Schizophrenia is a chronic, debilitating mental disorder characterized by hallucinations, delusions, racing thoughts and other psychotic symptoms (collectively referred to as “positive symptoms”), as well as moodiness, anhedonia (inability to feel pleasure), loss of interest, eating and sleep disturbances, and difficulty concentrating (collectively referred to as “negative symptoms”). Schizophrenia develops in late adolescence or early adulthood in approximately 1% of the world’s population. Genetic and environmental factors are believed to be responsible for the disease. Most schizophrenia patients today are treated with drugs known as “atypical” antipsychotics, which were first approved in the U.S. in the late 1980s. Atypical antipsychotics currently comprise over 90% of prescriptions for schizophrenia, having largely replaced “typical” antipsychotics, which were first introduced in the 1950s and are now generic. Atypical antipsychotics are generally regarded as having improved side effect profiles and efficacy in treating negative symptoms relative to typical antipsychotics. According to IMS, the global market for atypical antipsychotics exceeded $13 billion in 2004.

Industry sources estimate that of the 73 million U.S. adults who suffer from some form of insomnia, only approximately 11 million currently receive treatment. Sleep disorders are segmented into three major categories: primary insomnia, secondary insomnia and circadian rhythm sleep disorders (CRSD). Primary insomnia is a symptom complex that comprises difficulty falling asleep or staying asleep, or non-refreshing sleep, in combination with daytime dysfunction or distress. The symptom complex can be an independent disorder (primary insomnia) or be a result of another condition such as depression or anxiety (secondary insomnia). CRSD results from a misalignment of the sleep/wake cycle and an individual’s daily activities or lifestyle. The circadian rhythm is the rhythmic output of the human biological clock and is governed by melatonin levels in the bloodstream. Both the timing of behavioral events (activity, sleep, and social interactions) and the environmental light-dark cycle result in a sleep/wake cycle that follows the circadian rhythm. Examples of CRSD include transient disorders such as jet lag and chronic disorders such as shift work sleep disorder (SWSD). The American Academy of Sleep Medicine estimates that 25% of all sleep problems are directly related to CRSD. In 2004, the sleep disorder drug market exceeded $3.5 billion in global sales, according to IMS.

The Company’s second product candidate, VEC-162, is a melatonin agonist for the treatment of insomnia and depression which is entering a pivotal Phase III trial for insomnia. The compound exhibits highly selective binding to the melatonin-1 (MT1) and melatonin-2 (MT2) receptors, which are thought to govern the body’s natural sleep/wake cycle. Compounds that bind to these receptors are thought to be able to help treat sleep disorders, and additionally are believed to offer potential benefits in depression. The Company intends to commence enrollment of a Phase III trial of VEC-162 for insomnia in early 2006. VEC-162 is also ready to commence a Phase II trial for the treatment of depression.

The Company’s third product candidate, VSF-173, is a compound for the treatment of excessive daytime sleepiness and is ready for a Phase II trial. VSF-173 is an oral small molecule that has demonstrated effects on animal sleep/wake patterns and gene expression patterns suggestive of a stimulant effect. The compound also demonstrated a stimulant effect in humans during clinical trials conducted by Novartis for Alzheimer’s Disease. As a result of these observations, the Company is currently planning to begin the clinical evaluation of VSF-173 in excessive daytime sleepiness. The Company intends to initiate a Phase II trial for VSF-173 in late 2006.

Each of these product candidates benefits from new chemical entity (NCE) patent protection and may offer substantial advantages over currently approved therapifes.

Research and development expenses increased by approximately $6.6 million, or 131%, to approximately $11.6 million for the nine months ended September 30, 2005 compared to approximately $5.0 million for the nine months ended September 30, 2004.

General and administrative expenses increased approximately $4.3 million, or 341%, to approximately $5.6 million for the nine months ended September 30, 2005 from approximately $1.3 million for the nine months ended September 30, 2004.

Net interest income in the nine months ended September 30, 2005 was approximately $188,000 compared to net interest income of approximately $13,000 in the nine months ended September 30, 2004.