant and the exercise price of the Class B Warrant was reduced from $6.37 to $6.23.

Class A and Class B Warrant Exchange Offers

In 1998, the Company offered to exchange each outstanding Class A Warrant, at the holder's option, for either 0.438 shares of common stock or 0.254 shares of common stock and $0.66 in cash. The Company simultaneously offered to exchange each outstanding Class B Warrant, at the holder's option, for either 0.212 shares of common stock or 0.123 shares of common stock and $0.32 in cash. As a result of the exchange offers, 3,209,806 Class A Warrants and 1,881,835 Class B Warrants were exchanged for 1,395,027 and 397,925 shares of the Company's common stock, and $39,000 and $3,700 in cash, respectively.

Redemption of Class A Warrants

The Class A Warrants entitled the holder to purchase one share of common stock and one Class B Warrant for an exercise price of $4.63. In February 2000, the Company notified holders of its outstanding Class A Warrants of its intention to redeem the warrants on March 13, 2000 (the "Redemption Date"). The Company received net proceeds of $5.7 million from the exercise of 1.3 million Class A Warrants.

Redemption of Class B Warrants

The Class B Warrants entitled the holder to purchase one share of common stock at an exercise price of $6.23. In March 2000, the Company notified holders of its outstanding Class B Warrants of its intention to redeem the warrants on April 27, 2000 (the "Redemption Date"). The Company received net proceeds of $17.5 million from the exercise of 2.9 million Class B Warrants.

Private Placement of Common Stock – April 1999

In April 1999, the Company completed a private placement of 893,915 shares of its common stock at $4.47 per share resulting in net proceeds of approximately $4 million.

Public Offering of Common Stock – October 1999

In October and November 1999, the Company completed the sale of 2,530,000 shares of common stock at $5.00 per share, in an underwritten public offering. The net proceeds from this offering were approximately $11.1 million. In conjunction with the offering, the underwriter was granted warrants to purchase 220,000 shares of common stock at $6.00 per share, expiring October 25, 2004. Through the expiration date, holders of warrants to purchase 12,000 shares elected cashless exercises into 6,786 shares of common stock and the remaining warrants to purchase 208,000 shares of common stock expired.

Public Offering of Common Stock – August 2001

In August 2001, the Company completed the sale of 2,500,000 shares of common stock at $5.00 per share, in an underwritten public offering. The net proceeds from this offering were approximately $11.4 million.

Private Placement of Common Stock – June 2003

In June 2003, the Company completed a private placement of 3,846,150 shares of its common stock at $1.30 per share and warrants to purchase 1,923,075 shares of common stock at $2.20 per share. The warrants expire on June 23, 2008. The net proceeds from this offering were approximately $4.5 million.

Private Placement of Common Stock – September 2003

In September 2003, the Company completed a private placement of 6,475,000 shares of its common stock at $1.75 per share and warrants to purchase 6,475,000 shares of common stock at $2.50 per

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share. A warrant to purchase an additional 100,000 shares of common stock at $2.50 per share was issued to the placement agent and valued at approximately $172,000. All of these warrants expire on September 19, 2008. Beginning April 9, 2005, if the volume weighted average price of the common stock is at or above $3.50 per share for a period of 20 consecutive trading days, then the warrants shall become callable by the Company upon written notice within 3 trading days of such period. The net proceeds, after consideration of cash offering costs, were approximately $10.4 million.

Private Placement of Common Stock – February 2004

In February 2004, the Company completed a private placement of 13,553,845 shares of its common stock at $2.60 per share and warrants to purchase 3,388,463 shares of common stock at $3.25 per share. A warrant to purchase an additional 300,000 shares of common stock at $3.25 per share was issued to the placement agent and valued at approximately $667,000. All of these warrants expire on February 11, 2009. Beginning May 27, 2005, if the volume weighted average price of the common stock is at or above $4.875 per share for a period of 20 consecutive trading days, then the warrants shall become callable by the Company upon written notice within 10 trading days of such period. The net proceeds, after consideration of cash offering costs, were approximately $33 million.

Reserved Shares

As of December 31, 2004, the Company has reserved 15,553,907 shares of its common stock for issuances related to potential future exercises of warrants outstanding and stock options outstanding and available for grant (see Note 5), as well as potential future purchases of common stock under the employee stock purchase plan (see Note 6). In addition, shares are reserved for the following but the number of reserved shares is not fixed. The Company may from time to time sell up to an aggregate of $75 million of its common stock or warrants under an effective Form S-3 shelf registration statement including 10 million shares of common stock issued in January 2005 (see Note 12). The Company also has a stockholder rights plan whereby each share of its outstanding common stock has the right to purchase one share of common stock as set forth in the rights agreement.

Warrants Outstanding

A summary of the outstanding warrants to purchase shares of the Company's common stock, as described above, as of December 31, 2004 is as follows:

Warrants issued in connection with				Number of Shares of Common Stock to be Issued Upon Exercise of Outstanding Warrants				Exercise Price Per Share of Outstanding Warrants				Expiration Date
Private placement – June 2003					1,192,349			$	2.20				6/23/2008
Private placement – September 2003					4,439,313			$	2.50				9/19/2008
Private placement – February 2004					3,567,309			$	3.25				2/11/2009
Total					9,198,971

5.    Employee Stock Option Plans

The 2003 Stock Option Plan (the "2003 Option Plan") provides for the granting of both incentive stock options and non-qualified stock options to employees, officers, directors and consultants of the Company to purchase up to an aggregate of 2 million shares of common stock. No option may be granted under the 2003 Option Plan after September 9, 2013. The Company's Amended and Restated 1993 Stock Option Plan (the "1993 Option Plan") expired on April 15, 2003. As such, the Company no longer grants options under the 1993 Option Plan, but stock options granted prior to the Plan's expiration remain outstanding under the plan and will continue to vest according to schedule.

Incentive options granted to employees and officers under the 2003 Option Plan and 1993 Option Plan (the "Option Plans") vest in equal annual installments over periods ranging from one to four years

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commencing no earlier than the first anniversary of the date of grant, or earlier on change of control. Incentive options expire the earlier of: (i) ten years after the date of grant, or (ii) three months after termination of service. Incentive options which are not vested expire immediately upon termination of service. The exercise price for incentive options shall be equal to the fair market value of the common stock on the date of grant, except that the term of an incentive option granted to a stockholder owning more than 10% of the outstanding voting power may not exceed five years and its exercise price may not be less than 110% of the fair market value of the common stock on the date of grant.

The Option Plans provide for the automatic grant of non-qualified stock options to purchase shares of common stock to directors of the Company who are not employees or principal stockholders. Eligible directors are granted an option to purchase 20,000 shares of common stock on the date such person is first elected or appointed a director. Further, on the day immediately following the date of each annual meeting of stockholders, each eligible director, other than directors who received an initial director option within 180 days preceding such annual meeting, is granted an option to purchase 15,000 shares of common stock (20,000 shares in the case of the Chairman of the Board) on the day immediately following the date of each annual meeting of stockholders. The exercise price for each share subject to a director option shall be equal to the fair market value of the common stock on the date of grant. Director options vest after one year under the 2003 Option Plan and two years under the 1993 Option Plan, or earlier on a change of control. Generally, director options will expire the earlier of: (i) 10 years after the date of grant, or (i) one year after termination of service as a director under the 2003 Stock Option Plan or 90 days after termination of service as a director under the 1993 Stock Option Plan. Director options which are not vested expire immediately upon termination of service as a director. Options granted to directors totaled 115,000, 135,694 and 202,271 in 2004, 2003 and 2002, respectively.

Options outstanding outside the Option Plans represent stock options granted in 1999 to purchase 980,000 shares of common stock to the Company's Chief Executive Officer under the Senior Executive Stock Option Plan. There are no additional shares available for issuance under this plan.

A summary of the Company's stock option activity under all option plans and related information is as follows:

				2004								2003								2002
				Options (in 000's)				Weighted- Average Exercise Price				Options (in 000's)				Weighted- Average Exercise Price				Options (in 000's)				Weighted- Average Exercise Price
Outstanding at beginning of year					4,497			$	4.68				4,127			$	5.08				3,712			$	6.85
Granted					746				4.53				518				1.51				1,340				1.54
Exercised					(35	)			2.21				(6	)			0.55				(10	)			3.07
Forfeited					(24	)			2.85				(142	)			4.83				(915	)			7.10
Expired					(10	)			5.98				–				–				–				–
Outstanding at end of year					5,174			$	4.68				4,497			$	4.68				4,127			$	5.08
Exercisable at end of year					3,955			$	4.93				3,390			$	5.00				1,976			$	6.35

A summary of the Company's ranges of exercise prices and weighted-average remaining life and exercise price of options outstanding and of weighted-average exercise price of options currently exercisable under all option plans as of December 31, 2004, is as follows:

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				Options Outstanding																Options Exercisable
Range of Exercise Prices				Number Outstanding (in 000's)				Weighted- Average Remaining Life (Years)				Weighted- Average Exercise Price								Number Exercisable (in 000's)				Weighted- Average Exercise Price
$0.36 - $0.78					873				7.4			$	0.57								872			$	0.57
$1.57 - - $2.56					511				8.6				1.63								280				1.68
$3.03 - - $3.98					483				6.5				3.77								279				3.69
$4.00 - - $6.06					2,560				6.0				5.08								1,779				5.30
$7.00 - - $9.88					387				5.9				7.43								385				7.43
$12.25 - - $17.88					360				5.2				14.48								360				14.48
					5,174				6.5			$	4.68								3,955			$	4.93

6.    Stock Purchase Plan

A total of 450,000 shares of common stock are authorized for issuance under the Company's employee stock purchase plan (the "Stock Purchase Plan"). The Stock Purchase Plan permits eligible employees to purchase up to 2,000 shares of common stock at the lower of 85% of the fair market value of the common stock at the beginning or at the end of each six-month offering period. 6,692 shares, 31,782 shares and 7,918 shares were issued in 2004, 2003 and 2002, respectively, under the Stock Purchase Plan.

7.    401(k) Savings Plan

The Company makes matching contributions under a 401(k) Savings Plan in cash up to an annual maximum match of $1,000 per employee or, prior to January 1, 2004, its common stock at the election of the employee. The expense for the matching contribution was $23,000, $25,000 and $46,000 for the years ended December 31, 2004, 2003 and 2002, respectively, and $197,000 for the period from May 1, 1994 (inception) through December 31, 2004. 9,399 shares and 17,186 shares were issued in 2003 and 2002, respectively, for the stock matching contribution.

8.    Income Taxes

At December 31, 2004, the Company has available for federal income tax purposes net operating loss carryforwards, subject to review by the Internal Revenue Service, totaling $97.4 million and a general business tax credit of $3.1 million expiring in 2010 through 2024. The difference between the deficit accumulated during the development stage for financial reporting purposes and the net operating loss carryforwards for tax purposes is primarily due to certain costs which are not currently deductible for tax purposes and differences in accounting and tax basis resulting from the merger described in Note 1. The ability of the Company to realize a future tax benefit from a portion of its net operating loss carryforwards and general business credits may be limited due to changes in ownership of the Company.

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Significant components of the deferred income taxes are as follows (in thousands):

				December 31,
				2004				2003
Operating loss carryforwards				$	39,129			$	32,557
General business tax credit carryforwards					3,072				2,614
AMT tax credit carryforwards					10				10
Contributions					1,241				1,139
Compensation related					168				218
Other					375				355
Total deferred income tax asset					43,995				36,893
Valuation allowance					(43,995	)			(36,893	)
Deferred income tax asset, net				$	–			$	–

The valuation allowance increased by $7.1 million and $6.5 million during 2004 and 2003, respectively.

For the year ended December 31, 2004, the Company recorded approximately $28,000 related to minimum state capital taxes paid.

9.    Commitments and Contingencies

Leases

The Company has non-cancelable operating leases for its facility and its laboratory and office equipment expiring through 2007. Rental expense under the facility lease is recognized on a straight-line basis. Rental expense under the operating leases was approximately $298,000, $284,000 and $288,000 for the years ended December 31, 2004, 2003 and 2002, respectively, and $2.4 million for the period from May 1, 1994 (inception) through December 31, 2004. As of December 31, 2004, future minimum lease payments due under non-cancelable operating lease agreements with initial terms in excess of one year are $338,000 for 2005, $289,000 for 2006 and $6,000 for 2007.

Agreements

Under the terms of an employment agreement, the Company is obligated to pay its Chief Executive Officer ("CEO") a minimum annual salary of $412,000 through December 31, 2005. The CEO is also eligible for a bonus of up to 50% of his base salary based on the achievement of specified objectives. In the event the CEO's employment is terminated by the Company for any reason other than cause or disability, or if the CEO terminates for good reason as defined in the agreement, the Company is obligated to pay him two times the sum of his base salary plus his average annual bonus for the prior two years and to continue payment of certain insurance costs on his behalf.

The Company has entered into severance agreements with its officers pursuant to which each of these officers would be entitled to certain payments in the event such officer loses his employment during the twelve-month period following a "change of control", as defined in the agreement. Specifically, the officer would be entitled to a lump sum severance payment equal to the sum of twelve months of the officer's monthly base salary plus the average of the last two cash bonus payments made to the officer, and to the continuation of group health insurance benefits for up to eighteen months. The foregoing amounts are not payable if termination of the officer is because of his death, by the Company for cause, or by the officer other than for good reason.

A former director of the Company is a party to a Consulting and Finder's Agreement with the Company dated June 4, 1992, and amended February 17, 1995. This agreement entitles him to receive an annual fee equal to 10% of the net after-tax profits of the Company attributable to the sale or licensing of products or technology related to TAPET^® licensed pursuant to the Company's December 1995 license agreement with Yale (refer to Note 3), until the cumulative total of such fees equals $3 million. Such fee continues to be payable notwithstanding the director's death until the $3 million has been paid. Through December 31, 2004, no amounts are due or have been paid under this agreement.

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The Company has various commitments relating to its research and license agreements (refer to Note 3).

10.    Related Party Transactions

The Company recorded research and development expense of $200,000, $400,000 and $200,000 for the years ended December 31, 2004, 2003 and 2002, respectively, related to gifts to fund research through March 31, 2006 at the laboratory headed by one of its directors, an affiliate of Yale. Included in the Company's current liabilities at December 31, 2004, was $250,000 for the balance of the gifts to be paid in five equal quarterly installments through the first quarter of 2006.

In December 2001, the Company entered into a consulting agreement with PS Capital LLC, an entity of which its CEO is a member. The consulting agreement provided that the Company would pay $100,800 to PS Capital LLC in exchange for consulting services provided in 2002 consisting primarily of financial and investment advice as directed by its CEO. In connection with this agreement, its CEO's base salary for 2002 was reduced by $100,800.

11.    Selected Quarterly Financial Data (Unaudited)

The following is a summary of unaudited selected quarterly financial data for the years ended December 31, 2004 and 2003 (in thousands, except per share amounts):

				Quarter																Year 2004
2004				First				Second				Third				Fourth
Revenues				$	96			$	125			$	50			$	4			$	275
Net loss					(3,258	)			(3,669	)			(3,906	)			(5,222	)			(16,055	)
Basic and diluted loss per share					(0.07	)			(0.07	)			(0.07	)			(0.09	)			(0.30	)

2003				Quarter																Year 2003
				First				Second				Third				Fourth
Revenues				$	69			$	102			$	94			$	110			$	375
Net loss					(2,425	)			(3,136	)			(2,975	)			(3,302	)			(11,838	)
Basic and diluted loss per share					(0.08	)			(0.11	)			(0.09	)			(0.08	)			(0.36	)

12.    Subsequent Event

In January 2005, the Company received net proceeds of $30 million from a registered direct offering of 10 million shares of its common stock at $3.25 per share.

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ITEM 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

ITEM 9A.    Controls and Procedures

Controls and Procedures

Based on their evaluation as of December 31, 2004, our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were sufficiently effective to ensure that the information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms.

Management's Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control-Integrated Framework. Our management has concluded that, as of December 31, 2004, our internal control over financial reporting is effective based on these criteria. Our independent registered public accounting firm, Ernst & Young LLP, have issued an audit report on our assessment of our internal control over financial reporting, which is included herein.

There was no change in our internal control over financial reporting during the quarter ended December 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

ITEM 9B.    Other Information

None.

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PART III

ITEM 10.    Directors and Executive Officers of the Registrant

Executive Officers and Directors

The following table contains the names and positions of our executive officers and directors:

Name				Position
Alan Kessman				Chief Executive Officer and Director
Howard B. Johnson				President and Chief Financial Officer
Ivan King, Ph.D.				Vice President—Research and Development
Ann Cahill				Vice President—Clinical Development
Terrence W. Doyle, Ph.D.				Vice President—Chief Scientific Officer
William R. Miller (1,2,3)				Chairman of the Board
Stephen K. Carter, M.D.				Director
Frank T. Cary (1,2,3)				Director
Charles K. MacDonald (1,3)				Director
Alan C. Sartorelli, Ph.D.				Director
Mario Sznol, M.D.				Director

(1)	Member of the Compensation Committee of the Board of Directors.

(2)	Member of the Audit Committee of the Board of Directors.

(3)	Member of the Nominating and Governance Committee of the Board of Directors.

Alan Kessman, age 58, has been our Chief Executive Officer since January 1999 and has served on our Board of Directors since October 1998. Mr. Kessman also served as our President from April 1999 to January 2004. Mr. Kessman is a partner of PS Capital LLC, an international investment and management advisor, and a director of Comdial Corporation, a developer and marketer of voice communication solutions. From 1983 to 1998, Mr. Kessman was chairman, chief executive officer and president of Executone Information Systems, Inc., a developer and marketer of voice and data communications systems.

Howard B. Johnson, age 45, has been our President since January 2004 and our Chief Financial Officer since March 2002. Mr. Johnson was a vice president and a consultant for Nutrition 21, Inc., a nutri-ceutical company, from November 2001 until March 2002. From May 1999 until February 2001, Mr. Johnson was chief financial officer of IBS Interactive, Inc. (now Digital Fusion, Inc.), an information technology services company. Mr. Johnson founded and from 1996 to 1999 was chairman and chief executive officer of MedWorks Corporation, a privately held medical device company. From 1983 to 1993, Mr. Johnson was an investment banker at PaineWebber Group, Inc.

Ivan King, Ph.D., age 49, has been our Vice President of Research and Development since January 2004. Dr. King was our Vice President of Research from July 1998 to January 2004, Senior Director of Biology from April 1997 to July 1998 and Director of Biology from October 1995 to April 1997. From 1990 to 1995, Dr. King was a section leader in the department of tumor biology at Schering-Plough Research Institute in charge of the cell biology and in vivo biology groups where he was responsible for identifying targets, developing high throughput assays, evaluating in vitro and in vivo activities of drug candidates and recommending candidates for clinical development. Dr. King's first industrial position was as a senior research scientist at Bristol-Myers Squibb Company.

Ann Lee Cahill age 44, has been our Vice President of Clinical Development since October 2004. Ms. Cahill was our Senior Director of Clinical Affairs from October 2003 to October 2004 and Director of Clinical Affairs from January 2002 to October 2003. From 1997 to 2002, Ms. Cahill was a member of the project management group of Schering-Plough Corporation, including leadership roles in clinical affairs for hepatitis and medical oncology. From 1985 to 1997, Ms. Cahill was a physician associate in a medical oncology practice.

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Terrence W. Doyle, Ph.D., age 62, has been our Vice President and Chief Scientific Officer since January 2004. Prior to that, Dr. Doyle was our Vice President of Research and Development since the merger with OncoRx, Inc. and served in the same capacity for OncoRx, Inc. from January 1994 until the merger. From 1967 to 1993, Dr. Doyle was an employee of the Bristol-Myers Squibb Company, including from 1990 to 1993 an executive director with Bristol-Myers Squibb Company. Dr. Doyle is the original holder of 47 U.S. patents for anti-infective, anti-inflammatory and anti-tumor agents and the author of over 170 published research articles and abstracts on cancer chemotherapy.

William R. Miller, age 76, has been Chairman of our Board since April 1995. From February 1995 until April 1995, Mr. Miller was Chairman of the Board of OncoRx, Inc., which merged into the Company (then known as MelaRx, Inc.) in April 1995. Mr. Miller is currently a director of ImClone Systems, Inc., a biotechnology company. From 1964 until his retirement in 1991, Mr. Miller was employed by Bristol-Myers Squibb Company in various positions, including vice chairman of the board commencing in 1985.

Stephen K. Carter, M.D., age 67, has been a director since 2001. Dr. Carter is a director of Cytogen Corp., Alfacell Corp. and Emisphere Technologies Inc. (each a biotechnology company). From 1998 to 2000, Dr. Carter was senior vice president, clinical and regulatory affairs of SUGEN, Inc. (subsequently acquired by Pharmacia & Upjohn, Inc.). From 1995 to 1996, Dr. Carter was senior vice president, research and development with Boehringer Ingelheim Pharmaceuticals, Inc. and from 1982 to 1995 held various positions with Bristol-Myers Squibb Company, including senior vice president, worldwide clinical research and development.

Frank T. Cary, age 84, has been a director since 1995. Mr. Cary is a director of Celgene Corporation (a biopharmaceutical company), Cygnus, Inc. (a developer and marketer of glucose monitoring systems), ICOS Corporation (a biopharmaceutical company), Lincare Holdings Inc. (a provider of respiratory therapy services) and Lexmark International, Inc. (a computer peripherals company). From 1973 to 1981, Mr. Cary was chairman of the board and chief executive officer of IBM.

Charles K. MacDonald, age 46, has been a director since 2000. Mr. MacDonald is the principal and founder of Morgandane Management Corp., an investment advisory firm, since 1997. Mr. MacDonald also serves as a consultant to Elliott Management Corp. From 1987 to 1995, Mr. MacDonald was an analyst and, later, portfolio manager at Stonington Management Corp. (an investment company now known as Elliott Management Corp.).

Alan C. Sartorelli, Ph.D., age 73, has been a director since 1995. Dr. Sartorelli has been an Alfred Gilman Professor of Pharmacology at Yale University School of Medicine since 1967 and Chairman of our Scientific Advisory Board since April 1995. Dr. Sartorelli was Chairman of the OncoRx, Inc. Scientific Advisory Board from May 1993 to April 1995 and director of Yale Comprehensive Cancer Center from 1984 to 1993.

Mario Sznol, M.D., age 47, has been a director since October 2004. Dr. Sznol is a member of the Faculty, Medical Oncology at Yale University School of Medicine. Dr. Sznol was our Vice President of Clinical Affairs from September 1999 to October 2004. From 1994 to 1999, Dr. Sznol served as head of the Biologics Evaluation Section, Investigational Drug Branch, Cancer Therapy Evaluation Program, Division of Cancer Treatment and Diagnosis of the National Cancer Institute, or NCI, an institute of the National Institutes of Health. Prior to joining the NCI, Dr. Sznol conducted his fellowship in Medical Oncology, Department of Neoplastic Diseases of Mt. Sinai School of Medicine in New York City, and his residency in Internal Medicine at Baylor College of Medicine in Houston.

Our directors are elected annually to serve until the next annual meeting of stockholders and until their successors shall have been duly elected and shall qualify. Our executive officers are elected by the board annually and serve for such period or until their earlier resignation or removal by the board.

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Audit Committee Financial Expert

Our board of directors has determined that Mr. Miller who serves on its audit committee qualifies as "audit committee financial expert" (as that term is defined in the rules promulgated by the Securities and Exchange Commission pursuant to the Sarbanes-Oxley Act of 2002). Our board of directors has a separately-designated standing audit committee established in accordance with Section 3(a)(58)A of the Securities Exchange Act of 1934 and has also determined that all members of the audit committee are "independent", as that term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934. Currently, our audit committee members are William R. Miller and Frank T. Cary.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our executive officers and directors, and persons who beneficially own more than ten percent of our Common Stock, to file initial reports of ownership and reports of changes in ownership with the United States Securities and Exchange Commission (SEC) and the NASDAQ Stock Market. Executive officers, directors and greater than ten percent beneficial owners are required by the SEC to furnish us with copies of all Section 16(a) forms they file.

Based upon a review of the forms furnished to us and written representations from our executive officers and directors, we believe that during fiscal 2004 all Section 16(a) filing requirements applicable to our executive officers, directors and greater than ten percent beneficial owners were complied with.

Code of Ethics

We have adopted a Code of Ethics and Business Conduct applying to our directors, officers and employees, as well as a Code of Ethics that applies to our chief executive officer and senior financial officers. The codes have been posted on our website, www.vionpharm.com.

ITEM 11.    Executive Compensation

The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to our Chief Executive Officer, to our four most highly compensated current executive officers and to one former executive officer during the 2004 fiscal year for services rendered to us in all capacities during the three fiscal years ended December 31, 2004.

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								Annual Compensation												Long-Term Compensation
Name and Principal Position				Year				Salary ($)				Bonus ($)				Other Annual Compensation				Securities Underlying Options/ SARs (14) (#)				All Other Compensation ($)
Alan Kessman					2004			$	412,000	(11)		$	100,000				(3	)			150,000			$	1,000	(8)
— Chief Executive Officer (1)					2003			$	412,000	(2)			—				(3	)			80,000			$	14,200	(4)
					2002			$	412,000	(5)			—				(3	)			150,000			$	15,010	(6)
Howard B. Johnson					2004			$	250,000	(11)		$	25,001				(3	)			100,000				—
— President and Chief Financial					2003			$	200,000	(2)			—				(3	)			60,000				—
Officer (10)					2002			$	200,000	(9)			—				(3	)			422,499				—
Ivan King, Ph.D.					2004			$	208,000	(11)		$	20,800				(3	)			50,000			$	1,000	(8)
— Vice President, Research and					2003			$	200,000	(2)			—				(3	)			40,000			$	1,000	(8)
Development					2002			$	200,000	(9)			—				(3	)			65,000			$	1,500	(8)
Ann Lee Cahill					2004			$	184,800			$	15,400				(3	)			105,000			$	1,000	(8)
— Vice President, Clinical					2003				—				—				—				—				—
Development (12)					2002				—				—				—				—				—
Terrence W. Doyle, Ph.D.					2004			$	224,973	(11)		$	4,500				(3	)			—			$	1,000	(8)
— Vice President, Chief Scientific					2003			$	216,320	(2)			—				(3	)			10,000			$	1,500	(8)
Officer (7)					2002			$	216,320	(9)			—				(3	)			38,415			$	1,500	(8)
Mario Sznol, M.D.					2004			$	234,600	(11)		$	7,819				(3	)			—			$	42,893	(13)
— Vice President, Clinical					2003			$	225,576	(2)			—				(3	)			50,000			$	1,000	(8)
Affairs (14)					2002			$	225,576	(9)			—				(3	)			65,936			$	1,500	(8)

(1)	We are a party to an employment agreement with Mr. Kessman. See "— Employment Agreements."

(2)	Includes salary deferred in connection with our plan to conserve cash resources announced in May 2002 net of payments of the deferred salary beginning August 1, 2003, as follows: Mr. Kessman — $14,274; Mr. Johnson — $3,889; Dr. King — $3,889; Dr. Doyle — $4,203; and Dr. Sznol — $4,387.

(3)	Aggregate amount of such compensation is less than the lesser of $50,000 or 10% of the total salary and bonus reported for the indicated person.

(4)	Consists of life and disability insurance payments.

(5)

Includes $77,000 paid pursuant to our December 2001 consulting agreement with PS Capital LLC of which Mr. Kessman is a controlling member. Includes $100,333 of salary and consulting payments to PS Capital deferred as part of the realignment plan we announced in May 2002. In August 2003, we reinstated the full salaries of our named executive officers and repaid the salary deferrals over the twelve month period ended July 31, 2004.

(6)	Consists of life and disability insurance payments of $13,510 and matching contribution to the Company's 401(k) Savings Plan of $1,500.

(7)	In January 2004, we entered into a consulting agreement with Gemin X, Inc. (Gemin X), under which Dr. Doyle renders consulting services to Gemin X. Gemin X paid us $213,325 for Dr. Doyle's consulting for the year ended December 31, 2004.

(8)	Consists of matching contribution to the Company's 401(k) Savings Plan.

(9)	Includes salary deferred in connection with our realignment plan announced in May 2002 as follows: Mr. Johnson — $23,333; Dr. King — $23,333; Dr. Doyle — $25,237; and Dr. Sznol — $26,317. In August 2003, we reinstated the full salaries of our named executive officers and repaid the salary deferrals over the twelve month period ended July 31, 2004.

(10)	Mr. Johnson was hired on March 18, 2002.

(11)	Excludes 2004 payments of salary deferrals in 2002-2003 in connection with our realignment plan announced in May 2002 as follows: Mr. Kessman — $114,607; Mr. Johnson — $27,222; Dr. King — $27,222; Dr. Doyle — $29,440; and Dr. Sznol — $30,704.

(12)	Ms. Cahill was named an executive officer on October 15, 2004.

(13)	Consists of payment of accrued vacation of $41,893 and matching contribution to the Company's 401(k) Savings Plan of $1,000.

(14)	Dr. Sznol resigned on October 15, 2004 and joined our Board of Directors. He was granted an initial director option on October 15, 2004. See "— Director Compensation."

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Option Grants in Last Fiscal Year

The following table sets forth the grant of stock options made during the year ended December 31, 2004 to the persons named in the Summary Compensation Table:

Name (a)				Number of Securities Underlying Options Granted (1) (b)				% of Total Options Granted to Employees in Fiscal Period (2) (c)				Exercise of Base Price ($/Sh) (3) (d)				Expiration Date (e)				Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term
																				5% ($) (f)				10% ($) (g)
Alan Kessman					150,000				20.1	%		$	4.70			12/8/2014				$	443,371			$	1,123,588
Howard B. Johnson					100,000				13.4	%		$	4.70			12/8/2014				$	295,580			$	749,059
Ivan King, Ph.D.					50,000				6.7	%		$	4.70			12/8/2014				$	147,790			$	374,529
Ann Lee Cahill					55,000				7.4	%		$	4.31			10/15/2014				$	149,079			$	377,797
					50,000				6.7	%		$	4.70			12/8/2014				$	147,790			$	374,529
Terrence W. Doyle, Ph.D.					—				—				—			—					—				—
Mario Sznol, M.D. (4)					—				—				—			—					—				—

(1)	Mr. Kessman's option grant vests 100% on December 8, 2005. Ms. Cahill's option grant for 55,000 shares of common stock vests 25% on October 15, 2005, 50% on October 15, 2006, 75% on October 15, 2007 and 100% on October 15, 2008. All other option grants vest 25% on December 8, 2005, 50% on December 8, 2006, 75% on December 8, 2007 and 100% on December 8, 2008.

(2)	Computed based on an aggregate of 745,700 shares issuable upon exercise of options granted to employees during the year ended December 31, 2004.

(3)	For all option grants, the exercise price was equal to the market value of the underlying common stock at the date of grant.

(4)	Dr. Sznol resigned on October 15, 2004 and joined our Board of Directors. He was granted an initial director option on October 15, 2004. See "— Director Compensation."

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

The following table sets forth information with respect to stock options exercised in 2004 and unexercised stock options held by the persons named in the Summary Compensation Table at December 31, 2004.

Name (a)				Shares Acquired on Exercise (#) (b)				Value Realized ($) (c)				Number of Securities Underlying Unexercised Options at Fiscal Year-End (#)								Value of Unexercised In- the-Money Options at Fiscal Year-End ($) (1)
												Exercisable (d)				Unexercisable (e)				Exercisable (f)				Unexercisable (g)
Alan Kessman					—			$	—				1,352,927				190,000			$	788,340			$	124,800
Howard B. Johnson					—			$	—				267,499				315,000			$	504,296			$	266,550
Ivan King, Ph.D.					—			$	—				311,215				86,667			$	347,944			$	83,201
Ann Lee Cahill					—			$	—				30,833				119,167			$	93,199			$	41,701
Terrence W. Doyle, Ph.D.					—			$	—				217,200				16,667			$	191,391			$	20,801
Mario Sznol, M.D.(2)					—			$	—				389,669				44,584			$	324,973			$	104,002

(1)	Computed based upon the difference between the closing price of the Company's common stock on December 31, 2004 ($4.69) and the exercise price.

(2)	Dr. Sznol resigned on October 15, 2004 and joined our Board of Directors. Excludes an initial director option granted to Dr. Sznol on October 15, 2004. See "— Director Compensation."

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Employment Agreements

In November 2003, we entered into an employment agreement effective January 1, 2004 with Alan Kessman, our Chief Executive Officer. Pursuant to this agreement, which terminates on December 31, 2005, Mr. Kessman receives a minimum base salary of $412,000 per year and is eligible for a bonus of up to 50% of his base salary based on the achievement of specified objectives. In the event Mr. Kessman's employment is terminated by us for any reason other than cause or disability, or if Mr. Kessman terminates for good reason, we are obligated to pay him two times the sum of his base salary plus his average annual bonus for the prior two years and to continue payment of certain insurance costs on his behalf. Under Mr. Kessman's employment agreement, it shall constitute "good reason" for Mr. Kessman to terminate his employment and receive the amounts described above if there is a change in control and the Company or its successors, as the case may be, fails to agree in writing to extend the expiration date of the employment agreement to the two-year anniversary of the change of control.

Severance Agreements

We entered into severance agreements with Howard B. Johnson, our President and Chief Financial Officer, Dr. Ivan King, our Vice President of Research and Development, Ann Lee Cahill, our Vice President of Clinical Development and Dr. Terrence W. Doyle, our Vice President and Chief Scientific Officer, pursuant to which each of these officers would be entitled to certain payments in the event such officer loses his employment during the twelve-month period following a "change in control," as defined in the agreement. Specifically, if a "change in control" occurs, the officer shall be entitled to a lump sum severance payment equal to the sum of twelve months of the officer's monthly base salary as in effect as of the date of termination or immediately prior to the change in control, whichever is greater, plus the average of the last two cash bonus payments made to the officer prior to the change in control. The officer would also be entitled to all payments necessary to provide him with group health insurance benefits substantially similar to those which he was receiving immediately prior to the date of termination until the earlier of 18 months after such termination or the date he has obtained new full-time employment. The foregoing amounts are not payable if termination of the officer is because of his death, by us for cause, or by the officer other than for good reason.

Compensation of Directors

Directors are reimbursed for expenses actually incurred in attending a board or committee meeting. We also pay the Chairman of the Board $4,000 in cash or stock options for each meeting of the Board of Directors attended and each other non-employee director $1,000 in cash or stock options for each such meeting attended. Directors received cash for each such meeting attended in 2004. Directors who are not employees or principal stockholders are also entitled to automatic grants of options under our 2003 Stock Option Plan. Eligible directors are granted an option to purchase 20,000 shares of common stock on the date such person is first elected or appointed a director. Further, on the day immediately following the date of each annual meeting of stockholders, each eligible director, other than directors who received an initial director option within 180 days preceding such annual meeting, is granted an option to purchase 15,000 shares of common stock (20,000 shares in the case of the Chairman of the Board) on the day immediately following the date of each annual meeting of stockholders. The exercise price for each share subject to a director option shall be equal to the fair market value of the common stock on the date of grant. Director options vest after one year or earlier on a change of control. Generally, director options will expire the earlier of: (i) 10 years after the date of grant, or (ii) one year after termination of service as a director. Director options which are not vested expire immediately upon termination of service as a director. During 2004, Mr. MacDonald, Mr. Cary, Dr. Carter, Dr. Sartorelli and a former director were each granted a ten-year option to purchase 15,000 shares of common stock and Mr. Miller was granted a ten-year option to purchase 20,000 shares of common stock at an exercise price of $4.04. Dr. Sznol was granted a ten-year option to purchase 20,000 shares of common stock at an exercise price of $4.31 when he was first elected a director on October 15, 2004.

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During the year, we modified certain options to Dr. Sznol upon his termination as an employee and appointment to the Board of Directors. The options were modified, as allowed under the stock option plan agreements, to permit retention upon termination of employment, in connection with his on-going service to the Company as a non-employee director.

Compensation Committee Interlocks and Insider Participation

There are no Compensation Committee interlocks or insider participation.

Compensation Committee Report on Executive Compensation

This Executive Compensation Report discusses the Company's executive compensation policies and the basis for the compensation paid to the Executive Officers during the year ended December 31, 2004.

Compensation Policy.    The Committee's policy with respect to executive compensation has been designed to:

•	Adequately and fairly compensate executive officers in relation to responsibilities, capabilities and contributions to the Company and in a manner that is commensurate with compensation paid by companies of comparable size and at a comparable stage of development within the Company's industry;

•	Reward executive officers for the achievement of short-term goals and for the enhancement of the long-term value of the Company; and

•	Align the interests of the executive officers with those of the stockholders with respect to short-term operating goals and long-term increases in the value of the Company's Common Stock.

The components of compensation generally paid to executive officers consist of: (a) base salary and (b) incentive compensation in the form of annual bonus payments and stock options awarded by the Company under the Company's 2003 Stock Option Plan. The Company's Compensation Committee is responsible for reviewing and approving cash compensation paid by the Company to its executive officers and members of the Company's senior management team, including annual bonuses and stock options awarded, selecting the individual executives and members of senior management who will be awarded bonuses and stock options, and for determining the timing, pricing and amount of all stock options granted to executives and members of senior management under the Company's 2003 Stock Option Plan.

The Company's executive compensation program historically has emphasized the use of incentive-based compensation to reward the Company's executive officers and members of senior management for individual contributions to the achievement of the Company's business, research and product development objectives established by the Board of Directors. The Company uses stock options to provide an incentive for a substantial number of its officers and employees, including members of management, and to reward such officers and employees for achieving the Company's business objectives. The Company believes its incentive compensation plan rewards management when the Company and its stockholders have benefited from achieving the Company's business objectives and targeted clinical, research and development objectives, all of which the Compensation Committee feels will dictate, in large part, the Company's future operating results. The Compensation Committee believes that its policy of compensating officers and employees with incentive-based compensation fairly and adequately compensates those individuals in relation to their responsibilities, capabilities and contribution to the Company, and in a manner that is commensurate with compensation paid by companies of comparable size and at a comparable stage of development within the Company's industry.

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Components of Compensation.    The primary components of compensation paid by the Company to its executive officers and senior management personnel, and the relationship of such components of compensation to the Company's performance, are discussed below:

•

Base Salary.    The Compensation Committee periodically reviews the base salary paid by the Company to its executive officers and members of the senior management team. Adjustments to base salaries are determined based upon a number of factors, including the Company's performance (to the extent such can fairly be attributed or related to each executive's performance), as well as the nature of each executive's responsibilities, capabilities and contributions. In addition, the Compensation Committee periodically reviews the base salaries of its senior management personnel in an attempt to ascertain whether those salaries fairly reflect job responsibilities and prevailing market conditions and rates of pay. The Compensation Committee believes that base salaries for the Company's executive officers have historically been reasonable in relation to the Company's size and performance in comparison with the compensation paid by similarly sized companies or companies within the Company's industry. For most of 2003, the Company's executives deferred a portion of their base salary until the Company could raise funds for operations. In August 2003, the Company reinstated the full salaries for its executive officers and repaid the deferrals amounts during the twelve month period ended July 31, 2004.

•

Incentive Compensation.    As discussed above, a substantial portion of each executive officer's compensation package is in the form of incentive compensation designed to reward the achievement of short-term operating goals and long-term increases in stockholder value. Annual bonus payments are based on the individual's and the Company's performance. The Company's 2003 Stock Option Plan allows the Board of Directors or the Compensation Committee to grant stock options to executive officers and employees for the purchase of shares of the Company's Common Stock. Under the terms of the 2003 Stock Option Plan, the Board of Directors and the Compensation Committee have authority to select the executive officers and employees who will be granted stock options and to determine the timing, pricing and number of stock options to be awarded. The Compensation Committee believes that the stock option grants reward executive officers only to the extent that stockholders have benefited from increases in the value of the Company's Common Stock.

Compensation of the Chief Executive Officer.    The Company has entered into an executive employment agreement with Mr. Kessman. For material terms of this executive employment agreement see "Employment Agreements". The Compensation Committee believes that the monthly compensation under the agreement adequately and fairly compensates Mr. Kessman in relation to his responsibilities, capabilities, contributions and dedication to the Company and secures for the Company the benefit of his leadership, management and financial skills and capabilities. Moreover, the Compensation Committee believes that the salary and other benefits are reasonable in relation to the responsibilities, capabilities, contributions and dedication of Mr. Kessman to the Company and are in line with the compensation earned by chief executive officers employed by companies of comparable size and stage of development within the Company's industry.

Tax Deductibility.    Section 162(m) of the Internal Revenue Code of 1986, as amended, generally denies publicly-held corporations a federal income tax deduction for compensation exceeding $1,000,000 paid to Named Executive Officers, excluding performance-based compensation. Through December 31, 2004, this provision has not limited our ability to deduct executive compensation, but the Compensation Committee will continue to monitor the potential impact of Section 162(m) on our ability to deduct executive compensation.

Conclusion.    The Compensation Committee believes that the concepts discussed above further the stockholder interests because a significant part of executive compensation is based upon the Company achieving its product development and other specific goals set by the Board of Directors. At the same time, the Compensation Committee believes that the program encourages responsible management of the Company in the short-term. The Compensation Committee regularly considers plan design so that the total program is as effective as possible in furthering stockholder interests.

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The Compensation Committee bases its review on the experience of its own members, on information requested from management personnel, and on discussions with and information compiled by various independent consultants retained by the Company.

Submitted by the Compensation Committee:

Frank T. Cary, Chairman Charles K. MacDonald William R. Miller

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Performance Graph

The following line graph compares the five-year cumulative total stockholder's return on our Common Stock to: (i) the change in the cumulative total return on the Nasdaq Composite Index for U.S. Companies and (ii) the change in the cumulative total return on the Nasdaq Biotechnology Index, which includes biotechnology companies, assuming an investment of $100 made in each and assuming the reinvestment of any dividends.

ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth information as of March 1, 2005 (except as otherwise noted in the footnotes) regarding the beneficial ownership (as defined by the Securities and Exchange Commission (the "SEC")) of our Common Stock: (i) each person known by us to own beneficially more than five percent of our outstanding Common Stock; (ii) each of our current directors; (iii) each executive officer named in the Summary Compensation Table; and (iv) all of our current directors and executive officers as a group. Except as otherwise specified, the named beneficial owner has the sole voting and investment power over the shares listed and the address of each beneficial owner is c/o Vion Pharmaceuticals, Inc., 4 Science Park, New Haven, Connecticut 06511.

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Directors and Officers				Number of Shares Beneficially Owned				Percent of Outstanding Shares of Common Stock
Stephen K. Carter, M.D.					67,051	(1)		*
Frank T. Cary					169,165	(2)		*
Charles K. MacDonald					82,051	(3)		*
William R. Miller					361,359	(4)		*
Alan C. Sartorelli, Ph.D.					506,713	(5)		*
Mario Sznol, M.D.					397,161	(6)		*
Alan Kessman					1,401,574	(7)		2.1%
Howard B. Johnson					354,999	(8)		*
Ivan King, Ph.D.					323,659	(9)		*
Ann Lee Cahill					44,290	(10)		*
Terrence W. Doyle, Ph.D.					456,893	(11)		*
All directors and executive officers as a group (11 persons)					4,164,915	(12)		6.0%
Other Beneficial Owners
Raj Rajaratnam
Galleon Management, L.L.C.
Galleon Management, L.P.
Galleon Advisors, L.L.C.
Galleon Capital Partners, L.P.
Galleon Captains Offshore, Ltd.
Galleon Healthcare Partners, L.P.
Galleon Healthcare Offshore, Ltd. 135 East 57th Street, 16th Floor New York, NY 10022					3,979,671	(13)		6.0%

*	Less than one percent

(1)	Reflects 67,051 shares issuable upon exercise of options.

(2)	Reflects 106,447 shares issuable upon exercise of options.

(3)	Reflects 82,051 shares issuable upon exercise of options.

(4)	Reflects 171,953 shares issuable upon exercise of options.

(5)	Reflects 190,874 shares beneficially owned by Dr. Sartorelli's wife, as to which Dr. Sartorelli disclaims beneficial ownership. Also reflects 106,508 shares issuable upon exercise of options.

(6)	Reflects 389,669 shares issuable upon exercise of options.

(7)	Reflects 12,756 shares held by a family trust of which Mr. Kessman is a controlling member. Also reflects 1,352,927 shares issuable upon exercise of options.

(8)	Reflects 354,999 shares issuable upon exercise of options.

(9)	Reflects 311,215 shares issuable upon exercise of options.

(10)	Reflects 34,583 shares issuable upon exercise of options.

(11)	Reflects 43,400 shares held by Dr. Doyle's wife, as to which Dr. Doyle disclaims beneficial ownership. Also reflects 217,200 shares issuable upon exercise of options.

(12)	Reflects 3,194,603 shares issuable upon exercise of options.

(13)

Based on data set forth in an amendment No. 1 to Schedule 13G filed with the SEC on February 14, 2005. Of the shares of our common stock being reported as beneficially owned by: (i) 3,979,671 are held by Raj Rajaratnam; (ii) 3,979,671 shares are held by Galleon Management, L.L.C.; (iii) 3,979,671 shares are held by Galleon Management, L.P.; (iv) 507,950 are held by Galleon Advisors, L.L.C.; (v) 200,600 are held by Galleon Captains Partners, L.P.; (vi) 1,360,748 are held by Galleon Captains Offshore, Ltd.; (vii) 307,350 are held by Galleon Healthcare Partners, L.P.; and (viii) 2,110,973 shares are held by Galleon Healthcare Offshore, Ltd. Pursuant to the partnership agreement of Galleon Captains Partners, L.P. and Galleon Healthcare Partners, L.P., Galleon Management, L.P. and Galleon Advisors, L.L.C. share all investment and

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voting power with respect to the securities held by Galleon Captains Partners, L.P. and Galleon Healthcare Partners, L.P. Pursuant to an investment management agreement, Galleon Management, L.P. has all investment and voting power with respect to the securities held by Galleon Captains Offshore, Ltd. and Galleon Healthcare Offshore, Ltd. Raj Rajaratnam, as the managing member of Galleon Management, L.L.C., controls Galleon Management, L.L.C., which, as the general partner of Galleon Management, L.P., controls Galleon Management, L.P. Raj Rajaratnam, as the managing member of Galleon Advisors, L.L.C., also controls Galleon Advisors, L.L.C. The shares reported herein by Raj Rajaratnam, Galleon Management, L.P., Galleon Management, L.L.C., and Galleon Advisors, L.L.C. may be deemed beneficially owned as a result of the purchase of such shares by Galleon Captains Partners, L.P., Galleon Captains Offshore, Ltd., Galleon Healthcare Partners, L.P., and Galleon Healthcare Offshore, Ltd., as the case may be. Each of Raj Rajaratnam, Galleon Management, L.P., Galleon Management, L.L.C., and Galleon Advisors, L.L.C. disclaims any beneficial ownership of the shares reported herein, except to the extent of any pecuniary interest therein.

Equity Compensation Plan Information

The following table provides information about shares of our common stock that may be issued upon the exercise of options and rights under all of the Company's existing equity compensation plans as of December 31, 2004.

Plan Category				Number of Shares of Common Stock to be Issued Upon Exercise of Outstanding Options				Weighted-Average Exercise Price of Outstanding Options($)				Number of Shares of Common Stock Remaining Available for Future Issuance Under Equity Compensation Plans
Plans approved by stockholders:
2003 Stock Option Plan					1,218,093			$	3.38				781,907
1993 Stock Option Plan (1)					3,007,641			$	4.90				—
2000 Stock Purchase Plan					(2	)			(2	)			399,151
Equity compensation plans not approved by stockholders (3)					10,147,115			$	3.02				—

(1)	We no longer grant stock options under our 1993 Stock Option Plan, which expired on April 15, 2003.

(2)	Under our 2000 Employee Stock Purchase Plan, participants are permitted to purchase our common stock during the stock offering period. Accordingly, these numbers are not determinable.

(3)	Reflects the following:

	(a)	Outstanding warrants to purchase 1,192,349 shares of our common stock at $2.20 per share issued to investors in connection with our June 2003 private placement expiring on June 23, 2008. We registered the resale of these shares by the investors pursuant to a registration statement on Form S-3;

	(b)	Outstanding warrants to purchase 4,439,313 shares of our common stock at $2.50 per share issued to investors and a placement agent in connection with our private placement expiring on September 19, 2008. We registered the resale of these shares by the investors and placement agent pursuant to a registration statement on Form S-3;

	(c)	Outstanding warrants to purchase 3,567,309 shares of our common stock at $3.25 per share issued to investors and a placement agent in connection with our private placement expiring on February 11, 2009. We registered the resale of these shares by the investors and placement agent pursuant to a registration statement on Form S-3; and

	(d)	Outstanding options to purchase 948,144 shares of our common stock granted under our Senior Executive Stock Option Plan (the "Senior Plan") to Mr. Kessman in January 1999 at exercise prices ranging from $5.25 to $5.775 in connection with his employment agreement. The shares of common stock issuable upon exercise of the options granted to Mr. Kessman under the Senior Option Plan have not been registered.

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The following summarizes the principal terms of the Senior Plan, which was adopted by our Board of Directors on January 11, 1999.

Eligibility.    Options may be granted under the Senior Plan to our Chief Executive Officer and to a director or officers who are considered a Reporting Persons under Rule 16b-3.

Administration.    The Board has appointed its Compensation Committee (the "Committee") to administer the plan. Subject to the limitations of the plan, the Committee has broad authority under the plan.

Available Shares.    The maximum number of shares of Common Stock that may be issued under the Senior Plan is 980,000, subject to customary antidilution and other adjustments provided for in the plan, and the maximum number of shares of Common Stock with respect to such options that may be granted to any individual in any calendar year is 980,000 shares. Shares of Common Stock available for issuance under the Plan may be authorized and unissued or held by the Company in its treasury.

Types of Options.    Options issued under the Senior Plan are non-qualified stock options to purchase shares of Common Stock.

Option Term.    All options expire not more than 10 years after the date of grant.

Exercise Price.    The exercise price for each share of Common Stock covered by an option will be determined by the Committee at the time of grant.

Exercise of Options.    The Committee may establish vesting and other conditions or restrictions on the exercise of an option and/or upon the issuance of Common Stock in connection with the exercise of an option as it deems appropriate. No option will be exercisable during the first 6 months after the date of grant. The Committee may provide in the option agreement for the acceleration of the exercise date upon the occurrence of specified events and/or accelerate the exercise date of an option at any time prior to the option termination.

Restrictions on Transfer.    Benefits under the plan are generally non-transferable, except by will or the laws of descent and distribution, or by gift to a family member.

Termination of Employment or Other Service.    If an optionee's employment or service terminates, the portion of an option not exercisable on the date of termination shall immediately terminate and the portion of an option that is exercisable on the date of termination shall remain exercisable for a period of time following the termination date, as follows: (i) if due to death or disability, for one year; (ii) if due to cause, immediately terminates; and (iii) for any other termination, for 3 months.

Adjustment.    The maximum number and class of shares available for issuance under the plan, the maximum number and class of shares with respect to which an option may be granted to any employee during the calendar year, the number and class of shares to be subject to future awards of director options and the number and class of shares and exercise price per share in effect under each outstanding option are subject to adjustment upon capital adjustments and stock dividends, and are subject to conversion upon certain mergers, consolidations, acquisitions of property or stock, separations or reorganizations, as the Committee determines to be necessary or appropriate.

Termination of or Changes to the Plan.    The Plan will terminate on September 9, 2013, unless sooner terminated by the Board. The Board may amend or terminate the Plan at any time. Any amendment, except as provided under the Plan in the event of capital changes, reorganization or sale, which requires stockholder approval will be subject to the approval of the Company's stockholders. No amendment or termination may adversely affect the rights of the holder of an outstanding option without his or her consent.

Exchange of Options.    With the consent of optionees, the Committee has the authority to amend the terms of any outstanding options to provide an exercise price per share which is higher or lower than the current exercise price of such outstanding options.

U.S. Federal Income Tax Consequences.    The holder of a non-qualified option will not recognize taxable income upon the grant of the option. In general, the holder of a non-qualified option will

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recognize ordinary income upon the exercise of the option in an amount equal to the excess of the fair market value of the shares of Common Stock with respect to which the option is exercised at such time over the aggregate exercise price of such shares (i.e., the option spread). The Company generally will receive a corresponding tax deduction at such time. Upon a later sale of the Common Stock, the optionee will recognize capital gain or loss equal to the difference between the sale price and the sum of the exercise price plus the amount of ordinary income recognized on exercise.

In general, Section 162(m) of the Code denies a publicly-held corporation a deduction for federal income tax purposes for remuneration paid in excess of $1,000,000 per year per person to its chief executive officer and the four other officers whose compensation is disclosed in its proxy statement, subject to certain exceptions. Although the Plan has been designed so that remuneration attributable to the exercise of non-qualified options granted under the Plan will qualify for an exception from the deduction limitation, it is possible that, in certain instances, remuneration attributable to options granted under the Plan will not be deductible by us by virtue of Section 162(m) of the Code.

Rules covering the taxation of stock options are complex and subject to change. The preceding summary is only a summary of the basic U.S. federal income tax consequences with respect to options granted under the Plan, based upon management's understanding of existing federal income tax laws. Participants are urged to consult with their own tax advisors regarding the specific tax consequences associated with their participation in the Plan.

ITEM 13.    Certain Relationships and Related Transactions

We recorded research and development expense of $200,000 during 2004 related to a gift to fund research through March 31, 2006 at the laboratory headed by Dr. Sartorelli. The balance of gifts of $250,000 at December 31, 2004 will be paid in five equal quarterly installments through the first quarter of 2006.

ITEM 14.    Principal Accountant Fees and Services

The following table presents the aggregate fees for professional audit services and other services rendered by Ernst & Young LLP, our independent registered public accountants, in 2004 and 2003:

				Years ended December 31,
				2004								2003
				Fees				% Approved by the Audit Committee				Fees				% Approved by the Audit Committee
Audit fees				$	166,195				100	%		$	114,550				100	%
Audit related fees					—				—				—				—
Tax fees					28,000				100	%			25,200				100	%
All other fees					1,590				100	%			—				—
Total				$	195,785							$	139,750

Audit Fees consist of fees billed for the annual audit of our financial statements and other audit services including the provision of consents and the review of documents filed with the SEC. The fees for 2004 include $73,000 of accrued audit fees for third-quarter 2004 review and the 2004 year-end audit that were not billed until 2005. The fees for 2003 include $62,150 of accrued audit fees for the 2003 year-end audit that were not billed until 2004.

Audit Related Fees consist of fees billed for transaction consultations.

Tax Fees consist of fees billed for tax compliance services.

All Other Fees consist of a subscription fee for an online accounting research database.

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Audit Committee Pre-approval Policies and Procedures

The Audit Committee of our Board of Directors is responsible, among other matters, for the oversight of the external auditor. The Audit Committee has adopted a policy regarding pre-approval of audit and permissible non-audit services provided by our independent registered public accountants (the "Policy").

Under the Policy, proposed services either (i) may be pre-approved by the Audit Committee without consideration of specific case-by-case services as "general pre-approval"; or (ii) require the specific pre-approval of the Audit Committee as "specific pre-approval". The Audit Committee may delegate either type of pre-approval authority to one or more of its members. The appendices to the Policy set out the audit, audit-related, tax and other services that have received the general pre-approval of the Audit Committee, including those described in the footnotes to the table, above; these services are subject to annual review by the Audit Committee. All other audit, audit-related, tax and other services must receive a specific pre-approval from the Audit Committee.

The Audit Committee establishes budgeted fee levels annually for each of the four categories of audit and non-audit services that are pre-approved under the Policy, namely, audit, audit-related, tax and other services. Requests or applications to provide services that require specific approval by the Audit Committee are submitted to the Audit Committee by both the external auditor and the chief financial officer. At each regular meeting of the Audit Committee, the external auditor provides a report in order for the Audit Committee to review the services that the external auditor is providing, as well as the status and cost of those services.

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PART IV

ITEM 15.    Exhibits, Financial Statement Schedules

(a) 1.    Financial Statements

The following is a list of the Financial Statements included in Item 8 of Part II of this Report:

				Page
Reports of Independent Registered Public Accounting Firm					32
Consolidated Balance Sheets as of December 31, 2004 and 2003					34
Consolidated Statements of Operations for the Years Ended December 31, 2004, 2003 and 2002 and for the Period from May 1, 1994 (Inception) through December 31, 2004					35
Consolidated Statement of Changes in Shareholders' Equity for the Period from May 1, 1994 (Inception) Through December 31, 2004					36
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002 and for the Period from May 1, 1994 (Inception) through December 31, 2004					39
Notes to Consolidated Financial Statements					40

2.    Financial Statement Schedules

Schedules not included herein are omitted because they are inapplicable or not required or because the required information is given in the financial statements and notes thereto.

3.    Exhibits

The exhibits required by this item and included in this report or incorporated herein by reference are as follows:

Exhibit No.								Description
2.1				—				Agreement and Plan of Merger among MelaRx Pharmaceuticals, Inc., OncoRx Research Corp. and OncoRx, Inc. dated as of April 19, 1995 (1)
2.2				—				Certificate of Merger, dated April 20, 1995 (1)
3.1				—				Restated Certificate of Incorporation, as amended (2)
3.2				—				By-laws, as amended (2)
3.3				—				Certificate of Amendment to the Certificate of Incorporation of Vion Pharmaceuticals, Inc. dated as of July 26, 2001 (13)
3.4				—				Certificate of Amendment to the Certificate of Incorporation of Vion Pharmaceuticals, Inc. dated as of June 10, 2004 (22)
4.1				—				Rights Agreement dated as of October 26, 1998 between Vion Pharmaceuticals, Inc. and American Stock Transfer & Trust Company (includes form of Right Certificate attached as Exhibit A and a Summary of Rights to Purchase Common Shares attached as Exhibit B thereto) (3)
4.2				—				Revised form of Warrant Agreement by and between Vion Pharmaceuticals, Inc. and Brean Murray & Co., Inc. (4)
4.3				—				Form of Underwriter's Warrant (included as Exhibit A to Exhibit 4.2 above) (4)
4.4				—				Amendment No. 1 to Rights Agreement between Vion Pharmaceuticals, Inc. and American Stock Transfer & Trust Company dated as of August 16, 2004 (23)
10.1				—				License Agreement between Yale University and OncoRx, Inc. dated as of August 31, 1994 (1,16)

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Exhibit No.								Description
10.2				—				Letter Agreement between Yale University and OncoRx, Inc. dated August 19, 1994 (1)
10.3				—				Extension Agreement between Yale University and MelaRx Pharmaceuticals, Inc., dated as of July 1, 1992 (1)
10.4				—				License Agreement between Yale University and OncoRx Corporation dated as of November 15, 1995 (15)
10.5				—				Letter Agreement between Yale University and MelaRx Pharmaceuticals, Inc., dated as of February 2, 1995 (1)
10.6				—				Reserved
10.7				—				Reserved
10.8				—				License Agreement between Yale University and OncoRx, Inc. dated as of December 15, 1995 (15)
10.9				—				Reserved
10.10				—				Reserved
10.11				—				Reserved
10.12				—				Consulting and Finder's Agreement between MelaRx Pharmaceuticals, Inc. and Jacob A. Melnick, dated June 4, 1992, as amended by Agreement dated February 17, 1995 (1)
10.13				—				Clinical Trials Agreement between Vion Pharmaceuticals, Inc. and the Division of Cancer Treatment and Diagnosis, NCI, dated January 9, 2003 (15)
10.14				—				Letter Agreement between Yale University and OncoRx, Inc. (formerly MelaRx Pharmaceuticals, Inc.), dated July 5, 1995 (1)
10.15				—				Reserved
10.16				—				Reserved
10.17				—				Reserved
10.18				—				Reserved
10.19				—				Amendment No. 1 to License Agreement between Yale University and Vion Pharmaceuticals, Inc. (f/k/a OncoRx, Inc.) dated as of June 12, 1997 (9)
10.20				—				Amendment No. 2 to License Agreement between Yale University and Vion Pharmaceuticals, Inc. (f/k/a OncoRx, Inc.) dated as of June 12, 1997 (9)
10.21				—				Collaborative Development and Distribution Agreement between Boehringer Ingelheim International GmbH and Vion Pharmaceuticals, Inc. dated November 24, 1997 (6,25)
10.22				—				Reserved
10.23				—				Amendment No. 5 to a License Agreement between Yale University and Vion Pharmaceuticals, Inc. (f/k/a OncoRx, Inc.) dated as of March 3, 2003 (16,25)
10.24				—				Amendment No. 3 to a License Agreement between Yale University and Vion Pharmaceuticals, Inc. (f/k/a OncoRx, Inc.) dated as of September 25, 1998 (10)
10.25				—				Form of Severance Agreement between the Company and Terrence W. Doyle, Ivan King, Howard B. Johnson, Mario Sznol, Bijan Almassian and Ann Lee Cahill (11)
10.26				—				Reserved

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Exhibit No.								Description
10.27				—				Senior Executive Stock Option Plan (11)
10.28				—				Reserved
10.29				—				Development and License Agreement dated December 1, 1999 between the Company and Boehringer Ingelheim International GmbH (12,25)
10.30				—				Reserved
10.31				—				Amendment No. 4 to a License Agreement between Yale University and Vion Pharmaceuticals, Inc. (f/k/a OncoRx, Inc.) dated as of January 31, 2000 (13, 25)
10.32				—				Lease between Science Park Development Corporation and Vion Pharmaceuticals, Inc. dated November 1, 2001 (14)
10.33				—				Vion Pharmaceuticals, Inc. Amended and Restated 1993 Stock Option Plan, as Amended (14)
10.34				—				Securities Purchase Agreement as of June 19, 2003 (17)
10.35				—				Registration Rights Agreement as of June 19, 2003 (17)
10.36				—				Form of Warrant (17)
10.37				—				Securities Purchase Agreement as of September 8, 2003 (18)
10.38				—				Registration Rights Agreement as of September 8, 2003 (18)
10.39				—				Form of Warrant (18)
10.40				—				Research Services Agreement between Vion Pharmaceuticals, Inc. and Eli Lilly and Company as of September 8, 2003 (19,25)
10.41				—				License Agreement between Vion Pharmaceuticals, Inc. and Beijing Pason Pharmaceuticals, Inc. dated September 12, 2003 (19,25)
10.42				—				Employment Agreement between Vion Pharmaceuticals, Inc. and Alan Kessman dated as of November 3, 2003 (19)
10.43				—				Research Collaboration and Option Agreement with a group of inventors from the Institute of Pharmacy and the Institute of Medical Chemistry and Biochemistry at the University of Innsbruck, and Austria Wirtschaftsservice Gesellschaft m.b.H. and Vion Pharmaceuticals, Inc. dated November 24, 2003 (25)
10.44				—				Securities Purchase Agreement as of February 9, 2004 (20)
10.45				—				Registration Rights Agreement as of February 9, 2004 (20)
10.46				—				Form of Warrant (20)
10.47				—				License Agreement between Johnson & Johnson Consumer Companies, Inc. and Vion Pharmaceuticals, Inc. dated March 1, 2004 (21,26)
10.48				—				Vion Pharmaceuticals, Inc. 2003 Stock Option Plan, as amended (through June 2004) (22)
10.49				—				Form of Stock Option Agreement for Executive Officers (22)
10.50				—				Amendment to Option Agreements with Mario Sznol (22)
10.51				—				Consulting Agreement between Vion Pharmaceuticals, Inc. and Mario Sznol dated October 15, 2004 (24)

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Exhibit No.								Description
21.1								Subsidiaries of the Registrant
23.1								Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm
24.1								Power of Attorney (included on signature page)
31.1								Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2								Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1								Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2								Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1)				Incorporated by reference to the Company's Registration Statement on Form SB-2 (File No. 33-93468), effective August 14, 1995.
(2)				Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarterly period ended June 30, 1998.
(3)				Incorporated by reference to the Company's Current Report on Form 8-K filed on October 26, 1998.
(4)				Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-83837), effective October 26, 1999.
(5)				Reserved
(6)				Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997.
(7)				Reserved
(8)				Reserved
(9)				Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended June 30, 1997.
(10)				Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998.
(11)				Incorporated by reference to the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31, 1999.
(12)				Incorporated by reference to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1999.
(13)				Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001.
(14)				Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
(15)				Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2002.
(16)				Incorporated by reference to the Company's Annual Report on Form 10-K/A for the fiscal year ended December 31, 2002.
(17)				Incorporated by reference to the Company's Current Report on Form 8-K filed on June 20, 2003.
(18)				Incorporated by reference to the Company's Current Report on Form 8-K filed on September 10, 2003.
(19)				Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003.
(20)				Incorporated by reference to the Company's Current Report on Form 8-K filed on February 11, 2004.
(21)				Incorporated by reference to the Company's Current Report on Form 8-K/A filed on March 18, 2004.

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(22)				Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2004.
(23)				Incorporated by reference to the Company's Current Report on Form 8-K filed on August 16, 2004.
(24)				Incorporated by reference to the Company's Current Report on Form 8-K/A filed on November 9, 2004.
(25)				Certain portions of this exhibit have been omitted pursuant to an order granting confidential treatment by the Securities and Exchange Commission.
(26)				Certain portions of this exhibit have been omitted pursuant to a request for an order granting confidential treatment by the Securities and Exchange Commission. The omitted non-public information has been filed with the Securities and Exchange Commission.

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SIGNATURES

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

VION PHARMACEUTICALS, INC.

Date: March 15, 2005  By: /s/ Alan Kessman

Alan Kessman Chief Executive Officer

POWER OF ATTORNEY

KNOWN ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Alan Kessman and Howard B. Johnson, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting to said attorneys-in-fact and agents, and each of them, full power and authority to do and perform such and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue thereof.

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 registrant and in the capacities and on the dates indicated.

Signature		Title		Date
/s/ William R. Miller		Chairman of the Board		March 15, 2005
William R. Miller
/s/ Alan Kessman		Chief Executive Officer and Director (Principal Executive Officer)		March 15, 2005
Alan Kessman
/s/ Howard B. Johnson		President and Chief Financial Officer (Principal Financial and Accounting Officer)		March 15, 2005
Howard B. Johnson
/s/ Karen Schmedlin		Controller and Secretary		March 15, 2005
Karen Schmedlin
/s/ Stephen K. Carter, M.D.		Director		March 15, 2005
Stephen K. Carter, M.D.
/s/ Frank T. Cary		Director		March 15, 2005
Frank T. Cary
/s/ Charles K. MacDonald		Director		March 15, 2005
Charles K. MacDonald
/s/ Alan C. Sartorelli, Ph.D.		Director		March 15, 2005
Alan C. Sartorelli, Ph.D.
/s/ Mario Sznol, M.D.		Director		March 15, 2005
Mario Sznol M.D.

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