ENDOREX CORP
10QSB, 1999-11-12
PHARMACEUTICAL PREPARATIONS
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<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                  FORM 10-QSB

(X)  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934.

For the Quarterly Period Ended September 30, 1999

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

For the transition period from ____________  to  ____________

Commission File No.      1-14778


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

           DELAWARE                                   41-1505029
(State or other jurisdiction of               (I.R.S. Employer Identification
incorporation or organization)                Number)

28101 BALLARD DRIVE, SUITE F, LAKE FOREST, IL                 60045
(Address of principal executive offices)                    (Zip Code)

Issuer's telephone number, including area code     (847) 573-8990


(Former name, former address and former fiscal year, if changed since last
report)

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.

                             Yes  [X]    No   [ ]

At November 12, 1999 10,352,632 shares of the registrant's common stock
(par value, $.001 per share) were outstanding.

Transitional Small Business Disclosure Format (check one):

                             Yes  [ ]    No   [X]
<PAGE>

PART I. - FINANCIAL INFORMATION

ITEM 1 - Financial Statements

                              ENDOREX CORPORATION
                       (A DEVELOPMENT STAGE ENTERPRISE)
                          CONSOLIDATED BALANCE SHEET
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                                              September 30, 1999
<S>                                                           <C>
ASSETS
Current assets:
 Cash and cash equivalents                                        $  6,044,697
 Marketable securities - available for sale                          3,000,000
 Restricted cash                                                       500,000
 Prepaid expenses                                                       93,404
 Deferred costs                                                         73,865
                                                                  ------------
   Total current assets                                              9,711,966
Leasehold improvements and equipment,
   net of accumulated amortization of $633,685                         481,952
Patent issuance costs, net of accumulated
   amortization of $56,633                                             483,883
Investment in joint venture                                            400,500
                                                                  ------------
TOTAL ASSETS                                                      $ 11,078,301
                                                                  ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
 Accounts payable and accrued expenses                            $    280,952
 Accrued compensation                                                  108,714
 Due to joint venture                                                  500,000
 Note payable                                                           30,185
 Current portion of line of credit                                     108,545
                                                                  ------------
   Total current liabilities                                         1,028,396
Long-term liabilities:
 Long-term portion of line of credit                                   570,683
 Note payable to EIS                                                   310,314
                                                                  ------------
   Total long-term liabilities                                         880,997
                                                                  ------------
     Total Liabilities                                               1,909,393

Series C exchangeable convertible preferred stock,
 $.05 par value.  Authorized 200,000 shares; 84,105
 issued and outstanding at liquidation value                         8,872,187

Stockholders' equity:
Preferred stock, $.05 par value.  Authorized
 100,000 shares; none issued and outstanding                                --
Series B convertible preferred stock,
 $.05 par value.  Authorized 200,000 shares;
 80,100 issued and outstanding at liquidation value                  9,094,971
Common stock, $.001 par value.  Authorized
 50,000,000 shares; 10,471,274 issued, and 10,352,632
 outstanding                                                            10,472
Additional paid-in capital                                          33,261,301
Deficit accumulated during the development stage                   (41,626,273)
                                                                  ------------
                                                                       740,471
Less:
 Treasury stock, at cost, 118,642 shares                              (443,750)
                                                                  ------------
     Total Stockholders' Equity                                        296,721
                                                                  ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                        $ 11,078,301
                                                                  ============
</TABLE>
           See accompanying condensed notes to financial statements.
<PAGE>

                            ENDOREX CORPORATION
                     (A DEVELOPMENT STAGE ENTERPRISE)
                  CONSOLIDATED STATEMENTS OF OPERATIONS
                                (UNAUDITED)

<TABLE>
<CAPTION>
                                                                   Cumulative from
                                          Nine Months             February 15, 1985
                                        Ended Sept. 30,          (date of inception)
                                      1999          1998          to Sept. 30, 1999
<S>                               <C>           <C>                  <C>
Revenue:
SBIR contract revenue             $        --   $         --         $    100,000

Expenses:
SBIR contract
 research and
 development                               --             --               86,168
Proprietary research
 and development                    1,716,546      2,283,829           14,641,839
General and
 administrative                     2,576,567      2,588,170           10,500,160
                                  -----------   ------------         ------------
Total operating expenses            4,293,113      4,871,999           25,228,167
                                  -----------   ------------         ------------
  Loss from operations             (4,293,113)    (4,871,999)         (25,128,167)

Equity losses in
 joint ventures                    (1,626,826)    (8,010,000)         (17,646,826)
Other income                               --             --                1,512
Interest income                       370,365        629,962            2,176,298
Interest expense                      (38,338)       (13,483)            (247,905)
                                  -----------   ------------         ------------
  Net loss                         (5,587,912)   (12,265,520)         (40,845,088)
  Preferred stock dividends          (928,260)      (438,905)          (1,641,447)
                                  -----------   ------------         ------------
  Net loss available to common
   shareholders                   $(6,516,172)  $(12,704,425)        $(42,486,535)
                                  ===========   ============         ============
Basic and diluted
 net loss per share
 available to common
 shareholders                     $     (0.63)  $      (1.23)        $     (21.58)
Basic and diluted
 weighted average common
 shares outstanding                10,352,632     10,360,164            1,969,225
</TABLE>
           See accompanying condensed notes to financial statements.

                                       2
<PAGE>

                             ENDOREX CORPORATION
                       (A DEVELOPMENT STAGE ENTERPRISE)
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                                  (UNAUDITED)

<TABLE>
<CAPTION>
                                          Three Months
                                         Ended Sept. 30,
                                     1999              1998
<S>                                  <C>           <C>

Revenue:
SBIR contract revenue             $        --       $        --

Expenses:
SBIR contract
 research and
 development                               --                --
Proprietary research
 and development                      334,446           854,367
General and
 administrative                       836,821           845,098
                                  -----------       -----------
Total operating expenses            1,171,267         1,699,465
                                  -----------       -----------
  Loss from operations             (1,171,267)       (1,699,465)

Equity in losses from
 joint ventures                      (492,580)               --
Interest income                       116,000           182,964
Interest expense                      (12,820)           (3,074)
                                  -----------       -----------
  Net loss                         (1,560,667)       (1,519,575)
  Preferred stock dividends          (309,910)         (159,761)
                                  -----------       -----------
  Net loss available to common
   shareholders                   $(1,870,577)      $(1,679,336)
                                  ===========       ===========
Basic and diluted
 net loss per share
 available to common
 shareholders                     $     (0.18)      $     (0.16)
Basic and diluted
 weighted average common
 shares outstanding                10,352,632        10,352,632

</TABLE>
  See accompanying condensed notes to financial statements.

                                   3
<PAGE>

                             ENDOREX CORPORATION
                       (A DEVELOPMENT STAGE ENTERPRISE)
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (UNAUDITED)
<TABLE>
<CAPTION>


                                                                         Cumulative from
                                         Nine Months                    February 15, 1985
                                       Ended Sept. 30,                 (date of inception)
                                    1999             1998               to Sept. 30, 1999
<S>                              <C>              <C>                      <C>
Net cash used in operating
 activities                      $(2,282,588)     $(2,093,126)             $(17,056,259)
                                 -----------      -----------              ------------
INVESTING ACTIVITIES:
 Patent issuance cost               (129,181)         (89,396)                 (653,164)
 Investment in joint ventures     (1,626,826)      (8,010,000)              (18,047,326)
 Organizational costs
  incurred                                --               --                      (135)
 Purchases of leasehold
  improvements                            --         (237,375)                 (675,559)
 Purchases of office and
  lab equipment                     (125,518)        (149,865)                 (928,921)
 Proceeds from assets
  sold                                    --               --                     1,000
 Purchases of marketable
  securities - available for
  sale                            (4,095,000)              --                (5,045,000)
 Sale of marketable
  securities - available for
  sale                             2,045,000               --                 2,045,000
                                 -----------      -----------              ------------
Net cash used in
 investing activities             (3,931,525)      (8,486,636)              (23,304,105)
                                 -----------      -----------              ------------
</TABLE>

                                                4
<PAGE>

<TABLE>
<CAPTION>


FINANCING ACTIVITIES:
<S>                                                   <C>           <C>            <C>
 Net proceeds from issuance of common stock                --       1,871,845      30,024,722
 Net proceeds from issuance of preferred stock             --       8,010,000      16,325,712
 Proceeds from exercise of options                         --          61,750         200,986
 Proceeds from note payable to financing company       53,706              --          53,706
 Repayment of note payable to financing company       (23,521)             --         (23,521)
 Proceeds from borrowings from President                   --              --          41,433
 Repayment of borrowings from President                    --              --         (41,433)
 Proceeds from borrowings under line of credit         95,774              --       1,150,913
 Repayment of borrowings under line of credit         (69,564)             --        (732,054)
 Proceeds from note payable to bank                        --              --         150,000
 Payments on note payable to bank                          --              --        (150,000)
 Proceeds from borrowings from stockholders                --              --          15,867
 Repayment of borrowings from stockholders                 --              --         (15,867)
 Advances from parent company                              --              --         135,000
 Payments to parent company                                --              --        (135,000)
 Repayment of long-term note receivable                    --              --          50,315
 Repayment of note payable issued in
  exchange for legal service                               --              --         (71,968)
 Purchase and retirement of common stock                   --        (130,000)       (130,000)
 Purchase of treasury stock                                --              --        (443,750)
                                                  -----------     -----------       ----------
Net cash provided by financing activities              56,395       9,813,595       46,405,061
                                                  -----------      ----------      -----------
Net increase (decrease) in cash and
 cash equivalents                                  (6,157,718)     (1,603,167)       6,044,697
Cash and cash equivalents
 at beginning of periods                           12,202,415      15,706,374               --
                                                  -----------    ------------      -----------
Cash and cash equivalents
 at end of periods                               $  6,044,697    $ 14,103,207      $ 6,044,697
                                                 ============    ============      ===========

</TABLE>
                  See accompanying condensed notes to financial statements.

                                            5
<PAGE>

                              ENDOREX CORPORATION
                       (A DEVELOPMENT STAGE ENTERPRISE)
                    CONDENSED NOTES TO FINANCIAL STATEMENTS


We prepared these unaudited interim consolidated financial statements under  the
rules and regulations for reporting on Form 10-QSB.  Accordingly, we omitted
some information and footnote disclosures normally accompanying the annual
financial statements.  You should read these interim financial statements and
notes in conjunction with the consolidated financial statements and their notes
included in our latest annual report on Form 10-KSB. It is our opinion that the
consolidated financial statements include all adjustments necessary for a fair
statement of the results of operations, financial position and cash flows for
the interim periods.  All adjustments were of a normal recurring nature. The
results of operations for interim periods are not necessarily indicative of the
results for the full fiscal year.


COMMON STOCK DIVIDEND

In 1997, we sold and issued 8,648,716 shares of common stock in a private
placement (the "Private Placement").  The terms of the Private Placement
included 5%, semi-annual dividends payable in additional shares of common stock
based on the number of shares held as of the record date, including previous
dividend distributions.

The first semi-annual common stock dividend was payable to holders of stock with
dividend rights as of the record date of April 16, 1999.  We distributed the
first stock dividend on June 1, 1999.  Semi-annual common stock dividends
continue to be payable through October 16, 2002. Approximately 865,000 shares of
common stock per year will be payable to Private Placement shareholders.

The first stock dividend was reflected as a charge to accumulated deficit in the
second quarter, using the fair market value method computed with the closing
price as of the day before the declaration date.


NET LOSS PER SHARE

Net loss is restated from prior periods to include the effect of the common
stock dividend. Therefore, the number of shares outstanding is retroactively
restated for prior periods.  The effect on the earnings per share for 1998 is a
decrease in net loss per share of $0.05 and $.01, respectively, for the nine-
and three-month periods ended September 30, 1998.

Net loss per share is presented on the Consolidated Statements of Operations in
accordance with SFAS No. 128 for the current and prior periods.  Endorex had a
net loss for all periods being presented, which resulted in diluted and basic
earnings per share being the same for all periods presented.  The potential
impact of warrants and stock options outstanding was not included in the
calculation because it would have resulted in an anti-dilutive net loss per
share.


JOINT VENTURES

Until March 31, 1999, Elan Corporation, plc ("Elan") and Endorex each performed
research and development activities for their oral vaccine delivery joint
venture.  We included research and development expenditures incurred to conduct
those activities in Endorex's consolidated statement of operations as research
and development expense.  Beginning April 1, 1999, Endorex and Elan fund joint
venture

                                       6
<PAGE>

expenditures in proportion to their respective ownership levels.
Therefore, Endorex now records its share of the joint venture expenditures as
equity in losses from joint ventures.  Intercompany profit is eliminated.

Effective April 1, 1999, Elan, through its subsidiary Elan International
Services, Ltd. ("EIS"), extended to Endorex a line of credit of up to $2.5
million that is restricted to Endorex's funding obligations for the joint
venture.  The note bears interest of 11% per annum and matures on December 31,
2002.  In the event that EIS exercises its option to increase its ownership in
the joint venture to 50%, the note will be canceled and unpaid principal and
interest will be applied to EIS obligations to Endorex upon exercise.

Also during 1999, the joint venture purchased and exercised an option to acquire
an exclusive worldwide license to proprietary oral microsphere delivery
technology and a portfolio of patents (U.S. and foreign) from Vaxcel, Inc., for
human and veterinary vaccines. This technology had been originally invented and
developed at the Southern Research Institute ("SRI") and University of Alabama-
Birmingham Research Foundation ("UABRF"), and had been acquired by Vaxcel. In
addition, during the second quarter, the joint venture completed negotiations
with SRI and UABRF to further amend the license agreement that it acquired from
Vaxcel.

The joint venture paid total licensing fees to Vaxcel and SRI/UABRF of $870,000,
which Elan and Endorex agreed to fund equally.  Accordingly, Endorex recorded
$435,000 as equity in losses from joint ventures in the first and second
quarters.


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following "Discussion and Analysis or Plan of Operation" provides
information to explain Endorex's results of operations and financial condition.
You should also read our unaudited consolidated interim financial statements and
their notes and our Annual Report on Form 10-KSB. This report contains
statements of a forward-looking nature relating to possible future events or our
future financial performance. You should be aware that forward-looking
statements are only predictions and actual events or results may differ
materially from those forward-looking statements. In evaluating forward-looking
statements, you should carefully consider the various factors identified in this
report, including the additional risks discussed in Exhibit 99 "Risk Factors" of
this Quarterly Report on Form 10-QSB.

Endorex is a development stage enterprise and expects no significant revenue
from the sale of products in the near future.

Material Changes in Results of Operations

Net loss, excluding preferred stock dividends, for the nine months ended
September 30, 1999 decreased approximately $6.7 million, or 54%, compared to the
nine months ended September 30, 1998.  The primary difference was an $8.0
million equity loss from the joint venture, recorded in the first quarter of
1998, as compared to the $1.6 million equity loss for the same period in 1999.
The 1998 equity loss reflected our 80.1% share of the one-time $10.0 million
license fee paid by the joint venture to Elan in that period. The 1999 equity
loss represents our 80.1% share of the joint venture--$0.4 million for the joint
venture's acquisition of rights to patents and technology, and $1.2 million for
the joint venture's net losses for the second and third quarters.

                                       7
<PAGE>

Research and development expenditures for the nine months ended September 30,
1999 decreased $.5 million, or 25%, compared to the same period of 1998.  The
allocation of expenses to the joint venture decreased research expenses by $0.7
million, which is now recorded as equity losses in joint ventures.  In September
1999, we initiated a phase I human clinical trial for the new formulation of our
proprietary cancer drug, Perillyl alcohol ("POH").

Interest income for the nine and three-month periods ended September 30, 1999
decreased approximately $260,000 and $67,000, respectively, compared to the nine
and three-month periods ended September 30, 1998 as a result of decreasing cash
and investment balances.

Plan of Operation and Financial Condition

Endorex continues to progress preclinical development of the Orasome(TM)
delivery system for the oral delivery of vaccines and drugs. Development
includes ongoing work with Elan and several major medical institutions for
vaccines and key hormones such as insulin and human growth hormone. We began
marketing this technology to major pharmaceutical companies based on key in vivo
data completed during the first half of 1999.  Data on the Orasome(TM) delivery
system in conjunction with the oral delivery of two key proteins, human growth
hormone and insulin, has been presented at a number of key scientific
conferences including the 26th International Symposium for the Controlled
Release of Bioactive Materials held in Boston. Included in this data were in
vivo results demonstrating 10% bioavailability of human growth hormone. In the
coming months, we anticipate that the joint venture will begin to develop a
prototype combination oral vaccine. Such new vaccines have been made possible by
the joint venture advances in delivery technology that include safe and
effective adjuvants and site specific targeting. `Targeting' vaccines to the
correct sites in the gastrointestinal tract or the nasal passage gets the
antigen to the right place; otherwise, antigens are lost and are ineffective.
Adjuvants boost the overall immune response to the antigen, creating a higher
level of immunization. This element is critical in persons with diminished
immune systems, such as the elderly, where many vaccines are much less
effective.

During the first half of 1999, collaborative development efforts began for our
second joint venture with Elan, established for the commercialization, research
and development of two drugs using the Medipad(R) technology.  The Medipad(R)
system is a small, disposable drug delivery system, which combines a
microinfusion pump with the convenience of patch technology.  We expect to
initiate clinical trials during 2000 with Medipad(R) in one drug through the
joint venture.

During the next twelve months, Endorex's oncology subsidiary, Wisconsin
Genetics, Inc. ("WGI") plans to continue development of POH. In June 1999, WGI
completed development of a new oral formulation of POH and filed an
Investigational New Drug ("IND") application. The new formulation significantly
reduces the number of pills a patient needs to take daily and should enhance
overall patient compliance during the treatment. In September 1999, we commenced
the first Endorex-sponsored POH trial of the new formulation, a phase I (safety)
human clinical trial commenced at the University of Wisconsin-Madison
Comprehensive Cancer Center. The National Cancer Institute ("NCI") continues to
sponsor phase II clinical trials in breast, prostate and pancreatic cancer.
Recently, two Phase II NCI-sponsored trials for ovarian and colorectal cancer
were closed due to lack of objective response. All of the NCI-sponsored phase II
trials use the initial formulation of POH developed by the NCI. We are
evaluating initiation of additional phase II clinical trials with POH in other
types of cancer, and we are actively recruiting potential partners for
development of our cancer drugs.

                                       8
<PAGE>

On September 30, 1999 we had unrestricted cash, cash equivalents, and marketable
securities of $9.0 million, compared to $13.2 million as of December 31, 1998.
Our working capital, exclusive of deferred costs, was $8.6 million as of
September 30, 1999 and $12.6 million as of December 31, 1998. We presently have
available $5.6 million of unused lines of credit and restricted cash. The
current level of operating activities requires us to spend approximately
$450,000 per month. We believe our cash resources are sufficient to support
currently planned operations for the next two years. However, we intend, from
time to time in the future, to seek to expand research and development
activities into other technologies and/or products that we either may license
from other entities or develop ourselves. Research and development activities
may require the expenditure of funds not presently available. We may seek to
obtain funds from possible future public or private sales of securities or other
sources. For further discussion of these risks, you should read Exhibit 99 "Risk
Factors" of this report on Form 10-QSB.

On October 22, 1999, Andrew J. Stein resigned from our board of directors siting
other commitments on his time.  We thank him for his contributions to Endorex.

Year 2000

We are aware of the issues associated with some computer programming codes and
embedded computer chips used in computer systems as the Year 2000 approaches.
Some systems or software will produce erroneous results or fail unless they have
been modified or upgraded to process date information correctly. We utilize
personal computers, software packages developed by third party vendors, and a
service bureau for payroll processing to manage our business. We do not have
internally developed software and do not sell any products that are derived from
internally developed software.

We have evaluated substantially all of our major hardware platforms and software
in use and have modified and upgraded our hardware, software and information
technology and other systems to be Year 2000 compliant.  We have surveyed our
major vendors as to Year 2000 readiness. The results of our surveys indicate
critical business systems and vendors are or anticipate being Year 2000
compliant in all material aspects of operations. We do not presently believe
that the Year 2000 problem will pose significant operational problems for our
internal computer systems or have a negative effect on our operations. However,
we cannot assure you that any Year 2000 compliance problems of our suppliers
will not negatively affect our operations. Based on the results of our review,
we do not have a formal contingency plan. However, because uncertainty exists
concerning the potential costs and effects associated with any Year 2000
compliance, we intend to continue to make efforts to ensure that third parties
with whom we have relationships are Year 2000 compliant.

Our cash equivalents may be exposed to credit risk if investment companies are
materially adversely affected due to the Year 2000 issue. The results of our
vendor surveys indicate that all banks and investment companies which we
currently utilize are in the process of testing Year 2000 modifications and
expect to be compliant before the end of the year. We anticipate that any Year
2000 impact would be short lived and would not impact Endorex's liquidity or its
operating results.

We have not incurred significant costs associated with Year 2000 compliance and
presently believe estimated future costs will not be material. However, actual
results could differ materially from our expectations due to unanticipated
technological difficulties or project delays.

These estimates and conclusions contain forward-looking statements and are based
on our best estimates of future events. If we, or any third parties on which we

                                       9
<PAGE>

rely, are unable to address the Year 2000 issue in a timely manner, it could
have an adverse impact on our operations. Risks to completing the Year 2000 plan
include potential unavailability of alternative software, our ability to
discover and correct potential Year 2000 problems which might have a serious
impact on operations, failure of vendors to complete their expected Year 2000
compliance, and liquidity issues surrounding securities investments.



                         PART II. - OTHER INFORMATION

ITEM 5 - OTHER INFORMATION

As disclosed in our latest proxy statement, the deadline for submitting a
proposal to be considered for inclusion in Endorex's proxy statement for the
2000 Annual Meeting is January 1, 2000.

Under recent amendments to Rule 14a-4(c)(1) under the Securities Exchange
Act of 1934, we will have discretionary voting authority if a proponent does not
notify us by March 2, 2000 of their intent to present a proposal from the floor
at the 2000 Annual Meeting of Stockholders or of their intent to commence a
proxy solicitation for the 2000 Annual Meeting of Stockholders.


ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

a)   Exhibits:

        27     Financial Data Schedule
        99     Risk Factors
     ____________________


b)   Reports on Form 8-K:

     None.


SIGNATURES

In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                              ENDOREX CORPORATION

November 12, 1999             /s/ Michael S. Rosen
                              --------------------
                              Michael S. Rosen
                              President and Chief Executive Officer
                              (principal executive officer)


November 12, 1999             /s/ David G. Franckowiak
                              ------------------------
                              David G. Franckowiak
                              Chief Financial Officer
                              (principal financial and accounting officer)


                                      10

<TABLE> <S> <C>

<PAGE>

<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
the Consolidated Balance Sheet and Consolidated Statement of Operations and is
qualified in its entirety by reference to such financial statements.
</LEGEND>

<S>                             <C>
<PERIOD-TYPE>                   9-MOS
<FISCAL-YEAR-END>                         DEC-31-1999
<PERIOD-START>                            JAN-01-1999
<PERIOD-END>                              SEP-30-1999
<CASH>                                      6,044,697
<SECURITIES>                                3,000,000
<RECEIVABLES>                                       0
<ALLOWANCES>                                        0
<INVENTORY>                                         0
<CURRENT-ASSETS>                            9,711,966
<PP&E>                                      1,115,637
<DEPRECIATION>                                481,952
<TOTAL-ASSETS>                             11,078,301
<CURRENT-LIABILITIES>                       1,028,396
<BONDS>                                             0
                       8,872,187
                                 9,094,971
<COMMON>                                       10,472
<OTHER-SE>                                (8,808,722)
<TOTAL-LIABILITY-AND-EQUITY>               11,078,301
<SALES>                                             0
<TOTAL-REVENUES>                              370,365
<CGS>                                               0
<TOTAL-COSTS>                                       0
<OTHER-EXPENSES>                          (5,919,939)
<LOSS-PROVISION>                                    0
<INTEREST-EXPENSE>                             38,338
<INCOME-PRETAX>                           (5,587,912)
<INCOME-TAX>                                        0
<INCOME-CONTINUING>                       (5,587,912)
<DISCONTINUED>                                      0
<EXTRAORDINARY>                                     0
<CHANGES>                                           0
<NET-INCOME>                              (5,587,912)
<EPS-BASIC>                                    (0.63)
<EPS-DILUTED>                                  (0.63)


</TABLE>

<PAGE>

                                                                      Exhibit 99

                                 RISK FACTORS

If we cannot obtain additional funding, our product development and
commercialization efforts may be reduced or discontinued.

  We will require additional funding to sustain our research and development
efforts, provide for future clinical trials, and continue our operations until
we are able to generate sufficient revenue from the sale and/or licensing of our
products. We cannot be certain whether we will be able to obtain required
additional funding on terms satisfactory to us, if at all. In addition, we have
expended, and will continue to expend, substantial funds on the development of
our product candidates and for clinical trials. We currently have commitments to
expend additional funds for the development of the Orasome(TM) oral delivery
system, the Medipad(R) infusion pump, clinical trials for our two cancer drugs,
license contracts, severance arrangements, employment agreements, and consulting
agreements. If we are unable to raise additional funds when necessary, we may
have to reduce or discontinue development, commercialization or clinical testing
of some or all of our product candidates or enter into financing arrangements on
terms that we would not otherwise accept.

We have had significant losses and anticipate future losses.

  We are a development stage company, have experienced significant losses since
inception and have a significant accumulated deficit. We expect to incur
significant additional operating losses in the future and expect cumulative
losses to substantially increase due to expanded research and development
efforts, preclinical studies and clinical trials. All of our products are
currently in development, preclinical studies or clinical trials, and we have
not generated significant revenues from product sales. We do not expect to
generate significant product revenues in the next year. There can be no
guarantee that we will ever generate product revenues sufficient to become
profitable or to sustain profitability.

We are dependent on our joint ventures with Elan Corporation and any future
joint ventures.

  Our strategy for research, development and commercialization of certain of our
products is to rely on arrangements with corporate partners. As a result, our
products are dependent upon the success of third parties in performing
preclinical studies and clinical trials, obtaining regulatory approvals,
manufacturing and marketing. In connection with our two joint ventures with
Elan, we are obligated to fund 50% of each joint venture's research and
development activities during the first year of each joint venture and in
proportion to our ownership interest in each joint venture thereafter, based on
the research and development plan and budget we mutually agree upon with Elan.
If we do not have sufficient resources to meet our funding obligations under the
two Elan joint ventures, we may have to terminate the venture prior to
commercialization or renegotiate the terms of the joint venture with Elan, or
our interest in the venture may be diluted. We intend to pursue additional
collaborations in the future, however, the terms available may not be acceptable
to us and the collaborations may not be successful. In addition, the amount and
timing of resources that our collaborators devote to these activities are not
within our control.

Problems in product development may cause our cash depletion rate to increase.
<PAGE>

  We have limited experience with clinical trials and if we encounter unexpected
difficulties with our operations or clinical trials, we may have to expend
additional funds, which would increase our cash depletion rate. Our ability to
manage expenses and our cash depletion rate are keys to the continued
development of product candidates and the completion of ongoing clinical trials.
Our cash depletion rate will vary substantially from quarter to quarter as we
fund non-recurring items associated with clinical trials, product development,
patent legal fees and consulting fees.

Our product development and commercialization efforts may not be successful.

  Our product candidates, have not received regulatory approval, and are
generally in the early stages of development. If the initial results from any of
the clinical trials are poor, those results will adversely effect our ability to
raise additional capital, which will affect our ability to continue full-scale
research and development for our oral delivery technology. In addition, product
candidates resulting from our research and development efforts, if any, are not
expected to be available commercially for several years, if at all. Our
products, if approved, may not be used by doctors who are unfamiliar with their
application in the treatment of cancer. As with any new drug, doctors may be
inclined to continue to treat patients with conventional therapies, in most
cases chemotherapy, rather than new alternative therapies. We or our marketing
partner may be required to implement an aggressive education and promotion plan
with doctors in order to gain market recognition, understanding and acceptance
of our products. Any such effort may be time consuming and might not be
successful. Accordingly, we cannot guarantee that our product development
efforts, including clinical trials, or commercialization efforts will be
successful or that any of our products, if approved, can be successfully
marketed.

Our technology and products may prove ineffective or harmful, or be too
expensive to market successfully.

  Our future success is significantly dependent on our ability to develop and
test workable products for which we will seek approval from the United States
Food & Drug Administration to market to certain defined patient groups. The
products we are currently developing will require significant additional
laboratory and clinical testing and investment for the foreseeable future.
Although we are optimistic that we will be able to complete development of one
or more products, our proposed products may not prove to be effective in
clinical trials or they may cause harmful side effects during clinical trials.
In addition, our product candidates, if approved, may prove impracticable to
manufacture in commercial quantities at a reasonable cost and/or with acceptable
quality. Any of these factors could negatively affect our financial position and
results of operations.

Our dependence on a limited number of suppliers may negatively impact our
ability to complete clinical trials and market our products.

  We currently procure, and intend in the future to procure, clinical supply of
our cancer drugs from a small number of manufacturers. Additionally, prior to
commercial distribution of any of our products, if approved, we will be required
to identify and contract with a commercial supplier. We cannot guarantee that
these suppliers will be able to qualify their facilities under regulations
imposed by the FDA or that they will be able to label and supply us with drugs
in a timely manner, if at all. Accordingly, any change in our existing or future
contractual relationships with, or an interruption in supply from, any third-
party service
<PAGE>

provider or supplier could negatively impact our ability to complete ongoing
clinical trials and to market our products, if approved.

We do not have a sales force to market our products.

  If and when we receive approval from the United States Food and Drug
Administration for our initial product candidates, product marketing will be
contingent on our ability to license the products or enter into marketing
agreements with partner companies or on our ability to recruit, develop, train
and deploy our own sales force. We currently intend to sell our products in the
United States and internationally in collaboration with one or more marketing
partners. However, we presently have no agreements for the licensing or
marketing of our product candidates, and we cannot assure you that we will be
able to enter into any such agreements in a timely manner or on commercially
favorable terms, if at all. Additionally, we do not presently have a sales
force, or possess the resources or experience necessary to market any of our
product candidates, if and when they are approved. Development of an effective
sales force requires significant financial resources, time and expertise. We
cannot assure you that we will be able to obtain the financing necessary to
establish a sales force in a timely or cost effective manner, if at all, or that
a sales force will be capable of generating demand for our product candidates,
if and when they are approved.

We maintain only limited product liability insurance and may be exposed to
claims if our insurance coverage is insufficient.

  The manufacture and sale of our products involves an inherent risk of product
liability claims. We currently have product liability insurance with limits of
liability of $10 million. Because product liability insurance is expensive and
difficult to obtain, we cannot assure you that we will be able to maintain
existing insurance or obtain additional product liability insurance on
acceptable terms or with adequate coverage against potential liabilities. Our
inability to obtain sufficient insurance coverage on acceptable terms or to
otherwise protect against potential product liability claims in excess of our
insurance coverage, if any, could negatively impact our financial position and
results of operations.

We may not be able to compete with our competitors in the biotechnology
industry.

  The biotechnology industry is intensely competitive, subject to rapid change
and sensitive to new product introductions or enhancements. Virtually all of our
existing competitors have greater financial resources, larger technical staffs,
and larger research budgets than we have, as well as greater experience in
developing products and conducting clinical trials. Our competitors in the
vaccine development field include American Home Products, the Merck Company,
SmithKline Beecham, MedImmune, Aviron and Chiron, other major pharmaceutical
companies, specialized biotechnology firms, universities and governmental
agencies. Our competitors in the liposomal formulation field include The
Liposome Company, NexStar and Sequus. Our competitors in the field of the oral
delivery of drugs include Emisphere, which has recently completed Phase II
trials for oral heparin and is in preclinical development with oral hormones,
and Cortecs, which has several products in clinical development. In addition,
there may be other companies that are currently developing competitive
technologies and products or which may in the future develop technologies and
products that are comparable or superior to our technologies and products.
Accordingly, we cannot assure you that we will be able to compete successfully
with our existing and future competitors or that competition will not negatively
affect our financial position or results of operations in the future.
<PAGE>

We may not be successful if we are unable to obtain and maintain patents and
licenses to patents.

  Our success depends, in large part, on our ability to obtain and maintain a
proprietary position in our products through patents, trade secrets and orphan
drug designations. We have been granted several United States patents and have
submitted several United States patent applications and numerous corresponding
foreign patent applications, and have also obtained licenses to patents or
patent applications owned by other entities. However, we cannot assure you that
any of these patent applications will be granted or that our patent licensors
will not terminate any of our patent licenses. We also cannot guarantee that any
issued patents will provide competitive advantages for our products or that any
issued patents will not be successfully challenged or circumvented by our
competitors. Further, the laws of certain countries may not protect our
proprietary rights to the same extent as U.S. law. We are dependent upon our
license of oral delivery technology from MIT, our license of Perillyl alcohol
("POH") from the Wisconsin Alumni Research Foundation and licenses from Elan in
connection with our two joint ventures with Elan. We cannot assure you that the
technology underlying such licenses will be profitable, or that we will be able
to retain licenses for such technologies or that we will obtain patent
protection outside the United States. The issues are more significant with
respect to any product based upon natural substances, such as POH, for which
available patent protection may be limited due to the prior use or reported
utility of such products (or their natural sources) to treat various disorders
or diseases. To the extent that we rely on trade secret protection and
confidentiality agreements to protect our technology, others may develop similar
technology, or otherwise obtain access to our findings or research materials
embodying those findings. The application of patent law to the field of
biotechnology is relatively new and has resulted in considerable litigation.
There is a substantial risk in the rapidly developing biotechnology industry
that patents and other intellectual property rights held by us could be
infringed by others or that products developed by us or their method of
manufacture could be covered by patents owned by other companies. Although we
believe that our patents and our licensors' patents do not infringe on any third
party's patents, we cannot be certain that we can avoid litigation involving
such patents or other proprietary rights. Patent and proprietary rights
litigation entails substantial legal and other costs, and we may not have the
necessary financial resources to defend or prosecute our rights in connection
with any litigation. Responding to, defending or bringing claims related to
patents and other intellectual property rights may require our management to
redirect our human and monetary resources to address these claims and may take
years to resolve.

Our product development and commercialization efforts may be reduced or
discontinued due to difficulties or delays in clinical trials.

  We may encounter unanticipated problems, including development, manufacturing,
distribution, financing, and marketing difficulties, during the product
development, approval and commercialization process. Our product candidates may
take longer than anticipated to progress through clinical trials. In addition,
patient enrollment in the clinical trials may be delayed or prolonged
significantly, thus delaying the clinical trials and causing increased costs.
If we experience any such difficulties or delays, we may have to reduce or
discontinue development, commercialization or clinical testing of some or all of
our product candidates.

Our product development and commercialization efforts may be reduced or
discontinued due to delays or failure in obtaining regulatory approvals.
<PAGE>

  We will need to do substantial additional development and clinical testing
prior to seeking any regulatory approval for commercialization of our product
candidates. Testing, manufacturing, commercialization, advertising, promotion,
export and marketing, among other things, of our proposed products are subject
to extensive regulation by governmental authorities in the United States and
other countries. The testing and approval process requires substantial time,
effort and financial resources and we cannot guarantee that any approval will be
granted on a timely basis, if at all. At least initially, we intend, to the
extent possible, to rely on licensees to obtain regulatory approval for
marketing our products. The failure by us or our licensees to adequately
demonstrate the safety and efficacy of any of our product candidates under
development could delay, limit or prevent regulatory approval of the product.
Without regulatory approval, we may have to reduce or discontinue development,
commercialization or clinical testing of some or all of our product candidates.
Companies in the pharmaceutical and biotechnology industries have suffered
significant setbacks in conducting advanced human clinical trials, even after
obtaining promising results in earlier trials. Furthermore, the United States
Food & Drug Administration may suspend clinical trials at any time on various
grounds, including a finding that the subjects or patients are being exposed to
an unacceptable health risk. Also, even if regulatory approval of a product is
granted, such approval may entail limitations on the indicated uses for which it
may be marketed. Accordingly, we may experience difficulties and delays in
obtaining necessary governmental clearances and approvals to market our
products, and we may not be able to obtain all necessary governmental clearances
and approvals to market our products.

Our products, if approved, may not be commercially viable due to health care
reform and third-party reimbursement limitations.

  Recent initiatives to reduce the federal deficit and to reform health care
delivery are increasing cost-containment efforts. We anticipate that Congress,
state legislatures, and the private sector will continue to review and assess
alternative benefits, controls on health care spending through limitations on
the growth of private health insurance premiums and Medicare and Medicaid
spending, price controls on pharmaceuticals, and other fundamental changes to
the health care delivery system. Any such changes could negatively impact the
commercial viability of our products, if approved. Our ability to successfully
commercialize our product candidates, if and when they are approved, will depend
in part on the extent to which appropriate reimbursement codes and authorized
cost reimbursement levels of such products and related treatment are obtained
from governmental authorities, private health insurers, and other organizations,
such as health maintenance organizations. In the absence of national Medicare
coverage determination, local contractors that administer the Medicare program,
within certain guidelines, can make their own coverage decisions. Accordingly,
there can be no assurance that any of our product candidates, if approved and
when commercially available, will be included within the then current Medicare
coverage determination or the coverage determination of state Medicaid programs,
private insurance companies and other health care providers. In addition, third-
party payers are increasingly challenging the prices charged for medical
products and services. Also, the trend toward managed health care and the growth
of health maintenance organizations in the United States may all result in lower
prices for our products, if approved and when commercially available, than we
currently expect. The cost containment measures that health care payers and
providers are instituting and the effect of any health care reform could
negatively affect our financial performance, if and when one or more of our
products are approved and available for commercial use.

Our operations and financial performance could be negatively affected if we
cannot attract and retain key personnel.
<PAGE>

  Our success is dependent, in part, upon a limited number of key executive
officers and technical personnel remaining employed with us, including Michael
S. Rosen, President and Chief Executive Officer, David G. Franckowiak, Chief
Financial Officer, and Dr. Robert N. Brey, Vice President of Research and
Development. We also believe that our future success will depend largely upon
our ability to attract and retain highly skilled research and development and
technical personnel. We face intense competition in our recruiting activities,
including competition from larger companies with greater resources. We cannot
assure you that we will be successful in attracting or retaining skilled
personnel. The loss of certain key employees or our inability to attract and
retain other qualified employees could negatively affect our operations and
financial performance.

We may be adversely affected by Year 2000 issues.

  Beginning on January 1, 2000, some computer systems and software will produce
erroneous results or fail unless they have been modified or upgraded to process
date information correctly. We have evaluated substantially all of our major
hardware and software platforms in use and have modified and upgraded our
hardware, software and information technology and other systems to be Year 2000
compliant. We do not presently believe that the Year 2000 problem will pose
significant operational problems for our internal computer systems or have a
negative affect on our operations. However, we cannot assure you that any Year
2000 compliance problems of our suppliers will not negatively affect our
operations. We have surveyed our major vendors as to Year 2000 readiness. The
results of the surveys indicate the vendors are or anticipate being Year 2000
compliant. Because uncertainty exists concerning the potential costs and effects
associated with any Year 2000 compliance, we intend to continue to make efforts
to ensure that third parties with whom we have relationships are Year 2000
compliant. We have not incurred significant costs to date associated with Year
2000 compliance and presently believe estimated future costs will not be
material. However, actual results could differ materially from our expectations
due to unanticipated technological difficulties or project delays. If we, or any
third parties on which we rely, are unable to address the Year 2000 issue in a
timely manner, it could have an adverse impact on our operations. In order to
assure that this does not occur, we have developed a contingency plan and intend
to devote all resources required to attempt to resolve any significant Year 2000
problems in a timely manner.

Our stock price is highly volatile and our common stock is thinly traded.

   The market price of our common stock, like that of many other development-
stage public pharmaceutical and biotechnology companies, has been highly
volatile and may continue to be so in the future. Factors such as disclosure of
results of preclinical and clinical testing, adverse reactions to products,
governmental regulation and approvals, and general market conditions may have a
significant effect on the market price of the common stock and our other equity
securities. Since it commenced trading on the American Stock Exchange on August
6, 1998, our common stock has been thinly traded. We cannot guarantee that a
more active trading market will develop in the future.

Investors may suffer substantial dilution.

  In addition to the shares of common stock currently outstanding, Endorex has a
number of agreements or obligations that may result in dilution to investors.
These include:

  . warrants to purchase 2,162,162 shares of common stock at $2.54375 per share,
<PAGE>

     subject to adjustment, issued in connection with the October 1997 Private
     Placement;

  .  warrants for the purchase of 230,770 shares of common stock at $10.00 per
     share held by Elan;

  .  warrants to purchase 66,668 shares of common stock at $2.54375 per share,
     subject to adjustment, held by the Aries Master Fund and the Aries Domestic
     Fund, L.P.;

  .  conversion rights and dividend rights of preferred stock held by Elan,
     consisting of 80,100 shares of Series B Convertible Preferred Stock ($8.0
     million original liquidation value) bearing an 8% cumulative payment in
     kind dividend and convertible at liquidation value into common stock at
     $7.50 per share, subject to adjustment, and 84,105 shares of Series C
     Exchangeable Convertible Preferred Stock ($8.4 million original liquidation
     value) bearing a 7% cumulative payment-in-kind dividend and which is
     exchangeable for part of Endorex's interest in the second joint venture or
     convertible at liquidation value into common stock at $9.00 per share;

  .  options to purchase approximately 1.5 million shares of common stock
     outstanding to participants in our stock option plan with a weighted
     average exercise price of $3.18;

  .  semiannual 5% payment-in-kind dividend obligations at the rate of
     approximately 865,000 shares of common stock per year payable to holders of
     approximately 8.6 million shares of common stock, payable semiannually
     until October 16, 2002, unless certain conditions are met; and

  .  anti-dilution rights under the above warrants, preferred stock and
     contractual rights granted in connection with the October 1997 private
     placement which can permit purchase of additional shares and/or at lower
     prices under certain circumstances. To the extent that the payment-in-kind
     dividends are paid, anti-dilution rights are triggered, or warrants or
     conversion rights are exercised, our stockholders will experience
     substantial dilution and the Company's stock price may decrease.

Future sales of common stock by our existing stockholders could adversely affect
our stock price.

  The market price of our common stock could decline if our existing
stockholders sell shares of common stock in the market, or because of the
perception that these sales could occur. These sales also might make it more
difficult for us to sell equity securities in the future at a time and at a
price that we deem appropriate.

We have not paid cash dividends.

  We have never paid cash dividends on our common stock and we do not anticipate
paying any dividends in the foreseeable future. We currently intend to retain
earnings, if any, for the development of our business.

We have certain interlocking relationships that may present potential conflicts
of interest.

  Lindsay A. Rosenwald, M.D., is the Chairman and sole stockholder of Paramount
Capital Asset Management, Inc. ("PCAM"), Paramount Capital, Inc. ("Paramount"),
and Paramount Capital Investment LLC ("PCI"), a merchant banking and venture
capital
<PAGE>

firm specializing in biotechnology companies. PCAM is the investment manager of
The Aries Master Fund, a Cayman Island exempted company, and the general partner
of each of the Aries Domestic Fund, L.P. and the Aries Domestic Fund II, L.P.
each of which is a significant stockholder of Endorex. In addition, certain
officers, employees and/or associates of Paramount and/or its affiliates own
securities in subsidiaries of Endorex. In the regular course of its business,
PCI identifies, evaluates and pursues investment opportunities in biomedical and
pharmaceutical products, technologies and companies. Generally, Delaware
corporate law requires that any transactions between Endorex and any of its
affiliates be on terms that, when taken as a whole, are substantially as
favorable to us as those then reasonably obtainable from a person who is not an
affiliate in an arms-length transaction. Nevertheless, neither such affiliates
nor PCI is obligated pursuant to any agreement or understanding with us to make
any additional products or technologies available to us. We do not expect and
you should not expect, that any biomedical or pharmaceutical product or
technology identified by such affiliates or PCI in the future will be made
available to us. In addition, certain of the current officers and directors of
Endorex or any officers or directors of the company hereafter appointed may from
time to time serve as officers or directors of other biopharmaceutical or
biotechnology companies. There can be no assurance that such other companies
will not have interests in conflict with us.

Certain directors and stockholders have significant influence.

  Our directors, executive officers and principal stockholders and certain of
their affiliates have the ability to influence the election of directors and
most other stockholder actions. In particular, pursuant to a placement agency
agreement, as long as 50% of the shares sold in our October 1997 private
placement remain outstanding and subject to contractual rights described in the
subscription agreement, we may not do any of the following without the placement
agent's prior approval:

  .  issue or increase the authorized amount or alter the terms of any of our
     securities senior to, or on parity with, the private placement shares with
     respect to voting, liquidation or dividends,

  .  alter our charter documents in any manner that would adversely affect the
     relative rights, preferences, qualifications, limitations or restrictions
     of the private placement shares or of certain contractual rights described
     in the subscription agreements,

  .  incur indebtedness in excess of $1.0 million,

  .  incorporate or acquire any subsidiaries, and

  .  enter any transactions with our affiliates.

  In addition, our Board of Directors cannot exceed seven persons without the
prior written consent of the placement agent. These arrangements may discourage
or prevent any proposed takeover of Endorex, including transactions in which
stockholders might otherwise receive a premium for their shares over the then
current market prices. Such stockholders may influence corporate actions,
including influencing elections of directors and significant corporate events.


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