RespireRx Pharmaceuticals Inc. - Annual Report: 2004 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended June 30, 2004

OR

For the transition period from                      to                     

Commission file number 0-17951

Cortex Pharmaceuticals, Inc.

(Exact name of registrant as specified in its charter)

15241 Barranca Parkway, Irvine, California, 92618

(Address of principal executive offices, including zip code)

(949) 727-3157

(Registrant’s telephone number, including area code)

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

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

Common Stock, $0.001 par value

(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 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 ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES ¨ NO x

The aggregate market value of the voting stock held by non-affiliates as of December 31, 2003 was $53,084,500 (based on the closing sale price of the common stock as reported by The American Stock Exchange on such date). As of September 22, 2004, there were 28,455,303 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for the Annual Meeting of Stockholders to be held on December 16, 2004 (to be filed with the Commission on or before October 28, 2004) are incorporated by reference into Part III.

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TABLE OF CONTENTS

(Attached to this Report on Form 10-K)

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INTRODUCTORY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and the Company intends that such forward-looking statements be subject to the safe harbors created thereby. These forward-looking statements, which may be identified by words including “anticipates,” “believes,” “intends,” “estimates,” “expects,” and similar expressions include, but are not limited to, statements regarding (i) future research plans, expenditures and results, (ii) potential collaborative arrangements, (iii) the potential utility of the Company’s proposed products and (iv) the need for, and availability of, additional financing.

The forward-looking statements included herein are based on current expectations that involve a number of risks and uncertainties. These forward-looking statements are based on assumptions regarding the Company’s business and technology, which involve judgments with respect to, among other things, future scientific, economic and competitive conditions, and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, actual results may differ materially from those set forth in the forward-looking statements. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as representation by the Company or any other person that the objectives or plans of the Company will be achieved.

PART I

Since 1993, the primary effort at Cortex has been to develop a novel pharmacology that positively modulates AMPA-type glutamate receptors, a complex of proteins that is involved in communication between nerve cells in the human brain. Cortex is developing a family of chemical compounds known as AMPAKINE^®compounds that enhance the activity of this receptor. Cortex believes that AMPAKINE compounds hold promise for correcting neurological and psychiatric diseases and disorders that are known, or thought, to involve depressed functioning of pathways in the brain that use glutamate as a neurotransmitter.

AMPAKINE compounds, which act on chemical pathways that impact at least 85% of all the neurotransmission occurring in the brain, have been demonstrated to enhance memory and cognition in both animals and humans. The compounds can be taken orally or intravenously, and rapidly pass through the brain membrane.

The AMPAKINE program addresses large potential markets. According to research data from IMS Health, in 2003 worldwide sales for central nervous system products to treat brain-related disorders and diseases exceeded $57 billion, with growth at more than 19% on an annualized basis. The Company’s business plan involves partnering with larger pharmaceutical companies for research, development, clinical testing, manufacturing and global marketing of specific AMPAKINE compounds for those indications that require sizable, expensive Phase III clinical trials — and very large sales forces to achieve significant market penetration. At the same time, Cortex plans to develop internally a selected set of indications, many of which will allow it to apply for “Orphan Drug” status. Such designation by the Food and Drug Administration is usually applied to products where the number of patients in the given disease category is less than 200,000 per year. These Orphan Drug indications typically require more modest investment in the development stages, follow a quicker regulatory path to approval, and involve a more concentrated sales reach to a few, selected medical centers in the United States (“U.S.”). The key indications that Cortex plans to pursue internally include (a) restoration of memory and diminution of loss of memory due to electroconvulsive therapy, (b) narcolepsy and (c) Fragile X syndrome.

Cortex may also pursue other Orphan Drug indications and upon any related approval, may expand its clinical potential into non-Orphan Drug indications. As an example, if the Company obtains approval for an indication related to Fragile X syndrome, further expansion into treatment of autism may follow. While the market potential in the U.S. for most of the listed Orphan Drug indications varies between $200 million and $400 million per indication, Cortex estimates that the consolidated potential for all indications, including expansion into non-Orphan Drug indications, provides the Company a market potential of over $3 billion. This amount does not include any revenues from any potential license of the Company’s intellectual property. Cortex will

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continue to seek at least one more significant license agreement with a larger pharmaceutical company, while the Company prepares itself for potential entrance into the pharmaceutical market with its own product.

In January 1999, the Company entered into a research collaboration and exclusive worldwide license agreement with NV Organon (“Organon”), a subsidiary of Akzo Nobel. The agreement grants Organon worldwide rights to develop and commercialize the Company’s AMPAKINE technology for the treatment of schizophrenia and depression. In October 2000, the Company entered into a research collaboration and license agreement with Les Laboratoires Servier (“Servier”). The agreement, as amended in October 2002, will allow Servier to develop and commercialize the Company’s AMPAKINE technology in defined territories of Europe, Asia, the Middle East and certain South American countries as a treatment for memory impairment associated with aging and neurodegenerative diseases. The indications covered include, but are not limited to, Alzheimer’s disease, mild cognitive impairment, sexual dysfunction, anxiety disorders and the dementia associated with Parkinson’s disease, multiple sclerosis and Amyotrophic Lateral Sclerosis.

Cortex continues to actively pursue collaborative or licensing arrangements with other pharmaceutical companies. These arrangements may permit other applications of the AMPAKINE compounds to be advanced into later stages of clinical development and may provide access to the extensive clinical trials management, manufacturing and marketing expertise of such companies.

In the fiscal years ended June 30, 2004, 2003 and 2002, the Company’s total operating expenses were approximately $9,513,000, $6,421,000 and $7,487,000, respectively, with amounts for the fiscal year ended June 30, 2004 including $1,106,000 of non-cash charges related to warrants and stock options and increased research and development expenses for initiating toxicology and Phase I clinical testing of the AMPAKINE CX717.

Cortex faces a number of risks in moving its technology through research, development and commercialization. Since its inception in 1987, the Company has never had revenues from commercial sales, has never been profitable on an annual basis and has incurred net losses approximating $48,051,000. Cortex does not anticipate profitability in the short term and will continue to require external funding, either from the private or public equity markets or from corporate partners and licenses of the Company’s technology. As of yet, Cortex has not obtained FDA approval to market any of its products. All of these risks, and others, are described in “Risk Factors” starting on page 20.

In this annual report, the terms the “Company,” “Cortex,” “we,” “our,” and “us” refer to Cortex Pharmaceuticals, Inc., a Delaware corporation. Cortex was organized in 1987. The Company’s executive offices are located at 15231 Barranca Parkway, Irvine, California 92618, and its telephone number is (949) 727-3157. The Company’s website is www.cortexpharm.com.

AMPA Receptor Modulator Program

In June 1993, Cortex licensed a new class of molecules and technology — the AMPAKINE technology — from the University of California. Cortex has subsequently been working to develop and patent new AMPAKINE molecules and to demonstrate efficacy and safety in a number of potential indications.

AMPAKINE compounds facilitate the activity of the AMPA receptor, which binds the neurotransmitter glutamate. The AMPAKINE compounds interact in a highly specific manner with the AMPA receptor in the brain, lowering the amount of neurotransmitter required to generate a response, and increasing the magnitude of the response to any given amount of glutamate. Cortex hopes that this selective amplification of the normal glutamate signal will eventually find utility in the treatment of

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neurological and psychological diseases and disorders characterized by depressed functioning of brain pathways that utilize glutamate as a neurotransmitter.

It is well known that the majority of excitatory synaptic connections in the brain utilize glutamate, and such synaptic connections decline with age. Thus, brain disorders associated with aging may be amenable to treatment with AMPAKINE compounds. Such disorders include mild cognitive impairment, Alzheimer’s disease and Parkinson’s disease. Schizophrenia, depression and other psychiatric disorders may involve imbalances of neurotransmitters in the brain, such as dopamine, serotonin, acetylcholine and norepinephrine. Given that glutamate commonly is found in the same synapses with these other neurotransmitters, it may play a role in the rebalancing of neurotransmission. AMPAKINE compounds may provide a new approach to treat both neurological and psychiatric disorders by directly modulating the AMPA receptor to enhance the release of glutamate, thereby rebalancing deleterious effects from other neurotransmitters. A study with AMPAKINE compounds in patients with schizophrenia indicated improvement in a number of symptoms also common to patients with Attention Deficit Hyperactivity Disorder (“ADHD”). The Company and its collaborators have obtained other encouraging preliminary results in animal models of sleep deprivation, Fragile X syndrome, depression, libido and stroke.

See “Risk Factors — We are at an early stage of development and we may not be able to successfully develop and commercialize our products and technologies” on page 21 for a discussion of certain risks related to the development and commercialization of the Company’s products, including, without limitation, risks related to its clinical trials.

Lead Development Candidate — AMPAKINE CX717

One of the most compelling animal studies conducted with the AMPAKINE CX717 involves a model that examines the effects of sleep deprivation on cognitive performance in non-human primates. As reported by Wake Forest University School of Medicine scientists at the 2003 Annual Meeting of Society for Neurosciences, the model utilizes a colony of rhesus macaque monkeys. The monkeys are trained to use a cursor to respond to computer images projected onto a white screen.

A monkey initiates the task by placing a cursor on the start circle. Shortly thereafter, the computer screen displays a specific image. The screen then goes blank for between 1 and 60 seconds, after which the computer screen displays from two to six randomly selected images. From these images, the monkey must select the image that matches the one displayed at the start of the exercise. This technique is called a delayed-match-to-sample task.

The monkeys are trained to respond at a high overall level of performance. Under carefully controlled conditions and constant monitoring, the monkeys were then individually sleep deprived for between 30 and 36 hours, and then re-tested in the task. When the monkeys were sleep deprived, their performance accuracy on the task was reduced by 15% to 25%, and their reaction times slowed by at least 50%.

A single dose of 0.8 mg/kg of CX717 completely reversed the performance deficits associated with sleep deprivation. Additionally, in those monkeys given CX717, specific brain electroencephalogram changes that occur after sleep deprivation were returned to the non sleep deprived state.

Based upon these results, and extensive required safety testing in rats and dogs, as well as monkeys, Cortex has initiated Phase I studies of CX717 in the United Kingdom (“U.K.”). The studies are being conducted with the assistance of Quintiles – Guy’s Drug Research Unit, a large and well-respected clinical research organization.

The first of these studies was a randomized, double-blind single rising dose study to explore the safety, tolerability and pharmacokinetics (the time course of absorption, distribution, metabolism and excretion of the drug from the body) of CX717 in healthy young men between the ages of 18 and 45.

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Eight men per dose group randomly received CX717 (n = six) or placebo (n = two). To date, the Company has dosed patients with up to 1600 mg of CX717 in this protocol and has not yet reached a maximum tolerated single dose. Cortex has decided that further single dose increases are not warranted in this study and instead will be giving multiple doses over a period of ten days to help define the maximum tolerated dose. On a single dose basis, the 54 volunteers who have received CX717 tolerated the drug very well.

A second study explored the effect of food taken immediately before administration in a single dose group of eight young, healthy men in an open label, two-way crossover design. Of the eight male subjects, four are fed and four are fasted during each arm of the crossover. The results of this study demonstrated that there was no statistical difference between the rate and amount of drug absorption when given with food as compared to the fasting state. These results are encouraging in the Company’s consideration of potential future clinical trials of longer duration. If the compound is successful in additional clinical trials, the eventual dosage regimens for patients may be greatly simplified.

The third study is a randomized, double-blind multiple rising dose study to examine the safety and tolerability of CX717 in young, healthy men. Three groups of eight volunteers (CX717 = six; placebo = 2) will receive daily doses of CX717 for ten (10) days. Safety and pharmacokinetics were fully assessed on days one and ten, with single samples taken at pre-dosing during intervening days. The doses utilized were based upon the results from the first study. So far, single daily doses of 100 mg and 300 mg have been administered to these subjects for ten days with excellent safety results. In order to increase the exposure of the drug to volunteers, Cortex has decided to increase the dose to twice per day in future tolerance studies to help define a maximum tolerated dose for CX717. Cortex anticipates that these studies will be completed in October 2004.

The fourth of the studies is a randomized, double-blind, multiple dose study in healthy, elderly men and women to examine the safety, tolerability and pharmacokinetics of CX717 when administered daily for at least 10 days. This study has not been initiated yet, although Cortex anticipates that it will be completed during the fourth quarter of calendar year 2004. Additional pharmacodynamic parameters will be measured in this group of elderly subjects.

The pharmacokinetic results to date from the 64 volunteers who have taken CX717 show that the half life of the drug averages 9 hours and the amount of drug absorbed over the range of 25 mg to 1600 mg was linear. Very high unchanged drug levels and area under the curve values were found and indicated an excellent absorption profile for the drug. Additionally, using the single dose kinetic parameters, Cortex has been able to accurately predict the results of the multi-dosing trials. The simulations and the actual data overlapped as would be expected if the kinetic data was accurate. In summary, to date Cortex has found the drug to have an excellent safety profile, seemingly well absorbed and linear kinetics over a large range of doses in normal volunteers. The doses administered to the normal volunteers were up to 16 times greater than those needed to produce efficacy results in the primates. If the clinical efficacy in humans can be demonstrated over the same dosage ranges as has been found in primates, the potential for once a day dosing seems feasible.

In addition to the tolerance studies that continue and involve twice daily dosing over a ten-day period, Cortex has also initiated a kinetic study to evaluate the absorption of an oral solution as compared to oral capsules filled with drug of two different particle sizes. The results from this study are as expected: the oral solution was most rapidly absorbed, followed by the capsule containing the smaller particles. The capsule with the larger drug particles had the slowest absorption. This dissolution rate controlled absorption process is quite common and will allow the Company to improve the dosage forms to be used in the planned Phase II efficacy trials during calender year 2005. No Significant differences were found in the amount of drug absorbed by the subjects or in the elimination half-life for the drug among the various dosage forms tested.

The Company is currently in the planning stages to initiate a Phase I/II pilot efficacy in sleep deprivation in the U.K. Cortex hopes to have results from such a trial by early calendar year 2005, which may provide it with a dose range for future efficacy studies. Cortex plans to conduct several small pilot efficacy trials with CX717 during the first half of calendar 2005, the Company also plans to immediately initiate a three-month toxicology study for CX717 so that by mid-calendar 2005, it potentially may begin longer Phase IIb efficacy studies for this drug. Cortex plans to have a Notice of Claimed Investigational Exemption for a New Drug (“IND”) filed with the Food and Drug Administration for CX717 before the end of calendar year 2004.

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Based on the pharmacokinetic and safety profile of CX717 in the Phase I studies and the compound’s behavioral characteristics, Cortex may conduct small Phase II pilot efficacy studies in the indications that are listed below.

Potential Applications for CX717 and Follow-Up AMPAKINE Compounds

Alzheimer’s Disease

Impairment of memory and cognition is a significant health care problem that is growing as the elderly population continues to increase. Dementia can be diagnosed in those individuals who develop persistent memory and cognitive deficits as well as in those who suffer from difficulties in their social, occupational and other activities of daily living. With advanced dementia, many elderly individuals become confined to nursing homes because of psychological disorientation and profound functional difficulties. Pharmaceuticals to alleviate deficits in memory and cognition could potentially enable elderly individuals with dementia to regain some functional abilities that may help them remain independent longer, resulting in improved quality of life and substantial savings in health care costs.

Alzheimer’s disease is the most common form of dementia, currently afflicting some 4 million people in the U.S. and 12 million people worldwide. With the aging of our population, unless a treatment is found, the number of people in the U.S. with the disease is expected to reach 14 million by the middle of this century. According to the Alzheimer’s Association, the U.S. society spends at least $100 billion a year on Alzheimer’s disease at an average lifetime cost per patient of $174,000. Neither Medicare nor most private health insurance covers the long-term care more patients need. The impact of an effective treatment, even a symptomatic one, would be enormous.

It is in the early and middle stages of Alzheimer’s disease that Cortex believes AMPAKINE molecules may play a valuable role, enhancing the effectiveness of the brain cells that have not yet succumbed to the disease. This enhancement may help to alleviate the memory and cognitive deficits that constitute the major symptoms of Alzheimer’s disease.

There is also a possibility that treatment with AMPAKINE compounds may slow the progression of Alzheimer’s disease. Brain cells, or neurons, require continued input from other brain cells to remain alive. As neurons die, other neurons begin to lose their inputs, hastening their own death. AMPAKINE compounds may slow the rate at which functional levels of input from other neurons are lost. In animal models, selected AMPAKINE compounds have been shown to increase the production of BDNF, which is a protein associated with the formation of synapses by neurons. This possible mode of action also may prove beneficial to patients with Alzheimer’s disease, although it has not been demonstrated whether the same mechanism may produce similar results in humans.

Attention Deficit Hyperactivity Disorder

ADHD is the most commonly diagnosed psychological disorder of children. The National Institute of Mental Health (“NIMH”) estimates that ADHD affects three to five percent of school-age children, with about one child in every classroom in the U.S. in need of help for this disorder. According to the NIMH, national public school spending on behalf of students with ADHD may have exceeded $3 billion in 1995.

Symptoms of ADHD include an inability to sustain attention and concentration, along with developmentally inappropriate levels of activity, distractability and impulsivity. Children with the disorder may have functional impairment across multiple settings including home, school and peer relationships. ADHD has also been linked to long-term adverse effects on academic performance, vocational success and social and emotional development. These effects not only impact the individual patients, but also their families, schools and communities. For many, the symptoms and impact of the disorder continue into adulthood.

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Psychostimulants, including amphetamine, methylphenidate and pemoline, represent the most widely researched and commonly prescribed treatments for the disorder. One theory suggests that ADHD results from difficulties in inhibiting responses to internal and external stimuli. Evidence suggests that those areas of the brain thought to be involved in planning, foresight, and consideration of alternative responses may be under-stimulated in patients with ADHD. Stimulant medication may work on these areas of the brain to increase neural activity to more normal levels.

Because of the availability and frequent prescribing of psychostimulants, concerns over their potential overuse and abuse have intensified. Along with the abuse potential, treatments with psychostimulants may result in side effects. According to the National Institutes of Health, some children on these medications may lose weight, have less appetite and temporarily grow more slowly. Others may experience problems falling asleep. Given the lack of consistent improvement beyond the disorder’s core symptoms and the deficit of long-term studies, the need remains for additional testing with medications and behavioral treatments.

Cortex believes that AMPAKINE compounds may represent a novel, non-scheduled (not regulated by the Drug Enforcement Agency) approach for treating ADHD patients, but until the development of CX717 has lacked an AMPAKINE compound with the appropriate potency and duration of activity to treat ADHD on a once a day basis. Given the impressive behavioral improvement in attention and performance in primate studies with CX717 and of the longer acting AMPAKINE compounds, Cortex’s consultants have recommended that it considers a pilot trial in an ADHD population. Given the unmet medical need for a safe and non-scheduled (drugs with low potential for addiction) treatment for ADHD, Cortex may decide to pursue such a pilot trial. Cortex retains worldwide rights for this indication.

Narcolepsy and Other Day-Time Sleepiness Disorders

Narcolepsy represents a disabling neurological disorder involving excessive daytime sleepiness and periodic irresistible sleep attacks of sudden onset and brief duration. The number and severity of symptoms vary widely among individuals with the disorder, with symptoms generally beginning between the ages of 15 and 30. Prevalence of narcolepsy in the U.S. is under 200,000. The disorder is known to occur in equal frequency in both sexes and to affect all ethnic populations.

According to the National Institute of Neurological Disorders and Stroke, patients with narcolepsy experience sleep attacks that can last for up to 30 minutes, regardless of the amount or quality of the prior night’s sleep. The sleep attacks may occur at work, social events, while eating, talking and driving, and in other similarly inappropriate circumstances.

There is currently no cure for the disorder, although the symptoms may be controlled with behavioral and medical therapy. The therapeutic focus is to promote and enhance wakefulness and counteract excessive daytime sleepiness. The Company believes that AMPAKINE compounds may be useful in treating day time sleepiness, which is a key need for individuals with narcolepsy.

Sleep disorders represent a broad range of illnesses arising from many causes, including abnormalities in physiological functions during sleep, abnormalities of the biological clock and sleep disturbances that are induced by factors outside of the sleep process.

According to the National Sleep Foundation, over the past century, society has reduced its average asleep time by 20 percent and, in the past 25 years, added a month to its average annual work/commute time. When the body is deprived of the sleep that it needs, the ability to concentrate or perform even simple tasks declines, and productivity suffers.

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An internal biological clock in the brain regulates our sleep needs and patterns. Almost everyone’s clock is set for sleep at night, especially in the early morning hours between midnight and dawn. When our lives force us to work against our biological clocks, sleep problems are unavoidable.

The National Sleep Foundation estimates that 20 percent of American employees work non-traditional schedules. For these workers, getting enough sleep is a common problem.

Dr. Sam Deadwyler, Professor and Vice Chairman, Department of Physiology and Pharmacology at Wake Forest University School of Medicine, as part of a grant received from the Defense Advanced Research Projects Agency (“DARPA”) has studied the effects of sleep deprivation on cognitive performance and associated brain imaging changes in primates (to be published). Primates were trained to a high level of successful performance in a visual delayed-match-to-sample task. The animals were then individually sleep-deprived for 30-36 hours before being re-tested. Performance accuracy on the task was significantly reduced by 15-25%, and reaction times slowed by at least 50% in all monkeys as a result of the sleep deprivation.

In November 2003, at the Annual Society of Neuroscience Meeting, Dr. Deadwyler reported the results from a new sleep deprivation study in primates with the more potent AMPAKINE CX717. The results suggested that with CX717, a single dose of 0.5 to 1.5 mg/Kg produced an optimal response on short term memory, which would be the equivalent of approximately 75-100 mg per day in an average human patient.

Expansion of the use of AMPAKINE compounds to the treatment of narcolepsy may be possible. Narcolepsy represents an Orphan Drug indication that would reduce both the cost and time to market for a potential therapeutic agent from Cortex. The decision on whether CX717 will be evaluated in narcoleptic patients or any other Orphan Drug indication will be made by Cortex after the data from the Phase I/II sleep deprivation study becomes available.

In June 2004, Cortex announced that Dr. Deadwyler has received a grant of approximately $5,100,000 from DARPA to continue his research at Wake Forest University on the effects of sleep deprivation in primates, including the effects of CX717 and other AMPAKINE compounds.

Electroconvulsive Therapy

Electroconvulsive therapy is the most effective treatment of major depression, with approximately 100,000 patients receiving ECT in the U.S. ECT works by the intentional induction of a controlled generalized seizure by administration of electrical impulses to the anesthetized patient. The number of treatments in a course of therapy varies. Six to twelve treatments are usually effective. In the U.S., the usual frequency is three times weekly; in the United Kingdom, the standard practice is two treatments weekly.

Despite its effectiveness, patient and clinician acceptance is limited due to significant memory loss that has been associated with this therapy. ECT–induced memory impairment takes three forms. The first is post-treatment confusion. Typically, it takes a few minutes to half an hour for a patient to become fully alert and oriented after treatment. In elderly patients receiving ECT treatment with bi-temporal electrode placement, the period of post-treatment confusion may persist for several hours or even days. The second type of memory impairment with ECT is anterograde amnesia. This refers to the inability to recall information learned after the treatments have begun. The anterograde amnesia produced by ECT is short lived and, in group data, is rarely apparent more than 10 days after ECT. The third and most bothersome type of ECT-induced memory impairment is retrograde amnesia, forgetting things that happened before the course of treatments. With retrograde amnesia, events of several months before treatment are most likely forgotten.

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Efficacy of ECT is strongly influenced by the anatomical positioning of stimulating electrodes, which determine current paths, and by electrical dosages, which determine current density within the current path. These factors determine the magnitude and persistence of cognitive side effects.

In addition, the effects of chronic ECT have been discussed in recent studies demonstrating that the pathophysiology of depression involves atrophy or death of hippocampal neurons. This work has led to the hypothesis that ECT and antidepressant drugs, via regulation of neurotrophic factors, reverse the atrophy of stress-vulnerable neurons or protect these neurons from further damage. It is possible that AMPAKINE compounds may enhance the recovery of memory post-ECT therapy.

The effect of ECT on memory is based upon the assumption that sequence of memory formation corresponds to sequence of synaptic modification that is altered by ECT. To the degree that initial encoding and later consolidation of memory depend upon the induction and stabilization of long term potentiation (“LTP”), or the formation of memory, medications that enhance these cellular effects are expected to potentially preclude memory loss or at least minimize it.

It has been shown that the repetitive release of a transmitter over a period of 30–50 milliseconds allows AMPA receptors to generate sufficient depolarization to unblock NMDA receptors and thereby induce LTP. Both the AMPA and NMDA receptors must be triggered in order to induce LTP. Increasing the amount of glutamate released during stimulation or enhancing the effects of the transmitter on AMPA receptors can reduce this requirement and enhance memory capabilities. High impact AMPAKINE compounds have been demonstrated to facilitate the release of Brain Derived Neurotrophic Factor (“BDNF”), or brain growth factor, and theoretically may provide a neuroprotective effect against current induced by ECT, thereby potentially reducing retrograde amnesia effects.

This is a testable hypothesis given that there are non-human primate models available to test intervention with CX717 and other AMPAKINE compounds. This in-vivo model measures acute, anterograde and retrograde amnesia effects after the administration of precise doses of ECT. If AMPAKINE drugs, like CX717 or a high impact AMPAKINE compound can protect the primate from the acute insult of ECT, this will provide a unique niche for AMPAKINE drugs in the hospitals where ECT is currently used.

Fragile X and Autism

Fragile X is an inherited disorder that represents the most common cause of inherited mental retardation. The disorder affects approximately 60,000 to 80,000 patients in the U.S. alone. Symptoms of Fragile X syndrome include mental impairment ranging from learning disabilities to mental retardation, attention deficit and hyperactivity, anxiety and unstable mood and autistic-like behaviors.

Males are typically more severely affected by Fragile X syndrome than females. Although most males with Fragile X syndrome have mental retardation, only one-third to one-half of females with the disorder has significant intellectual impairment; the rest have either normal intelligence or learning disabilities. Emotional and behavioral problems are common in both sexes. There are no current therapeutic treatments for the disorder, although medications are used to treat some symptoms.

Autism is a complex developmental disability that typically appears during the first three years of life. The result of a neurological disorder that affects the functioning of the brain, autism and its associated behaviors have been estimated to occur in as many as 2 to 6 in 1,000 individuals. The disability is four times more prevalent in males than in females.

Autism impacts the normal development of the brain in the areas of social interaction and communication skills. Children and adults with autism typically have difficulties in verbal and nonverbal communication, social interactions, and leisure or play activities. Persons with autism may exhibit repeated body movements, unusual responses to people or attachments to objects, and resistance to

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changes in routines. Individuals also may experience heightened sensitivities of sight, hearing, touch, smell and taste. There are currently no approved therapeutic treatments for autism, although early behavioral intervention dramatically improves outcome.

Recent scientific research has led to an improved understanding of Fragile X syndrome and autism. A number of scientists have suggested that the use of a drug to enhance glutamate transmission may be beneficial. AMPAKINE compounds, which have demonstrated enhanced glutamate transmission, may therefore serve as potential new therapeutics.

Imaging studies demonstrate that areas of the brain that are extremely rich in glutamate transmission are less active in autistic patients. Molecular studies suggest that although genes involved in the AMPA-type glutamate receptor are more active in autistic patients, the density of AMPA-type glutamate receptors is decreased. Taken together, these facts suggest that enhancing AMPA receptor activity may be beneficial in autistic patients.

The scientific logic for using an AMPA receptor modulator in Fragile X is more complex but equally compelling. The Fragile X genetic defect results in the reduction or absence of an important protein, FMRP. FMRP is thought to play an important role in allowing normal levels of AMPA receptor proteins to be made. Increasing the activity of AMPA receptors with an AMPAKINE may overcome the reduced number of AMPA receptors produced by the reduced level of FMRP protein.

Some Fragile X clinicians believe that AMPAKINE compounds with the potential to raise neurotrophic levels may improve Fragile X patients, especially if administered at a young age. AMPAKINE compounds such as CX717 may have sufficient potency and safety to restore some cognitive function to patients afflicted with the disorder. Cortex will assess whether to conduct a study with CX717 in this population after an evaluation of efficacy is derived from early Phase I/IIa studies with the compound.

Other Indications

Cortex may conduct studies in various other indications that have not been discussed above. In addition to the AMPAKINE CX717, Cortex plans to advance other AMPAKINE compounds that have shown promise in animal models. The Company hopes to initiate toxicology testing for one of these compounds before the end of calendar year 2004. If those tests are successful, Cortex plans to prepare this drug candidate for clinical trials during mid-calendar year 2005.

Proof of Principal Compound — CX516

Cortex’s development of the AMPAKINE technology began with its exclusive license of the technology from the University of California in 1993. CX516 was among a number of AMPAKINE compounds that were rapidly synthesized and evaluated by Cortex’s scientists during the early discovery and preclinical development processes. Given concerns about potential brain-related side effects caused by excess glutamate, many believed that AMPAKINE compounds (through their potentiation of glutamate) would cause serious side effects in humans. While this concern has since been alleviated, it initially created a serious impediment for Cortex in raising funds for its research in the private equity markets. At the same time, Cortex was able to accumulate an impressive patent portfolio.

Three human clinical safety studies have been completed with the AMPAKINE CX516 in healthy volunteers. In all three studies, CX516 was safe and well-tolerated on acute oral administration, and importantly, indicated statistically positive effects on memory performance.

Phase II studies in mild cognitive impairment (MCI), Alzheimer’s disease, ADHD, schizophrenia and Fragile X syndrome subsequently were initiated and/or completed with CX516. The current status of these trails is described more fully under the respective headings below.

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Mild Cognitive Impairment

In the aging population there is a continuum of cognitive decline. This continuum ranges from normal (for the general age group) to MCI to probable Alzheimer’s disease or other types of dementia.

Patients with MCI currently represent the earliest clinically-defined group with memory impairment beyond that expected for normal individuals of the same age and education, but do not meet clinical criteria for Alzheimer’s disease. It is estimated that there are between 3 and 4 million people with MCI. The memory deficits in the MCI population are clinically discernible and can interfere with daily functioning. MCI patients also appear to have a greatly increased risk of developing Alzheimer’s disease. Whereas approximately 1-2% of the normal elderly population will be diagnosed with Alzheimer’s disease every year, 10-15% or more of MCI patients will progress to Alzheimer’s disease per year.

Together with its partner, Servier, Cortex conducted a cross-national study of the AMPAKINE technology as a potential treatment for MCI. This study was designed and conducted by a joint Cortex and Servier clinical team, in consultation with the International Scientific Advisory Committee (“ISAC”). The majority of the study costs were funded by Servier, with initial funding provided by the Institute for the Study of Aging, a non-profit foundation supported by the Estee Lauder Trust.

The Phase II study began enrollment in March 2002 in the U.S. and several months later in five European countries. The last patient completed the study in mid-August 2003. Given the size of the data base and the expense incurred for the trial by Servier, Servier required that the ISAC review the data before the results were disclosed publicly. The ISAC met with Cortex and Servier to review the analysis in February 2004.

CX516 failed to meet the study’s primary endpoint, improvements in the 15-item word list delayed recall. However, a subset review of the patients with the worst baseline memory impairment (the worst 25% of the patient population), showed a modest improvement with CX516 versus placebo on the 15- item word list delayed recall test. A review of the safety data showed a significant difference in patient withdrawals in the active treatment group, primarily due to gastrointestinal side effects, when compared to the placebo group. While there were a substantial number of adverse events in the active treatment group, only the gastrointestinal side effects were significantly different from those side effects attributed to the placebo group. There were no treatment-related serious adverse events in either the placebo or CX516 groups.

CX516 has a half-life of less than one hour and very low potency, which may require the administration of several grams of drug per dosing period, making improvement in the primary endpoint for this study a difficult objective to achieve. Neither Cortex nor Servier views the results from this MCI study as an indication that the AMPAKINE technology is flawed. Both companies have a large number of compounds with much greater potency and longer pharmacokinetic half-lives, which will be more appropriate for clinical development than the “proof of concept” compound, CX516. Both companies are proceeding diligently with the clinical development of other AMPAKINE compounds, CX717 from Cortex, S-18986 and related compounds from Servier and a large number of compounds resulting from the collaborative efforts of the two companies.

Based on the Company’s animal and clinical studies, Cortex believes that CX516 is a short acting drug that requires multiple administrations of extremely high doses per day to achieve and maintain the desired therapeutic effect. Therefore, Cortex does not intend to commercialize this compound. However, there are currently other studies underway with CX516 in Fragile X syndrome, Alzheimer’s disease and schizophrenia (as a combination with anti-psychotics). Cortex advised the investigators from these studies of the results from the MCI trial with CX516. All of the investigators elected to continue their clinical trials with the compound. Because the studies are funded by sources external to Cortex, Cortex agreed to allow the investigators to continue these trials, but does not intend to perform further research or development with CX516.

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Schizophrenia

The worldwide incidence of schizophrenia is approximately one percent of the population, regardless of ethnic, cultural or socioeconomic status. On any given day, approximately 100,000 of the estimated 2 million U.S. patients with schizophrenia are in public mental hospitals.

Schizophrenia typically develops in late adolescence or early adulthood and involves a collection of symptoms. These are generally characterized as positive symptoms (delusions and hallucinations), negative symptoms (social withdrawal and loss of emotional responsiveness) and cognitive symptoms (disordered thought and attention deficits).

The first conventional anti-psychotics for schizophrenia were developed in the 1950s and 1960s. These drugs helped to reduce the positive symptoms of the disease and greatly reduced the need for chronic hospitalization. However, some of these drugs are characterized by troublesome and occasionally life-threatening side effects. One of the most common side effects of conventional anti-psychotics is EPS or “extrapyramidal signs,” which include restlessness and tremors. EPS side effects have a strong negative impact on quality of life and tend to lead to poor patient compliance with medication.

Since then, a new type of anti-psychotic agent, referred to as atypical due to the virtual lack of EPS side effects, has been developed. Clozapine was the first such drug. It was initially studied in the 1970s, but clinical trials were halted due to the risk of a fatal blood disorder known as agranulocytosis and a dose-dependent risk of seizures. Clozapine was reintroduced in the 1980s, with approval by the FDA for use in patients who cannot be adequately treated with conventional anti-psychotics, either because of lack of efficacy or side effects. Risperidone and olanzapine are other recent atypical anti-psychotics without agranulocytosis side effects.

The newer atypical agents achieve good control of positive symptoms, partial control of negative symptoms and better patient compliance with medication due to lower levels of EPS side effects. However, clinicians agree that there are still substantial side effects and that the cognitive symptoms of schizophrenia are not greatly improved by any available agent. The persistence of cognitive symptoms prevents many patients from successfully reintegrating into society.

Schizophrenia has long been thought to have its biochemical basis in an over-activity of dopamine pathways projecting into an area of the brain known as the striatum. More recently, a developing body of evidence suggests that schizophrenia also involves reduced activity of glutamate pathways projecting into the same area. Cortex began studying whether AMPAKINE compounds, which increase current flow through the AMPA subtype of glutamate receptor, might have relevance to the treatment of schizophrenia.

In January 1999, Cortex entered into an exclusive worldwide license agreement with Organon. The agreement will enable Organon to develop and commercialize Cortex’s proprietary AMPAKINE technology for the treatment of schizophrenia. Under the agreement, Organon has rights to intellectual property that includes broad medical use patents covering the use of any AMPA receptor modulating compound to treat schizophrenia as a mono-therapy, or in combination with other anti-psychotic medications.

Shortly after signing the agreement with Organon, in April 1999 Cortex reported preliminary results from a study with CX516 in patients with schizophrenia being treated with clozapine. This Phase I/IIa clinical trial, conducted at Massachusetts General Hospital, was designed primarily as a safety study. Extensive testing also was included in an attempt to obtain a preliminary indication that CX516 may effect the psychological parameters that likely contribute to symptoms of the disease, particularly the cognitive symptoms that have thus far been resistant to treatment. The results indicate that CX516 is reasonably safe in combination with clozapine and improves performance on a number of tests of verbal

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learning, memory, problem solving and distractability. Interestingly, the improvements noted in CX516-treated patients appeared to persist for a period after cessation of treatment.

Further clinical testing of the AMPAKINE compound, ORG24448, a successor compound to CX516, in patients with schizophrenia is being conducted by the Company’s corporate partner, Organon. In May 2000, Cortex achieved its first milestone under the related agreement when Organon selected a licensed compound to pursue in Phase I clinical testing, triggering a $2,000,000 payment to Cortex. In September 2001, Organon informed Cortex of its intent to continue development of the selected compound by entering Phase II clinical testing, triggering a second $2,000,000 milestone payment. Additional payments from the Organon agreement for schizophrenia will depend upon the results of the Phase II study.

In September 2001, Cortex received notice of a Phase II Small Business Innovative Research (“SBIR”) award for approximately $770,000 from the National Institutes of Health to investigate the therapeutic potential of the AMPAKINE technology in schizophrenia. The goals of the related research plan include determining whether the AMPAKINE CX516 will improve negative symptoms, attention and memory. The research plan also hopes to assess the effects of an AMPAKINE compound on positive systems, anxiety and depressive symptoms. As of June 30, 2004, Cortex had received approximately $575,000 from this four-year grant award, as extended. Also as of June 30, 2004, approximately two-thirds of the planned enrollment for this study had been completed. It is currently projected that enrollment will be completed during the first calendar quarter of 2005, with results potentially available during the third calendar quarter of 2005.

Attention Deficit Hyperactivity Disorder

In April 1999, the Company reported preliminary results from a study with the AMPAKINE CX516 in patients with schizophrenia being treated with clozapine. The results noted in CX516-treated patients included improved performance on several tests of memory, problem solving and distractability, as well as a clinical improvement in attention — symptoms that are also common to patients with ADHD. Based upon these results, the Company believes that AMPAKINE compounds may represent a novel, non-scheduled (not regulated by the Drug Enforcement Agency) approach for treating ADHD patients.

In April 2000, the Company entered an option agreement with Shire Pharmaceuticals Group, plc (“Shire”), under which Shire initiated a Phase II double-blind, placebo-controlled study of Cortex’s AMPAKINE CX516 for the treatment of ADHD. Enrollment in the study began in the summer of 2001, with Shire responsible for all of the costs of the trial. In exchange for the option, Cortex received $130,000; Shire also purchased 254,353 shares of Cortex common stock for $870,000.

Shire had the right to convert its option into an exclusive worldwide license for the AMPAKINE technology for ADHD. Upon exercise, Cortex would have received a license fee, milestone payments based on successful clinical and commercial development, research support for additional AMPAKINE compounds and royalties on sales.

In May 2002, Shire made a business decision to abruptly terminate the Phase II study of CX516 in adult patients with ADHD. At the time of the decision to immediately stop all treatments, 72 patients out of a planned 110 patient study target had been enrolled. Only 45 patients had completed the 28-day course of treatment required by the study design. While the data from these 45 patients suggest that treatment differences might exist, because the study design was broken by the sudden cessation of all treatments and only 40% of the patients completed the full treatment plan, the data from the study could not be properly analyzed. In June 2002, Shire elected not to exercise its option for use of the AMPAKINE technology in ADHD. Cortex still believes that the potential for the use of AMPAKINE compounds as a treatment for ADHD exists and is seeking other partners to pursue this possibility.

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Fragile X and Autism

Fragile X is an inherited disorder that represents the most common cause of inherited mental retardation. Autism is a complex developmental disability that typically appears during the first three years of life. Autism impacts the normal development of the brain in the areas of social interaction and communication skills. Children and adults with autism typically have difficulties in verbal and nonverbal communication, social interactions, and leisure or play activities.

Recent scientific research has led to an improved understanding of Fragile X syndrome and autism. A number of scientists have suggested that the use of a drug to enhance glutamate transmission may be beneficial. AMPAKINE compounds, which have demonstrated enhanced glutamate transmission, may therefore serve as potential new therapeutics.

In April 2002, Cortex announced that it is collaborating with several research organizations to conduct a Phase II clinical study to evaluate the AMPAKINE CX516 as a potential treatment for Fragile X syndrome and autism. The study design is a randomized double-blind, placebo controlled trial with four weeks of treatment. Outcome measures will include testing in attention and executive function, spatial and verbal/auditory memory, language and behavior. Planned enrollment for this study currently is approximately 60% completed.

Stroke

A stroke occurs when a blood clot blocks a blood vessel or artery, or when a blood vessel breaks and interrupts blood flow to the brain. When a stroke occurs, brain cells within the immediate area of damage usually die within minutes to a few hours. When brain cells die, control of functions such as speech, movement and memory may be lost.

A stroke can happen to anyone, although the risk increases significantly with age. According to the National Stroke Association, two-thirds of all strokes happen to people over the age of 65, with the risk doubling each decade past age 55.

Treatment of stroke victims represents a critical unmet need. The National Stroke Association estimates that there are nearly 4 million people in the U.S. who have survived a stroke and are living with the after-effects.

Preclinical experiments conducted by Kevin Lee, Ph.D. at the University of Virginia and by two pharmaceutical companies have demonstrated that the AMPAKINE CX516 can be safely administered to animals under mimicked stroke-like conditions. Additionally, research at Cortex suggests that AMPAKINE compounds may be neuroprotective — AMPAKINE treatment may provide protection to at-risk neurons adjacent to the area of damage following a stroke.

AMPAKINE compounds also may improve post-stroke recovery. Nerve cells depend upon active stimulation or communication to maintain function. After a stroke, many neurons lose connections with other cells. Patients must try to recover function by engaging new pathways of nerve cell communication. AMPAKINE compounds, which enhance communication between nerve cells, may be ideal for the stroke recovery process.

In May 1999, Cortex received notice of a Phase I SBIR award of $100,000 from the National Institutes of Health to investigate the AMPAKINE technology as a potential new stroke therapy. Subsequently, in October 2000 Cortex received notice of a Phase II SBIR award of up to $1,074,000 to continue its research.

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The goals of the research plan include determining if an AMPAKINE compound administered in advance can reduce damage to neurons in an animal model of stroke; and to determine if the compound reduces damage to the memory of the animals. An AMPAKINE compound will also be administered after the stroke to determine if there is an improved recovery of memory function. As of June 30, 2004, Cortex had received approximately $755,000 from this grant award, with the term of the project extended through August 2005. Research of the AMPAKINE technology as a treatment for stroke, beyond that funded by the SBIR grant, will depend upon the Company’s financial resources.

Manufacturing

Cortex has no experience or capability to either manufacture bulk quantities of the new compounds that it develops, or to produce finished dosage forms of the compounds, such as tablets or capsules. Cortex relies, and presently intends to rely, on the manufacturing and quality control expertise of contract manufacturing organizations or current and prospective corporate partners. There is no assurance that the Company will be able to enter into manufacturing arrangements to produce bulk quantities of its compounds on favorable financial terms. There is however, substantial availability of dosage form manufacturing capability in the U.S. pharmaceutical industry that the Company believes that it can readily access. See “Risk Factors — We are at an early stage of development and we may not be able to successfully develop and commercialize our products and technologies” on page 21 for a discussion of certain risks related to the development and commercialization of the Company’s products.

Marketing

The Company has no experience in the marketing of pharmaceutical products and does not anticipate having the resources to distribute and broadly market any products that it may develop for indications such as Alzheimer’s disease and schizophrenia. The Company will therefore continue to seek commercial development arrangements with other pharmaceutical companies for its proposed products for those indications that require significant sales forces to effectively market. In entering into such arrangements, the Company may seek to retain the right to promote or co-promote products for certain of the Orphan Drug indications in North America. The Company’s worldwide licensing agreement with Organon (see Note 5 of Notes to Financial Statements) does not provide Cortex with co-promotional rights. With respect to Orphan Drugs, the Company may distribute and market such products directly. See “Risk Factors — We are at an early stage of development and we may not be able to successfully develop and commercialize our products and technologies” on page 21 for a discussion of certain risks related to the development and commercialization of the Company’s products.

Technology Rights

In 1993, Cortex entered an agreement with the Regents of the University of California, under which Cortex secured exclusive commercial rights to AMPA-receptor modulating technology and compounds (the AMPAKINE technology) for the treatment of deficits of memory and cognition. The relationship later was expanded to include additional agreements for other indications. The Company paid an initial license fee and is obligated to make additional payments, including license maintenance fees and patent expense reimbursements creditable against future royalties, over the course of initiating and conducting human clinical testing and obtaining regulatory approvals. When and if sales of licensed products commence, the Company will pay royalties on net sales. During the fiscal year ended June 30, 2003, Cortex amended the agreement with the Regents of the University of California to exclude the treatment of disease areas outside of the central nervous system that the Company would not have the resources nor the capability to develop in a timely manner.

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Patents and Proprietary Rights

The Company is aggressively pursuing patent protection of its technologies. Cortex owns or has exclusive rights (within its areas of product development) to approximately 50 issued or allowed U.S. and foreign patents and has a number of additional U.S. patent applications and their international counterparts pending.

Cortex has rights to over 36 composition of matter patents that cover hundreds of its compounds. These patents form the foundation of the Company’s business and the pharmaceutical industry in general. Additionally, Cortex is consistently filing new disclosures and patents for new structures and new uses.

In 1998, the Regents of the University of California (the “University”) received a U.S. patent that contained a broad claim for any AMPA-modulating compound to treat schizophrenia. Under the Company’s agreements with the University, Cortex has exclusive rights to AMPAKINE compounds for all applications covered by the University’s patent rights, other than endocrine modulation, and the treatment of sexual dysfunction in North and South America. Cortex’s rights are contingent upon it making certain minimum annual payments to the University, meeting certain milestones, and diligently seeking to commercialize the underlying technology.

In April 1999, a method of use patent issued in the U.S. that covers the Company’s AMPAKINE compounds — as well as compounds made by others — and describes the mechanism by which AMPAKINE compounds may effect the treatment of memory and cognition. The Company believes that the coverage from this patent extends to both neurological disorders such as Alzheimer’s disease as well as psychiatric conditions with cognitive disturbances including depression, obsessive compulsive disorder, attention deficit disorder, and phobic disorders. Similar method of use patents have issued to Cortex in Mexico, Australia and New Zealand. In November 2003, a similar patent was issued by the European Patent Office. These patents have issued to the University of California and rights to the patents are licensed exclusively to Cortex.

Under the rules of the European Patent Office, the patent that issued in November 2003 entered into a nine-month period during which oppositions to the issuance could be filed. Upon issuance of the patent, an opposition was filed by Eli Lilly and Company. During August 2004, GlaxoSmithKline also filed an opposition. Cortex, in cooperation with the University of California, plans to respond to these oppositions promptly. There is no timeframe available for a decision from the European Patent Office and such decision may be appealed by either Cortex or the party filing the opposition. As a result, the process to determine whether the oppositions filed for this patent will or will not prevail in Europe may take anywhere from six months to several years to resolve.

There is no assurance that patents, whether already issued or issuing in the future in connection with current or future patent applications, will afford effective protection against competitors with similar technology. There is also no assurance that any patents issued or licensed to Cortex will not be infringed upon or designed around by others. Further, since issuance of a patent does not guarantee the right to practice the claimed invention, there is no assurance that others will not obtain patents that the Company would then need to license or design around in order to practice its patented technologies, or that Cortex would be able to obtain licenses that might be required to practice these technologies due to patents of others on reasonable terms. Additionally, any unpatented manufacture, use or sale of the Company’s technology, processes or products may infringe on patents or proprietary rights of others, and the Company may be unable to obtain licenses or other rights to these other technologies that may be required for commercialization of the Company’s proposed products or processes.

Cortex relies to a certain extent upon unpatented proprietary technology and may determine in some cases that its interests would be better served by reliance on trade secrets or confidentiality agreements rather than patents. No assurance is made that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to or disclose such technology. In addition, there is no assurance that Cortex can meaningfully protect its rights in such unpatented proprietary technology or that others will not wrongfully obtain such technology.

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If Cortex is unable to obtain strong protection of its proprietary rights in its products or processes prior to or after obtaining regulatory clearance, whether through patents, trade secrets or otherwise, competitors may be able to market competing products by obtaining regulatory clearance through demonstration of equivalency to the Company’s products, without being required to conduct the same lengthy clinical tests conducted by the Company.

Government Regulation

In order to test, produce and market human therapeutic products in the U.S., mandatory procedures and safety standards established by the FDA must be satisfied. Obtaining FDA approval is a costly and time-consuming process. Cortex has initiated Phase I and early Phase II testing in the U.S. and Europe, primarily with the assistance of clinical collaborators and its corporate partners, Organon and Servier. Some clinical trials were and are performed in the U.S. under Notices of Claimed Investigational Exemption for a New Drug (“IND”) filed with the FDA by the Company’s clinical collaborators. Cortex filed an IND for the AMPAKINE CX516 in the name of the Company in the fall of 2000. Cortex intends to submit an IND for the AMPAKINE CX717 as soon as the data from the Phase I studies underway in the U.K. are available to add to the filing. It is Cortex’s intent that Organon, Servier or another pharmaceutical company partner or partners that the Company is seeking, will pursue other required regulatory approvals to conduct further clinical testing with AMPAKINE compounds that result from the respective collaborative research programs with Cortex. However, Cortex intends to file other IND’s for additional AMPAKINE compounds to facilitate the development of its Orphan Drug strategy.

Clinical trials are normally conducted in three phases. Phase I trials are concerned primarily with safety of the drug, involve fewer than 100 subjects, and may take from six months to over a year. Phase II trials normally involve a few hundred patients. Phase II trials are designed to demonstrate effectiveness and to determine optimal dosing in treating or diagnosing the disease or condition for which the drug is intended. Short-term side effects and risks in people whose health is impaired also may be examined. Phase III trials may involve up to several thousand patients who have the disease or condition for which the drug is intended, to approximate more closely the conditions of ordinary medical practice. Phase III trials also are designed to clarify the drug’s benefit-risk relationship, to uncover less common side effects and adverse reactions, and to generate information for proper labeling of the drug. The FDA receives reports on the progress of each phase of clinical testing, and may require the modification, suspension, or termination of clinical trials if an unwarranted risk is presented to patients. The FDA estimates that the clinical trial period of drug development can take up to ten years, and averages five years. With certain exceptions, once clinical testing is completed, the sponsor can submit a New Drug Application (“NDA”) for approval to market a drug. The FDA’s review of an NDA can also be lengthy.

Therapeutic products that may be developed and sold by the Company outside the U.S. will be subject to regulation by the various countries in which they are to be distributed. In addition, products manufactured in the U.S. that have not yet been cleared for domestic distribution will require FDA approval in order to be exported to foreign countries for distribution there.

There is no assurance that any required FDA or other governmental approval will be granted or, if granted, will not be withdrawn. Governmental regulation may substantially delay or prevent the marketing of the Company’s proposed products, or cause the Company to undertake additional procedures, which may be both costly and lengthy, and thereby furnish a competitive advantage to the competitors of the Company or its licensees.

Cortex plans to seek additional financing to support its development of selected AMPAKINE compounds for Orphan Drug indications. Without such financing, Cortex may be severely restricted in its overall development. The Company would be dependent upon its sub-licensees and would be unable to maintain its current core technical and management capabilities. Under such circumstances, the Company would be dependent upon entering into partnerships or other collaborative arrangements with third parties with the required resources to obtain the needed approvals. Along with its licensing agreements with

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Organon and Servier, Cortex intends to enter into license or other arrangements with other pharmaceutical companies under which those companies would conduct the required clinical trials and seek FDA approval for most or all of its proposed products. There is no assurance that Cortex will be able to enter into such arrangements on favorable terms, or at all, or that such arrangements will ultimately result in obtaining the necessary governmental approvals.

Competition

The pharmaceutical industry is characterized by rapidly evolving technology and intense competition. Many companies of all sizes, including both major pharmaceutical companies and specialized biotechnology companies, are engaged in activities similar to those of Cortex. A large number of drugs intended for the treatment of Alzheimer’s disease, MCI, schizophrenia, depression, ADHD and other neurological and psychiatric diseases and disorders are on the market or in the later stages of clinical testing. For example, approximately 15 drugs are in development in the U.S. for schizophrenia and over 25 drugs are under clinical investigation in the U.S. for the treatment of Alzheimer’s disease. Some of the Company’s competitors have substantially greater financial and other resources and larger research and development staffs. Larger pharmaceutical company competitors also have significant experience in preclinical testing, human clinical trials and regulatory approval procedures.

In addition, colleges, universities, governmental agencies and other public and private research organizations will continue to conduct research. These institutions are becoming more active in seeking patent protection and licensing arrangements to collect license fees, milestone payments and royalties in exchange for license rights to technology that they have developed, some of which may be directly competitive with that of the Company.

The Company expects technological developments in the neuropharmacology field to continue to occur at a rapid rate and expects that competition will remain intense as those advances continue. Based on the technical qualifications, expertise and reputations of its Scientific Directors, consultants and other key scientists, the Company believes that its operating strategy to develop AMPAKINE compounds for the treatment of selected Orphan Drug indications and to out-license the technology to larger pharmaceutical companies for major chronic indications is appropriate.

Product Liability Insurance

The clinical testing, manufacturing and marketing of the Company’s products may expose the Company to product liability claims, against which the Company maintains liability insurance. Although the Company has never been subject to a product liability claim, there is no assurance that such claims will not be brought in the future, that the coverage limits of the Company’s insurance policies will be adequate or that one or more successful claims brought against the Company would not have a material adverse effect upon the Company’s business, financial condition and results of operations.

Employees

As of June 30, 2004, Cortex had 18 full-time employees and two part-time employees and had engaged one part-time DVM-level and three part-time Ph.D.-level scientific consultants. One of the Ph.D.-level consultants to the Company is also an M.D. Of the 18 full-time employees, 13 were engaged in research and development, of which 7 were Ph.D.-level or equivalent, and 5 were engaged in management and administrative support. Shortly after June 30, 2004, Cortex added an M.D. to its staff as its Vice President of Clinical Development and Chief Medical Officer.

Cortex anticipates that it may make modest increases in its employee levels based upon the further development of the AMPAKINE CX717. However, the Company will continue to outsource a substantial amount of its research and development to qualified vendors. The Company also sponsors a

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substantial amount of research in academic laboratories, primarily at the University of California, Irvine and at Wake Forest University in North Carolina.

Risk Factors

In addition to the other matters set forth in this Annual Report on Form 10-K, our continuing operations and the price of our common stock are subject to the following risks:

Risks related to our business

We have a history of net losses; we expect to continue to incur net losses and we may never achieve or maintain profitability.

Since our formation on February 10, 1987 through June 30, 2004, we have generated only modest operating revenues and we have incurred net losses approximating $48,051,000. For the fiscal years ended June 30, 2004, 2003 and 2002, our net losses amounted to $5,994,000, $1,175,000 and $983,000, respectively. As of June 30, 2004, we had an accumulated deficit of approximately $50,083,000. We have not generated any revenue from product sales to date, and it is possible that we will never generate revenues from product sales in the future. Even if we do achieve significant revenues from product sales, we expect to incur significant operating losses over the next several years. As with other companies in the biotechnology industry, it is possible that we will never achieve profitable operations.

We will need additional capital in the future and, if it is not available on terms acceptable to us, or at all, we may need to scale back our research and development efforts and may be unable to continue our business operations.

We will require substantial additional funds to advance our research and development programs and to continue our operations, particularly if we decide to independently conduct later-stage clinical testing and apply for regulatory approval of any of our proposed products. Based on our current operating plan, including planned clinical trials and other product research and development costs, we estimate that our existing cash resources, including committed sources of funding from Servier, will be sufficient to meet our requirements through at least mid-calendar year 2006. However, we believe that we will require additional capital to fund on-going operations beyond that time. Additional funds may result from milestone payments related to our agreements with Organon and Servier, although there is no assurance that we will receive milestone payments from Organon or Servier within the desired timeframe, or at all.

Our cash requirements in the future may be significantly different from our current estimates and depend on many factors, including:

To finance our future activities, we may seek funds through additional rounds of financing, including private or public equity or debt offerings and collaborative arrangements with corporate partners. We cannot say with any certainty that we will be able to obtain the additional needed funds on

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reasonable terms, or at all. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. If we issued preferred equity or debt securities, these securities could have rights superior to holders of our common stock, and could contain covenants that will restrict our operations. We might have to obtain funds through arrangements with collaborative partners or others that may require us to relinquish rights to our technologies, product candidates or products that we otherwise would not relinquish. If adequate funds are not available, we could lose our key employees and might have to delay, scale back or eliminate one or more of our research and development programs, which would impair our future prospects. In addition, we may be unable to meet our research spending obligations under our existing licensing agreements and may be unable to continue our business operations.

Our products rely on licenses from the Regents of the University of California, and if we lose access to these technologies, our business would be substantially impaired.

Under our agreements with the Regents of the University of California, we have exclusive rights to AMPAKINE compounds for all applications for which the University has patent rights, other than endocrine modulation, and the treatment of sexual dysfunction in North and South America.

Our rights to the AMPAKINE compounds are secured by patents or patent applications owned wholly by the University or by the University as a co-owner with us. Our existing agreements with the University require the University to prepare, file, prosecute and maintain patent applications related to our licensed rights at our expense. Such agreements also require us to make certain minimum annual payments, meet certain milestones or diligently seek to commercialize the underlying technology.

Under our agreements, we are required to make minimum annual royalty payments approximating $70,000. Separately, we are required to spend a minimum of $750,000 per year to advance the AMPAKINE compounds during the three years ending in May 2006. At the end of May 2006, our spending requirements will decrease to $250,000 per year, and will continue at that level until we begin marketing an AMPAKINE compound.

The commercialization efforts in the agreements require us to initiate human clinical testing of an AMPAKINE compound, other than CX516, by July 2005, and to file for regulatory approval of an AMPAKINE compound during October 2007. Although we currently are in compliance with our obligations under the agreements, including minimum annual payments and diligence milestones, our failure to meet any of these requirements could allow the University to terminate that particular agreement. Management believes that it maintains a strong relationship with the University.

We are at an early stage of development and we may not be able to successfully develop and commercialize our products and technologies.

The development of AMPAKINE products is subject to the risks of failure commonly experienced in the development of products based upon innovative technologies and the expense and difficulty of obtaining approvals from regulatory agencies. Drug discovery and development is time consuming, expensive and unpredictable. On average, only one out of many thousands of chemical compounds discovered by researchers proves to be both medically effective and safe enough to become an approved medicine. In the fields that we target, approximately one in five compounds placed in clinical trials generally reaches the market. All of our proposed products are in the preclinical or early clinical stage of development and will require significant additional funding for research, development and clinical testing before we are able to submit them to any of the regulatory agencies for clearances for commercial use. Our AMPAKINE compound, CX516, has undergone considerable clinical trials, some of which are continuing. This compound has a short half-life and is weaker than our newer AMPAKINE compounds. We therefore have concluded that we will not further develop CX516, although we may be required to complete and report on some of the ongoing clinical trials on that compound. Such trials are being funded by third parties and do not involve financial commitments from Cortex.

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The process from discovery to development to regulatory approval can take several years and drug candidates can fail at any stage of the process. Late stage clinical trials often fail to replicate results achieved in earlier studies. Historically, in our industry more than half of all compounds in development failed during Phase II trials and 30% failed during Phase III trials. We cannot assure you that we will be able to complete successfully any of our research and development activities. Even if we do complete them, we may not be able to market successfully any of the products or be able to obtain the necessary regulatory approvals or assure that healthcare providers and payors will accept our products. We also face the risk that any or all of our products will not work as intended or that they will be unsafe, or that, even if they do work and are safe, that our products will be uneconomical to manufacture and market on a large scale. Due to the extended testing and regulatory review process required before we can obtain marketing clearance, we do not expect to be able to commercialize any therapeutic drug for several years, either directly or through our corporate partners or licensees.

A significant percentage of our revenues come from our agreements with Organon and Servier, and if either or both agreements were terminated, such revenues could be impaired.

Under the agreement with Organon that we entered in January 1999, the collaborative research phase ended in January 2001. Organon has primary responsibility for developing and commercializing AMPAKINE compounds for use in the treatment of schizophrenia and depression. Through June 30, 2004 we have received $8,000,000 in up-front and milestone payments and approximately $6,000,000 in research support payments. The agreement includes additional milestone payments, plus royalty payments on products sold, if any, on a worldwide basis. We do not anticipate that we will receive any milestone payments from Organon during the fiscal year ending June 30, 2005. Under the terms of the agreement, Organon has the right to terminate the agreement upon four-months’ prior notice. Such termination may have negative effects on our stock price and could impact our ability to achieve other licensing arrangements on acceptable terms, or at all.

Under the agreement with Servier that we entered into in October 2000, as amended to date, we share the research efforts. Servier has primary responsibility for developing and commercializing AMPAKINE compounds for use in the treatment of memory impairment associated with aging, and of neurodegenerative diseases such as Alzheimer’s disease. Through June 30, 2004, we have received an up-front payment of $5,000,000 and research support payments of approximately $10,900,000. Under the October 2000 agreement, as amended to date, we currently receive approximately $2,165,000 per year (subject to us providing agreed-upon levels of research) and Servier is obligated to continue this level of support until early December 2005. Under the October 2002 amendment, we currently receive an additional $2,000,000 per year, which Servier is obligated to continue until October 2004. The agreement includes milestone payments, plus royalty payments on product sales, if any, in licensed territories. We do not anticipate that we will receive any milestone payments from Servier during the fiscal year ending June 30, 2005. Under the terms of the agreement, Servier has the right to terminate the agreement in the case of a merger or acquisition involving us and a third party. Servier also has the right to terminate the agreement upon six-months’ prior notice at any time after the research phase of the collaboration. In addition, Servier has the right to terminate the related research and development in the event that we materially breach the agreement.

As described above, each of our agreements with Organon and Servier provides us with the opportunity to receive future milestone payments upon the achievement of certain milestones. In the event that all of the milestones set forth in such agreements are met, we estimate that we could collectively receive up to an additional aggregate of $30,000,000 in future milestone payments. However, we cannot assure you that we will be able to meet all or any of the specified milestones, in which case we would not receive the corresponding future milestone payments.

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We may not be able to enter into the strategic alliances necessary to fully develop and commercialize our products and technologies, and we will be dependent on our corporate partners if we do.

In addition to our agreements with Organon and Servier, we are seeking other pharmaceutical company partners to develop other major indications for the AMPAKINE compounds. These agreements would potentially provide us with additional funds in exchange for exclusive or non-exclusive license or other rights to the technologies and products that we are currently developing. Competition between biopharmaceutical companies for these types of arrangements is intense. Although we have been engaged in discussions with candidate companies for some time, we cannot give any assurance that these discussions will result in an agreement or agreements in a timely manner, or at all. Additionally, we cannot assure you that any resulting agreement will generate sufficient revenues to offset our operating expenses and longer-term funding requirements.

In connection with our efforts to secure corporate partners, we will seek to retain certain co-promotional rights to our proposed products. These co-promotional rights will allow us to market our products to selected medical specialists while our corporate partner markets our products to the general medical market. We cannot assure you that we will be able to enter into any partnering arrangements on this or any other basis. In addition, we cannot assure you that we, Organon, Servier or our prospective corporate partners, can successfully introduce our proposed products. We also face the risks that our products will be rejected by patients, health care providers or insurance companies, or that our products cannot be manufactured and marketed at prices that would permit us to operate profitably. Additionally, we plan to develop certain compounds for selected smaller indications referred to previously as Orphan Drugs. We may or may not be successful in getting the appropriate clinical results and obtaining approval to market our compounds for these indications in the U.S.

If we are unable to maintain our relationships with academic consultants and the University of California, Irvine, our business could suffer.

We depend upon our relationships with academic consultants, particularly Dr. Gary S. Lynch of the University of California, Irvine. Dr. Lynch plays a key role in guiding our research. In addition, we sponsor preclinical research in Dr. Lynch’s laboratories at the University of California, Irvine that is part of our product development and corporate partnering profile. If our relationship with Dr. Lynch or the University of California, Irvine, is disrupted, our AMPA- receptor research program could be adversely affected. The term of our consulting agreement with Dr. Lynch commenced in November 1987 and will continue until terminated by either party to the agreement upon at least 60 days’ prior written notice to the other party. Our agreements with our other consultants are generally also terminable by the consultant on short notice. We maintain a positive relationship with Dr. Lynch and continue to fund research related to understanding the molecular actions of the AMPAKINE compounds and the AMPA receptor in his laboratory.

Risks related to our industry

If we fail to secure adequate intellectual property protection, it could significantly harm our financial results and ability to compete.

Our success will depend, in part, on our ability to get patent protection for our products and processes in the U.S. and elsewhere. We have filed and intend to continue to file patent applications as we need them. However, additional patents that may issue from any of these applications may not be sufficiently broad to protect our technology. Also, any patents issued to us or licensed by us may be challenged by others, and if successful, such challenges may diminish our rights.

If we are unable to obtain sufficient protection of our proprietary rights in our products or processes prior to or after obtaining regulatory clearances, our competitors may be able to obtain regulatory clearance and market competing products by demonstrating the equivalency of their products

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to our products. If they are successful at demonstrating the equivalency between the products, our competitors would not have to conduct the same lengthy clinical tests that we have conducted.

We also rely on trade secrets and confidential information that we try to protect by entering into confidentiality agreements with other parties. Those confidentiality agreements may be breached, and our remedies may be insufficient to protect the confidential information. Further, our competitors may independently learn our trade secrets or develop similar or superior technologies. To the extent that our consultants, key employees or others apply technological information independently developed by them or by others to our projects, disputes may arise regarding the proprietary rights to such information. We cannot assure you that such disputes will be resolved in our favor.

We may be subject to potential product liability claims. One or more successful claims brought against us could materially impact our business and financial condition.

The clinical testing, manufacturing and marketing of our products may expose us to product liability claims. We maintain liability insurance with coverage limits of $10 million per occurrence and $10 million in the annual aggregate. We have never been subject to a product liability claim, and we require each patient in our clinical trials to sign an informed consent agreement that describes the risks related to the trials, but we cannot assure you that the coverage limits of our insurance policies will be adequate or that one or more successful claims brought against us would not have a material adverse effect on our business, financial condition and result of operations. Further, if one of our AMPAKINE compounds is approved by the FDA for marketing, we cannot assure you that adequate product liability insurance will be available, or if available, that it will be available at a reasonable cost. Any adverse outcome resulting from a product liability claim could have a material adverse effect on our business, financial condition and results of operations.

We face intense competition that could result in products that are superior to the products that we are developing.

Our business is characterized by intensive research efforts. Our competitors include many companies, research institutes and universities that are working in a number of pharmaceutical or biotechnology disciplines to develop therapeutic products similar to those we are currently investigating. For example, the Pharmaceutical Research and Manufacturers of America estimates that more than 100 pharmaceutical and biotechnology companies are conducting research in the field of neurological disorders, with over 25 drugs under clinical investigation in the U.S. for the treatment of Alzheimer’s disease. Virtually all of the major multinational pharmaceutical companies have active projects in these areas. Most of these competitors have substantially greater financial, technical, manufacturing, marketing, distribution and/or other resources than we do. In addition, many of our competitors have experience in performing human clinical trials of new or improved therapeutic products and obtaining approvals from the FDA and other regulatory agencies. We have no experience in conducting and managing later-stage clinical testing or in preparing applications necessary to obtain regulatory approvals. Accordingly, it is possible that our competitors may succeed in developing products that are safer or more effective than those that we are developing and may obtain FDA approvals for their products faster than we can. We expect that competition in this field will continue to intensify.

We may be unable to recruit and retain our senior management and other key technical personnel on whom we are dependent.

We are highly dependent upon key management and technical personnel and currently do not carry any insurance policies on such persons. In particular, we are highly dependent on our Chairman, President and Chief Executive Officer, Roger G. Stoll, Ph.D., and our Senior Vice President, Pharmaceutical Research, Gary A. Rogers, Ph.D., both of whom have entered into employment agreements with us. Competition for qualified employees among pharmaceutical and biotechnology companies is intense. The loss of any of our key management or technical personnel, or our inability to attract, retain and motivate the additional highly-skilled employees and consultants that our business

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requires, could substantially hurt our business and prospects. We cannot assure you that we will be able to retain our existing personnel or attract additional qualified employees when we need them.

The regulatory approval process is expensive, time consuming, uncertain and may prevent us from obtaining required approvals for the commercialization of some of our products.

The FDA and other similar agencies in foreign countries have substantial requirements for therapeutic products. Such requirements often involve lengthy and detailed laboratory, clinical and post-clinical testing procedures and are expensive to complete. It often takes companies many years to satisfy these requirements, depending on the complexity and novelty of the product. The review process is also extensive, which may delay the approval process even more. According to the Pharmaceutical Research and Manufacturers of America, historically the cost of developing a new pharmaceutical from discovery to approval was approximately $800 million, and this amount is expected to increase annually.

As of yet, we have not obtained any approvals to market our products. Further, we cannot assure you that the FDA or other regulatory agency will grant us approval for any of our products on a timely basis, if at all. Even if regulatory clearances are obtained, a marketed product is subject to continual review, and later discovery of previously unknown problems may result in restrictions on marketing or withdrawal of the product from the market.

Other risks

Our stock price may be volatile and our common stock could decline in value.

The market price of securities of life sciences companies in general has been very unpredictable. The range of sales prices of our common stock for fiscal years ended June 30, 2004 and June 30, 2003, as quoted on The American Stock Exchange, was $1.62 to $4.99 and $0.51 to $2.49, respectively. The following factors, in addition to factors that affect that market generally, could significantly impact our business, and the market price of our common stock could decline:

There is a large number of shares of common stock that may be sold, which may depress the market price of our stock.

If all outstanding warrants and options are exercised prior to their expiration, approximately 12.9 million additional shares of common stock could become freely tradable without restriction. Sales of substantial amounts of common stock in the public market could adversely affect the prevailing market price of our common stock.

Our charter document and shareholder rights plan may prevent or delay an attempt by our stockholders to replace or remove management.

Certain provisions of our restated certificate of incorporation, as amended, could make it more difficult for a third party to acquire control of our business, even if such change in control would be beneficial to our stockholders. Our restated certificate of incorporation, as amended, allows our Board of Directors to issue up to 549,500 shares of preferred stock without stockholder approval. Pursuant to this authority, in February 2002 our Board of Directors adopted a shareholder rights plan and declared a dividend of a right to purchase one one-thousandth of a share of preferred stock for each outstanding share of our common stock. The ability of our Board of Directors to issue additional preferred stock and

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our shareholder rights plan may have the effect of delaying or preventing an attempt by our stockholders to replace or remove existing directors and management.

The Company leases approximately 32,000 square feet of office, research laboratory and expansion space in Irvine, California, under an operating lease that expires May 31, 2009. Current monthly rent on these facilities is approximately $32,000. The Company believes that this facility will be adequate for its research and development activities for at least the remainder of the lease term.

The Company is not a party to any material legal proceedings, nor has any material proceeding been terminated during the fourth quarter of the fiscal year ended June 30, 2004.

The Company did not submit any matter to a vote of security holders during the fourth quarter of the fiscal year ended June 30, 2004, through the solicitation of proxies or otherwise.

PART II

The Company’s common stock trades on The American Stock Exchange under the symbol, “COR.” The following table presents quarterly information on the high and low sales prices of the common stock for the fiscal years ended June 30, 2004 and 2003, as furnished by The American Stock Exchange.

As of June 30, 2004, there were 519 stockholders of record of the Company’s common stock, and approximately 10,200 beneficial owners. The high and low sales prices for the Company’s common stock on September 24, 2004, as reported by The American Stock Exchange, were $2.60 and $2.45, respectively.

The Company has never paid cash dividends on its common stock and does not anticipate paying such dividends in the foreseeable future. The payment of dividends, if any, will be determined by the Board of Directors in light of conditions then existing, including the Company’s financial condition and

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requirements, future prospects, restrictions in financing agreements, business conditions and other factors deemed relevant by the Board of Directors.

During the fiscal year ended June 30, 2004, in connection with the engagement of a consultant for investor relations purposes, the Company issued warrants to purchase an aggregate of 48,000 shares of the Company’s common stock to two investors. The warrants have a weighted average exercise price of $2.95 per share and a five-year term.

The sales and issuances of each of the foregoing were made in reliance upon the exemption from the registration provisions of the Securities Act of 1933, as amended, set forth in Section 4(2) thereof as transactions by an issuer not involving any public offering. The agreements executed in connection with the issuance of the warrants contain representations to support the Company’s reasonable belief that the purchasers are familiar with or have access to information concerning the operations and financial condition of the Company, and the purchasers are acquiring the securities for investment and not with a view to the distribution thereof. At the time of their issuance, the warrants were deemed to be restricted securities for purposes of the Securities Act of 1933, as amended, and the warrants bear legends to that effect.

During the fourth quarter of the fiscal year ended June 30, 2004, the Company did not repurchase any of its securities.

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We have derived the selected financial data presented below from our audited financial statements and notes related thereto. The information set forth below is not necessarily indicative of the results of future operations. You should read the selected financial data together with the audited financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.

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The following discussion and analysis should be read in conjunction with the audited financial statements and notes related thereto appearing elsewhere herein.

Critical Accounting Policies and Management Estimates

The Securities and Exchange Commission defines critical accounting policies as those that are, in management’s view, most important to the portrayal of the company’s financial condition and results of operations and most demanding of their judgment. Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities.

We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. This process forms the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

Our revenue recognition policies are in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101, “Revenue Recognition” (“SAB 101”). SAB 101 provides guidance in applying accounting principles generally accepted in the United States to revenue recognition issues, and specifically addresses revenue recognition for up-front, nonrefundable fees received in connection with research collaboration arrangements.

In accordance with SAB 101, revenues from up-front fees from our collaborators are deferred and recorded over the term that we provide ongoing services. Similarly, research support payments are recorded as revenue as we perform the research under the related agreements. We record grant revenues as we incur expenses related to the grant projects. All amounts received under collaborative research agreements or research grants are nonrefundable, regardless of the success of the underlying research.

Revenues from milestone payments are recognized when earned, as evidenced by written acknowledgment from our collaborator, provided that (i) the milestone event is substantive and its achievement was not reasonably assured at the inception of the agreement, and (ii) our performance obligations after the milestone achievement will continue to be funded by our collaborator at a comparable level to that before the milestone achievement. If both of these criteria are not met, the milestone payment is recognized over the remaining minimum period of our performance obligations under the agreement.

In November 2002, the Emerging Issues Task Force (“EITF”) of the Financial Accounting Standards Board reached consensus on Issue 00-21. EITF Issue 00-21 addresses the accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. Specifically, Issue 00-21 requires the recognition of revenue from milestone payments over the remaining minimum period of performance obligations. As required, we will apply the principles of Issue 00-21 to multiple element agreements that we may enter into after July 1, 2003.

The above listing is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not

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produce a materially different result. See our audited financial statements and notes thereto which begin on page F-1 of this Annual Report on Form 10-K, which contain accounting policies and other disclosures required by accounting principles generally accepted in the United States.

Results of Operations

General

In October 2000, the Company entered into a research collaboration and an exclusive license agreement with Les Laboratoires Servier (“Servier”). The agreement will allow Servier to develop and commercialize the Company’s AMPAKINE^® technology for the treatment of declines in cognitive performance associated with aging and neurodegenerative diseases. The indications covered include, but are not limited to, Alzheimer’s disease, mild cognitive impairment, sexual dysfunction, and the dementia associated with multiple sclerosis and Amyotrophic Lateral Sclerosis.

The agreement with Servier, as amended in December 2003, includes a nonrefundable up-front fee of $5,000,000 and research support payments of $2,025,000 per year through early December 2005 (subject to Cortex providing agreed-upon levels of research personnel). The amount of research support is subject to annual adjustment based upon the increase in the U.S. Department of Labor’s Consumer Price Index. Currently, Cortex receives research support of approximately $2,165,000 per year. The agreement also includes potential milestone payments, plus royalty payments on sales in licensed territories.

In October 2002, Servier agreed to provide Cortex with $4,000,000 of additional research support, in exchange for rights to our AMPAKINE compounds for the potential treatment of anxiety disorders, in Servier’s licensed territories. The $4,000,000 will be paid in quarterly installments of $500,000 over a two-year period, beginning in October 2002.

In January 1999, the Company entered into a research collaboration and exclusive worldwide license agreement with NV Organon (“Organon”), a pharmaceutical business unit of Akzo Nobel. The agreement will allow Organon to develop and commercialize the Company’s proprietary AMPAKINE technology for the treatment of schizophrenia and depression. In connection with the agreement, the Company received a $2,000,000 up-front licensing payment and research support payments of approximately $3,000,000 per year for two years.

The agreement with Organon also includes milestone payments based upon clinical development, plus royalty payments on worldwide sales. Cortex achieved its first milestone under the agreement in May 2000, when Organon selected a candidate compound to pursue in Phase I clinical testing as a treatment for schizophrenia. Achieving this milestone triggered a $2,000,000 payment from Organon, which Cortex recorded as revenue upon achievement.

Cortex achieved its second milestone under the agreement in September 2001, when Organon elected to continue development of the selected compound in Phase II clinical testing. Achieving the second milestone triggered another $2,000,000 payment from Organon, with the related revenue recorded upon achievement of the milestone.

In December 2003, Organon paid Cortex an additional $2,000,000 in order to retain its rights to the AMPAKINE technology in the field of depression. Cortex recorded the revenue related to this milestone upon its achievement.

From inception (February 10, 1987) through June 30, 2004, the Company sustained losses aggregating $48,051,000. Due to projected fluctuations in funding, continuing losses are likely over the next several years, as the Company’s ongoing operating expenses will only be offset, if at all, by research support payments and possible milestone payments from its research collaborations with Servier and Organon, or

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under planned strategic alliances that the Company is seeking with other pharmaceutical companies for the clinical development, manufacturing and marketing of its products. The nature and timing of payments to Cortex under the Servier and Organon agreements or other planned strategic alliances, if and when entered into, are likely to significantly affect the Company’s operations and financing activities and to produce substantial period-to-period fluctuations in reported financial results. Over the longer term, the Company will require successful commercial development of its products by Servier, Organon, or its other prospective partners to attain sustained profitable operations from royalties or other product-based revenues.

The Company believes that inflation and changing prices have not had a material impact on its ongoing operations to date.

Fiscal Years ended June 30, 2004 and 2003

For the year ended June 30, 2004, the Company’s net loss of $5,994,000 compared to a net loss of $1,175,000 for the prior year, with the increase primarily attributable to non-cash charges of $3,603,000 recorded for warrants issued in the Company’s private placements of its common stock, as discussed more fully below.

Revenues for the year ended June 30, 2004 increased from $5,232,000 to $6,973,000, or by 33% compared to the prior year, primarily due to a $2,000,000 milestone payment received from Organon. The related agreement required this payment in order for Organon to retain its rights to the Company’s AMPAKINE technology in the field of depression.

Research and development expenses for the year ended June 30, 2004 increased from $3,724,000 to $6,116,000, or by 64% compared to the prior fiscal year. The increase mostly resulted from charges incurred to develop the second generation AMPAKINE compound, CX717, which entered Phase I human clinical trials in May 2004. The increase for the current year also reflected increased personnel-related expenses, including recruiting fees to expand the Company’s clinical staff. Additionally, increased research and development expenses included technology access payments related to the Organon milestone. Cortex licenses the AMPAKINE technology from the University of California. Under the related agreement, Cortex is required to remit a portion of certain remuneration received in connection with sublicensing agreements. In late December 2003, when Cortex achieved its milestone under its agreement with Organon, a technology access payment to the University of California became due and was paid by the Company shortly thereafter.

General and administrative expenses for the year ended June 30, 2004 decreased from $2,480,000 to $2,291,000, or by 8% compared to the corresponding prior year period. The decrease resulted from reduced salary-related expenses due to severance costs in the prior year period to the Company’s former President and Chief Executive Officer.

Increased non-cash stock compensation charges primarily included the estimated fair value for the vesting of warrants issued earlier with a professional services agreement.

Other expenses for the year ended June 30, 2004 represent non-cash charges for the change in the estimated value of warrants issued in connection with the private equity financing in August 2003, as explained more fully in Note 3 to the Financial Statements.

Net interest income for the year ended June 30, 2004 increased from $15,000 to $149,000, or by 893% compared to the prior year, due to the cash available for investing from the Company’s two private placements during the year.

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Fiscal Years ended June 30, 2003 and 2002

For the year ended June 30, 2003, the Company’s net loss of $1,175,000 compared to a net loss of $983,000 for the prior year, with the increased net loss primarily attributable to the timing of revenues from the Company’s collaborative agreements.

Revenues for the year ended June 30, 2003 decreased from $6,433,000 to $5,232,000, or by 19% compared to the prior year, with a net increase in research and licensing revenue from the agreement with Servier of $1,036,000, but a decrease in revenues from the agreement with Organon of $2,000,000. For the year ended June 30, 2003, revenues included $1,500,000 related to the amendment to the Servier agreement signed in October 2002. That amendment granted Servier rights to the Company’s AMPAKINE technology in the field of anxiety disorders, in Servier’s licensed territories. In exchange for those rights, Cortex will receive $4,000,000 of research funding from Servier, paid as $500,000 per quarter over a two-year period.

With the amendment to the agreement, Cortex extended the period that it amortizes revenues from Servier’s earlier up-front fee. Under the original October 2000 agreement, Cortex received a $5,000,000 licensing fee from Servier, which Cortex was recording as revenue over that agreement’s three-year collaborative research phase. After amending the agreement in October 2002, Cortex began amortizing the remaining unearned licensing revenues over the two-year period of the extended research support. Compared to the prior year, licensing revenues for the year ended June 30, 2003 decreased by approximately $500,000 as a result of this change.

Revenues for fiscal year 2002 included a $2,000,000 milestone payment from the agreement with Organon, the Company’s other collaborative partner. Organon triggered this milestone in September 2001 when it elected to continue its development of an AMPAKINE compound by entering Phase II studies for schizophrenia. Cortex recorded the revenue from this milestone upon achievement as the Company has no ongoing obligations under the related agreement.

Research and development expenses for the year ended June 30, 2003 decreased to $3,724,000, or by 24% compared to the prior fiscal year. The decrease resulted from charges incurred in the prior year for the Phase II clinical study in MCI being conducted with Servier. In connection with the MCI study, in January 2002 the Company sponsored a meeting of the clinical investigators participating in the trial. Nearly all other costs for this study were borne by Servier. The decrease for the current year also reflected decreased personnel-related expenses of $407,000 from comparatively lower staffing levels and a resultant decrease of $100,000 in spending for animals and laboratory supplies. In addition, prior year research and development expenses included technology access payments related to the Organon milestone. In September 2001, when Cortex achieved its milestone under its agreement with Organon, a technology access payment to the University of California became due.

General and administrative expenses for the year ended June 30, 2003 of $2,480,000 were materially consistent with the prior year.

Net interest income for the year ended June 30, 2003 decreased to $15,000, or by 80% compared to the prior year, due to a decrease in cash available for investing.

Liquidity and Capital Resources

Under the agreement signed with Servier in October 2000 and amended, as of June 30, 2004 Cortex has received research and licensing payments approximating $15,913,000. Of this amount, Cortex received $2,957,000 during the year ended June 30, 2004. The October 2000 agreement, as amended, provides research support of approximately $2,165,000 per year through early December 2005, subject to annual adjustment based on the U.S. Department of Labor’s Consumer Price Index. Beginning in October 2002,

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Servier has agreed to provide an additional $4,000,000 of research support to Cortex, to be paid in quarterly installments of $500,000 over a two-year period. The agreement also includes milestone payments based upon successful clinical development and royalties on sales in licensed territories.

Research and licensing payments received in connection with the agreement with Organon totaled $13,880,000 through June 30, 2004. Of this amount, Cortex received $2,000,000 during the year ended June 30, 2004, representing the third milestone from Organon. The related agreement required the milestone payment in order for Organon to retain its rights to the Company’s AMPAKINE technology in the field of depression. Under the terms of the agreement, Cortex may receive additional milestone payments based on clinical development of the licensed technology and ultimately, royalties on worldwide sales.

In August 2003, the Company completed a private placement to 22 accredited investors of an aggregate of 3,333,334 shares of its common stock at $1.50 per share and five-year warrants to purchase up to an additional aggregate of 3,333,334 shares at an exercise price of $2.55 per share. The Company received approximately $4,500,000 in net proceeds from the private placement. The warrants are subject to a call right in favor of the Company to the extent that the closing price of the Company’s common stock exceeds $6.00 per share for any thirteen consecutive trading day period following December 8, 2005. In January 2004, the Company received proceeds of approximately $870,000 from the exercise of warrants issued in connection with this private placement. If the remaining warrants are fully exercised, of which there can be no assurance, these warrants would provide approximately $7,630,000 of additional capital.

In January 2004, the Company completed a private placement of an aggregate of 6,909,091 shares of its common stock at $2.75 per share and five-year warrants to purchase up to an additional aggregate of 4,490,910 shares at an exercise price of $3.25 per share. The Company received approximately $17,500,000 in net proceeds from the private placement. The warrants are subject to a call right in favor of the Company to the extent that the closing price of the Company’s common stock exceeds $7.50 per share for any 13 consecutive trading day period following March 18, 2005. If the warrants are fully exercised, of which there can be no assurance, these warrants would provide approximately $14,600,000 of additional capital.

Cash Proceeds

As of June 30, 2004 the Company had cash, cash equivalents and marketable securities totaling $22,188,000 and working capital of $20,567,000. As of June 30, 2003, the Company had cash and cash equivalents of $1,125,000 and a working capital deficit of $1,505,000. The increases in cash and working capital reflect approximately $22,000,000 of net proceeds from the private placements of the Company’s common stock and warrants in August 2003 and January 2004.

Commitments

The Company leases approximately 32,000 square feet of research laboratory, office and expansion space under an operating lease that expires May 31, 2009. The commitments under the lease agreement for the years ending June 30, 2005, 2006, 2007, 2008 and 2009 are $435,000, $459,000, $478,000, $498,000 and $472,000, respectively. From inception (February 10, 1987) through June 30, 2004, expenditures for furniture, equipment and leasehold improvements aggregated $2,698,000.

The Company is committed to nearly $1,350,000 for sponsored research to academic institutions, of which $787,000 is payable over the next 12 months. Remaining Cortex commitments for the Phase I clinical study for CX717 approximate $2,300,000, all of which is payable within the next 12 months.

In June 2000, the Company received $247,300 from the Institute, which will partially offset the Company’s costs for the testing in patients with MCI. Given that Cortex committed to use the funding

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from the Institute solely for clinical trials, the Company recorded the amounts received as restricted cash in its balance sheet. Provided that Cortex complies with the conditions of the funding agreement, repayment of the advance shall not be required unless Cortex enters an AMPAKINE compound into Phase III clinical trials for Alzheimer’s disease. Upon such potential clinical trials, repayment would include interest computed at a rate equal to one-half of the prime lending rate. In lieu of cash, in the event of repayment the Institute may elect to receive the balance of outstanding principal and accrued interest as shares of Cortex common stock. The conversion price for such form of repayment shall initially equal $4.50 per share, subject to adjustment under certain circumstances.

The following table sets forth the Company’s contractual obligations as of June 30, 2004:

Staffing

As of June 30, 2004, Cortex had 20 employees. Cortex anticipates a modest increase in the number of its full-time employees within the coming year. The Company expects that it will require modest investments in plant and equipment within the same timeframe.

Outlook

Cortex anticipates that its cash and cash equivalents, marketable securities and scheduled research support payments from its agreements with Servier will be sufficient to satisfy the Company’s capital requirements through at least mid-calendar year 2006. Additional funds will be required to continue operations beyond that time. Cortex may receive additional milestone payments from the Organon and Servier agreements, but there is no assurance that the Company will receive such milestone payments within the desired timeframe, or at all. See “Risk Factors — We will need additional capital in the future and, if it is not available on terms acceptable to us, or at all, we may need to scale back our research and development efforts and may be unable to continue our business operations.”

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In order to provide for both its longer-term spending requirements, the Company is presently seeking collaborative or other arrangements with larger pharmaceutical companies. Under these agreements, it is intended that such companies would provide additional capital to the Company in exchange for exclusive or non-exclusive license or other rights to certain of the technologies and products the Company is developing. Competition for such arrangements is intense, however, with a large number of biopharmaceutical companies attempting to secure alliances with more established pharmaceutical companies. Although the Company has been engaged in discussions with candidate companies, there is no assurance that an agreement or agreements will arise from these discussions in a timely manner, or at all, or that revenues that may be generated thereby will offset operating expenses sufficiently to reduce the Company’s short and longer-term funding requirements.

Because there is no assurance that the Company will secure additional corporate partnerships, the Company may raise additional capital through the sale of debt or equity securities. There is no assurance that funds will be available on favorable terms, or at all. If equity securities are issued to raise additional funds, dilution to existing stockholders may result.

The Company’s proposed products are in the preclinical or early clinical stage of development and will require significant further research, development, clinical testing and regulatory clearances. They are subject to the risks of failure inherent in the development of products based on innovative technologies. These risks include the possibilities that any or all of the proposed products will be found to be ineffective or unsafe, or otherwise fail to receive necessary regulatory clearances; that the proposed products, although effective, will be uneconomical to market; that third parties may now or in the future hold proprietary rights that preclude the Company from marketing them; or that third parties will market superior or equivalent products. Accordingly, the Company is unable to predict whether its research and development activities will result in any commercially viable products or applications. Further, due to the extended testing and regulatory review process required before marketing clearance can be obtained, the Company does not expect to be able to commercialize any therapeutic drug for at least five years, either directly or through its prospective corporate partners or licensees. There can be no assurance that the Company’s proposed products will prove to be safe or effective or receive regulatory approvals that are required for commercial sale. See “Business — Risk Factors.”

Off-Balance Sheet Arrangements

The Company does not currently have any off-balance sheet arrangements within the meaning of Item 303(a)(4) of Regulation S-K.

The Company is exposed to certain market risks associated with interest rate fluctuations on its marketable securities and borrowing arrangement. All investments in marketable securities are entered into for purposes other than trading. The Company is not subject to risks from currency rate fluctuations as it does not typically conduct transactions in foreign currencies. In addition, the Company does not utilize hedging contracts or similar instruments.

The Company’s exposure to interest rate risk arises from financial instruments entered into in the normal course of business. Certain of the Company’s financial instruments are fixed rate, short-term investments in government and corporate notes and bonds, which are available for sale (and have been marked to market in the accompanying financial statements). Changes in interest rates generally affect the fair value of the investments, however, because these financial instruments are considered “available for sale,” all such changes are reflected in the financial statements in the period affected. The Company manages interest rate risk on its investment portfolio by matching scheduled investment maturities with its cash requirements. As of June 30, 2004, the Company’s investment portfolio had a carrying amount of approximately $12,320,000. If market interest rates were to increase immediately and uniformly by 10%

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from levels as of June 30, 2004, the resulting decline in the fair value of fixed rate bonds held within the portfolio would not be material to the Company’s financial position, results of operations and cash flows.

The Company’s borrowing consists solely of its advance from the Institute, which is subject to potential repayment in the event that Cortex enters an AMPAKINE compound into Phase III clinical testing as a potential treatment for Alzheimer’s disease. Potential repayment would include interest accruing at a discount to the prime lending rate. Changes in interest rates generally affect the fair value of such debt, but, based upon historical activity, such changes are not expected to have a material impact on earnings or cash flows. As of June 30, 2004, the principal and accrued interest of the advance amounted to $275,112.

The financial statements of the Company and other information required by this item are set forth herein in a separate section beginning with the Index to Financial Statements on page F-1.

Not applicable.

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s “disclosure controls and procedures” as of the end of the period covered by report, pursuant to Rules 13a-15(b) and 15d-15(b) under the Exchange Act. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this report, were effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC filings.

There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13(a)-15(f) and 15(d)-15(f) under the Exchange Act) during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Not Applicable.

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PART III

The sections entitled “Nominees for Director,” “Executive Officers,” “Scientific Directors and Consultants,” “Audit Committee” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934” included in the Company’s Proxy Statement for its 2004 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission on or before October 28, 2004, are incorporated herein by reference.

The Company has adopted a Code of Business Conduct and Ethics, which covers all directors and employees, including its principal executive and financial officers. Any amendment or waiver to its Code of Business Conduct and Ethics that applies to its directors or executive officers will be posted on its website at www.cortexpharm.com or in a report filed with the Securities and Exchange Commission on Form 8-K. A copy of its Code of Business Conduct and Ethics is available free of charge upon written request to its Corporate Secretary at 15241 Barranca Parkway, Irvine, California 92618.

The sections entitled “Executive Compensation,” “Option Matters,” “Employment and Consulting Agreements,” “Compensation Committee Interlocks and Insider Participation” and “Director Compensation” included in the Company’s Proxy Statement for its 2004 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission on or before October 28, 2004, are incorporated herein by reference.

The section entitled “Principal Stockholders” included in the Company’s Proxy Statement for its 2004 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission on or before October 28, 2004, is incorporated herein by reference.

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EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth information regarding outstanding options, warrants and rights and shares reserved for future issuance under the Company’s existing equity compensation plans as of June 30, 2004. The Company’s only stockholder approved equity compensation plan consists of the 1996 Stock Incentive Plan. The Company does not have any non-stockholder approved equity compensation plans.

The section entitled “Certain Transactions” included in the Company’s Proxy Statement for its 2004 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission on or before October 28, 2004, is incorporated herein by reference.

The section entitled “Ratification of Appointment of Independent Auditors” included in the Company’s Proxy Statement for its 2004 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission on or before October 28, 2004, is incorporated herein by reference.

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PART IV

Reference is made to the Index to Financial Statements on page F-1, where these documents are listed.

The financial statement schedules have been omitted because the required information is not applicable, or not present in amounts sufficient to require submission of the schedules, or because the information is included in the financial statements or notes thereto.

See (c) below.

The Company furnished the press release announcing its financial results for the fiscal quarter ended March 31, 2004 to the Securities and Exchange Commission in a Report on Form 8-K dated May 10, 2004.

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Signatures

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

We, the undersigned directors and officers of Cortex Pharmaceuticals, Inc., do hereby constitute and appoint each of Roger G. Stoll, Ph.D. and Maria S. Messinger as our true and lawful attorneys-in-fact and agents with power of substitution, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorneys-in-fact and agents, or either of them, may deem necessary or advisable to enable said corporation to comply with the Securities and Exchange Act of 1934, as amended, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with this Annual Report on Form 10-K, including specifically but without limitation, power and authority to sign for us or any of us in our names in the capacities indicated below, any and all amendments (including post-effective amendments) hereto; and we do hereby ratify and confirm all that said attorney-in-fact and agent, shall do or cause to be done by virtue hereof.

In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

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Index to Financial Statements

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Report of Independent Registered Public Accounting Firm

The Stockholders and Board of Directors

Cortex Pharmaceuticals, Inc.

We have audited the accompanying balance sheets of Cortex Pharmaceuticals, Inc. (the “Company”) as of June 30, 2004 and 2003, and the related statements of operations, stockholders’ equity (deficit) and cash flows for the years ended June 30, 2004, 2003 and 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cortex Pharmaceuticals, Inc. at June 30, 2004 and 2003, and the results of its operations and its cash flows for the three years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

San Diego, California

July 27, 2004

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Cortex Pharmaceuticals, Inc.

BALANCE SHEETS

See accompanying notes.

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Cortex Pharmaceuticals, Inc.

STATEMENTS OF OPERATIONS

See accompanying notes.

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Cortex Pharmaceuticals, Inc.

STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)