ENDOREX CORP, 10KSB/A, 2000-11-27

ENDOREX CORP
10KSB/A, 2000-11-27
PHARMACEUTICAL PREPARATIONS

Previous: SALOMON BROTHERS MORTGAGE SECURITIES VII INC, 8-K, EX-5.1, 2000-11-27

Next: ENDOREX CORP, 10KSB/A, EX-10.21, 2000-11-27

<PAGE>

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

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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

FORM 10-KSB/A

----------------
(Mark
One)

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1999

[_] TRANSITION REPORT UNDER 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 (I.R.S. Employer
of incorporation or organization) Identification Number)

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

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

Securities registered under Section 12(b) of the Exchange Act:

<TABLE>
<CAPTION>
Name of each Exchange
Title of each class on Which registered
------------------- ---------------------
<S> <C>
None American Stock Exchange
</TABLE>

Securities registered under Section 12(g) of the Securities Exchange Act:

Common Stock, par value $.001 per share
(Title of class)

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

Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the 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 [_]

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [_]

Revenues for its most recent fiscal year were: $-0-

The aggregate market value of the voting stock held by non-affiliates
computed by reference to the closing price of such stock, as of March 1, 2000,
was $64,800,000. Non-affiliates have been determined on the basis of holdings
set forth under Item 11 of this Annual Report on Form 10-KSB.

At March 1, 2000, 10,786,337 shares of the registrant's common stock (par
value, $.001 per share) were outstanding.

Documents Incorporated by Reference

The definitive proxy statement of Endorex Corporation in connection with
the annual meeting held on May 17, 2000 is incorporated by reference into Part
III of this Form 10-KSB.

Transitional Small Business Issuer: Yes [_] No [X]

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>

PART I

Item 1. Business.

The Company

Endorex Corporation is a development stage drug delivery company,
incorporated in Delaware. Our core drug delivery technology, the Orasome(TM)
system, focuses on the oral and mucosal delivery of protein and peptide-based
drugs and vaccines previously delivered only by injection. The Orasome system
is licensed from the Massachusetts Institute of Technology ("MIT").

In 1998 Endorex formed two drug delivery joint ventures with Elan
Corporation, plc ("Elan"), one of the world's leading drug delivery companies.
The purpose of the first joint venture, InnoVaccines Corporation
("InnoVaccines"), is to research, develop and commercialize novel delivery
systems for the human and veterinary vaccine markets.

The second joint venture, Endorex Newco, Ltd. ("Newco"), focuses on the
utilization of the MEDIPAD(R) microinfusion pump, developed by Elan, to
deliver iron chelators for the treatment of a series of genetic blood
disorders known as iron overload disorders.

Our headquarters is located north of Chicago, close to the headquarters of
several major pharmaceutical companies such as Abbott Laboratories, Baxter
International, Searle (the pharmaceutical division of Monsanto), and the U.S.
subsidiaries of two major Japanese pharmaceutical companies, Fujisawa and
Takeda Chemicals.

This report contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended, and Section
27A of the Securities Act of 1933, as amended, and is subject to the safe-
harbors created by those sections. These forward-looking statements are
subject to significant risks and uncertainties, including those identified in
the "Risk Factors" section of this Form 10-KSB, which may cause actual results
to differ materially from those discussed in any forward-looking statements.
The forward-looking statements within this Form 10-KSB are identified by words
such as "believes," "anticipates," "expects," "intends," "may," "will" and
other similar expressions. However, these words are not the exclusive means of
identifying such statements. In addition, any statements that refer to
expectations, projections, or other characterizations of future events or
circumstances are forward-looking statements. We undertake no obligation to
publicly release the results of any revisions to forward-looking statements
that may be made to reflect events or circumstances occurring subsequent to
the filing of this form 10-KSB with the SEC. You should carefully review and
consider the various disclosures we make in this report and our other reports
filed with the SEC that attempt to advise interested parties of the risks and
factors that may affect our business.

Orasome Oral and Mucosal Drug Delivery System

Endorex's fundamental platform technology resides in its potential ability
to convert injectable-only therapy into the patient-preferred format of oral
therapy. This conversion process includes encapsulating "fragile" protein
and/or peptide based drugs for oral delivery using proprietary patented
technology from MIT. Many vaccines and macromolecular drugs are exceptionally
fragile and thus cannot survive the digestive action of the gastrointestinal
("GI") tract. By employing the Orasome system, a specially engineered,
polymerized liposome-based technology for entrapment of protein or peptide-
based vaccines and drugs, many of these agents might be made orally available
at therapeutic levels. Endorex is developing core technology for a new
generation of vaccines that may be taken by mouth, thereby replacing painful
injections, and thereby increasing patient compliance. Other applications of
this technology under development at Endorex could enable preparation of oral
formulations of peptide hormones, such as insulin and human growth hormone,
other sensitive peptide drugs and proteins, and nucleic acids ("DNA").
Virtually all of these compounds are currently given to patients solely via
injection.

The Orasome system represents a series of improvements in encapsulation
technology resulting in properties that we believe enable efficient uptake by
crucial cells in the gastrointestinal tract. Because of the unique

1
<PAGE>

ability of these polymerized liposomes to withstand the activity of bile
salts, digestive enzymes, and gastric acids, this proprietary liposomal
technology may be utilized practically and commercially for the oral delivery
of many therapeutics.

Orasomes encapsulate sensitive drugs and hold them within a membrane
envelope that is resistant to the environmental stress of the GI tract.
Orasomes can also be engineered to release contents in a controlled fashion
and to contain surface ligands (or biological "magnets") capable of targeting
specific receptors in the intestine and other tissues. By comparison,
conventional liposomes appear to be chemically and physically unstable and
tend to be unsuitable for oral delivery, because they degrade rapidly upon
introduction into the GI tract. If the encapsulated drug or vaccine is
released into this environment, the active material is destroyed and the
therapeutic effect negated. In vitro studies with orasomes have demonstrated
high stability under harsh conditions similar to conditions found in the human
intestinal tract, such as exposure to acidic pH, simulated bile salts, and
detergents.

Liposomal formulations have been scaled up and manufactured commercially.
Examples of such formulations include the cancer drugs liposomal doxorubicin
and liposomal daunorubicin as well as the anti-fungal agent liposomal
amphotericin B, which have been approved by the Food and Drug Administration
("FDA") and are currently being marketed. Endorex is currently scaling up its
Orasome system for human clinical trials through its joint venture partner,
Elan.

Endorex believes that the Orasome system as a platform technology satisfies
a number of criteria necessary for a successful drug delivery system,
including:

--Flexibility for incorporation of numerous types of drugs and vaccines;

--Stability of the drug or vaccine through the GI tract;

--Enhanced mucosal uptake of the drug or vaccine;

--Compatibility of the delivery system with current manufacturing
methodology; and

--No apparent toxicity of the orasomes in animal studies to-date.

Drug Delivery Development Status

Endorex has demonstrated the bioavailability and bioactivity of using
orasomes for oral delivery of selected drugs in animal models as well as the
immunogenicity of oral vaccines in similar models. Orasomes have been used
successfully in animal models for oral delivery of human growth hormone
("hGH"). Endorex believes an oral version of hGH should provide product
differentiation along with the convenience and improved compliance that
accompanies oral delivery. Daily oral delivery should offer an attractive
alternative to daily injections or slow release formulations, particularly for
chronic therapies. Animal studies have shown that delivery of unencapsulated
hGH, or hGH in non-polymerized liposomes, does not result in a rise in serum
hGH, while hGH is detected in serum after oral delivery in orasomes.

Endorex recently signed a research and option agreement with Novo Nordisk
A/S (a major European pharmaceutical company with a significant share of the
estimated $1.7 billion global market for hGH), to evaluate the commercial
attractiveness of Novo's brand of hGH delivered orally, Norditropin(R). They
plan to evaluate the Orasome system in several animal models. Novo Nordisk has
taken an exclusive option to license the Orasome technology for
Norditropin(R).

During 2000, Endorex will also evaluate the Orasome system for oral
delivery of a DNA based product (vaccine).

Oral Delivery of Human and Veterinary Vaccines

According to a Frost & Sullivan market research report on human vaccines,
the worldwide vaccine market is projected to reach $6 billion in 2000. There
is also a large and growing veterinary vaccine market.

2
<PAGE>

In order to participate in this attractive and large market with a new
delivery alternative, Endorex partnered with Elan in 1998 and established a
joint venture, InnoVaccines, for the research, development and
commercialization of oral and mucosal vaccines. In forming this joint venture,
Elan purchased equity securities of Endorex (common and preferred stock, as
well as warrants) for aggregate investments of $10 million. InnoVaccines
combines novel existing and future delivery systems from both companies for
the development of human vaccines.

The joint venture has evaluated the Orasome system in animal models for its
potential to deliver a variety of vaccines, including tetanus, orally and by
nasal administration. Additionally, the company has demonstrated successful
encapsulation of a vaccine adjuvant in combination with the vaccine antigen.
No toxicological side effects have been seen in animal studies with orasomes.
During 2000, InnoVaccines plans to scale up the Orasome technology in
preparation for a clinical trial of its lead clinical candidate, an oral
tetanus vaccine. Additionally, the joint venture plans to evaluate the
feasibility and efficacy of an oral hepatitis B vaccine and an oral flu
vaccine in animal models.

The Orasome technology for delivery of drugs and vaccines is the subject of
two MIT U.S. patents which have issued and four pending patents: one from MIT
and three filed by Endorex. In addition, the joint venture further extended
its fundamental oral vaccine intellectual property by acquiring an exclusive
worldwide license to the Southern Research Institute and University of
Alabama-Birmingham's portfolio of patents on oral microsphere delivery for
vaccines in 1999. This patent portfolio consists of six issued U.S. patents
and more than 40 related issued patents in Europe and in many countries
throughout the world.

Endorex/Elan MEDIPAD Drug Delivery System Joint Venture for Iron Chelators

In October 1998, Endorex announced that it had established a second joint
venture with Elan whose purpose was the exclusive research, development and
commercialization of the MEDIPAD drug delivery system to deliver iron
chelators for the treatment of iron overload disorders. The most common cause
of this health problem is a type of genetic blood disorder. These diseases
include Cooley's anemia (beta-thalassemia) and sickle cell anemia.

MEDIPAD is Elan's unique microinfusion pump designed for the subcutaneous
delivery of selected drugs that require continuous infusion via pump. Each
MEDIPAD is a low cost, disposable drug delivery device with an adhesive
backing. Its light weight enables it to be worn in a manner similar to a
transdermal patch. MEDIPAD is expected to replace conventional infusion pumps
that are expensive and cumbersome for the patient. Conventional pumps appear
to impede patient compliance. We believe MEDIPAD will improve patient
compliance.

In February 2000, Endorex announced that the MEDIPAD iron chelator joint
venture has entered into an exclusive worldwide license, development, and
supply agreement with Schein Pharmaceutical, Inc. to develop and commercialize
iron chelating products using the MEDIPAD drug delivery system. Schein
Pharmaceutical will market this product in the United States.

The Schein Pharmaceutical Agreement

Effective February 2nd 2000, Endorex Newco, Ltd., a joint venture between
Endorex and Elan Corporation, plc, entered into a license, co-development and
supply agreement with Schein Pharmaceutical (Bermuda) Ltd, an affiliate of
Schein Pharmaceutical, Inc. Under the terms of this agreement, Endorex Newco
granted to Schein exclusive worldwide license to utilize and commercialize
MEDIPAD(R) in combination with a Schein iron chelator. Subsequent to the date
of the agreement, Watson Pharmaceuticals, Inc. acquired 100% ownership of
Schein Pharmaceutical, Inc.

Under the license, co-development and supply agreement, Endorex Newco is
responsible for development of the MEDIPAD(R) delivery system, for use with
Schein's iron chelator product, in accordance with product

3
<PAGE>

specifications as defined jointly by Endorex Newco and Schein. Schein is
responsible for the development, sourcing and supply of the iron chelator
compound. Schein will also be responsible for the packaging, selling and
distribution of the MEDIPAD(R)/iron chelator product in the U.S. Subject to
approval of Endorex Newco, Schein may sublicense commercialization of the
MEDIPAD(R)/iron chelator product in countries outside of the U.S.

Costs and royalties associated with the license, co-development and supply
agreement are as follows:

. Endorex Newco will supply MEDIPAD(R) product to Schein at manufacturing
cost.

. Development costs are shared between Endorex Newco and Schein, with
Endorex Newco bearing substantially all of the costs of developing the
MEDIPAD(R) system and Schein bearing substantially all of the costs of
developing the iron chelator.

. Costs of any clinical trials on the MEDIPAD(R) or the MEDIPAD(R)/iron
chelator product will generally be shared.

. Schein is responsible for the costs of regulatory filings for the
MEDIPAD(R)/iron chelator product.

. Schein will remit to Endorex Newco a license royalty fee based on the
operating profit from MEDIPAD(R)/iron chelator product sales.

. Endorex Newco is entitled to share in any fees received by Schein for
sub-licenses granted.

Endorex Newco's development costs throughout the remainder of the year 2000
are not expected to exceed $500,000. Endorex will recognize approximately 80%
of these costs, due to its 80% interest in Endorex Newco.

The license, co-development and supply agreement has an initial term of 10
years from the date of MEDIPAD(R)/iron chelator product launch (on a country
by country basis) subject to automatic, 2-year renewal periods. After the
expiration of the initial 10-year period, either party may terminate the
license, co-development and supply agreement by providing two years' notice.

Either party may terminate the license, co-development and supply agreement
if the other party goes into liquidation or bankruptcy or breaches the
agreement, without curing. In addition, Newco may terminate the agreement.

. If Schein fails in its performance obligations regarding supply of the
iron chelator,

. If Schein fails to file for U.S. regulatory approval of the
MEDIPAD(R)/iron chelator product within 6 months of the completion of its
development,

. If Schein fails to effect a timely commercial launch of the product in
the U.S.,

. If Schein notifies Endorex Newco that it does not wish to commercialize
the MEDIPAD/iron chelator product, or

. If a technological competitor of Endorex Newco acquires 25% or more of
Schein or, alternatively, if Schein acquires 25% or more of a
technological competitor.

Oncology Program

On March 1, 2000, we announced that in spite of several active phase I and
II trials with our two oncology drugs, POH and ImmTher(R), Endorex has decided
to divest the oncology business in favor of focusing on the rapid expansion
and promise of our drug delivery business. Further development of the oncology
business would require a substantial step-up in investment in product
development and human resources at a time when we are facing a similar
requirement in our drug delivery business that has already attracted initial
partners. Oncology has been our focus for many years. However, to be a serious
participant in this highly competitive arena would require a significant
restructuring of our business and significantly higher financial resources. We
have already begun to pursue several alternatives for terminating our role in
this business early in 2000.

Endorex's oncology program consists of two areas of cancer therapy:
immunotherapy and natural chemotherapy.

4
<PAGE>

Immunotherapy Program

Endorex's immunomodulator, ImmTher(R), works by activating macrophages,
cells that specifically recognize and destroy cancer cells. ImmTher(R) is
currently being evaluated in a randomized phase II (efficacy) trial as an
adjunct therapy, following surgery and chemotherapy, for the treatment of bone
cancer in children and young adults. The initial therapy for this type of
cancer is often surgery (including limb amputation). However, residual cancer
cells remaining after surgery metastasize to the liver or lungs and patients
rarely survive more than a few years. ImmTher(R) is being tested for its
usefulness in treating micrometastases with a goal of increasing the life of
these children and young adults. The trial is being conducted at the two
leading cancer centers in the U.S., Memorial Sloan Kettering in New York and
M.D. Anderson Cancer Center in Houston. Endorex has received Orphan Drug
designation for ImmTher(R) by the FDA for two types of bone cancer, Ewings
sarcoma and osteogenic sarcoma.

Natural Chemotherapy

POH is a synthetic compound that is a member of a new class of anti-cancer
agents, monoterpenes, which have shown anti-tumor and preventative activity
against a wide range of tumor types in preclinical studies at non-toxic dose
levels. POH was developed by Dr. Michael Gould and his collaborators at the
University of Wisconsin-Madison, with the support of the National Cancer
Institute.

Monoterpenes are natural compounds produced by plants and are found in
commonly consumed fruits and vegetables, and have multiple cellular effects
including the modulation of the cellular levels of growth factors and their
receptors. Monoterpenes selectively inhibit cell growth in a wide variety of
rodent tumors and human cancer cell lines and also act to induce programmed
cell death (apoptosis).

Wisconsin Genetics, Inc. ("WGI"), a majority-owned Endorex subsidiary, was
founded to develop new therapies for the prevention and treatment of cancer.
Patents covering the use of POH in the treatment of cancer have been licensed
for development by WGI from Wisconsin Alumni Research Foundation ("WARF").
WARF, a non-profit organization, is the office designated to receive and
license new discoveries made by the University of Wisconsin-Madison
researchers.

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. During 1999, 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. Additional phase II clinical trials
with POH in other types of cancer, such as brain cancer and different types of
leukemia, are being considered.

Government Regulation

Prior to marketing, each of our products must undergo an extensive
regulatory approval process conducted by the FDA and applicable agencies in
other countries. Testing, manufacturing, commercialization, advertising,
promotion, export and marketing, among other things, of our proposed products
are subject to extensive regulation by government authorities in the United
States and other countries. All products must go through a series of tests,
including advanced human clinical trials, which the FDA is allowed to suspend
as it deems necessary.

Patents and Other Proprietary Rights

We rely on patent rights, trade secrets and nondisclosure agreements to
establish and protect our proprietary rights to our technologies. Despite
these precautions, it may be possible for unauthorized third parties to
utilize

5
<PAGE>

our technology or to obtain and use information that we regard as proprietary.
The laws of some foreign countries do not protect our proprietary rights in
processes and products to the same extent as the laws of the United States.

Endorex currently has the following patent portfolio in the United States:
(1) Endorex has three issued patents, (2) Orasomal has two patents issued, (3)
InnoVaccines has licensed a series of patents from Southern Research
Institute, 6 of which have issued in the U.S., and (4) WGI has licensed the
rights to three patents issued to WARF. In addition, we have more than 50
foreign issued patents, as well as several foreign patent applications
pending.

Research and Development Expense

Research and development expenditures were approximately $2.0 million for
the year ended December 31, 1999 and the year ended December 31, 1998.

Employees

As of March 1, 2000 we had fifteen full-time employees, including 5 Ph.D.s,
and 4 masters-level employees.

Endorex has recruited seasoned managers with considerable experience in the
pharmaceutical industry and utilizes a Scientific Advisory Board, certain
members of which are prominent researchers and academics in their fields.
Michael Rosen, the company's President/CEO, joined Endorex in 1996. Prior to
joining Endorex, Mr. Rosen held senior executive positions at Monsanto, Pfizer
and Bristol-Myers Squibb. Robert Brey, Ph.D., Vice President of Research and
Development, has prior experience with American Home Products' vaccine
division. David Franckowiak, Chief Financial Officer, spent eleven years with
PricewaterhouseCoopers LLP prior to joining Endorex in 1997. Frank C. Reid
joined Endorex in February 2000 as Vice President of Finance and Corporate
Development. He has extensive experience in banking and management consulting,
including nineteen years with Bank of America/Continental Bank in senior
executive positions.

Endorex's board of directors includes CEO's and senior management of other
publicly traded biotechnology companies with extensive pharmaceutical company
expertise, and a member of Elan's senior management team.

Endorex has assembled an expert Scientific Advisory Board for its Orasome
technology. Drug Delivery Advisory Board Co-Chairman, Dr. Robert Langer,
recognized as a leading expert on drug delivery technology, is a member of
three National Academies (Sciences, Medicine and Engineering), holds 265
patents and has authored over 500 articles. Dr. Langer is a Professor of
Biomedical and Chemical Engineering and is co-inventor of the Orasome
technology. Advisory Board Co-Chairman, Dr. Henry Brem, is a Professor of
Neurology, Ophthalmology and Oncology at Johns Hopkins University. Drs. Langer
and Brem have significant continued involvement with Endorex as advisors,
consultants and shareholders.

6
<PAGE>

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
oral delivery system, the MEDIPAD infusion pump, 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 research and development activities in
proportion to our ownership interest in each joint venture, currently 80.1% of
each joint venture, based on the research and development plan and budget that
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.

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, which have not received regulatory approval, 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

7
<PAGE>

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 immediately used by
doctors unfamiliar with our product's 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 FDA 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.

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 provider or supplier could negatively
impact our ability to complete 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 FDA for our initial product
candidates, the marketing of these products will be contingent upon our
ability to either license these products or enter into marketing agreements
with partner companies or 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 such a sales force in a timely or cost effective manner, if at all,
or that such 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

8
<PAGE>

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 delivery field include Aviron, which is developing
a nasal flu vaccine that is in phase III, BioVector, which is in phase II
trials with an intranasal flu vaccine and another major vaccine, 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 started Phase III trials for oral heparin and
phase I trials with oral calcitonin, and is in preclinical development with
oral hormones; Unigene, which has an oral calcitonin product in phase I; and
Protein Delivery which has an oral insulin in early clinical trials in Europe
and the U.S. In addition, there may be other companies which are currently
developing competitive technologies and products or which may in the future
develop technologies and products which 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.

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, 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. 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.

9
<PAGE>

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.

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,
which may require us 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
changes and third-party reimbursement limitations.

Recent initiatives to reduce the federal deficit and to change 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 changes could

10
<PAGE>

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.

Our success is dependent, in part, upon a limited number of key executive
officers and technical personnel, including Michael S. Rosen, our President
and Chief Executive Officer, David G. Franckowiak, our Chief Financial
Officer, Dr. Robert N. Brey, our Vice President of Research and Development,
and Frank C. Reid, our Vice President of Finance and Corporate 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.

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.

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, 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 92,973 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 91,218
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 1.6 million shares of common stock
outstanding to participants in our stock option plan with a weighted
average exercise price of approximately $3.00;

. anti-dilution rights under the above warrants and preferred, which can
permit purchase of additional shares and/or at lower prices under
certain circumstances. To the extent that 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.

11
<PAGE>

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

The market price of our common stock could decline as a result of sales by
our existing stockholders of shares of common stock in the market, or 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 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, directors or consultants 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, so 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
securities of the Company senior to, or on parity with, the private
placement shares with respect to voting, liquidation or dividends,

. alter the Company's 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 affiliates of the Company.

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

12
<PAGE>

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.

Item 2. Facilities.

Endorex's executive offices and research and development center are located
in a leased facility of approximately 7,500 square feet in Lake Forest,
Illinois, near Chicago. The lease expires on December 31, 2003. We believe
that our current leased facilities are sufficient to meet our needs for the
foreseeable future and that suitable additional space will be available if and
as needed.

Item 3. Legal Proceedings.

The Company is not a party to any legal proceedings.

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

There were no matters submitted to a vote of security holders in the fourth
quarter of 1999.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

As of August 6, 1998, our common stock started trading on the American
Stock Exchange under the symbol "DOR." Prior to that, quotations for Endorex's
common stock appeared on the "pink sheets" published by the National
Quotations Bureau, Inc. and on the "Bulletin Board" of the National
Association of Securities Dealers, Inc. The following table sets forth the
high and low bid quotations, as provided by the National Quotation Bureau,
Inc., for our common stock during the period January 1, 1998 through August 5,
1998. The table sets forth the high and low closing prices, as provided by the
American Stock Exchange, for the period from August 6, 1998 through March 1,
2000. The amounts represent inter-dealer quotations without adjustment for
retail markups, markdowns or commissions and do not represent the prices of
actual transactions.

<TABLE>
<CAPTION>
High Low
----- -----
<S> <C> <C>
1998
1st Quarter................................................. $9.00 $5.38
2nd Quarter................................................. $6.25 $2.88
3rd Quarter................................................. $4.88 $2.13
4th Quarter................................................. $2.63 $1.88
1999
1st Quarter................................................. $2.69 $1.50
2nd Quarter................................................. $2.23 $1.50
3rd Quarter................................................. $2.25 $1.50
4th Quarter................................................. $2.94 $1.38
2000
1st Quarter................................................. $9.00 $2.69
</TABLE>

As of December 31, 1999, we had approximately 1,100 stockholders of record.
We currently intend to retain any earnings for use in our business and do not
anticipate paying any cash dividends in the foreseeable future.

In connection with a senior line of credit agreement entered into by
Endorex with two of our major stockholders, Aries Domestic Fund, L.P. and The
Aries Fund, on May 19, 1997, we granted warrants to purchase an aggregate of
66,668 shares of common stock at an initial exercise price equal to the
offering price of Endorex's Private Placement (as defined below), subject to
adjustment under certain circumstances. The warrants are exercisable until May
19, 2002.

13
<PAGE>

Pursuant to a private placement (the "Private Placement") of common stock,
we issued and sold an aggregate of 8,648,718 shares of common stock to
accredited investors on July 16, October 10 and October 16, 1997, in
consideration of an aggregate amount of $20,000,000. Our net proceeds, after
deducting commissions and expenses of Paramount Capital, Inc., which acted as
the placement agent for the Private Placement (the "Placement Agent"), were
$17,400,000.

In connection with the Private Placement, we issued and sold to the
Placement Agent and/or its designees, warrants (the "Placement Warrants") to
purchase up to an aggregate of 864,865 shares of common stock. In connection
with the execution of a financial advisory agreement, dated October 16, 1997,
between Endorex and the Placement Agent, we issued and sold to the Placement
Agent warrants (the "Advisory Warrants") to purchase up to an aggregate of
1,297,297 shares of common stock. The Placement Warrants and the Advisory
Warrants are exercisable until April 16, 2003, at an exercise price of
$2.54375 per share, subject to adjustment under certain circumstances.

On January 21, 1998, Endorex formed a joint venture, InnoVaccines
Corporation, with Elan. In connection with the agreement, we issued and sold
to Elan International Services, Ltd. ("EIS"), 307,692 shares of Endorex common
stock and warrants to purchase an aggregate of 230,770 shares of common stock
in consideration of an aggregate amount of $2.0 million. The warrants are
exercisable until January 20, 2007, at an exercise price of $10.00 per share.
In addition, we issued and sold to EIS 80,100 shares of Endorex Series B
Convertible Preferred Stock at a price of $100 per share. The Series B
Preferred Stock is voting and pays an 8% annual cumulative in-kind dividend.
The shares can be converted to common stock based upon their liquidation
value, currently at $7.50 per share, subject to adjustment.

On October 21, 1998, we formed a second joint venture with Elan, Endorex
Newco, Ltd. In connection with the new agreement, Endorex issued and sold to
EIS 84,105 shares of Series C Exchangeable Convertible Preferred Stock
("Series C Preferred"), at a price of $100 per share. The Series C Preferred
Stock is non-voting and pays a 7% annual cumulative in-kind dividend. The
shares can be exchanged for common stock in the joint venture or converted to
Endorex common stock at $9.00 per common share.

Item 6. Management's Discussion and Analysis or Plan of Operations.

The following "Discussion and Analysis" provides information that we
believe is relevant to an assessment and understanding of our results of
operation and financial condition. You should read this analysis in
conjunction with our audited consolidated financial statements and notes
thereto. This report contains statements of a forward-looking nature relating
to future events or our future financial performance. These statements are
only predictions and actual events or results may differ materially. In
evaluating such statements, you should carefully consider the various factors
identified in this report, which could cause actual results to differ
materially from those indicated from any forward-looking statements, including
those set forth in "Risk Factors" on this Annual Report Form 10-KSB.

Material Changes in Results of Operations

Net loss for the twelve months ended December 31, 1999 of $7.5 million
decreased approximately $14.3 million as compared to the $21.8 million loss
recorded for the twelve months ended December 30, 1998. Reduction in equity
losses from Endorex's two joint ventures with Elan accounted for substantially
all of the reduction in consolidated net loss from 1998 to 1999. For 1999,
equity losses from joint ventures were $2.9 million as compared with $17.1
million for 1998. The 1998 equity losses include our 80.1% share of the
aggregate $20.0 million license fees paid by the joint ventures to Elan to
acquire two technologies: 1) an oral delivery technology for vaccines, and 2)
a medical device called MEDIPAD for delivery of certain drugs for treatment of
life-threatening diseases.

Research and development expenditures for the year ended December 31, 1999
were $2.0 million, approximately the same as compared to the year ended
December 31, 1998. The increased effort devoted to the InnoVaccines joint
venture versus other Endorex activities offset the reduction related to
expenses we incurred in 1998 to transfer the laboratory facilities and
scientific personnel to Lake Forest, IL from Fargo, ND.

14
<PAGE>

Excluding the impact of the license fees paid to Elan in 1998, equity in
losses from joint ventures increased $1.8 million or 166% from 1998 to 1999.
Elan and Endorex each funded research and development related to InnoVaccines
equally from the inception of the joint venture through March 31, 1999, in
accordance with the agreement between Elan and Endorex. As of April 1, 1999,
Endorex and Elan fund future joint venture expenditures in proportion to our
respective ownership levels, therefore Endorex includes 80.1% of the joint
ventures results. The current year equity loss also includes $0.4 million for
Endorex's portion of InnoVaccines' acquisition of an exclusive worldwide
license and intellectual property for proprietary oral microsphere delivery
technology for human and veterinary vaccines. The license encompasses a
portfolio of over 50 patents acquired from Vaxcel, Inc., which was the
previous exclusive licensee for this technology from the Southern Research
Institute and the University of Alabama-Birmingham Research Foundation. The
current year equity loss includes $400,500 reflecting Endorex's 80.1% share of
losses relating to the second joint venture.

General and administrative expenses for the year ended December 31, 1999
decreased $0.5 million, or 13%, to $3.0 million as compared to $3.5 million
for the year ended December 31, 1998. The decrease was mainly due to a $0.3
million reduction in amortization of fair value of warrants issued in
connection with the financial advisory agreement with Paramount Capital, Inc.
The warrants, which were amortized over a two-year period, were fully
amortized by the end of the third quarter of 1999. Excluding this
amortization, legal expenses decreased approximately $160,000 as compared to
1998. During 1998, we had additional legal expenses related to the initiation
of Endorex's listing on the American Stock Exchange, effective August 6, 1998
under our new symbol DOR, joint venture activity, and private placement
activities.

Interest income for the year ended December 31, 1999 decreased
approximately $0.3 million as compared to the year ended December 31, 1998 due
to a depletion of cash and marketable securities utilized in research and
development activities. Endorex is a development stage enterprise and expects
no significant revenue from the sale of products in the near future.

Plan of Operation and Financial Condition

Endorex continues to progress preclinical development of the Orasome
delivery system for the oral delivery of vaccines and drugs. Development
includes ongoing work with Elan and several major medical and academic
institutions for vaccines and key hormones such as insulin and human growth
hormone. A new patent for this technology was issued in February 2000. During
2000, we anticipate that InnoVaccines will begin to scale up an oral tetanus
vaccine to take into human clinical trials. Additionally the joint venture
will develop prototype oral hepatitis B and flu vaccines and evaluate them in
animal models during 2000. Such new vaccines have been made possible by
InnoVaccines's 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.
InnoVaccines combines novel existing and future delivery systems of the two
companies for the development of human vaccines, a $6 billion market that is
projected to increase to $10 billion by 2003, as well as for the growing
veterinary vaccine market.

During 1999 collaborative development efforts began for our second joint
venture with Elan, Endorex Newco, Ltd., established for the commercialization,
research and development of two iron chelator drugs using the MEDIPAD
technology. The MEDIPAD 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 in one iron
chelator drug through the joint venture, and our recently announced agreement
with Schein Pharmaceutical, Inc.

Endorex recently signed a research and option agreement with Novo Nordisk
A/S (a major pharmaceutical company with a significant share of the estimated
$1.7 billion global market for hGH), to evaluate the commercial attractiveness
of Novo's brand of hGH delivered orally, Norditropin(R). They plan to evaluate
the Orasome system in several animal models. Novo Nordisk has taken an
exclusive option to license the Orasome technology for Norditropin(R).

15
<PAGE>

During 2000, Endorex will also evaluate the Orasome system for oral
delivery of a DNA vaccine.

On December 31, 1999 and December 31, 1998, we had cash, cash equivalents,
and marketable securities of $8.5 million and $13.2 million, respectively, and
working capital of $6.9 million and $12.6 million, respectively, exclusive of
deferred costs. Our current level of activities requires the expenditure of
approximately $400,000 per month, including costs associated with the joint
ventures. We believe that our current cash resources will be 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 our research and
development activities into other technologies and/or products that we either
may license from other persons or develop. Any such activities may require the
expenditure of funds not presently available. We also may seek to obtain funds
from possible future public or private sales of our securities or other
sources. See "Risk Factors--If we cannot obtain additional funding, our
product development and commercialization efforts may be reduced or
discontinued."

Item 7. Financial Statements.

Pursuant to Exchange Act Rule 12b-23, the financial statements set forth on
pages F-1, et seq. attached hereto are incorporated herein by reference.

Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

None.

PART III

Item 9. Directors, Executive Officers, Promoters, and Control Persons;
Compliance with Section 16(A) of the Exchange Act.

The information required by this Item is incorporated by reference from our
definitive proxy statement to be filed with the Commission prior to 120 days
after December 31, 1999.

Item 10. Executive Compensation.

The information required by this Item is incorporated by reference from our
definitive proxy statement to be filed with the Commission prior to 120 days
after December 31, 1999.

Item 11. Security Ownership of Certain Beneficial Owners and Management.

The information required by this Item is incorporated by reference from our
definitive proxy statement to be filed with the Commission prior to 120 days
after December 31, 1999.

Item 12. Certain Relationships and Related Transactions.

The information required by this Item is incorporated by reference from our
definitive proxy statement to be filed with the Commission prior to 120 days
after December 31, 1999.

16
<PAGE>

Item 13. Exhibits and Reports on Form 8-K.

(a) The following financial statements are filed as part of this report:

Financial Statements.

(1) Balance Sheet as of December 31, 1999.

(2) Statements of Operations for the periods ended December 31, 1999
and 1998 and cumulative from February 15, 1985 (date of inception) to
December 31, 1999.

(3) Statements of Cash Flows for the periods ended December 31, 1999
and 1998 and cumulative from February 15, 1985 (date of inception) to
December 31, 1999.

(4) Statements of Stockholders' Equity for the period from February
15, 1985 (date of inception) to December 31, 1999.

(5) Notes to Financial Statements.

(6) Independent Accountants' Report.

(b) Reports on Form 8-K

During the fiscal quarter ended December 31, 1999 we did not file any
Current Reports on Form 8-K.

<TABLE>
<C> <S>
3.1 Certificate of Incorporation of Endorex. (1)

3.2 Certificate of Ownership and Merger filed March 30, 1987. (1)

3.3 Certificate of Amendment to Certificate of Incorporation filed September
7, 1989. (2)

3.4 Certificate of Amendment to Certificate of Incorporation filed November
13, 1990. (3)

3.5 Certificate of Amendment to Certificate of Incorporation filed May 29,
1991. (3)

3.6 Certificate of Amendment to Certificate of Incorporation filed February
27, 1992. (3)

3.7 Certificate of Amendment to Certificate of Incorporation filed February
27, 1992. (3)

3.8 Certificate of Amendment to Certificate of Incorporation filed June 29,
1993. (4)

3.9 Certificate of Amendment to Certificate of Incorporation filed April 15,
1996. (5)

3.10 Certificate of Amendment to Certificate of Incorporation filed June 10,
1997. (8)

3.11 Certificate of Amendment to Certificate of Incorporation filed December
9, 1998. (11)

3.12 Series B Preferred Certificate of Designations, Preferences and Rights
filed January 21, 1998. (10)

3.13 Series C Preferred Certificate of Designations, Preferences and Rights
filed October 21, 1998. (10)

3.14 By-laws of the Company. (1)

4.1 Specimen Common Stock Certificate. (1)

4.2 Warrant for the Purchase of 864,865 Shares of Common Stock. (7)

4.3 Warrant for the Purchase of 1,297,297 Shares of Common Stock. (7)

4.4 Warrant for the Purchase of 230,770 Shares of Common Stock. (8)

10.1 Patent License Agreement dated December 16, 1996 between Endorex and
Massachusetts Institute of Technology. (6)

10.2 Employment Agreement dated July 25, 1996 between Endorex and Michael S.
Rosen. (4)

10.3 Employment Agreement dated December 1, 1996 between Endorex and Robert
N. Brey. (6)

</TABLE>

17
<PAGE>

<TABLE>
<C> <S>
10.4 Purchase Agreement dated as of June 26, 1996 between Endorex, The Aries
Fund and The Aries Domestic Fund, L.P. (6)

10.5 Amended and Restated 1995 Omnibus Incentive Plan. (9)

10.6 Placement Agency Agreement between Endorex and Paramount Capital, Inc.,
dated July 1, 1997. (7)

10.7 Side Letter #1 to Placement Agency Agreement. (7)

10.8 Form of Subscription Agreement for the purchase of Common Stock. (7)

10.9 Lease dated December 19, 1997 between Endorex and Howard M. Ruskin. (8)

10.12+ Joint Development and Operating Agreement, dated as of January 21,
1998, between Endorex, Elan Corporation, plc, Orasomal Technologies,
Inc. and Endorex Vaccine Delivery Technologies, Inc. (8)

10.13 Securities Purchase Agreement, dated as of January 21, 1998, between
Endorex and Elan International Services, Ltd. (8)

10.14 Registration Rights Agreement, dated as of January 21, 1998, between
the Company and Elan International Services, Ltd. (8)

10.15+ License Agreement, dated as of January 21, 1998, between Elan
Pharmaceuticals, plc. and Endorex Vaccine Delivery Technologies, Inc.
(8)

10.16+ License Agreement, dated as of January 22, 1998, between Orasomal
Technologies, Inc., Endorex Vaccine Delivery Technologies, Inc. and the
Company. (8)

10.17 Securities Purchase Agreement, dated as of October 21, 1998, between
Endorex and Elan International Services, Ltd. (10)

10.18 Registration Rights Agreement, dated as of October 21, 1998, between
Endorex and Elan International Services, Ltd. (10)

10.19+ License Agreement, dated as of October 21, 1998, between Endorex, Elan
Corporation, plc, Endorex Newco. Ltd., and Elan Medical Technologies
Ltd. (10)

10.20+ Joint Development and Operating Agreement, dated as of October 21,
1998, between Endorex, Elan Corporation, plc, Elan International
Services, Ltd. and Endorex Newco, Ltd. (10)

10.21* Development License and Supply Agreement, dated February 2, 2000,
between Endorex Newco, Ltd. and Schein Pharmaceutical (Bermuda), Ltd.

10.22 Employment Agreement, dated February 8, 2000, between Endorex
Corporation and Frank C. Reid. (12)

10.23 Letter Agreement, dated March 13, 2000, between Endorex Corporation and
David Franckowiak. (12)

21 Subsidiaries of Endorex. (12)

23.1 Consent of PricewaterhouseCoopers LLP, independent certified public
accountants.

27 Financial Data Schedule.
</TABLE>
--------
+ Endorex was granted Confidential Treatment of portions of this exhibit
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as
amended.
* Endorex has applied for Confidential Treatment of portions of this exhibit
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as
amended.
(1) Incorporated by reference to our Registration Statement on Form S-1 (File
No. 33-13492).
(2) Incorporated by reference to our Annual Report on Form 10-K for the
fiscal year ended January 31, 1989.
(3) Incorporated by reference to our Annual Report on Form 10-K for the
fiscal year ended January 31, 1992.
(4) Incorporated by reference to our Annual Report on Form 10-KSB for the
fiscal year ended January 31, 1996.
(5) Incorporated by reference to our Quarterly Report on Form 10-QSB for the
fiscal quarter ended July 31, 1996.
(6) Incorporated by reference to our Annual Report on Form 10-KSB, as
amended, for the transition period ended December 31, 1996.

18
<PAGE>

(7) Incorporated by reference to our Quarterly Report on Form 10-QSB, as
amended, for the fiscal quarter ended September 30, 1997.
(8) Incorporated by reference to our Annual Report on Form 10-KSB, as
amended, for the period ended December 31, 1997.
(9) Incorporated by reference to our Registration Statement on Form S-8 dated
September 23, 1998.
(10) Incorporated by reference to our Quarterly Report on Form 10-QSB, for the
fiscal quarter ended September 30, 1998.
(11) Incorporated by reference to our Registration Statement on Form 10-KSB,
for the period ended December 31, 1998.
(12) Incorporated by reference to the initial filing of this Annual Report on
Form 10-KSB for the fiscal year ended December 31, 1999.

19
<PAGE>

ENDOREX CORPORATION
(A Development Stage Enterprise)

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
December 31,
1999
------------
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents...................................... $ 4,995,906
Marketable securities--available for sale...................... 3,547,847
Prepaid expenses............................................... 102,546
------------
Total current assets....................................... 8,646,299
Leasehold improvements and equipment, net of accumulated
amortization of $649,092........................................ 448,951
Patent issuance costs, net of accumulated amortization of $5,088. 176,875
------------
Total Assets..................................................... $ 9,272,125
============
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable and accrued expenses.......................... $ 496,889
Accrued compensation........................................... 184,508
Due to joint ventures.......................................... 942,333
Current portion of line of credit.............................. 110,342
------------
Total current liabilities.................................. 1,734,072
Long-term portion of line of credit.............................. 281,899
------------
Total Liabilities................................................ 2,015,971
Series C exchangeable convertible preferred stock, $.05 par
value. Authorized 200,000 shares; 91,218 issued and outstanding
at liquidation value............................................ 9,027,012
Stockholders' Deficit:
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; 92,973 issued and outstanding at
liquidation value............................................. 9,297,300
Common stock, $.001 par value. Authorized 50,000,000 shares;
10,874,295 issued and 10,755,653 outstanding.................. 10,878
Additional paid-in capital..................................... 33,659,131
Deficit accumulated during the development stage............... (44,294,417)
------------
(1,327,108)
------------
Less: treasury stock, at cost, 118,642 shares.................... (443,750)
------------
TOTAL STOCKHOLDERS' DEFICIT................................ (1,770,858)
------------
Total Liabilities, Convertible Preferred Stock, And Stockholders'
Deficit......................................................... $ 9,272,125
============
</TABLE>

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

F-1
<PAGE>

ENDOREX CORPORATION
(A Development Stage Enterprise)

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
Cumulative Period
February 15,
Year Ended Year ended 1985 (Inception)
December December 31, to December 31,
31, 1999 1998 1999
----------- ------------ -----------------
<S> <C> <C> <C>
SBIR contract revenue............. $ -- $ -- $ 100,000
Expenses:
SBIR contract research and
development.................... -- -- 86,168
Proprietary research and
development.................... 2,028,945 1,977,994 13,876,263
General and administrative...... 3,046,684 3,500,682 10,970,277
----------- ------------ ------------
Total expenses.................... 5,075,629 5,478,676 24,932,708
----------- ------------ ------------
Loss from operations.............. (5,075,629) (5,478,676) (24,832,708)
Equity in losses from joint
ventures......................... (2,865,908) (17,097,975) (19,963,883)
Other income...................... 3,790 -- 5,302
Interest income................... 488,582 799,335 2,294,515
Interest expense.................. (51,854) (15,854) (261,421)
----------- ------------ ------------
Loss before income taxes.......... (7,501,019) (21,793,170) (42,758,195)
Income taxes...................... -- -- --
----------- ------------ ------------
Net loss.......................... (7,501,019) (21,793,170) (42,758,195)
Preferred stock dividends......... (1,285,413) (713,187) (1,998,600)
----------- ------------ ------------
Net loss applicable to common
stockholders..................... $(8,786,431) $(22,506,357) $(44,756,795)
=========== ============ ============
Basic and diluted net loss per
share applicable to common
stockholders..................... $ (0.82) $ (2.09) $ (17.80)
Basic and diluted weighted average
common shares outstanding........ 10,755,328 10,760,988 2,513,871
</TABLE>

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

F-2
<PAGE>

ENDOREX CORPORATION
(A Development Stage Enterprise)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
(Deficit)
Preferred Accumulated Treasury Total
Common Stock Stock Additional During the Stock Stockholders'
---------------- ------------ Paid-In Development ------------- Deferred Note Equity
Shares Par Value Shares Value Capital Stage Shares Cost Compensation Receivable (Deficit)
------ --------- ------ ----- ---------- ----------- ------ ------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Common stock
issued for cash
in February 1985
at $1.50 per
share........... 667 $ 1 -- $ -- $ 999 $ -- -- $ -- $ -- $ -- $ 1,000
Net earnings for
the period from
February 15,
1985 to
January 31,
1996............ -- -- -- -- -- 6,512 -- -- -- -- 6,512
----- ---- --- ----- ---------- --------- --- ------ -------- ------ ----------
Balance--January
31, 1986........ 667 1 -- -- 999 6,512 -- -- -- -- 7,512
Common stock
issued for cash
in October 1986
at $750.00 per
share........... 666 1 -- -- 499,999 -- -- -- -- -- 500,000
Excess of fair
market value
over option
Price of
non-qualified
stock option
granted......... -- -- -- -- 13,230 -- -- -- -- -- 13,230
Net loss for the
year............ -- -- -- -- -- (34,851) -- -- -- -- (34,851)
----- ---- --- ----- ---------- --------- --- ------ -------- ------ ----------
Balance--January
31, 1987........ 1,333 2 -- -- 514,228 (28,339) -- -- -- -- 485,891
Common stock
issued in May
1987 at $750.00
per share for
legal services
performed for
the company..... 7 -- -- -- 5,000 -- -- -- -- -- 5,000
Net proceeds
from initial
public stock
offering in June
1987 at
$6,000.00 per
share, less
issuance costs.. 333 -- -- -- 1,627,833 -- -- -- -- -- 1,627,833
Non-qualified
stock options
exercised....... 48 -- -- -- 33,808 -- -- -- (28,188) -- 5,620
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- 7,425 -- 7,425
Excess of fair
market value
over option
price of
non-qualified
stock options
granted......... -- -- -- -- 75,063 -- -- -- -- -- 75,063
Net loss for the
year............ -- -- -- (627,652) -- -- -- -- (627,652)
----- ---- --- ----- ---------- --------- --- ------ -------- ------ ----------
Balance--January
1988--forward... 1,721 $ 2 -- -- $2,255,932 $(655,991) -- $ -- $(20,763) $ -- $1,579,180
</TABLE>

F-3
<PAGE>

ENDOREX CORPORATION
(A Development Stage Enterprise)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)--(Continued)

<TABLE>
<CAPTION>
(Deficit)
Accumulated
Common Stock Preferred Stock Additional During the Treasury Stock
----------------- ----------------- Paid-In Development ----------------- Deferred Note
Shares Par Value Shares Value Capital Stage Shares Cost Compensation Receivable
------ --------- -------- -------- ----------- ------------ -------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance--January
1988--forward... 1,721 $ 2 -- -- $ 2,255,932 $ (655,991) -- $ -- $ (20,763) $ --
Non-qualified
stock options
exercised....... 18 -- -- -- 256 -- -- -- -- --
Stock warrants
exercised....... 1 -- -- -- 12,000 -- -- -- -- --
Common stock
redeemed and
retired......... (10) -- -- -- (150) -- -- -- -- --
Excess of fair
market value
over option
price of
non-qualified
stock options
granted......... -- -- -- -- 36,524 -- -- -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- 19,113 --
Net loss for the
Year............ -- -- -- -- -- (1,092,266) -- -- -- --
----- ---- ------ -------- ----------- ------------ ------ -------- --------- -----
Balance--January
31, 1989........ 1,730 2 -- -- 2,304,562 (1,748,257) -- -- (1,650) --
Non-qualified
stock options
exercised....... 71 -- -- -- 1,060 -- -- -- -- --
Common stock
redeemed and
retired......... (12) -- -- -- (175) -- -- -- -- --
Excess of fair
market value
over option
price of
non-qualified
stock options
granted......... -- -- -- -- 113,037 -- -- -- -- --
Net proceeds
from secondary
public stock
offering in
April 1989 at
$525.00 per
share, less
issuance cost... 2,174 2 -- -- 980,178 -- -- -- -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- 1,650 --
Net loss for the
year............ -- -- -- -- -- (1,129,477) -- -- -- --
----- ---- ------ -------- ----------- ------------ ------ -------- --------- -----
Balance--January
31,1990--
forward......... 3,963 $ 4 -- $ -- $ 3,398,662 $ (2,877,734) -- $ -- $ -- $ --
<CAPTION>
Total
Stockholders'
Equity
(Deficit)
-------------
<S> <C>
Balance--January
1988--forward... $ 1,579,180
Non-qualified
stock options
exercised....... 256
Stock warrants
exercised....... 12,000
Common stock
redeemed and
retired......... (150)
Excess of fair
market value
over option
price of
non-qualified
stock options
granted......... 36,524
Amortization of
deferred
compensation.... 19,113
Net loss for the
Year............ (1,092,266)
-------------
Balance--January
31, 1989........ 554,657
Non-qualified
stock options
exercised....... 1,060
Common stock
redeemed and
retired......... (175)
Excess of fair
market value
over option
price of
non-qualified
stock options
granted......... 113,037
Net proceeds
from secondary
public stock
offering in
April 1989 at
$525.00 per
share, less
issuance cost... 980,180
Amortization of
deferred
compensation.... 1,650
Net loss for the
year............ (1,129,477)
-------------
Balance--January
31,1990--
forward......... $ 520,932
</TABLE>

F-4
<PAGE>

ENDOREX CORPORATION
(A Development Stage Enterprise)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)--(Continued)

<TABLE>
<CAPTION>
(Deficit)
Accumulated
Common Stock Preferred Stock Additional During the Treasury Stock
----------------- ----------------- Paid-In Development ----------------- Deferred Note
Shares Par Value Shares Value Capital Stage Shares Cost Compensation Receivable
------- --------- -------- -------- ---------- ------------ -------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance--January
31, 1990--
forward......... 3,963 $ 4 -- $ -- $3,398,662 $ (2,877,734) -- $ -- $ -- $ --
Common stock
issued for cash
in October 1990
through January
1991 at $9.00
per share....... 5,694 6 -- -- 51,244 -- -- -- -- --
Excess of fair
market value
over option
price of non-
qualified stock
options granted. -- -- -- -- 30,635 -- -- -- -- --
Net loss for the
year............ -- -- -- -- -- (854,202) -- -- -- --
------- ---- ------ -------- ---------- ------------ ------ -------- ----- --------
Balance--January
31, 1991........ 9,657 10 -- -- 3,480,541 (3,731,936) -- -- -- --
Common stock
issued for cash
in February 1991
through April
1991 at $9.00
per share....... 2,772 3 -- -- 24,947 -- -- -- -- --
Common stock
issued for cash
and services in
November 1991 at
$1.50 per share. 15,333 15 -- -- 22,985 -- -- -- -- --
Common stock
issued for cash
and note in
December 1991 at
$0.75 per share. 296,949 297 -- -- 200,018 -- -- -- -- (50,315)
Excess of fair
market value
over option
price of non-
qualified stock
options granted. -- -- -- -- 16,570 -- -- -- -- --
Non-qualified
stock options
exercised....... 1 -- -- -- 1 -- -- -- -- --
Net loss for the
year............ -- -- -- -- -- (410,149) -- -- -- --
------- ---- ------ -------- ---------- ------------ ------ -------- ----- --------
Balance--January
31, 1992--
forward......... 324,712 $325 -- $ -- $3,745,062 $ (4,142,085) -- $ -- $ -- $(50,315)
<CAPTION>
Total
Stockholders'
Equity
(Deficit)
-------------
<S> <C>
Balance--January
31, 1990--
forward......... $ 520,932
Common stock
issued for cash
in October 1990
through January
1991 at $9.00
per share....... 51,250
Excess of fair
market value
over option
price of non-
qualified stock
options granted. 30,635
Net loss for the
year............ (854,202)
-------------
Balance--January
31, 1991........ (251,385)
Common stock
issued for cash
in February 1991
through April
1991 at $9.00
per share....... 24,950
Common stock
issued for cash
and services in
November 1991 at
$1.50 per share. 23,000
Common stock
issued for cash
and note in
December 1991 at
$0.75 per share. 150,000
Excess of fair
market value
over option
price of non-
qualified stock
options granted. 16,570
Non-qualified
stock options
exercised....... 1
Net loss for the
year............ (410,149)
-------------
Balance--January
31, 1992--
forward......... $(447,013)
</TABLE>

F-5
<PAGE>

ENDOREX CORPORATION
(A Development Stage Enterprise)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)--(Continued)

<TABLE>
<CAPTION>
(Deficit)
Accumulated
Common Stock Preferred Stock Additional During the Treasury Stock
----------------- ----------------- Paid-In Development ---------------- Deferred Note
Shares Par Value Shares Value Capital Stage Shares Cost Compensation Receivable
------- --------- -------- -------- ----------- ----------- ------ --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance--January
31, 1992--
forward......... 324,712 $ 325 -- $ -- $ 3,745,062 $(4,142,085) -- $ -- $ -- $(50,315)
Payment on note
receivable...... -- -- -- -- -- -- -- -- -- 11,300
Net proceeds
from secondary
public stock
offering in
August 1992 at
$112.50 per
share, less
issuance costs.. 66,666 66 -- -- 6,230,985 -- -- -- -- --
Non-qualified
stock options
exercised....... 2,000 2 -- -- 28 -- -- -- -- --
Net loss for the
year............ -- -- -- -- -- (564,173) -- -- -- --
------- ----- ------ -------- ----------- ----------- ------ --------- --------- --------
Balance--January
31, 1993........ 393,378 393 -- -- 9,976,075 (4,706,258) -- -- -- (39,015)
Excess of fair
market value
over option
price of non-
qualified stock
options granted. -- -- -- -- 126,000 -- -- -- (126,000) --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- 40,750 --
Non-qualified
stock options
exercised....... 67 -- -- -- 57 -- -- -- -- --
Collection of
note receivable. -- -- -- -- -- -- -- -- -- 39,015
Net loss for the
year............ -- -- -- -- -- (1,012,882) -- -- -- --
------- ----- ------ -------- ----------- ----------- ------ --------- --------- --------
Balance--January
31, 1994........ 393,445 393 -- -- 10,102,132 (5,719,140) -- -- (85,250) --
Acquisition of
treasury stock.. -- -- -- -- -- -- 41,975 (300,000) -- --
Forfeiture of
non-qualified
stock options
granted......... -- -- -- -- (22,402) -- -- -- 22,402 --
Amortization of
deferred
compensation.... -- -- -- -- -- -- -- -- 49,348 --
Net loss for the
year............ -- -- -- -- -- (1,349,678) -- -- -- --
------- ----- ------ -------- ----------- ----------- ------ --------- --------- --------
Balance--January
31, 1995--
forward......... 393,445 $ 393 -- $ -- $10,079,730 $(7,068,818) 41,975 $(300,000) $ (13,500) $ --
<CAPTION>
Total
Stockholders'
Equity
(Deficit)
-------------
<S> <C>
Balance--January
31, 1992--
forward......... $ (447,013)
Payment on note
receivable...... 11,300
Net proceeds
from secondary
public stock
offering in
August 1992 at
$112.50 per
share, less
issuance costs.. 6,231,051
Non-qualified
stock options
exercised....... 30
Net loss for the
year............ (564,173)
-------------
Balance--January
31, 1993........ 5,231,195
Excess of fair
market value
over option
price of non-
qualified stock
options granted. --
Amortization of
deferred
compensation.... 40,750
Non-qualified
stock options
exercised....... 57
Collection of
note receivable. 39,015
Net loss for the
year............ (1,012,882)
-------------
Balance--January
31, 1994........ 4,298,135
Acquisition of
treasury stock.. (300,000)
Forfeiture of
non-qualified
stock options
granted......... --
Amortization of
deferred
compensation.... 49,348
Net loss for the
year............ (1,349,678)
-------------
Balance--January
31, 1995--
forward......... $ 2,697,805
</TABLE>

F-6
<PAGE>

ENDOREX CORPORATION
(A Development Stage Enterprise)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)--(Continued)

<TABLE>
<CAPTION>
(Deficit)
Accumulated
Common Stock Preferred Stock Additional During the Treasury Stock
------------------- ----------------- Paid-In Development ----------------- Deferred Note
Shares Par Value Shares Value Capital Stage Shares Cost Compensation Receivable
--------- --------- -------- -------- ----------- ------------ ------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance--January
31, 1995--for-
ward............ 393,445 $ 393 -- $ -- $10,079,730 $ (7,068,818) 41,975 $(300,000) $(13,500) $ --
Acquisition of
treasury stock.. -- -- -- -- -- -- 76,667 (143,750) -- --
Forfeiture of
non-qualified
stock options
granted......... -- -- -- -- (1,379) -- -- -- 1,379 --
Amortization of
deferred compen-
sation.......... -- -- -- -- -- -- -- -- 12,121 --
Net loss for the
year............ -- -- -- -- -- (1,187,985) -- -- -- --
--------- ------ ------ -------- ----------- ------------ ------- --------- -------- -----
Balance--January
31, 1996........ 393,445 $ 393 -- $ -- $10,078,351 $ (8,256,803) 118,642 $(443,750) $ -- $ --
Common stock is-
sued at $0.975
per share....... 333,333 333 -- -- 324,667 -- -- -- -- --
Common stock is-
sued at $3.00
per share....... 333,333 333 -- -- 999,667 -- -- -- -- --
Non-qualified
stock options
exercised....... 145,283 146 -- -- 379,003 -- -- -- -- --
Net loss for the
period.......... -- -- -- -- -- (1,962,877) -- -- -- --
--------- ------ ------ -------- ----------- ------------ ------- --------- -------- -----
Balance--Decem-
ber 31, 1996.... 1,205,394 1,205 -- -- 11,781,688 (10,219,680) 118,642 (443,750) -- --
Warrents exer-
cised at $1.20
per share....... 1,173 1 -- -- 1,407 -- -- -- -- --
Proceeds on ex-
ercise of stock
options......... -- -- -- -- 5,000 -- -- -- -- --
Warrants Issued. -- -- -- -- 5,407,546 -- -- -- -- --
Net proceeds
from private
placement at
$2.3125 per
share, less is-
suance cost..... 8,648,718 8,650 -- -- 15,122,943 -- -- -- -- --
Net loss for the
year............ -- -- -- (3,244,326) -- -- -- --
--------- ------ ------ -------- ----------- ------------ ------- --------- -------- -----
Balance--Decem-
ber 31, 1997--
forward......... 9,855,285 $9,856 -- $ -- $32,318,584 $(13,464,006) 118,642 $(443,750) $ -- $ --
<CAPTION>
Total
Stockholders'
Equity
(Deficit)
-------------
<S> <C>
Balance--January
31, 1995--for-
ward............ $ 2,697,805
Acquisition of
treasury stock.. (143,750)
Forfeiture of
non-qualified
stock options
granted......... --
Amortization of
deferred compen-
sation.......... 12,121
Net loss for the
year............ (1,187,985)
-------------
Balance--January
31, 1996........ $ 1,378,191
Common stock is-
sued at $0.975
per share....... 325,000
Common stock is-
sued at $3.00
per share....... 1,000,000
Non-qualified
stock options
exercised....... 379,149
Net loss for the
period.......... (1,962,877)
-------------
Balance--Decem-
ber 31, 1996.... 1,119,463
Warrents exer-
cised at $1.20
per share....... 1,408
Proceeds on ex-
ercise of stock
options......... 5,000
Warrants Issued. 5,407,546
Net proceeds
from private
placement at
$2.3125 per
share, less is-
suance cost..... 15,131,593
Net loss for the
year............ (3,244,326)
-------------
Balance--Decem-
ber 31, 1997--
forward......... $18,420,684
</TABLE>

F-7
<PAGE>

ENDOREX CORPORATION
(A Development Stage Enterprise)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)--(Continued)

<TABLE>
<CAPTION>
(Deficit)
Accumulated
Common Stock Preferred Stock Additional During the Treasury Stock
--------------------- ------------------ Paid-In Development ------------------ Deferred
Shares Par Value Shares Value Capital Stage Shares Cost Compensation
---------- --------- ------- ---------- ------------ ------------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance--
December 31,
1997--forward... 9,855,285 $ 9,856 -- $ -- $ 32,318,584 $ (13,464,006) 118,642 $ (443,750) $ --
Net proceeds
from issuance of
common stock and
warrants........ 307,692 308 -- -- 1,871,537 -- -- -- --
Proceeds from
exercise of
stock options... 25,000 25 -- -- 61,725 -- -- -- --
Purchase and
retirement of
common stock.... (133,335) (134) -- -- (129,866) -- -- -- --
Net proceeds
from issuance of
Series B
Preferred Stock
at $100 per
share........... -- -- 80,100 8,010,000 -- -- -- -- --
Accrued
preferred stock
dividends....... -- -- 5,986 598,666 (713,187) -- -- -- --
Net loss for the
year............ -- -- -- -- -- (21,793,170) -- -- --
---------- ------- ------- ---------- ------------ ------------- ------- ---------- -----
Balance--
December 31,
1998............ 10,054,642 $10,055 86,086 $8,608,666 $ 33,408,793 $ (35,257,176) 118,642 $ (443,750) $ --
Proceeds from
exercise of
stock options... 334 4 -- -- 347 -- -- -- --
Common stock
dividends
issued.......... 819,319 819 1,535,404 (1,536,223) -- -- --
Accrued
preferred stock
dividends....... 68,867 688,634 (1,285,413)
Net loss for the
year............ -- -- -- -- -- (7,501,019) -- -- --
---------- ------- ------- ---------- ------------ ------------- ------- ---------- -----
Balance--
December 31,
1999............ 10,874,295 $10,878 154,953 $9,297,300 $ 33,659,131 $ (44,294,417) 118,642 $ (443,750) $ --
========== ======= ======= ========== ============ ============= ======= ========== =====
<CAPTION>
Total
Stockholders'
Note Equity
Receivable (Deficit)
---------- --------------
<S> <C> <C>
Balance--
December 31,
1997--forward... $ -- $ 18,420,684
Net proceeds
from issuance of
common stock and
warrants........ -- 1,871,845
Proceeds from
exercise of
stock options... -- 61,750
Purchase and
retirement of
common stock.... -- (130,000)
Net proceeds
from issuance of
Series B
Preferred Stock
at $100 per
share........... -- 8,010,000
Accrued
preferred stock
dividends....... -- (114,521)
Net loss for the
year............ -- (21,793,170)
---------- --------------
Balance--
December 31,
1998............ $ -- $ 6,326,588
Proceeds from
exercise of
stock options... -- 351
Common stock
dividends
issued.......... -- --
Accrued
preferred stock
dividends....... (596,778)
Net loss for the
year............ -- (7,501,019)
---------- --------------
Balance--
December 31,
1999............ $ -- $ (1,770,858)
========== ==============
</TABLE>

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

F-8
<PAGE>

ENDOREX CORPORATION
(A Development Stage Enterprise)

CONSOLIDATED STATEMENTS OF CASH FLOW

<TABLE>
<CAPTION>
Cumulative Period
Year Ended Year Ended February 15, 1985
December 31, December 31, (Inception) to
1999 1998 December 31, 1999
------------ ------------ -----------------
<S> <C> <C> <C>
Operating Activities:
Net Loss......................... $(7,501,019) $(21,793,170) $(42,758,195)
Adjustments to reconcile net
loss to cash used in operating
activities:
Depreciation and amortization.. 153,894 93,722 1,217,724
Gain on sale of marketable
securities--available for
sale.......................... (110,244) -- (110,244)
Amortization of deferred
compensation.................. 131,786
Equity in losses from joint
ventures...................... 2,865,908 17,097,975 19,963,883
Excess of fair market value
over option prices on non-
qualified stock options....... -- -- 528,680
Amortization of fair value of
warrants...................... 1,253,856 1,577,644 3,307,546
Gain on sale of assets......... (3,790) -- (4,530)
Write off patent issuance cost. 327,078 -- 439,725
Changes in assets and
liabilities:
Restricted cash................ 500,000 (500,000) --
Prepaid expenses............... (36,785) 70,027 (102,546)
Accounts payable and accrued
expenses...................... 188,503 (177,734) 586,859
Accrued compensation........... (56,509) 97,655 184,508
Due to joint ventures.......... 442,333 500,000 942,333
----------- ------------ ------------
Total adjustments............ 5,524,244 18,759,289 27,085,724
----------- ------------ ------------
Net Cash Used In Operating
Activities....................... (1,976,775) (3,033,881) (15,672,471)
Investing Activities:
Patent issuance cost............. (152,530) (96,933) (676,513)
Investment in joint ventures..... (2,465,408) (17,498,475) (19,963,883)
Organizational costs incurred.... -- -- (135)
Purchases of leasehold
improvements.................... (20,054) (255,888) (695,613)
Purchases of office and lab
equipment....................... (107,873) (190,738) (911,276)
Proceeds from assets sold........ 3,790 -- 4,790
Purchases of marketable
securities--available for sale.. (4,663,099) (950,000) (5,613,099)
Proceeds from sale of marketable
securities--available for sale.. 2,175,496 -- 2,175,496
----------- ------------ ------------
Net Cash Used In Investing
Activities....................... (5,229,678) (18,992,034) (25,680,233)
Financing Activities:
Net proceeds from issuance of
common stock.................... -- 1,871,845 30,024,722
Net proceeds from issuance of
preferred stock................. -- 16,325,712 16,325,712
Proceeds from exercise of
options......................... 351 61,750 201,338
Proceeds from borrowings from
President....................... -- -- 41,433
Repayment of borrowings from
President....................... -- -- (41,433)
Proceeds from borrowings under
line of credit.................. 95,774 392,649 1,150,913
Repayment of borrowings under
line of credit.................. (96,181) -- (758,672)
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 (Used In)
Financing Activities............. (56) 18,521,956 46,348,610
----------- ------------ ------------
Net Increase (decrease) In Cash
And Cash Equivalents............. (7,206,509) (3,503,959) 4,995,906
Cash And Cash Equivalents-
Beginning Of Period.............. 12,202,415 15,706,374 --
----------- ------------ ------------
Cash And Cash Equivalents-End Of
Period........................... $ 4,995,906 $ 12,202,415 $ 4,995,906
=========== ============ ============
Supplemental Disclosure Of Cash
Flow:
Cash paid for interest........... $ 51,950 $ 15,854 $ 108,452
Non-cash Transactions
Issuance of common stock
dividends in kind............... $ 1,536,223 $ -- $ 1,536,223
Issuance of preferred stock
dividends in kind............... 1,285,413 713,187 1,998,600
</TABLE>

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

F-9
<PAGE>

ENDOREX CORPORATION
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

1. Operations

Basis of Presentation--Endorex Corporation and Subsidiaries was
incorporated in January 1987 as ImmunoTherapeutics, Inc, a wholly owned
subsidiary of BiologicalTherapeutics, Inc. ("BTI"). BTI was incorporated on
December 19, 1984 and commenced operations on February 15, 1985 [inception
date]. On March 30, 1987 BTI was merged into Endorex. Our financial statements
include the accounts of our predecessor, BTI, for all periods presented. In
October 1996 Endorex formed its first subsidiary, Orasomal Technologies, Inc.
("Orasomal"), and in July 1997, we formed a second subsidiary, Wisconsin
Genetics, Inc. ("WGI").

Nature of Business--Endorex Corporation is a development-stage drug
delivery company. Our core drug delivery technology focuses on oral/mucosal
delivery of drugs and vaccines previously delivered only by injection. The
Company's Orasome system utilizes technology licensed from MIT to develop the
oral/mucosal delivery of vaccines, proteins and peptides.

In 1998 Endorex formed two joint ventures with Elan Corporation, plc, one
of the world's leading drug delivery companies. The purpose of the first joint
venture, InnoVaccines, is to research, develop, and commercialize novel
delivery systems for the human and veterinary vaccine markets. The second
joint venture, Newco, focuses on the utilization of the MEDIPAD microinfusion
pump, developed by Elan, to deliver iron chelators for the treatment of a
series of genetic blood disorders known as iron overload disorders.

2. Summary of Significant Accounting Policies

Principles of Consolidation--The consolidated financial statements include
Endorex and its subsidiaries, Orasomal and WGI. Intercompany accounts and
transactions have been eliminated. We account for the joint ventures by
recognizing Endorex's portion of the joint venture losses as Equity in losses
from joint ventures.

Segment and Geographic Information -- Endorex operates exclusively in the
biotechnology drug delivery industry. We are currently in the development
stage and do not have any revenues, or any segregation of assets relating to
products or business entities. All development work is performed in the United
States. During 1999, we made operating decisions based upon product and market
potential and collaborative agreements and did not utilize specific operating
results to manage the business. Therefore, we do not have reportable operating
segments as defined by Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information."

Cash and Cash Equivalents--Cash equivalents are comprised of certain highly
liquid investments with maturity of three months or less when purchased.

Marketable Securities--Marketable securities are comprised of high-grade
commercial paper and short-term government agency notes that have maturities
ranging from six to twelve months from the purchase date. The fair value of
marketable securities classified as available for sale approximates the
carrying value of these assets due to the short maturity of the instruments.

Office and Lab Equipment and Leasehold Improvements--Office and lab
equipment is stated at cost. Depreciation is computed on a straight-line basis
over five years. Leasehold improvements are amortized utilizing the straight-
line method over the term of the lease. Depreciation expense was $138,582 and
$75,934 for the periods ended December 31, 1999 and 1998, respectively.

Research and Development Costs--Expenditures for research and development
activities are charged to operations as incurred. Previously reported research
and development expenses related to our first year funding

F-10
<PAGE>

ENDOREX CORPORATION
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

of InnoVaccines have been reclassified in the accompanying 1998 consolidated
statement of operations to Equity in losses from joint ventures to conform to
our 1999 presentation of expenditures. The reclassification did not impact
previously reported net loss or deficit accumulated during the development
stage.

Patent Issuance Costs--The cost of patents is accumulated during the
approval process. Patents granted are amortized on a straight-line basis over
the remaining legal life of the patent or the estimated remaining economic
life. When a patent is not granted, or the process is terminated, the
accumulated cost is charged to operations.

Common Stock Dividend--Common stock dividends are reflected as a charge to
accumulated deficit, using the fair market value method computed with the
closing price as of the day before the declaration date.

Investment in Joint Ventures--We own 80.1% of each of the joint ventures
with Elan as of December 31, 1999. Each joint venture is governed by a joint
development and operating agreement which provides that both Elan and Endorex
must approve all major transactions, research and development plans, and
budgets. Therefore, Endorex records its share of the joint ventures'
expenditures as Equity in losses from joint ventures.

Impairment of Long-Lived Assets--In the event that facts and circumstances
indicate that the cost of any long-lived assets may be impaired, an evaluation
of recoverability would be performed. If an evaluation is required, the
estimated future undiscounted cash flows associated with the asset would be
compared to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow is required.

Concentrations of Credit Risk--Financial instruments that potentially
subject us to concentrations of credit risk primarily are limited to cash,
cash equivalents, and marketable securities. Cash is primarily invested in
money market mutual funds managed by investment banks approved by the Board of
Directors. Our marketable securities investments consist of high-grade
commercial paper and short-term government agency notes.

Use of Estimates--While preparing financial statements in conformity with
generally accepted accounting principles, our management makes estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Risk and Uncertainties--We are subject to risks common to companies in the
biotechnology industry, including, but not limited to, litigation, product
liability, development by ourselves or our competitors of new technological
innovations, dependence on key personnel, protections of proprietary
technology, and compliance with FDA regulations.

3. Joint Ventures

In 1998 Endorex formed the two joint ventures with Elan as follows:

InnoVaccines Corporation

InnoVaccines was established in January 1998 pursuant to agreements between
Endorex and Elan. At the time of closing, we issued to Elan International
Services, Ltd. ("EIS") 307,692 shares of Endorex common stock and a six-year
warrant to purchase an additional 230,777 shares of Endorex common stock at an
exercise price of $10.00 per share for an aggregate purchase price of $2.0
million. In addition, EIS purchased $8.0 million of Endorex Series B
convertible preferred stock, which is convertible into Endorex common stock at
a price of $7.50 per share, subject to adjustment. The Series B convertible
preferred stock pays an 8% annual in-kind dividend.

F-11
<PAGE>

ENDOREX CORPORATION
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

InnoVaccines is initially owned 80.1% by Endorex and 19.9% by Elan. It
licensed certain technology from Elan and certain other technology from
Orasomal. Endorex and Elan invested $8.0 and $2.0 million in the joint
venture, respectively.

At the time of closing, InnoVaccines paid Elan an initial $10.0 million
license payment. Elan may receive future milestones and royalties based on the
joint venture's performance. Since the technology did not yet represent a
commercial product, the joint venture recorded an expense in the first quarter
of 1998 for the initial license fee. We recorded our $8.0 million share of
that expense and simultaneously recorded Elan's purchase of $8.0 million of
Endorex Series B convertible preferred stock.

Orasomal sub-licensed to InnoVaccines oral vaccine rights to its
proprietary Orasome polymerized liposome technology exclusively licensed from
MIT. In consideration of the license, Orasomal may receive milestone payments
and royalties.

Elan and Endorex each funded research and development related to
InnoVaccines equally from the inception of the joint venture through March 31,
1999, in accordance with the agreement between Elan and Endorex. Those
expenditures by Endorex aggregated $1.1 million and $0.4 million for the year
ended December 31, 1998 and 1999, respectively, and are included in Equity in
losses from joint ventures. As of April 1, 1999, Endorex and Elan fund future
joint venture expenditures in proportion to our respective ownership levels.
Accordingly, Endorex and Elan each invoice InnoVaccines for activities
performed on behalf of the venture. During the period April 1, 1999 through
December 31, 1999, Endorex incurred research and development expenditures
aggregating $1.1 million related to the joint venture. Endorex billed the
joint venture $1.6 million during that period related to this research and
development activity. Endorex has a net due to joint venture of $0.6 million
as of December 31, 1999 relating to InnoVaccines, which represents the
difference between Endorex's funding obligations to the venture and receivable
from the venture for activities performed. In addition, Elan has agreed to
lend Endorex up to $2.5 million, restricted to Endorex's funding obligations
for the joint venture. During 1999, the joint venture acquired certain rights
to licenses, aggregating $870,000, which were immediately recorded as expense
of the joint venture, as such technology did not yet represent a commercial
product. Elan and Endorex agreed to fund these licensing expenditures equally.

Endorex Newco, Ltd.

Newco was established in October 1998 pursuant to agreements between
Endorex and Elan. At the time of closing, Endorex and EIS purchased $8.4
million and $2.1 million of Newco's common stock, respectively. In addition,
Elan purchased $8,410,500 of Endorex Series C exchangeable convertible
preferred stock ("Series C Preferred"). The Series C Preferred is exchangeable
at Elan's option for an additional 30.1% ownership interest of Newco's common
stock, or it may be converted into Endorex's common stock at a price of $9.00
per share. The Series C Preferred pays a 7% annual in-kind dividend.

Newco is initially owned 80.1% by Endorex and 19.9% by EIS. At the time of
closing, Newco paid Elan an initial $10.0 million license payment. Elan may
receive future milestones and royalties based on Newco's performance. Since
the technology did not yet represent a commercial product, Newco recorded an
expense in the fourth quarter of 1998 for the initial license fee. We also
recorded our $8.0 million share of that expense and simultaneously recorded
EIS's $8.4 million purchase of Series C Preferred.

In consideration of the license fee, Newco has obtained an exclusive
worldwide license to the MEDIPAD drug delivery system developed by Elan with
two drugs. Newco is now focusing on development of the first of those drugs,
iron chelators, for the treatment of a series of genetic blood disorders known
as iron overload

F-12
<PAGE>

ENDOREX CORPORATION
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

disorders. MEDIPAD is a lightweight, microinfusion pump, which combines the
simplicity of a patch with the extensive delivery capabilities of an infusion
pump.

During 1999, Newco's research and development activities were funded from
working capital. As of December 31 1999, Elan and Endorex invoiced activities
totaling approximately $500,000. Endorex has a net due to joint venture of
$350,000 as of December 31, 1999 relating to Newco, which represents the
difference between Endorex's funding obligations to the venture and receivable
from the venture for activities performed. During 2000 and 2001, Elan and
Endorex are required to fund Newco expenditures according to their respective
ownership interests. However, Endorex may require Elan to lend up to $4.8
million, pursuant to a convertible note, to fund our portion of the joint
venture's research and development expenses.

Unaudited Condensed Financial Statements for Unconsolidated Joint Ventures

Condensed, unaudited financial statement information of the joint ventures
is stated below. The joint ventures had no revenues. Net expenses equaled the
net loss for all periods.

<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
InnoVaccines, net of Endorex mark-up on
billings to InnoVaccines.................. $ (3,731,588) $ (12,577,975)
Newco...................................... (500,000) (10,000,000)
------------ -------------
Total net loss............................. $ (4,231,588) $ (22,577,975)
============ =============
Reconciliation to Equity in losses from
joint ventures:
Total joint venture net losses............. $ (4,231,588) $ (22,577,975)
Less: Elan Minority Interest............... 1,365,680 5,480,000
------------ -------------
Equity in losses from joint ventures....... $ (2,865,908) $ (17,097,975)
============ =============
</TABLE>

4. Development Stage Activities and Operations

For the period from our incorporation to date, we have been a "development
stage enterprise" and our operations have consisted primarily of financial
planning, raising capital, and research and development activities. We have
not produced any revenues from product sales since our inception.

5. Leasehold Improvements and Equipment

As of December 31, 1999, leasehold improvements and equipment consisted of
the following:

<TABLE>
<S> <C>
Leasehold improvements...................................... $ 255,888
Laboratory equipment........................................ 730,803
Office equipment............................................ 111,302
----------
1,097,993
Accumulated depreciation.................................... (649,042)
----------
$ 448,951
==========
</TABLE>

F-13
<PAGE>

ENDOREX CORPORATION
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

6. Lines of Credit

On December 31, 1998, Endorex obtained a $750,000 equipment financing line
with Finova Technology Financing, Inc. ("Finova"). As of December 31, 1999, we
had used approximately $456,000 to finance equipment and leasehold
improvements related to the Lake Forest Research and Development Center.
Interest rates for each draw are based upon a base interest rate of 7.4%, plus
an index rate equivalent to the highest yield as published in The Wall Street
Journal of three-year United States Treasury Notes two days prior to the loan
draw. The index rates for the first and second draws were 4.75% and 5.83%,
respectively, resulting in an aggregate interest rate of 12.15% and 13.23%,
respectively. Draws are payable in monthly installments over a period of 48
months, which currently amounts to approximately $11,000 per month. Finova
filed security interest in the assets. In addition, the agreement is subject
to certain terms and covenants, including the right of Finova to call the loan
in the event of materially adverse financial conditions. We estimate the fair
value of the line of credit to be approximately the carrying value based upon
borrowing rates currently available to us for borrowings with similar terms.

On May 19, 1997, Endorex entered into a senior line of credit agreement
with The Aries Funds, two of our major stockholders, pursuant to which we
could borrow up to $500,000 (the "Bridge Loan"). During 1997, we paid the
outstanding principal and interest on the Bridge Loan. In partial
consideration of the Bridge Loan, Endorex granted warrants to purchase an
aggregate of 66,668 shares of common stock at an initial exercise price equal
to $2.54 per share. The warrant exercise price and the number of shares of
common stock that the warrants can be used to purchase are subject to
adjustment in certain circumstances. The warrants are exercisable until May
19, 2002.

7. Stockholders' Equity

Private Placement--Pursuant to a Private Placement, Endorex issued and sold
an aggregate of 8,648,718 shares of common stock on July 16, October 10 and
October 16, 1997 to certain accredited investors. The aggregate proceeds of
these issuances were $20 million and the net proceeds to Endorex, after
deducting commissions and expenses, were $17.2 million.

In connection with the Private Placement, we issued warrants to purchase
864,865 shares of Endorex common stock at an exercise price of $2.54375 per
share to Paramount Capital, Inc., the Placement Agent ("Paramount") and
certain of its affiliates and employees. The estimated fair value at the
warrants' grant date was $2.1 million, which we recorded as a reclassification
of additional paid-in capital. We also executed a financial advisory agreement
with Paramount. In connection with the financial advisory agreement, we issued
warrants to purchase 1,297,297 shares of Endorex common stock at an exercise
price of $2.54375 per share to certain employees of Paramount. The estimated
fair value at the warrants' grant date was $3.16 million, which was recorded
as a deferred cost and amortized to expense over two years, the term of the
agreement. The warrants currently are exercisable and expire on April 16,
2003.

Common Stock Dividend--The terms of the Private Placement also 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 and second semi-annual common stock dividends were payable to
holders of stock with dividend rights as of the record date of April 16, 1999
and October 16, 1999, respectively. We distributed the first and second
dividends on June 1, 1999 and November 16, 1999, respectively. Semi-annual
common stock dividends continue to be payable through October 16, 2002.

F-14
<PAGE>

ENDOREX CORPORATION
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The stock dividends were reflected as a charge to accumulated deficit,
using the fair market value method computed with the closing price as of the
day before the declaration date.

Net Loss Per Share--Pursuant to Statement of Financial Accounting Standards
("SFAS") No. 128 "Earnings per Share," we presented earnings per share on the
Consolidated Statement of Operations in accordance with SFAS No. 128 for the
current and prior periods. As operations resulted in a net loss for all
periods presented, diluted earnings per share are the same as basic earnings
per share due to the anti-dilutive effect of potential dilutive common shares,
including warrants discussed above and stock options discussed in Note 8.

8. Stock Based Compensation

The Amended and Restated 1995 Omnibus Plan ("the Plan") is intended to
promote Endorex's interests by providing eligible persons with the opportunity
to acquire a proprietary interest, or otherwise increase their proprietary
interest, in the Company as an incentive for them to remain in the service of
the Company. The Plan is divided into three separate equity programs: 1) the
Discretionary Option Grant Program, under which eligible persons may, at the
discretion of the Plan Administrator, be granted options to purchase shares of
common stock, 2) the Salary Investment Option Grant Program, under which
eligible employees may elect to have a portion of their base salary invested
each year in options to purchase shares of common stock, 3) the Automatic
Option Grant Program, under which eligible non-employee Board members will
automatically receive options at periodic intervals to purchase shares of
common stock, and 4) the Director Fee Option Grant Program, under which non-
employee Board members may elect to have all, or any portion, of their annual
retainer fee otherwise payable in cash applied to a special option grant.

The terms of the options, including vesting periods, are determined by the
Compensation Committee of the Board of Directors in accordance with the Plan.
Options generally vest over four years. No one person participating in the
Plan may receive options and separately exercisable stock appreciation rights
for more than 750,000 shares of Common Stock per calendar year.

We elected the disclosure-only option under Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" and accordingly account for stock options per the terms of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." If instead, compensation expense for stock options had been
determined based upon the fair value at the grant date, according to the terms
of SFAS No. 123, our net loss would have increased by approximately $0.4
million, or $.03 per share, and $1.3 million, or $0.12 per share, for 1999 and
1998, respectively. Net loss and net loss per share would have increased as
follows:

<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Net loss applicable to common stockholders:
As reported.............................. $ (8,786,431) $ (22,506,357)
Pro forma................................ (9,118,581) (23,814,669)
Basic and diluted net loss per share
applicable to common stockholders
As reported.............................. $ (0.82) $ (2.09)
Pro forma................................ (0.85) (2.21)
</TABLE>

F-15
<PAGE>

ENDOREX CORPORATION
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The weighted average fair value of options granted with an exercise price
equal to the fair market value of the stock was $1.45 and $5.46 for 1999 and
1998, respectively.

For purposes of estimating the fair value of options according to SFAS 123,
we estimated the fair value of each option grant as of the date of the grant
using the Black-Scholes option-pricing model. The following weighted-average
assumptions were used: dividend yield 0%, volatility of 139% and 149-226%,
expected life of four (4) years, and risk-free interest rates as of the date
of grant ranging from 5.05%-6.2% and 5.36-6.06% for 1999 and 1998,
respectively.

Option activity for the periods ended December 31, 1999 and 1998 was as
follows:

<TABLE>
<CAPTION>
Weighted Average
Exercise Price Shares
---------------- ---------
<S> <C> <C>
Ending Balance at December 31, 1997........... $2.66 1,300,114
Granted....................................... $6.24 209,500
Expired/Cancelled............................. $2.70 (23,838)
Exercised..................................... $2.47 (25,000)
---------
Ending Balance at December 31, 1998........... $3.18 1,460,776
=========
Granted....................................... $1.93 229,000
Expired/Cancelled............................. $5.11 (117,940)
Exercised..................................... $1.05 (334)
---------
Ending Balance at December 31, 1999........... $2.82 1,571,502
=========
</TABLE>

The range of exercise prices and weighted average contractual lives are as
follows:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------- ------------------------
Weighted Average Weighted Average
Exercise Price Shares Term Exercise Price Shares Exercise Price
-------------- --------- ---- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$1.05 1,002 0.02 $1.05 1,002 $1.05
$2.47 1,155,000 7.81 $2.47 812,935 $2.47
$4.75 35,000 7.97 $4.75 19,687 $4.75
$5.50 20,000 7.97 $5.50 20,000 $5.50
$5.63 35,000 7.92 $5.63 35,000 $5.63
$6.50 18,000 0.06 $6.50 18,000 $6.50
$6.75 80,000 8.12 $6.75 27,500 $6.75
$6.63 12,500 8.16 $6.63 3,125 $6.63
$2.00 86,000 9.16 $2.00 -- $2.00
$1.75 3,000 9.21 $1.75 -- $1.75
$1.88 20,000 9.37 $1.88 -- $1.88
$2.54 36,000 9.82 $2.54 9,000 $2.54
$2.54 10,000 0.82 $2.54 10,000 $2.54
$1.38 60,000 9.81 $1.38 7,500 $1.38
--------- -------
1,571,502 7.92 $2.82 963,749 $2.90
========= =======
</TABLE>

F-16
<PAGE>

ENDOREX CORPORATION
(A Development Stage Enterprise)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

9. Income Taxes

At December 31, 1999, we had a usable net operating loss carryforward of
approximately $15.9 million after limitations based on ownership. If not
utilized to offset future taxable income, this carryforward will expire in
years 2007 to 2019. Pursuant to SFAS No. 109, we have deferred taxes as of
December 31, 1999 consisting of the following:

<TABLE>
<S> <C>
Net operating loss carryforward............................. $ 5,414,203
Research & development credit carryforward.................. 618,058
Licensing fees--amortization................................ 5,045,090
Depreciation................................................ 108,008
------------
Gross deferred tax assets................................... 11,185,359
Valuation allowance......................................... (11,185,359)
------------
Net deferred tax assets..................................... $ --
============
</TABLE>

Due to the uncertainty that we will generate income in the future
sufficient to fully or partially utilize these carryovers, a valuation
allowance of $11,185,359 has been established to offset the deferred tax
asset. This represents an increase of $1.9 million over the valuation
allowance at December 31, 1998. Under the Internal Revenue Code certain stock
transactions including sales of stock and the granting of options to purchase
stock, could limit the amount of net operating loss carry forwards that may be
utilized on an annual basis to offset taxable income in future periods. If
utilization is limited by such transactions the net operating loss carry
forwards may expire before they are utilized.

10. Leases

Endorex leases its executive offices and research facilities under
operating leases, which provide for annual minimum rent and additional rent
based on increases in operating costs and real estate taxes. Rental expense
was $83,153 during 1999 and $95,522 during 1998.

Future minimum lease payments for operating leases are as follows:

F-17
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Endorex Corporation (A
Development Stage Enterprise):

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' equity (deficit) and
of cash flows, present fairly, in all material respects, the financial
position of Endorex Corporation and its subsidiaries (a development stage
enterprise) at December 31, 1999, and the results of their operations and
their cash flows for the years ended December 31, 1999 and 1998, and for the
period cumulative from inception (February 15, 1985) to December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
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 of these statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

Chicago, Illinois
February 4, 2000

F-18