The fundamental goal of drug development is to maximize a compound's therapeutic activity while minimizing its toxic side effects. The relationship between a drug's efficacy and its toxicity is known as its therapeutic index. High therapeutic index drugs, such as aspirin, demonstrate significant efficacy while exhibiting low toxicities, enabling widespread use. On the other hand, drugs with a low

therapeutic index, such as many cancer chemotherapy agents, have toxic side effects that, regardless of the drugs' efficacy, may severely limit their use.

A drug's efficacy is largely determined by three characteristics. First, the pharmaceutical agent must cause the desired physiological effect. Second, the drug must be capable of penetrating the tissues needing treatment. Finally, the drug must be sustained within the targeted tissue for a sufficient period of time to achieve the desired therapeutic response. Therapeutic efficacy is often limited by toxic side effects, which largely result from a drug's interaction with tissues other than those targeted for treatment. Many drugs act nonspecifically with respect to tissue type

To improve the therapeutic index, drug developers have linked, or conjugated, an active drug with other chemical compounds to increase efficacy, reduce toxicity, or both. Such molecules are known as conjugate drugs. Most conjugate drugs are designed to more effectively target the drug to a specified tissue and mitigate toxicity in other tissues. The principal components of a conjugate drug are the pharmaceutical agent, the vector, and the chemical bond, or linker, used to connect the two. The composition of the vector is of particular importance as it is responsible for conferring the targeting and activation properties of the conjugate drug.

The Company’s lead Targaceutical product candidate is Taxoprexin, a novel compound for the treatment of a variety of cancers. Taxoprexin is currently the subject of eight multi-center Phase II studies in four countries. In addition, Taxoprexin is being evaluated in combination with carboplatin in a Phase I/II study. DHA-paclitaxel, the active ingredient in Taxoprexin, is a synthetic small molecule made by linking paclitaxel to the natural fatty acid DHA. Paclitaxel is the active ingredient in Taxol, one of the most widely used anti-cancer agents, and is a member of the taxane class of molecules.

Taxoprexin is a patented drug candidate intended to improve the therapeutic index of taxane therapy, and thereby expand the application of taxane therapy to a broader range of cancer types. The Company designed this investigational drug to increase the proportion of taxane reaching tumor cells; generate sustained levels of taxane within tumors to prolong anti-cancer activity; and reduce toxic taxane activity in healthy tissues, thereby reducing side effects.

In the area of cancer, the Company’s five preclinical drug candidates are chemical conjugates of fatty acids with known anti-cancer compounds and are designed to improve their therapeutic index. Of these drug candidates, two are conjugates of widely marketed drugs and three are conjugates of novel compounds that have demonstrated good anti-cancer activity. Two of these three novel compounds have been evaluated in Phase II clinical studies by the U.S. National Cancer Institute, or NCI.

In the area of CNS disorders, the Company has synthesized several Targaceutical compounds that are designed to improve the therapeutic index of pharmaceutical agents with demonstrated clinical utility. The Company is developing its lead CNS product candidate Clozaprexin DHA-clozapine, or Clozaprexin, for the treatment of schizophrenia.

In the area of infectious disease, the Company is developing Targaceutical drugs for the treatment of HIV, herpes and hepatitis B virus infections. The Company has developed formulations for these fatty acid conjugates, conducted animal dose ranging studies and are examining drug activities in a variety of animal models of the relevant infections. Significant activity in these models would spur development of lead candidates for the treatment of these prevalent, and in some cases life threatening, diseases.

General and administrative expenses increased from $1.9 million in the nine months ended September 30, 2000 to $3.5 million in the nine months ended September 30, 2001, an increase of 84%. This increase reflects a $1.0 million increase in operating expenses to support the growth and operations of the Company and an increase in non-cash, stock based compensation of approximately $580 thousand.

Interest income (net of interest expense) increased from $102 thousand for the nine months ended September 30, 2000 to approximately $311 thousand for the nine months ended September 30, 2001, an increase of 205%.