**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**





**FORM
      10-KSB**





(Mark
      One)





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





For
      The
      Fiscal Year Ended December 31, 2006





o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF
      1934





For
      the
      transition period from ____________ to ____________




COMMISSION
      FILE NO. **000-32947**




**LEV
                PHARMACEUTICALS, INC.**(Name
                of Small Business Issuer in Its Charter)**Delaware**
            **88-0211496**(State
                or other jurisdiction of
              incorporation
                or organization)
            (I.R.S.
                Employer Identification No.)**675
                Third Avenue, Suite 2200**
              **New
                York, New York**
            **10017**(Address
                of principal executive offices)
            (Zip
                Code)**(212)
                682-3096**(Issuer's
                Telephone Number, Including Area
                Code)











SECURITIES
      REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT: **NONE**





SECURITIES
      REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:





**Common
      Stock, $.01 Par Value Per Share**





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o





Check
      whether the issuer (1) has filed all reports required to be filed by Section
      13
      or 15(d) of the Securities Exchange Act of 1934 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 o





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





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes o No x





The
      issuer’s revenues for the year ended December 31, 2006 were $0.





State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked price of such common equity, as of March
      23,
      2007: $103,140,393.




State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date: As of March 23, 2007, there were outstanding
      an aggregate of 114,088,402 shares of Common Stock, par value $0.01 per share





Transitional
      Small Business Disclosure Format (Check one): Yes o No x










**TABLE
      OF CONTENTS**




PagePART
                IItem
                1. DESCRIPTION OF BUSINESS
            1Item
                2. DESCRIPTION OF PROPERTY
            29Item
                3. LEGAL PROCEEDINGS
            29Item
                4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
            29PART
                IIItem
                5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
                MATTERS
            30Item
                6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
                OPERATION
            32Item
                7. FINANCIAL STATEMENTS
            42Item
              8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL
              DISCLOSURE
            42Item
                8A. CONTROLS AND PROCEDURES
            42Item
                8B. OTHER INFORMATION
            43PART
                IIIItem
                9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
            44Item
                10. EXECUTIVE COMPENSATION
            49Item
                11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                MANAGEMENT
            56Item
                12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
            58Item
                13. EXHIBITS
            59Item
                14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
            62SIGNATURES





ii


**PART
      I**





**ITEM
      1. DESCRIPTION OF BUSINESS**





*The
      Private Securities Litigation Reform Act of 1995 provides a safe harbor for
      forward-looking statements made by us or on our behalf. We and our
      representatives may from time to time make written or oral statements that
      are
“forward-looking,” including statements contained in this Form 10-KSB and other
      filings with the Securities and Exchange Commission, reports to our stockholders
      and news releases. All statements that express expectations, estimates,
      forecasts or projections are forward-looking statements within the meaning
      of
      the Act. In addition, other written or oral statements which constitute
      forward-looking statements may be made by us or on our behalf. Words such as
      “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,”
“projects,” “forecasts,” “may,” “should,” variations of such words and similar
      expressions are intended to identify such forward-looking statements. These
      statements are not guarantees of future performance and involve risks,
      uncertainties and assumptions which are difficult to predict. Therefore, actual
      outcomes and results may differ materially from what is expressed or forecasted
      in or suggested by such forward-looking statements. We undertake no obligation
      to update publicly any forward-looking statements, whether as a result of new
      information, future events or otherwise. Among the important factors on which
      such statements are based are:*





·  *assumptions
      concerning uncertainties associated with product development;*




·  *the
      risk that we will not obtain approval to market our products;*




·  *the
      risk that our products will not gain market acceptance;*




·  *our
      ability to obtain additional financing;*




·  *our
      ability to attract and retain key employees;*




·  *our
      ability to protect intellectual property; and*




·  *our
      ability to adapt to economic, political and regulatory conditions affecting
      the
      healthcare industry.*





*All
      references to “we,” “our,” “us,” “Lev” and the “Company” in this Annual Report
      on Form 10-KSB refer to Lev Pharmaceuticals, Inc. and its wholly-owned
      subsidiary, Lev Development Corp.*





**Introduction**





We
      are a
      development stage biopharmaceutical company that was formed in July 2003 to
      develop and commercialize therapeutic products for the treatment of inflammatory
      diseases. Our product candidates are based on C1-esterase inhibitor, C1-INH,
      a
      human plasma protein that modulates inflammation and is potentially applicable
      as a treatment for a range of medical indications. During 2005, we initiated
      a
      Phase III clinical trial of our lead product candidate, C1-INH for the
      treatment, both acute and prophylactic, of hereditary angioedema (“HAE”). In
      October 2005, we received fast track designation status by the U.S Food and
      Drug
      Administration, (“FDA”) for the treatment of HAE. On
      March
      14, 2007, we announced positive results from our Phase III clinical trial of
      C1-INH for the acute treatment of HAE. Based on the positive results of this
      study, we intend to submit a biologics license application, or BLA, to the
      FDA
      during the second quarter of 2007. In addition to the acute study, the clinical
      trial of the prophylactic use of C1-INH in preventing HAE attacks in more
      severely affected patients is ongoing and is expected to conclude in the second
      half of 2007. The FDA has substantial discretion in the approval process and
      may
      disagree with our interpretation of the data submitted in the BLA. Accordingly,
      there can be no assurance that the FDA will ultimately approve our BLA. We
      are
      also developing C1-INH for the treatment of selective other diseases and
      disorders, such as acute myocardial infarction (“AMI”), or heart attack, in
      which inflammation is known or believed to play an underlying role. We have
      certain rights to C1-INH technology through agreements with Sanquin Blood Supply
      Foundation (“Sanquin”), an Amsterdam-based not-for-profit organization that
      provides blood and plasma products and related services, carries out research
      and provides education, primarily in the Netherlands.










**General**





Our
      principal executive office is located at 675 Third Avenue, Suite 2200, New
      York,
      New York 10017 and our telephone number is (212) 682-3096. Our website
      is www.levpharma.com .
      Information contained in our website shall not be deemed to constitute a part
      of
      this Form 10-KSB.





**Public
      Company Merger**





On
      November 5, 2004, Fun City Popcorn, Inc. a non-operating public company
      incorporated in Nevada (“FCP”), Lev Acquisition Corp., its wholly-owed
      subsidiary (“Lev Sub”), and Lev Development Corp., previously know as Lev
      Pharmaceuticals, Inc. (“Old Lev” or “LDC”), entered into an Agreement and Plan
      of Merger (as amended on December 8, 2004, the “Agreement”). On December 29,
      2004, the merger closed and pursuant to the Agreement, Lev Sub merged into
      Old
      Lev and the combined entity became a wholly-owned subsidiary of FCP (the “Public
      Company Merger”). As a result of the Public Company Merger, FCP issued 5,029,795
      shares of common stock and 4,789,433 shares of Series A convertible preferred
      stock to holders of outstanding Old Lev common stock.





**Delaware
      Reincorporation**





Later,
      on
      December 29, 2004, the Board of Directors and stockholders of FCP approved
      a
      merger of FCP into a newly formed, wholly-owned subsidiary of FCP incorporated
      in Delaware (the “Recapitalization Merger”). This merger was undertaken to
      increase the authorized number of shares of common stock to permit the
      conversion of the Series A preferred stock, to reincorporate FCP in the State
      of
      Delaware and to change the name of the company. On February 17, 2005, the
      Recapitalization Merger closed and the issued and outstanding Series A Preferred
      Stock of FCP was automatically converted into an aggregate of 66,767,994 shares
      of common stock, which, along with the 4,505,530 shares of FCP common stock
      outstanding prior to the Public Company Merger and the 5,029,795 shares of
      common stock issued to the Old Lev stockholders in the Public Company Merger,
      resulted in a total of 76,303,319 shares of common stock outstanding as of
      February 17, 2005. As part of the Recapitalization Merger, Old Lev changed
      its
      name to Lev Development Corp. and FCP changed its name to Lev Pharmaceuticals,
      Inc. As a result of these mergers, the stockholders of Old Lev acquired
      approximately 94% of our outstanding common stock.




**Product
      Programs**





Our
      lead
      program is the development of C1-INH for the treatment of HAE. HAE is a rare
      genetic disorder characterized by episodic attacks of edema (swelling) in the
      extremities, face, abdomen, and most seriously, the airway passages. The disease
      is caused by a deficiency of C1-INH, and there are believed to be 10,000 or
      more
      people with HAE in the United States.





In
      July
      2004, we received orphan drug designation from the FDA for C1-INH (human),
      which, upon product licensure from the FDA, could provide us with a seven-year
      exclusive right to market the C1-INH product as a treatment for HAE in the
      United States. **** This
      designation is for both acute and prophylactic treatment. **** In
      October 2005, we received fast track designation status by the FDA
      for **** both
      acute and prophylactic treatment of HAE. Fast
      track designation facilitates the development and expedites the review of drugs
      and biologics intended to treat serious or life-threatening conditions and
      that
      demonstrate the potential to address unmet medical needs. We
      initiated a Phase III clinical trial of C1-INH for the acute treatment of HAE
      in
      March 2005 and in November 2005 we initiated a Phase III clinical trial of
      C1-INH for the prophylactic treatment of HAE. The trials are multi-center,
      placebo-controlled, double-blind studies designed to examine the use of C1-INH
      in both treating acute attacks of HAE and in preventing the onset of such
      attacks. Phase III clinical trials of this type are highly unpredictable, and
      may take from one year to many years for completion, depending on a large number
      of factors, most of which are entirely beyond our control. Following completion
      of a successful Phase III trial, we intend to submit a biologics license
      application, or BLA, to the FDA. Preparation of this BLA could take from six
      months to substantially more than one year. Following the submission of the
      BLA,
      the FDA may take from six months, in the case of an expedited review, to more
      than one year, to review the BLA. There can be no assurance that any of these
      timelines can or will be met, and there can be no assurance that the outcome
      of
      our Phase III trials will be successful or that the results of the trials will
      support licensure by the FDA.




2





On
      January 17, 2007, we announced t hat
      we
      have completed patient treatment in the acute portion of a pivotal Phase III
      clinical trial for our lead product candidate, C1-INH for the treatment of
      HAE.
      On March 14, 2007, we announced positive results from our Phase III clinical
      trial of C1-INH for the acute treatment of HAE. In the acute study, the
      protocol-defined primary endpoint was reached, showing a clinically and
      statistically significant reduction in the time to sustained relief of acute
      HAE
      symptoms. Based on the positive results of this study, we intend to submit
      a BLA
      to the FDA during the second quarter of 2007.




The
      second phase of the trial, examining the effectiveness of C1- INH in preventing
      inflammatory attacks in more severely affected HAE patients, is ongoing and
      is
      expected to conclude in the second half of 2007.





Our
      second development program is focused on the use of C1-INH in treating AMI,
      commonly known as a heart attack. AMI results from an obstruction of blood
      flow
      to the heart. There are approximately 865,000 patients with AMI in the United
      States annually, resulting in an estimated 171,000 directly attributable deaths.
      Current treatments for AMI, both surgical and pharmaceutical, are directed
      at
      restoring blood flow to heart tissue or preventing further obstruction. Despite
      a widespread appreciation for the role of inflammation in AMI in both the
      scientific and medical communities, no presently available treatments directly
      target the mechanisms of inflammation. Based on preliminary animal and clinical
      data presented by others, we believe that C1-INH may be useful as a treatment
      for AMI. We
      intend
      to initiate a research program in 2007 for the development of a genetically
      engineered or recombinant version of C1-INH to be used in the treatment of
      AMI.
      In 2007, we may also initiate studies for C1-INH in treating AMI. There can
      be
      no assurance, however, that we will have sufficient resources to deploy in
      furtherance of all of these potential research programs, in addition to our
      ongoing clinical trials, within the next twelve months or at all.





The
      process of inflammation underlies a number of other serious diseases, including
      gram-negative septicemia and inflammatory bowel disease, and is now also
      understood to play a role in other disorders previously thought to be unrelated
      to inflammation, including Alzheimer’s disease and stroke. As a potent mediator
      of inflammation, C1-INH has been examined as a potential treatment for some
      of
      these diseases in animal studies, and, in a limited number of disorders, in
      clinical studies as well. Based on these studies, and on the role C1-INH is
      known to play in inhibiting key inflammatory pathways, we intend to develop
      C1-INH for certain other diseases and disorders. We believe that the extensive
      clinical experience with C1-INH in treating HAE in Europe will facilitate its
      introduction into other clinical indications.





**Strategy**





Our
      goal
      is to create a biopharmaceutical company that develops and commercializes a
      portfolio of C1-INH products that offer improved efficacy and safety
      characteristics over existing treatments. The key elements of our strategy
      are
      to:





·
            complete
                the development of our lead product candidate, C1-INH for the treatment
                of
                HAE;·
            market
                and sell our HAE product independently or together with a third
                party;·
            advance
                our second product candidate, C1-INH for the treatment of AMI, into
                early-stage clinical development in the United States;
                and




3




·
            selectively
                develop C1-INH for additional therapeutic
                indications.





**Technology**





C1-INH
      is
      a human plasma protein that mediates inflammation and coagulation. In Europe,
      C1-INH, produced by several manufacturers, has been used to treat patients
      with
      HAE safely and effectively for more than 30 years, and is widely accepted as
      the
      treatment of choice for HAE. It is this extensive record of safety and efficacy
      that provides the basis for our lead program, the development of C1-INH in
      the
      United States for the treatment of HAE.





Beyond
      this record of clinical experience, however, C1-INH is also a well-characterized
      and well-understood molecule that is known to play a key role regulating the
      complex biochemical interactions of blood-based systems involved in inflammation
      and coagulation. C1-INH is known to be either a major or minor inhibitor of
      multiple proteins involved in these systems. More specifically, C1-INH is known
      to inhibit three key biochemical pathways underlying inflammation and/or
      coagulation - the complement system, the contact pathway of intrinsic
      coagulation and the fibrinolytic system. Under normal circumstances, these
      systems play important roles in defending the body from infection, injury and
      disease and in repairing tissue damage. If improperly controlled, however,
      these
      same systems can cause or contribute to disease and tissue damage. Excessive
      activity in one or more of these systems is known or believed to contribute
      to a
      number of diseases or disorders, including: myocardial infarction,
      ischemic-reperfusion injury, inflammatory bowel disease, gram-negative
      septicemia, Alzheimer's disease and stroke.





Based
      on
      (i) the demonstrated role of these inflammatory pathways in specific diseases,
      (ii) the known function of C1-INH in regulating these pathways and (iii) the
      extensive clinical experience in using C1-INH to treat HAE, C1-INH has been
      extensively studied, both clinically and pre-clinically, as a potential
      treatment for a number of diseases. We intend to leverage and extend these
      studies to develop a portfolio of products based on C1-INH.





**Hereditary
      Angioedema (HAE)**





**Background**





HAE
      is a
      genetic disorder characterized by episodes of edema (swelling) in the
      extremities, face, abdomen, and airway passages. The majority of patients have
      stretches of severe abdominal pain, nausea, and vomiting that is caused by
      swelling in the intestinal wall. Attacks that involve the face and throat must
      be taken seriously and medical treatment should be sought without delay.
      Swelling of the throat can close the air passage and cause death by suffocation.
      The mortality rate from untreated airway obstruction has been reported to be
      over 30% with death most frequently caused by asphyxiation due to airway
      closure. The course of the disease is diverse and unpredictable, even within
      a
      single patient over his lifetime. Swelling caused by HAE usually lasts for
      24-72
      hours, but the length of an attack can range from four hours to four days.
      On
      average, patients experience approximately one attack per month, but the
      frequency is highly variable. As many as 5% to 10% of patients are severely
      affected, experiencing attacks one to three times per week. HAE affects between
      1:10,000 and 1:50,000 individuals worldwide and there are believed to be 10,000
      or more people with HAE in the United States.





HAE
      is
      caused by a defective gene for C1-INH, and this defect is passed on in families
      - a child has a 50% chance of inheriting this disease if one parent is affected.
      The absence of family history, however, does not rule out HAE diagnosis, and
      as
      many as 20% of HAE cases involve patients who appear to have had a spontaneous
      mutation of the C1-INH gene at conception. The genetic defect results in
      production of either inadequate or nonfunctioning C1-INH protein.




4





C1-INH
      is
      known to inhibit three key biochemical pathways underlying inflammation and/or
      coagulation - the complement system, the contact pathway of intrinsic
      coagulation and the fibrinolytic system. Excessive activity of each of these
      systems has been demonstrated in HAE, as evidenced by increased levels of
      components of the complement system, kallikrein, coagulation Factors XIa and
      XIIa, and plasmin. The biochemical imbalance that results from reduced levels
      of
      functional C1-INH leads to the production of proteins and peptides that cause
      fluids to be released from the capillaries into surrounding tissues thereby
      causing edema.





In
      the
      absence of C1-INH activity, activated C1 and plasmin generate certain
      inflammatory mediators that are thought to be causal factors of the angioedema
      observed in patients with HAE. C1-INH concentrate replaces the missing or
      non-functional protein and inhibits the catalytic subunits of the first
      component of the classic complement pathway (C1r and C1s), and also inhibits
      the
      function of kallikrein, plasmin, and coagulation factors XIa and
      XIIa.





Because
      HAE is rare and has a wide variability in disease expression, it is not uncommon
      for patients to remain undiagnosed or misdiagnosed for many years. Many patients
      report that their frequent and severe abdominal pain was inappropriately
      diagnosed as psychosomatic. Although rare, HAE is a disease with potentially
      catastrophic consequences for those affected. Aside from the potentially fatal
      acute respiratory compromise, unnecessary exploratory surgery has been performed
      on patients experiencing gastrointestinal edema because abdominal HAE attacks
      mimic conditions requiring surgery.





Traditionally,
      HAE has been classified into two types (I and II). The most common form of
      the
      disease, Type I, is characterized by low levels of C1-INH and affects about
      85%
      of patients, whereas Type II HAE affects 15% of patients and is characterized
      by
      non-functional C1-INH. A third type of HAE has been identified in which the
      abnormal C1-INH protein binds to albumin, effectively reducing the amount of
      functional C1-INH.





**Current
      Treatments of HAE**





Treatment
      of HAE can be categorized as: (i) mitigation or acute treatments to remedy
      the
      symptoms of infrequent episodic acute attacks; and (ii) preventive or
      prophylactic treatments for patients severely affected by HAE.





There
      are
      currently no approved treatments for acute attacks available in the United
      States. Rather, current therapies primarily focus upon treating the symptoms
      of
      an acute attack. For swelling of the intestinal wall, which can cause
      debilitating pain, narcotics such as morphine and antiemetics for nausea are
      given, but these medications only address the symptoms and not the underlying
      cause. For severe laryngeal swelling, which can be life threatening, rescue
      therapy such as intubation or tracheotomy may be required. The use of fresh
      frozen plasma, which contains C1-INH but which also contains a wide variety
      of
      other factors that may activate multiple inflammatory pathways and exacerbate
      an
      attack, is also used in some instances. Facial and extremity attacks are usually
      left to resolve on their own.





Long-term
      prevention therapy is recommended for patients who experience more than one
      attack per month, or for whom the disease significantly interferes with their
      quality of life. Most of these patients are currently treated with anabolic
      steroids that reduce the frequency of attacks of edema. The most commonly used
      steroids are alpha-alkylated androgens such as stanozolol and danazol. Although
      these drugs are effective in some patients in reducing the number and severity
      of the most serious attacks, they do not prevent all attacks. In addition,
      use
      of such anabolic steroids can have numerous side effects ranging from
      hepatotoxicity (liver toxicity), virilization (development of male sexual
      characteristics in a female), weight gain, acne and hirsutism (unwanted hair
      growth).




5





**C1-Esterase
      Inhibitor (C1-INH) for the Treatment of HAE**





HAE
      has
      been shown to be effectively treated with intravenous administration of C1-INH
      purified from human plasma. In Europe, C1-INH, produced by several
      manufacturers, has been used to treat patients with HAE safely and effectively
      for more than 30 years, and is widely accepted by treating physicians and HAE
      associations around the world as the treatment of choice for acute attacks
      of
      HAE. It can be used to treat acutely, when there is an attack, or
      prophylactically, to prevent attacks. This treatment concept is similar to
      hemophilia, in which a patient is treated regularly with the particular clotting
      factor for which he is deficient, as well as on demand for specific bleeding
      episodes. In spite of this long record of safety and efficacy in Europe, C1-INH
      has never been introduced in the United States, and it is our objective to
      bring
      C1-INH to the United States for the treatment of patients with HAE.





Our
      first
      product candidate, C1-INH prepared from human plasma, is being developed for
      both acute and prophylactic treatment of HAE. C1-INH is given by intravenous
      administration. Published studies by others have shown C1-INH treatment to
      resolve angioedema in 30 minutes to two hours, compared to 24-72 hours when
      untreated. A research study published in the New England Journal of Medicine
      in
      1996 provided evidence that this treatment was safe and effective for both
      prevention of attacks and as an acute attack therapy. In addition, rapid
      resolution of laryngeal, facial, abdominal, and extremity swelling was observed.
      A study published in the Archives of Internal Medicine in 2001 concluded C1-INH
      to be highly effective in treating the laryngeal edema of HAE with rapid
      resolution of symptoms. We believe these studies, which did not involve our
      product, and others showing comparable efficacy, are representative of the
      extensive European clinical experience using C1-INH as a treatment for HAE
      for
      more than 30 years.





On
      March
      2, 2005, we entered into a CRO (Clinical Research Organization) services
      agreement with INC Research which governs INC Research's provision of services
      in connection with the support of clinical investigation, management and/or
      research of our Phase III clinical trial. We
      entered into a separate services agreement with INC Research in September 2006
      which governs INC Research’s provision of additional services in connection with
      our Phase III clinical trials and activities related to the commercialization
      of
      our product candidates. The services provided by INC Research pursuant to both
      contractual arrangements are on a work-order basis and we are invoiced on a
      time
      and materials basis. We have the right to terminate both agreements, and any
      pending work-order, on prior notice and without cause. As of December 31, 2006,
      we have estimated that we will pay INC Research at least $1,272,000 for its
      services under both agreements in 2007. However, du e
      to the
      variability associated with the conduct of clinical trials, we are unable to
      estimate with certainty the future costs we will incur under our CRO agreement.
      We anticipate that these costs will increase significantly above our current
      estimates in future periods as a result of our initiation or expansion of the
      clinical trials.





In
      October 2005, we received fast track designation status by the FDA for the
      treatment of HAE. We initiated a Phase III clinical trial of C1-INH for the
      acute treatment of HAE in March 2005. In November 2005, we initiated a Phase
      III
      clinical trial of C1-INH for the prophylactic treatment of HAE. On January
      17,
      2007, we announced t hat
      we
      have completed patient treatment in the acute portion of a pivotal Phase III
      clinical trial for our lead product candidate, C1-INH for the treatment of
      HAE . On
      March
      14, 2007, we announced positive results from our Phase III clinical trial of
      C1-INH for the acute treatment of HAE. In the acute study, the protocol-defined
      primary endpoint was reached, showing a clinically and statistically significant
      reduction in the time to sustained relief of acute HAE symptoms. The primary
      endpoint was met using the protocol-defined intent to treat analysis, with
      a
      median time to sustained symptom relief of 2.0 hours for patients receiving
      C1-INH compared to greater than four hours, the maximum evaluation period,
      for
      patients receiving placebo. Based on the positive results of this study, we
      intend to submit a BLA to the FDA during the second quarter of 2007. The second
      phase of the trial, examining the effectiveness of C1- INH in preventing
      inflammatory attacks in more severely affected HAE patients, is ongoing and
      is
      expected to conclude in the second half of 2007.




6





**Acute
      Myocardial Infarction**





**Background**





AMI,
      commonly known as a heart attack, is a sudden, life-threatening cardiac disorder
      caused by an obstruction of blood flow to the heart. The major symptom of AMI
      is
      chest discomfort, but associated symptoms include nausea, vomiting, shortness
      of
      breath, and dizziness. AMIs vary in severity and symptoms, and the intensity
      of
      the symptoms depends on the size of the area of heart muscle affected by the
      infarction. Clinical diagnosis of AMI is typically based on elevation of two
      cardiac enzyme markers, creatine kinase and troponin, markers considered highly
      reliable measures of cardiac injury.


AMI
      results in the development of myocardial necrosis, or death of heart cells
      or
      tissue, due to ischemia (lack of oxygen). The heart cells are not supplied
      with
      sufficient oxygen to meet their metabolic requirements. The most common cause
      of
      AMI is atherosclerosis or the accumulation of plaques in the arterial wall.
      Plaques can rupture and form a thrombus, or clot, that partially or totally
      blocks arterial blood flow. Patients with this condition suffer the disruption
      of the normal pattern of contractions of the heart muscle leading to atrial
      fibrillation (rapid uncontrolled beat) and/or heart failure. There are
      approximately 865,000 patients with AMI in the United States annually, resulting
      in an estimated 171,000 directly attributable deaths.





**Current
      Treatments of AMI**





Current
      treatments of AMI are limited and are aimed at restoring blood flow, improving
      tissue oxygenation and preventing further arterial obstruction. The first line
      of treatment usually includes oxygen (to reduce the workload of the heart),
      aspirin (to inhibit further clot formation), nitroglycerin (to reduce the oxygen
      requirements of the heart) and morphine (for pain). Fibrinolytic drugs, such
      as
      streptokinase, urokinase or alteplase, are administered to dissolve clots,
      and
      heparin is given as an anticoagulant to prevent further clot formation.
      Percutaneous transluminal coronary angioplasty, or PTCA, is commonly performed
      to restore blood flow to the affected coronary artery, a procedure that may
      involve the placement of a stent to prevent closure of the vessel. In some
      cases, coronary arterial bypass graft surgery may be required. Antiplatelet
      medications, such as aspirin and clopidogrel, have become a cornerstone of
      therapy for AMI. These medications prevent the accumulation of platelets, a
      trigger event in clot formation. Newer strategies include the use of platelet
      glycoprotein IIb-IIIa receptor inhibitors, low molecular weight heparin, and
      Factor Xa inhibitors.





**C1-INH
      for the Treatment of AMI**





Current
      treatments for AMI, both surgical and pharmaceutical, are directed at restoring
      blood flow to heart tissue or preventing further obstruction. The later stages
      of cardiac cell injury during AMI, however, result at least in part from an
      inflammatory response. Activation of the complement system has been
      demonstrated, inflammatory mediators have been identified, and certain
      anti-inflammatory drugs have been shown to reduce infarct size in animal models.
      Despite a widespread appreciation for the role of inflammation in AMI in both
      the scientific and medical communities, no presently available treatments
      directly target the mechanisms of inflammation. **** Based
      on
      preliminary animal and clinical data, we believe that C1-INH may be useful
      as a
      treatment for AMI.





Two
      of
      the major inflammatory pathways believed to be involved in AMI are the
      complement system and the contact pathway of intrinsic coagulation. C1-INH
      is an
      important inhibitor of both of these pathways and, therefore, may provide a
      therapeutic benefit in the treatment of AMI. C1-INH has been studied extensively
      in animal models of myocardial infarction in rat, pig, cat and dog models.
      In
      these studies, C1-INH was shown both to restore blood flow and to reduce cardiac
      damage. The use of C1-INH in treating AMI has also been studied in a preliminary
      clinical trial published in the European Heart Journal in 2002. In 13 patients,
      release of troponin T and creatine kinase MB, two accepted biochemical markers
      of cardiac damage, were reduced by 36% and 57%, respectively, compared to 18
      controls. We entered into an exclusive worldwide license with Sanquin for the
      use of C1-INH for the treatment of AMI.




7





The
      supply of plasma derived C1-INH may not be sufficient for the treatment of
      AMI.
      Based on the rights we obtained from Sanquin, as described below, we intend
      to
      initiate a research program for the development of a genetically engineered
      or
      recombinant version of C1-INH.




**Distribution,
      Manufacturing and Licensing Relationships**





**Distribution
      and Manufacturing Services Agreement with Sanquin**





We
      entered into a Distribution and Manufacturing Services Agreement with Sanquin
      as
      of January 16, 2004. Under this agreement, Sanquin has granted us (i) the
      exclusive right to distribute, market, offer for sale, sell, import and promote
      C1-INH derived from human plasma manufactured by Sanquin for the treatment
      of
      HAE in Israel and in all countries in North America and South America (other
      than the Dutch Overseas Territories, Argentina and Brazil), and (ii) a right
      of
      first refusal to distribute, market, offer for sale, sell, import and promote
      C1-INH derived from human plasma manufactured by Sanquin for the treatment
      of
      HAE in certain other geographic regions and under certain
      conditions.





Under
      the
      distribution agreement, it is our responsibility to conduct the Phase III
      clinical trials of C1-INH for the treatment of HAE and to prepare and file
      all
      regulatory applications necessary to register the product candidate. **** In
      exchange, Sanquin agreed to provide us with the technical data and support
      necessary to assist us in preparing and filing all such regulatory
      applications.





Furthermore,
      Sanquin agreed to supply C1-INH for our Phase III clinical trials. Upon receipt
      of FDA approval for our product candidate for the treatment of HAE, upon
      commercial launch of this product and thereafter during the term of the
      agreement, Sanquin will supply us with our commercial requirements for C1-INH
      for the treatment of HAE in each country where we have received regulatory
      approval, subject to minimum annual purchase requirements in Euros equal to
      approximately $9,900,000 per year.





The
      initial term of this agreement expires on December 31, 2007, subject to
      extension. We have the right to extend the term of this agreement for up to
      six
      years in two successive three year periods upon written notice to Sanquin no
      later than six months before this agreement or an extension of this agreement
      terminates.





In
      September 2006 we engaged Sanquin to provide us with clinical laboratory testing
      services to conduct diagnostic test on blood samples derived from our clinical
      trials to assist us in establishing the safety and efficacy of C1-INH for HAE.
      For these services, we pay Sanquin a professional services fee for the tests
      they conduct during the term of the engagement. This services agreement expires
      July 1, 2007, however, it can be terminated by either party for any reason
      on 30
      days notice.





In
      accordance with the agreement, we have obtained FDA consent for our plan to
      collect necessary data to support licensure by the FDA in the United States
      and
      we have secured the support of a clinical research organization to conduct
      our
      Phase III clinical trials for our HAE product candidate. Sanquin has the right
      to terminate this agreement in the event, among other things, that:





·
            we
                fail to submit a BLA to the FDA within a specified time frame;
                or




8




·
            we
                fail to obtain marketing approval in the United States within a specified
                time frame.





**Exclusive
      License Agreement with Sanquin**





We
      entered into a license agreement with Sanquin on January 27, 2004. Under this
      agreement, we have an exclusive, worldwide, royalty-bearing license, with the
      right to sublicense Sanquin patent rights and know-how relating to the use
      of
      C1-INH for the treatment of AMI. In connection with the license agreement,
      we
      paid Sanquin certain fees and reimbursed Sanquin for certain expenses. In
      addition, we have an obligation to pay Sanquin royalties on sales of products
      incorporating the licensed technology.




We
      are
      required to create a comprehensive research plan for the commercial exploitation
      of the licensed technology. We are continuing to work with Sanquin on the design
      of the research plan. We agreed to commit a minimum of $125,000 per annum during
      the first three years following the execution of the license agreement toward
      research on the licensed technology conducted by Sanquin and other parties.
      As
      of March 15, 2007, we have funded approximately $141,000 to third parties
      engaged in this research. In addition, we have agreed to use commercially
      reasonable efforts to manufacture and market products incorporating the licensed
      technology. If funding permits, w e
      intend
      to initiate a research program in 2007 for the development of a genetically
      engineered or recombinant version of C1-INH to be used in the treatment of
      AMI.





The
      license agreement, unless it is terminated earlier, shall continue in force
      until the expiration, invalidation or unenforceability of the last to expire
      patent licensed pursuant to the agreement. The U.S. patent licensed from Sanquin
      will expire on July 18, 2017, provided that applicable maintenance fees are
      timely paid. **** Either
      party may terminate the agreement in the event of an uncured material breach
      by
      the other.





**Intellectual
      Property**





The
      following factors are important to our success:





·
            receiving
                patent protection for our product candidates;·
            not
                infringing the intellectual property rights of others;·
            preventing
                others from infringing our intellectual property rights;
                and·
            maintaining
                our patent rights and trade
                secrets.





We
      actively seek, when appropriate, protection for our proposed products,
      technologies and proprietary information through United States and foreign
      patents. In addition, we rely upon trade secrets and contractual arrangements
      to
      protect our proprietary information.





As
      of
      December 31, 2006, under our license agreement with Sanquin, we license a United
      States patent and an International Patent Application including any foreign
      patents issuing therefrom related to our technologies, compounds and their
      applications in pharmaceutical development or their use as pharmaceuticals
      and
      in particular for the use of C1-INH in the treatment of AMI. We face the risk
      that our licensed patent and any patents issued to us in the future may be
      challenged or circumvented or may otherwise not provide protection for any
      commercially viable products that we develop. We also note that United States
      patents and patent applications may be subject to interference proceedings
      and/or reexamination proceedings in the United States Patent and Trademark
      Office (and foreign patents may be subject to opposition or comparable
      proceedings in the corresponding foreign patent office), which could result
      in
      either loss of the patent or denial of the patent application or loss or
      reduction in the scope of one or more of the claims of the patent or patent
      application. In addition, such interference, reexamination and opposition
      proceedings may be costly. Furthermore, an adverse decision in an interference
      proceeding can result in a third party receiving the very patent rights sought
      by us, which in turn could affect our ability to market a potential product
      to
      which that patent filing was directed. In the event that we seek to enforce
      any
      of our owned or exclusively licensed patents against an infringing party, it
      is
      likely that the party defending the claim will seek to invalidate the patents
      we
      assert, which, if successful, would result in the entire loss of our patent
      or
      the relevant portion of our patent and not just with respect to that particular
      infringer. Any litigation to enforce or defend our patent rights, even if we
      were to prevail, could be costly and time-consuming and would divert the
      attention of our management and key personnel from our business
      operations.




9





In
      addition, our ability to assert our patents against a potential infringer,
      depends on our ability to detect the infringement in the first instance. Many
      countries, including certain European countries, have compulsory licensing
      laws
      under which a patent owner may be compelled to grant licenses to third parties
      in some circumstances (for example, when the patent owner has failed to “work”
the invention in that country, or the third party has patented improvements).
      In
      addition, many countries limit the enforceability of patents against government
      agencies or government contractors. In these countries, the patent owner may
      have limited remedies, which could materially diminish the value of the patent.
      Compulsory licensing of life-saving drugs is also becoming increasingly popular
      in developing countries either through direct legislation or international
      initiatives. Such compulsory licenses could be extended to include some of
      our
      product candidates, which could limit our potential revenue opportunities.
      Moreover, the legal systems of certain countries, particularly certain
      developing countries, do not favor the aggressive enforcement of patent and
      other intellectual property protection.





Our
      success will also depend in part upon our not infringing patents issued to
      others. If our product candidates are found to infringe the patents of others,
      our development, manufacture and sale of such potential products could be
      severely restricted or prohibited.





Patent
      litigation can involve complex factual and legal questions and its outcome
      is
      uncertain. Any claim relating to infringement of patents that is successfully
      asserted against us may require us to pay substantial damages. Even if we were
      to prevail, any litigation could be costly and time-consuming and would divert
      the attention of our management and key personnel from our business operations.
      Furthermore, if a patent infringement suit were brought against us or our future
      strategic partners or licensees, if any, we or they may be forced to stop or
      delay developing, manufacturing or selling potential products that are alleged
      to infringe a third party's intellectual property unless that party grants
      us or
      our strategic partners or licensees rights to use its intellectual property.
      In
      such cases, we may be required to obtain licenses to patents or proprietary
      rights of others in order to continue to commercialize our products. However,
      we
      may not be able to obtain any licenses required under any patents or proprietary
      rights of third parties on acceptable terms, or at all. Even if we or our
      strategic partners or licensees were able to obtain rights to the third party's
      intellectual property, these rights may be non-exclusive, thereby giving our
      competitors access to the same intellectual property. Ultimately, we may be
      unable to commercialize some of our potential products or may have to cease
      some
      of our business operations as a result of patent infringement claims, which
      could severely harm our business.




Much
      of
      our technology and many of our processes depend upon the knowledge, experience
      and skills of our scientific and technical personnel. To protect rights to
      our
      proprietary know-how and technology, we generally require all employees,
      contractors, consultants, advisors, visiting scientists and collaborators as
      well as potential collaborators to enter into confidentiality agreements that
      prohibit the disclosure of confidential information. The agreements with
      employees and consultants also require disclosure and assignment to us of ideas,
      developments, discoveries and inventions. These agreements may not effectively
      prevent disclosure of our confidential information or provide meaningful
      protection for our confidential information.




10





**Competition**





We
      operate in an industry characterized by intense competition and rapid
      technological change. New developments occur and are expected to continue to
      occur at a rapid pace. Discoveries or commercial developments by our competitors
      may render some or all of our technologies, products or potential products
      obsolete or non-competitive.





Our
      principal focus is on the development of therapeutic products. We conduct
      research and development programs to develop and test product candidates and
      demonstrate to appropriate regulatory agencies that these products are safe
      and
      effective for therapeutic use in particular indications. Our principal
      competitors are companies that are already marketing products in those
      indications or are developing new products for those indications. Most of these
      organizations have greater financial resources and drug development experience
      than we do. Companies developing therapeutics for the treatment of HAE include
      Dyax Corp., Jerini AG, Pharming Group N.V. and CSL Behring. Other competitors
      and potential competitors include companies that market and develop anabolic
      steroid-based drugs and anti-inflammatory compounds.





HAE
      is a
      disease that fits within the definition of the Orphan Drug Act, and therefore
      any company that develops a therapy for this indication could, upon licensure,
      obtain a seven year marketing exclusivity in the United States for the licensed
      indication. We believe CSL Behring and Pharming Group N.V. are currently
      developing therapy for the acute treatment of HAE that the FDA may consider
      the
      same as ours under the Orphan Drug Act. In the event that these companies obtain
      FDA product licensures before us, we could be prevented from obtaining FDA
      licensure and marketing our C1-INH product for the treatment of HAE for up
      to
      seven years.





For
      potential cardiovascular disease product applications, our potential competitors
      include numerous pharmaceutical and biotechnology companies, most of which
      have
      substantially greater financial resources and experience than we
      do.





**Sales
      and Marketing**





During
      2006, we began to assemble a small, highly-focused sales and marketing force.
      As
      C1-INH for the treatment of HAE moves closer to potential regulatory approval,
      we intend to identify a suitable strategic partner for purposes of collaborating
      in the marketing and distribution of the product in the U.S. In addition to
      building our own sales and marketing organization, we are also evaluating the
      utilization of a broader channel of distribution such as large, established
      pharmaceutical companies and contract sales organizations to assist in the
      broadest commercialization of our product candidates. In order to cover all
      of
      the key prescribing physicians at an adequate level of reach and frequency,
      we
      would need to significantly expand our proposed sales force or partner with
      a
      company with a substantial sales organization.





**Government
      Regulation**





Regulation
      by governmental authorities in the United States and other countries is a
      significant factor in the development, manufacture and marketing of
      pharmaceuticals, and in our ongoing research and development activities. All
      of
      our products will require regulatory approval by governmental agencies prior
      to
      commercialization. In particular, pharmaceutical drugs are subject to rigorous
      preclinical testing and clinical trials and other pre-marketing approval
      requirements by the FDA and regulatory authorities in other countries. In the
      United States, various federal, and in some cases, state statutes and
      regulations also govern or impact upon the manufacturing, safety, labeling,
      storage, record-keeping and marketing of pharmaceutical products. The lengthy
      process of seeking required approvals and the continuing need for compliance
      with applicable statutes and regulations, require the expenditure of substantial
      resources.




11





Regulatory
      approval, when and if obtained for any of our product candidates, may be limited
      in scope which may significantly limit the indicated uses for which our product
      candidates may be marketed. Further, approved drugs and manufacturers are
      subject to ongoing review and discovery of previously unknown problems that
      may
      result in restrictions on their manufacture, sale or use or in their withdrawal
      from the market.





**Preclinical
      Studies**





Before
      testing any compounds with potential therapeutic value in human subjects in
      the
      United States, stringent government requirements for preclinical data must
      be
      satisfied. Preclinical testing includes both *in
      vitro* and *in
      vivo* laboratory evaluation and characterization of the safety and efficacy of a
      drug
      and its formulation. Preclinical testing results obtained from studies in
      several animal species, as well as from *in
      vitro* studies,
      are submitted to the FDA as part of an investigational new drug application,
      or
      IND, and are reviewed by the FDA prior to the commencement of human clinical
      trials. These preclinical data must provide an adequate basis for evaluating
      both the safety and the scientific rationale for the initial trials in human
      volunteers.





**Clinical
      Trials**





If
      a
      company wants to test a new drug in humans, an IND must be prepared and filed
      with the FDA. The IND becomes effective if not rejected or put on clinical
      hold
      by the FDA within 30 days. In addition, an Institutional Review Board comprised
      in part of physicians at the hospital or clinic, as well as others representing
      the interests of the community where the proposed trials will be conducted,
      must
      review and approve the trial protocol and monitor the trial and the
      investigators on an ongoing basis. The FDA may, at any time during the 30-day
      period or at any time thereafter, impose a clinical hold on proposed or ongoing
      clinical trials. If the FDA imposes a clinical hold, clinical trials cannot
      commence or recommence without FDA authorization and then only under terms
      authorized by the FDA. In some instances, the IND application process can result
      in substantial delay and expense.





**Clinical
      Trial Phases**





Clinical
      trials typically are conducted in three sequential phases, phases I, II and
      III,
      with phase IV trials potentially conducted after marketing approval. These
      phases may be compressed, may overlap or may be omitted in some
      circumstances.





·
            *Phase
                I clinical trials*.
                After an IND becomes effective, Phase I human clinical trials can
                begin.
                These trials evaluate a drug's safety profile, and the range of safe
                dosages that can be administered to healthy volunteers and/or patients,
                including the maximum tolerated dose that can be given to a trial
                subject
                with the target disease or condition. Phase I trials also determine
                how a
                drug is absorbed, distributed, metabolized and excreted by the body,
                and
                the duration of its action.·
            *Phase
                II clinical trials*.
                Phase II clinical trials typically are designed to evaluate the potential
                effectiveness of the drug in patients and to further ascertain the
                safety
                of the drug at the dosage given in a larger patient
                population.




12




·
            *Phase
                III clinical trials*.
                In Phase III clinical trials, the drug is usually tested in a controlled,
                randomized trial comparing the investigational new drug to an approved
                form of therapy in an expanded and well-defined patient population
                and at
                multiple clinical sites. The goal of these trials is to obtain definitive
                statistical evidence of safety and effectiveness of the investigational
                new drug regime as compared to an approved standard therapy in defined
                patient populations with a given disease and stage of
                illness.·
            *Phase
                IV clinical trials*.The
                FDA may require post-approval studies, known as Phase IV studies,
                to
                develop additional information regarding the product. In addition,
                the FDA
                requires post-approval adverse event reporting, and the agency has
                the
                power to require changes in labeling or to prevent further marketing
                of a
                product. The FDA may also decide later to withdraw product approval
                if
                compliance with regulatory standards is not maintained or if safety
                problems occur after the product reaches the market.





**Biologics
      License Application**





After
      completion of clinical trials, if there is substantial evidence that the drug
      is
      safe, pure and potent, a biologics license application, or BLA, is prepared
      and
      submitted for the FDA to review. The BLA must contain all of the essential
      information on the drug gathered to that date, including data from preclinical
      and clinical trials, and the content and format of a BLA must conform with
      all
      FDA regulations and guidelines. Accordingly, the preparation and submission
      of a
      BLA is a major undertaking for a company. In addition, the FDA reviews a BLA
      to
      determine whether the facility in which a product is manufactured, processed,
      packed or held meets standards designed to assure the product's continued
      safety, purity and potency.





The
      FDA
      reviews all BLAs submitted before it accepts them for filing and may request
      additional information from the sponsor rather than accepting a BLA for filing.
      In such an event, the BLA must be submitted with the additional information
      and,
      again, is subject to review before filing. Once the submission is accepted
      for
      filing, the FDA begins an in-depth review of the BLA. By law, the FDA has 180
      days in which to review the BLA and respond to the applicant. The review process
      is often significantly extended by the FDA through requests for additional
      information and clarification. The FDA may refer the application to an
      appropriate advisory committee, typically a panel of clinicians, other
      scientific experts and patient representatives, for review, evaluation and
      a
      recommendation as to whether the application should be approved. The FDA is
      not
      bound by the recommendation, but gives great weight to it. If the FDA
      evaluations of both the BLA and the manufacturing facilities are favorable,
      the
      FDA may issue either an approval letter or an approvable letter, which usually
      contains a number of conditions that must be satisfied in order to secure final
      approval. If the FDA's evaluation of the BLA submission or manufacturing
      facility is not favorable, the FDA may refuse to approve the BLA or issue a
      not
      approvable letter.





**Other
      Regulatory Requirements**





Any
      products that we manufacture or distribute under FDA approvals are subject
      to
      pervasive and continuing regulation by the FDA, including record-keeping
      requirements and reporting of adverse experiences with the products. Drug
      manufacturers and their subcontractors are required to register with the FDA
      and, where appropriate, state agencies, and are subject to periodic unannounced
      inspections by the FDA and state agencies for compliance with current good
      manufacturing processes (“cGMP”) regulations which impose procedural and
      documentation requirements upon us and any third party manufacturers we
      utilize.





The
      FDA
      closely regulates the marketing and promotion of drugs. A company can make
      only
      those claims relating to safety and efficacy that are approved by the FDA.
      Failure to comply with these requirements can result in adverse publicity,
      warning letters, corrective advertising and potential civil and criminal
      penalties. Physicians may prescribe legally available drugs for uses that are
      not described in the product's labeling and that differ from those tested by
      us
      and approved by the FDA. Such off-label uses are common across medical
      specialties. Physicians may believe that such off-label uses are the best
      treatment for many patients in varied circumstances. The FDA does not regulate
      the behavior of physicians in their choice of treatments. The FDA does, however,
      restrict manufacturer’s communications on the subject of off-label
      use.




13





The
      FDA’s
      policies may change and additional government regulations may be enacted which
      could prevent or delay regulatory approval of our product candidates or approval
      of new indications for our existing products. We cannot predict the likelihood,
      nature or extent of adverse governmental regulations that might arise from
      future legislative or administrative action, either in the United States or
      abroad.





**Approvals
      Outside of the United States**





We
      will
      also be subject to a wide variety of foreign regulations governing the
      development, manufacture and marketing of our products. Whether or not FDA
      approval has been obtained, approval of a product by the comparable regulatory
      authorities of foreign countries must still be obtained prior to manufacturing
      or marketing the product in those countries. The approval process varies from
      country to country and the time needed to secure approval may be longer or
      shorter than that required for FDA approval. There is no assurance that clinical
      trials conducted in one country will be accepted by other countries or that
      approval in one country will result in approval in any other
      country.





**Employees**





As
      of
      March 15, 2007, we had 17 employees. We consider our relationship with our
      employees to be satisfactory.




**RISK
      FACTORS**





You
      should carefully consider the following risk factors and the other information
      included herein as well as the information included in other reports and filings
      made with the SEC. If any of the matters or events described in the following
      risks actually occurs, our business, financial condition or results of
      operations could be harmed. In addition, the trading price of our common stock
      could decline due to any of these risks.





**Risks
      related to our business**





*We
      are at an early stage of development as a company and currently have no source
      of revenue and may never become profitable.*





We
      are a
      development stage biopharmaceutical company with a limited operating history.
      Currently, we have no products approved for commercial sale and, to date, we
      have not generated any revenue. Our ability to generate revenue depends on:
      first, obtaining FDA marketing approval for any of our products and, second,
      successfully commercializing and bringing to market these products. In
      particular, if we do not successfully develop and commercialize C1-INH for
      the
      treatment of HAE, we will be unable to generate any revenue for many years,
      if
      at all and, even if successful in obtaining FDA marketing approval for C1-INH
      for the treatment of HAE, it may be up to a year or more before we can expect
      to
      begin to generate revenue. If we are unable to generate revenue, we will not
      become profitable, and we may be unable to continue our operations.





*We
      have incurred significant losses since inception and anticipate that we will
      incur continued losses for the foreseeable future.*




14





As
      of
      December 31, 2006, we had a deficit accumulated during the development stage
      of
      $23,188,339.  We
      have
      from inception incurred and will continue to incur significant and increasing
      operating losses for the next several years as we prepare the BLA based on
      the
      Phase III trial results of C1-INH for the acute treatment of HAE, continue
      the
      Phase III clinical trials of C1-INH for the prophylactic treatment of HAE,
      and
      advance C1-INH for the treatment of AMI into clinical development. In addition,
      if we receive regulatory approval of any of our product candidates, we expect
      to
      incur significant sales and marketing expenses in the future. Because of the
      numerous risks and uncertainties associated with developing and commercializing
      these product candidates, we are unable to predict the extent of future losses
      or when and if we will become profitable.





*We
      are a development stage company, making it difficult for you to evaluate our
      business and your investment.*




We
      are in
      the development stage and our operations and the development of our proposed
      products are subject to all of the risks inherent in the establishment of a
      new
      business enterprise, including:




·
            the
                absence of an operating history;




·
            the
                lack of commercialized products;




·
            insufficient
                capital;




·
            expected
                substantial and continual losses for the foreseeable
                future;




·
            Limited
                experience in dealing with regulatory
                issues;





·
            Limited
                marketing and manufacturing
                experience;




·
            an
                expected reliance on third parties for the development and
                commercialization of some of our proposed
                products;




·
            a
                competitive environment characterized by numerous, well-established
                and
                well-capitalized competitors;




·
            uncertain
                market acceptance of our proposed products;
                and




·
            Reliance
                on key personnel.




Because
      we are subject to these risks, you may have a difficult time evaluating our
      business and your investment in our company.





*We
      may need to raise substantial additional capital to fund our operations, and
      our
      failure to obtain funding when needed* *would
      adversely affect our development programs and other operations.* **





Our
      operations have consumed substantial amounts of cash since inception. We expect
      to continue to spend substantial amounts to:





·
            complete
                the clinical development of C1-INH for the treatment of
                HAE;




15


·
              continue
                  the development of our other product
                  candidates;
  ·
              finance
                  our general, administrative and license acquisition
                  costs;
  ·
              prepare
                  regulatory approval applications and seek approvals for C1-1NH
                  and our
                  other product candidates;
  ·
              launch
                  and commercialize our product candidates, if any such product candidates
                  receive regulatory approval; and
  ·
              develop
                  and implement sales, marketing and distribution
                  capabilities.





Our
      cash
      used in operations increased significantly over the period from July 21, 2003
      (inception) to December 31, 2006 and we expect that our cash used in operations
      will increase significantly over the next several years. Based on our current
      levels of research and development and our business plan, we
      believe that our existing cash and cash equivalents (including the proceeds
      received from our recent private placement), payments for research and
      development services and other payments required to be made by our collaboration
      partners, if any, should be sufficient to fund our anticipated levels of
      operations through at least the end of 2007. We have based this estimate on
      various assumptions that may prove to be wrong. However, due to the foregoing
      factors, it is likely that we will need to raise additional
      capital to complete the development and commercialization of our current product
      candidates. Our future funding requirements will depend on many factors,
      including, but not limited to:





·
            the
                rate of progress and cost of our clinical trials and other development
                activities;·
            any
                future decisions we may make about the scope and prioritization of
                the
                programs we pursue;·
            the
                costs and timing of filing, prosecuting, defending and enforcing
                any
                patent claims and other intellectual property rights;·
            the
                timing of, and the costs involved in, obtaining regulatory
                approvals;·
            the
                costs of establishing sales, marketing and distribution
                capabilities;·
            the
                effect of competing technological and market
                developments;·
            ongoing
                determinations of the potential commercial success of our proposed
                products;·
            the
                costs involved in utilizing third party contract research organizations
                for preclinical studies and clinical trials;·
            the
                availability of third parties, and the cost, to manufacture compounds
                for
                clinical trial supply;·
            the
                terms and timing of any collaborative, licensing and other arrangements
                that we may establish;
              and·
            general
                market conditions for offerings from biopharmaceuticals
                companies.





To
      date,
      our sources of cash have been primarily limited to the sale of equity
      securities. We cannot be certain that additional funding will be available
      on
      acceptable terms, or at all. To the extent that we raise additional funds by
      issuing equity securities, our stockholders may experience significant dilution.
      Any debt financing, if available, may involve restrictive covenants that impact
      our ability to conduct our business. If we are unable to raise additional
      capital, when required, or on acceptable terms, we may have to significantly
      delay, scale back or discontinue the development and /or the commercialization
      of one or more of our product candidates. Accordingly,
      any failure to raise adequate capital in a timely manner would have a material
      adverse effect on our business, operating results, financial condition and
      future growth prospects. We
      also
      may be required to:




·
            seek
                collaborators for our product candidates at an earlier stage than
                otherwise would be desirable and on terms that are less favorable
                than
                might otherwise be available; and·
            relinquish,
                license or otherwise dispose of rights to technologies, on unfavorable
                terms, product candidates or products that we would otherwise seek
                to
                develop or commercialize ourselves.





*If
      either of our agreements with Sanquin terminate, we may be unable to continue
      our business.*




16





Our
      business is highly dependent on distribution and license rights that we have
      received from Sanquin pursuant to a distribution agreement relating to the
      treatment of HAE and a license agreement relating to the treatment of AMI.
      If we
      fail to fulfill certain obligations or fail to meet certain milestones under
      the
      distribution agreement, the distribution agreement may be terminated. These
      milestones include (a) submission of the BLA with the FDA within 12 months
      from
      the completion of the clinical trial, and (b) failure to obtain marketing
      approval in the United States within 18 months from the submission of the BLA.
      In addition, Sanquin has the right to terminate the agreement if it is unable
      to
      maintain liability insurance for its United States obligations, under certain
      circumstances as described in the distribution agreement. **** In
      addition, either party may terminate the agreement upon an uncured breach.
      If
      Sanquin terminates the distribution agreement, we would have to retain another
      supplier of C1-INH for the treatment of HAE. If we are unable to locate another
      supplier of C1-INH comparable to Sanquin on economically acceptable terms,
      or at
      all, we will not be able to commercialize our product candidates and we may
      be
      forced to cease our operations.





Under
      the
      license agreement, Sanquin granted us an exclusive license to use certain
      patent, patent applications and know-how related to the use of C1-INH technology
      for the treatment of AMI. Under the terms of the license agreement, we are
      obligated to make minimum and earned royalty and other payments to Sanquin.
      If
      we fail to fulfill those obligations or other material obligations, the license
      agreement may be terminated by Sanquin. If Sanquin terminates the license
      agreement, we will have no further rights to utilize the intellectual property
      covered by the license agreement, we would not be able to commercialize the
      applicable product candidate for the treatment of AMI and we may be forced
      to
      cease our operations relating to the treatment to AMI using C1-INH, particularly
      if we do not have rights to other product candidates.




*We
      are dependent on Sanquin as our sole source of supply for
      C1-1NH.*





Pursuant
      to our distribution agreement with Sanquin, Sanquin will supply us with certain
      annual minimum and maximum amounts of C1-INH. In the event demand for C-1NH
      is
      greater than the amount supplied by Sanquin, we would have to find alternative
      suppliers of C1-1NH. If we are unable to locate another supplier of C1-1NH
      comparable to Sanquin on economical terms, or at all, we may lose business
      and
      our reputation in the marketplace could be adversely affected.





**We
      rely on third parties to supply and manufacture our product candidates, without
      any direct control over the timing for the supply, production and delivery
      of
      our product candidates, thereby possibly adversely affecting any future
      revenues.**




We
      have relied exclusively and are dependent on certain third party source
      suppliers to supply raw materials, specifically plasma, for our product
      candidates. To date, we have only required plasma for the production of
      materials to conduct our clinical trials. However, if any of our product
      candidates receives the approval of the FDA we will need increased supplies
      of
      plasma in order to commercialize our products. We may need to obtain plasma
      from
      other parties in order to satisfy this potential need. Establishing additional
      or replacement suppliers for these materials may take a substantial amount
      of
      time. In addition, we may have difficulty obtaining similar supplies from other
      suppliers that are acceptable to the FDA. If we have to switch to a replacement
      supplier, we may face additional regulatory delays and the manufacture and
      delivery of our product candidates, could be interrupted for an extended period
      of time, which may delay completion of our clinical trials or commercialization
      of our product candidates. As a result, regulatory approval of our product
      candidates may not be received at all. All these delays could cause delays
      in
      commercialization of our product candidates, delays in our ability to generate
      revenue, and increase our costs.





If
      any of our product candidates receives the approval of the FDA we expect to
      rely
      on one or more third-party contractors to manufacture
      our commercial products. If any current or future third-party suppliers cease
      to
      supply the products in the quantity and quality we need to manufacture the
      drug
      candidates or if the current or future third-party suppliers are unable to
      comply with good manufacturing practice and other government regulations, the
      qualification of additional or replacement suppliers could be a lengthy process,
      and there may not be adequate alternatives to meet our needs, which would
      negatively affect our business. We may not be able to obtain the necessary
      materials used in our products in the future on a timely basis, if at all.
      The
      FDA and regulatory agencies in other countries also periodically inspect
      manufacturing facilities, including third parties who manufacture products
      or
      active ingredients for us. The FDA and/or applicable foreign regulatory agencies
      may not believe that the chosen manufacturers have sufficient experience making
      the dosage forms that we have contracted with them to produce, and may subject
      those manufacturers to increased scrutiny. Pharmaceutical manufacturing
      facilities must comply with applicable good manufacturing practice standards,
      and manufacturers usually must invest substantial funds, time and effort to
      ensure full compliance with these standards. We will not have control over
      our
      contract manufacturers’ compliance with these regulations and standards. Failure
      to comply with applicable regulatory requirements can result in sanctions,
      fines, delays or suspensions of approvals, seizures or recalls of products,
      operating restrictions, manufacturing interruptions, costly corrective actions,
      injunctions, adverse publicity against us and our products and possible criminal
      prosecutions.





17




*Our
      proposed products are in the development stages and will likely not be
      commercially introduced for one or more years, if at all.*




Our
      proposed products are in the development stages and will require further
      development, preclinical and clinical testing and investment prior to
      commercialization in the United States and abroad. We have not commercially
      introduced any products and do not expect to do so until 2008 at the earliest,
      depending upon the timing of our completion of clinical trials, our preparation
      and filing, and the FDA’s review, of our biologics license application for our
      proposed pr oducts .
      We
      cannot assure you that any of our proposed products will:




·
            be
                successfully developed;




·
            prove
                to be safe and efficacious in clinical
                trials;




·
            meet
                applicable regulatory standards or obtain required regulatory
                approvals;




·
            demonstrate
                substantial protective or therapeutic benefits in the prevention
                or
                treatment of any disease;




·
            be
                capable of being produced in commercial quantities at reasonable
                costs;




·
            obtain
                coverage and favorable reimbursement rates from insurers and other
                third-party payors; or




·
            be
                successfully marketed or achieve market acceptance by physicians
                and
                patients.




*Clinical
      trials involve a lengthy and expensive process with an uncertain outcome, and
      results of earlier studies and trials may not be predictive of future trial
      results.*





In
      order
      to receive regulatory approval for the commercialization of our product
      candidates, we must conduct, at our own expense, extensive clinical trials
      to
      demonstrate safety and efficacy of these product candidates. Clinical testing
      is
      expensive, can take many years to complete and its outcome is uncertain. Failure
      can occur at any time during the clinical trial process.




18





The
      results of preclinical studies and early clinical trials of our product
      candidates do not necessarily predict the results of later-stage clinical
      trials. Product candidates in later stages of clinical trials may fail to show
      the desired safety and efficacy traits despite having progressed through initial
      clinical testing. The data collected from clinical trials of our product
      candidates may not be sufficient to support the submission of a biologics
      license application to the FDA or to obtain regulatory approval in the United
      States or elsewhere. Because of the uncertainties associated with drug
      development and regulatory approval, we cannot determine if or when we will
      have
      an approved product for commercialization or achieve sales or
      profits.





*Delays
      in clinical testing could result in increased cost to us and delay our ability
      to generate revenue.*





We
      may
      experience delays in clinical testing of our product candidates. We do not
      know
      whether planned clinical trials will need to be redesigned or will be completed
      on schedule, if at all. Clinical trials can be delayed for a variety of reasons,
      including delays in obtaining regulatory approval to commence a trial, in
      reaching agreement on acceptable clinical trial terms with prospective sites,
      in
      obtaining institutional review board approval to conduct a trial at a
      prospective site, in recruiting patients to participate in a trial or in
      obtaining sufficient supplies of clinical trial materials. Many factors affect
      patient enrollments, including the size of the patient population, the proximity
      of patients to clinical sites, the eligibility criteria for the trial, competing
      clinical trials and new drugs approved for the conditions we are investigating.
      Prescribing physicians will also have to decide to use our product candidates
      over existing drugs that have established safety and efficacy profiles. Any
      delays in completing our clinical trials will increase our cost, slow down
      our
      product development and approval process and delay our ability to generate
      revenue.





*We
      may be required to suspend or discontinue clinical trials due to unexpected
      side
      effects or other safety risks that could preclude approval of our product
      candidates.*





Our
      clinical trials may be suspended at any time for a number of reasons. For
      example, we may voluntarily suspend or terminate our clinical trials if at
      any
      time we believe that they present an unacceptable risk to the clinical trial
      patients. In addition, regulatory agencies may order the temporary or permanent
      discontinuation of our clinical trials at any time if they believe that the
      clinical trials are not being conducted in accordance with requirements or
      that
      they present an unacceptable safety risk to the clinical trial
      patients.





Administering
      any product candidates to humans may produce undesirable side effects. These
      side effects could interrupt, delay or halt clinical trials of our product
      candidates and could result in the FDA or other regulatory authorities denying
      further developments or approval of our product candidates for any or all
      targeted indications. Ultimately, some or all of our product candidates may
      prove to be unsafe for human use. Moreover, we could be subject to significant
      liability if any volunteer or patient suffers, or appears to suffer, adverse
      health effects as a result of participating in our clinical trials.





*If
      we
      are unable to satisfy regulatory requirements, we may not be able to
      commercialize our product candidates.*





We
      need
      FDA approval prior to marketing our product candidates in the United States.
      If
      we fail to obtain FDA approval to market our product candidates, we will be
      unable to sell our products in the United States and we will not generate any
      revenue.





The
      FDA
      regulatory review and approval process, which includes evaluation of preclinical
      studies and clinical trials of a product candidate as well as the evaluation
      of
      our manufacturing process and our contract manufacturers’ facilities, is
      lengthy, expensive and uncertain. To receive approval, we must, among other
      things, demonstrate with substantial evidence from well-controlled clinical
      trials that the product is both safe and effective for each indication where
      approval is sought. Satisfaction of these requirements typically takes several
      years and the time needed to satisfy them may vary substantially, based on
      the
      type, complexity and novelty of the pharmaceutical product. We cannot predict
      if
      or when we might submit for regulatory review any of our product candidates
      currently under development. Any approvals we may obtain may not cover all
      of
      the clinical indications for which we are seeking approval. Also, an approval
      might contain significant limitations in the form of narrow indications,
      warnings, precautions, or contra-indications with respect to conditions of
      use.




19





The
      FDA
      has substantial discretion in the approval process and may either refuse to
      file
      our application for substantive review or may form the opinion after review
      of
      our data that our application is insufficient to allow approval of our product
      candidates. If the FDA does not file or approve our application, it may require
      that we conduct additional clinical, preclinical or manufacturing validation
      studies and submit that data before it will reconsider our application.
      Depending on the extent of these or any other studies, approval of any
      applications that we submit may be delayed by several years or may require
      us to
      expend more resources than we have available. It is also possible that
      additional studies, if performed and completed, may not be considered sufficient
      by the FDA to make our application approvable. If any of these outcomes occur,
      we may be forced to abandon our applications for approvals, which might cause
      us
      to cease operations.





We
      will
      also be subject to a wide variety of foreign regulations governing the
      development, manufacture and marketing of our products. Whether or not FDA
      approval has been obtained, approval of a product by the comparable regulatory
      authorities of foreign countries must still be obtained prior to manufacturing
      or marketing the product in those countries. The approval process varies from
      country to country and the time needed to secure approval may be longer or
      shorter than that required for FDA approval. We cannot assure you that clinical
      trials conducted in one country will be accepted by other countries or that
      approval in one country will result in approval in any other
      country.





*The
      commercial success of our product candidates will depend upon the degree of
      market acceptance of these products among physicians, patients, health care
      payors and the medical community.*





Our
      product candidates have never been commercialized in the United States for
      any
      indication. Even if approved for sale by the appropriate regulatory authorities,
      physicians may not prescribe our product candidates, in which case we could
      not
      generate revenue or become profitable. Market acceptance of C1-INH for the
      treatment of HAE and our other product candidates by physicians, healthcare
      payors and patients will depend on a number of factors, including:


·
              acceptance
                  by physicians and patients of each such product as a safe and effective
                  treatment;
 
 ·
              cost
                  effectiveness;
 
 ·
              adequate
                  reimbursement by third parties;
 
 ·
              potential
                  advantages over alternative
                  treatments;
 
 ·
              Relative
                  convenience and ease of administration;
                  and
 
 ·
              prevalence
                  and severity of side effects.





*If
      our product candidates are unable to compete effectively with marketed
      treatments, our commercial opportunity will be reduced or
      eliminated* .





We
      face
      competition from established pharmaceutical and biotechnology companies, as
      well
      as from academic institutions, government agencies and private and public
      research institutions. Many products are either under development or are
      currently marketed for the treatment of HAE and AMI. Many of our competitors
      have significantly greater financial resources and expertise in research and
      development, manufacturing, preclinical testing, conducting clinical trials,
      obtaining regulatory approvals and marketing approved products than we do.
      Smaller or early-stage companies may also prove to be significant competitors,
      particularly through collaborative arrangements with large, established
      companies. Our commercial opportunity will be reduced or eliminated if our
      competitors develop and commercialize competing products that are safer, more
      effective, have fewer side effects or are less expensive than our product
      candidates. These third parties compete with us in recruiting and retaining
      qualified scientific and management personnel, establishing clinical trial
      sites
      and patient registration for clinical trials, as well as in acquiring
      technologies and technology licenses complementary to our programs or
      advantageous to our business. Because we will most often be competing against
      significantly larger companies with established track records, we will have
      to
      demonstrate to physicians that based on experience, clinical data, side-effect
      profiles and other factors, our products are preferable to existing products.
      If
      we are unable to compete effectively and differentiate our products from
      currently marketed products, we may never generate meaningful
      revenue.





20


*If
      we
      are not first to market for our HAE product, the Orphan Drug Act may provide
      a
      competitor with up to seven years of market exclusivity.*





The
      Orphan Drug Act was created to encourage companies to develop therapies for
      rare
      diseases by providing incentives for drug development and commercialization.
      One
      of the incentives provided by the act is seven years of market exclusivity
      for
      the first product in a class licensed for the treatment of a rare disease.
      HAE
      is considered to be a rare disease under the Orphan Drug Act, and companies
      may
      obtain orphan drug status for therapies that are developed for this indication.
      We believe CSL Behring and Pharming NV are currently developing products that
      the FDA may determine to be in the same class as our C1-INH product candidate.
      In the event that either of these companies are first to obtain FDA licensure
      for their product, we could be prevented from obtaining licensure and marketing
      our C1-INH product candidate for the treatment of HAE.





*We
      currently have a very limited sales and marketing organization. If we are unable
      to establish a direct sales force or we are unable to enter into marketing
      agreements with third parties in the United States to promote our products,
      the
      commercial opportunity for our products may be diminished.*





We
      currently have a very limited sales and marketing organization. If any of our
      product candidates are approved by the FDA, we intend to market these products
      directly to health care providers in the United States through our own sales
      force or enter into marketing agreements with third parties. We will incur
      significant additional expenses and may need to commit significant additional
      management resources to promote and sell our products. In the event we are
      unable to develop our own sales force or collaborate with a third party to
      sell
      our product candidates, we may not be able to commercialize our product
      candidates, which would negatively impact our ability to generate
      revenue.





*If
      the FDA does not approve our contract manufacturers’ facilities, we may be
      unable to develop or commercialize our product candidates.*





We
      rely
      on Sanquin to manufacture our product candidates, and currently have no plans
      to
      develop our own manufacturing facility. The facilities used by Sanquin to
      manufacture our product candidates will require approval by the FDA. There
      can
      be no assurance that Sanquin will be able to obtain or maintain compliance
      with
      the FDA’s requirements. We may need to find alternative manufacturing
      facilities, which would result in significant costs to us as well as a delay
      of
      up to several years in obtaining approval for and manufacturing of our product
      candidates.




21




*We
      rely on third parties to conduct our clinical trials. If these third parties
      do
      not successfully carry out their contractual duties or meet expected deadlines,
      we may not be able to seek or obtain regulatory approval for or commercialize
      our product candidates.*





We
      have
      an agreement with a third party clinical research organization, or CRO, to
      implement, provide monitors and manage data for our clinical programs. We and
      our CRO are required to comply with current Good Clinical Practices, or GCPs,
      regulations and guidelines enforced by the FDA for all of our products in
      clinical development. The FDA enforces GCPs through periodic inspections of
      trial sponsors, principal investigators and trial sites. In the future, if
      we or
      our CRO fails to comply with applicable GCPs, the clinical data generated in
      our
      clinical trials may be deemed unreliable and the FDA may require us to perform
      additional clinical trials before approving our marketing applications. We
      cannot assure you that, upon inspection, the FDA will determine that any of
      our
      clinical trials for products in clinical development comply with GCPs. In
      addition, our clinical trials must be conducted with products produced under
      current Good Manufacturing Practices, or cGMP regulations, and will require
      a
      large number of test subjects. Our failure to comply with these regulations
      may
      require us to repeat clinical trials, which would delay the regulatory approval
      process.





If
      any of
      our current or future relationships with these third-party CROs terminate,
      we
      may not be able to enter into arrangements with alternative CROs. If CROs do
      not
      successfully carry out their contractual duties or obligations or meet expected
      deadlines, if they need to be replaced, or if the quality or accuracy of the
      clinical data they obtain is compromised due to the failure to adhere to our
      clinical protocols, regulatory requirements or for other reasons, our clinical
      trials may be extended, delayed or terminated, and we may not be able to obtain
      regulatory approval for or successfully commercialize our product candidates.
      As
      a result, our financial results and the commercial prospects for our product
      candidates would be harmed, our costs could increase, and our ability to
      generate revenue could be delayed.





*If
      product liability lawsuits are successfully brought against us, we may incur
      substantial liabilities and may be required to limit commercialization of our
      product candidates.*





We
      face
      an inherent risk of product liability lawsuits related to the testing of our
      product candidates, and will face an even greater risk if we sell our products
      commercially. Currently, we are not aware of any anticipated product liability
      claims with respect to our product candidates. In the future, an individual
      may
      bring a liability claim against us if one of our product candidates causes,
      or
      merely appears to have caused, an injury. If we cannot successfully defend
      ourself against the product liability claim, we may incur substantial
      liabilities. We have clinical trial liability insurance that covers our clinical
      trials with an annual aggregate limit of $5,000,000. We intend to expand our
      insurance coverage to include the sale of commercial products if marketing
      approval is obtained for our product candidates. We believe that we will be
      able
      to procure sufficient insurance coverage for our proposed clinical development
      activities. However, as enrollment in our clinical trials increases and we
      initiate additional clinical trials, such insurance coverage may prove
      insufficient to cover any liability claims brought against us. In addition,
      because of the increasing costs of insurance coverage, we may not be able to
      maintain insurance coverage at a reasonable cost or obtain insurance coverage
      that will be adequate to satisfy any liability that may arise.





*Even
      if we receive regulatory approval for our product candidates, we will be subject
      to ongoing significant regulatory obligations and oversight.*





If
      we
      receive regulatory approval to sell our product candidates, the FDA and foreign
      regulatory authorities may, nevertheless, impose significant restrictions on
      the
      indicated uses or marketing of such products, or impose ongoing requirements
      for
      post-approval studies. If we fail to comply with applicable regulatory
      requirements, we may be subject to fines, suspension or withdrawal of regulatory
      approvals, product recalls, seizure of products, operating restrictions and
      criminal prosecution. Any of these events could harm or prevent sales of the
      affected products or could substantially increase the costs and expenses of
      commercializing and marketing these products.




22





*If
      we
      fail to attract and keep senior management and key scientific personnel, we
      may
      be unable to successfully develop our product candidates, conduct our clinical
      trials and commercialize our product candidates.*





Our
      success depends in part on our continued ability to attract, retain and motivate
      highly qualified management, clinical and scientific personnel and on our
      ability to develop and maintain important relationships with leading academic
      institutions, clinicians and scientists. We are highly dependent upon our senior
      management, particularly Judson Cooper, our Chairman and Executive Vice
      President, and Joshua D. Schein, Ph.D., our Chief Executive Officer. The loss
      of
      services of Mr. Cooper or Dr. Schein, or one or more other members of senior
      management could delay or prevent the successful completion of our planned
      clinical trials or the commercialization of our product candidates.





*We
      will need to increase the size of our organization, and we may experience
      difficulties in managing growth.*





We
      are a
      small company with 17 employees as of March 15, 2007. To continue our clinical
      trials and commercialize our product candidates, we will need to expand our
      employee base for managerial, operational, financial and other resources. Future
      growth will impose significant added responsibilities on members of management,
      including the need to identify, recruit, maintain and integrate additional
      employees. Our future financial performance and our ability to commercialize
      our
      product candidates and to compete effectively will depend, in part, on our
      ability to manage any future growth effectively.





*Reimbursement
      may not be available for our product candidates, including due to legislative
      or
      regulatory reform of the healthcare system, which could diminish our sales
      or
      affect our ability to sell our products profitably.*





As
      a
      result of legislative proposals and the trend towards managed healthcare in
      the
      United States, third-party payers are increasingly attempting to contain health
      care costs by limiting both coverage and the level of reimbursement for new
      drugs. Market acceptance and sales of our product candidates will depend on
      reimbursement policies and healthcare reform measures. The levels at which
      government authorities and third-party payers, such as private health insurers
      and health maintenance organizations, reimburse patients for the price they
      pay
      for our products will affect whether we are able to commercialize these
      products. We cannot be sure that reimbursement will be available for any of
      these products. Also, we cannot be sure that reimbursement amounts will not
      reduce the demand for, or the price of, our products. We have not commenced
      efforts to have our product candidates reimbursed by government or third party
      payers. If reimbursement is not available or is available only to limited
      levels, we may not be able to commercialize our products.





*Rapid
      technological change could make our product candidates
      obsolete.*





Biopharmaceutical
      technologies have undergone rapid and significant change and we expect that
      they
      will continue to do so. Any compounds, products or processes that we develop
      may
      become obsolete or uneconomical before we recover any expenses incurred in
      connection with their development. Rapid technological change could make our
      products obsolete or uneconomical.





*Compliance
      with the Sarbanes-Oxley Act of 2002 will result in increased expenditures.*





We
      are
      exposed to significant costs and risks associated with complying with
      increasingly stringent and complex regulation of corporate governance and
      disclosure standards. Changing laws, regulations and standards relating to
      corporate governance and public disclosure, including the Sarbanes-Oxley Act
      of
      2002 and new SEC regulations require a growing expenditure of management time
      and external resources. In particular, Section 404 of the Sarbanes-Oxley
      Act of 2002 requires management’s annual review and evaluation of our internal
      controls, and attestations of the effectiveness of our internal controls by
      our
      independent auditors. Under current law, the internal controls certification
      and
      attestation requirements of Section 404 of the Sarbanes-Oxley act will not
      apply
      to us until the fiscal years ended December 31, 2007 and 2008,
      respectively. Accordingly, management has begun reviewing our internal control
      procedures to facilitate compliance with those requirements when they become
      applicable. This process could result in our needing to implement measures
      to
      improve our internal controls. Any failure by us to maintain effective internal
      controls could have a material adverse effect on our business, operating results
      and stock price. This process may also require us to hire additional personnel
      and outside advisory services and will result in significant accounting and
      legal expenses. We expect to incur significant expense in future periods to
      comply with regulations pertaining to corporate governance and internal controls
      as described above.




23





*We
      have a significant amount of net operating loss and credit carryforwards the
      use
      of which may be limited in certain circumstances.*





As
      of
      December 31, 2006, we have available, for tax purposes, unused net
      operating loss carryforwards of approximately $8,993,000 that expire from 2023
      to 2026. We also have approximately $525,000 of research and development credits
      that expire from 2024 to 2026. Pursuant to Sections 382 and 383 of the
      Internal Revenue Code, annual use of our net operating loss and credit
      carryforwards prior to August 23, 2004 is limited due to a cumulative change
      in
      ownership of more than 50% that occurred within a three-year period. In the
      event we achieve profitable operations, any significant limitation on the
      utilization of net operating loss and credit carryforwards would have the effect
      of increasing our current tax liability.





**Risks
      related to our intellectual property**





*It
      is
      difficult and costly to protect our proprietary rights, and we may not be able
      to ensure their protection.*





Our
      commercial success will depend in part on obtaining and maintaining patent
      protection and trade secret protection of our product candidates and the methods
      used to manufacture them, as well as successfully defending these patents
      against third party challenges. We will only be able to protect our product
      candidates from unauthorized making, using, selling, and offering to sell or
      importation by third parties to the extent that we have rights under valid
      and
      enforceable patents or trade secrets that cover these activities.





The
      patent position of pharmaceutical and biotechnology companies can be highly
      uncertain and involve complex legal and factual questions for which important
      legal principles remain unresolved. No consistent policy regarding the breadth
      of claims allowed in biotechnology patents has emerged to date in the United
      States. The biotechnology patent situation outside the United States is even
      more uncertain. Changes in either the patent laws or interpretations of patent
      laws in the United States and other countries may diminish the value of our
      intellectual property. Accordingly, we cannot predict the breadth of claims
      that
      may be allowed or enforced in our licensed patents or in third-party
      patents.





The
      degree of future protection for our proprietary rights is uncertain because
      legal means afford only limited protection and may not adequately protect our
      rights or permit us to gain or keep our competitive advantage. For
      example:




24





·
            others
                may be able to make compounds that are competitive with our product
                candidates but that are not covered by the claims of our licensed
                patents,
                or for which we are not licensed under our license
                agreements;·
            we
                or our licensor might not have been the first to make the invention
                covered by our future pending patent applications, if any, or the
                pending
                patent applications and issued patents of our
                licensors;·
            we
                or our licensor might not have been the first to file patent applications
                for these inventions;·
            others
                may independently develop similar or alternative technologies or
                duplicate
                any of our technologies;·
            it
                is possible that our pending patent applications, if any, or one
                or more
                of the pending patent applications of our licensor, will not result
                in
                issued patents;·
            the
                issued patents of our licensor may not provide us with any competitive
                advantage, or may be held invalid or unenforceable as a result of
                legal
                challenges by third parties;·
            we
                may not develop additional proprietary technologies that are patentable;
                or·
            the
                patents of others may have an adverse effect on our
                business.





We
      also
      may rely on trade secrets to protect our technology, especially where we do
      not
      believe patent protection is appropriate or obtainable. However, trade secrets
      are difficult to protect. While we use reasonable efforts to protect our trade
      secrets, our employees, consultants, contractors, outside scientific
      collaborators and other advisors may unintentionally or willfully disclose
      our
      information to competitors. **** Enforcing
      a claim that a third party illegally obtained and is using our trade secrets
      is
      expensive and time-consuming and the outcome is unpredictable. In addition,
      courts outside the United States are sometimes less willing to protect trade
      secrets. Moreover, our competitors may independently develop equivalent
      knowledge, methods, and know-how.





*We
      may incur substantial costs as a result of litigation or other proceedings
      relating to patent and other intellectual property rights and we may be unable
      to protect our rights or use our technology.*





If
      we
      pursue litigation to stop someone else from using the inventions claimed in
      our
      owned or licensed patents or the patents issuing from a licensed application,
      that individual or company has the right to ask the court to rule that these
      patents are invalid and/or should not be enforced. These lawsuits are expensive
      and would consume time and other resources even if we were successful in
      stopping the infringement of these patents. In addition, there is a risk that
      the court will decide that these patents are not valid and that we do not have
      the right to stop the other party from using the inventions. There is also
      the
      risk that even if the validity of these patents is upheld, the court will refuse
      to stop the other party on the ground that such other party’s activities do not
      infringe our rights in these patents.





Furthermore,
      a third party may claim that we are using inventions covered by the third
      party’s patent rights and may go to court to stop us from engaging in our normal
      operations and activities, including making or selling our products. These
      lawsuits are costly and could affect our results of operations and divert the
      attention of managerial and technical personnel. There is a risk that a court
      would decide that we are infringing the third party’s patents and would order us
      to cease engaging in activities judged to be covered by the patents. In
      addition, there is a risk that a court will order us to pay the other party
      damages for having violated the other party’s patents. The biotechnology
      industry has produced a proliferation of patents, and it is not always clear
      to
      industry participants, including us, which patents cover various types of
      products or methods of use. The coverage of patents is subject to interpretation
      by the courts, and the interpretation is not always uniform. If we are sued
      for
      patent infringement, we would need to demonstrate that our products or methods
      of use either do not infringe the patent claims of the relevant patent and/or
      that the patent claims are invalid and/or unenforceable, and we may not be
      able
      to do this. Proving invalidity and/or unenforceability is difficult since it
      requires a showing of clear and convincing evidence to overcome the presumption
      of validity enjoyed by issued patents.




25




Because
      some patent applications in the United States may be maintained in secrecy
      until
      the patents are issued, because patent applications in the United States and
      many foreign jurisdictions are typically not published until eighteen months
      after filing and because publications in the scientific literature often lag
      behind actual discoveries, we cannot be certain that others have not filed
      patent applications for technology covered by our licensors’ issued patents or
      patents issued from a licensed application or our licensors’ pending
      applications or that we or our licensors were the first to invent the
      technology. Our competitors may have filed, and may in the future file, patent
      applications covering technology similar to ours. Any such patent application
      may have priority over our licensors’ patent applications and could further
      require us to obtain rights to issued patents covering such technologies. If
      another party has filed a United States patent application on inventions similar
      to ours, we may have to participate in an interference proceeding declared
      by
      the United States Patent and Trademark Office to determine priority of
      inventions in the United States. The cost of these proceedings would be
      substantial, and it is possible that such efforts would be unsuccessful,
      resulting in a loss of our United States patent position with respect to such
      inventions.





Some
      of
      our competitors may be able to sustain the costs of complex patent litigation
      more effectively than we can because they have substantially greater resources.
      In addition, any uncertainties resulting from the initiation and continuation
      of
      any litigation could have a material adverse effect on our ability to raise
      the
      funds necessary to continue our operations.





**Risks
      Relating to our Securities**





*As
      a
      result of the shares issued in our recent private placement, the number of
      shares of our common stock outstanding has increased substantially and certain
      purchasers beneficially own significant blocks of our common stock and these
      shares are generally available for resale in the public market.*





Upon
      the
      closing of the private placement in October 2006, we issued to a small
      group of institutional and other accredited investors an aggregate of 32,307,693
      shares of common stock, plus warrants to purchase an aggregate of 9,692,308
      additional shares of common stock. The issuance of these shares and warrants
      resulted in substantial dilution to stockholders who held our common stock
      prior
      to the private placement. Under the purchase agreement for the private
      placement, we agreed to file a registration statements with the SEC covering
      the
      resale of the all of the shares of common stock issued or to be issued in the
      private placement, including the shares of common stock issuable upon exercise
      of the warrants. We have also granted to the purchasers piggyback rights to
      participate in any company registration, subject to certain limitations. This
      registration statement was declared effective by the SEC on December 11, 2006
      and these shares are presently generally available for immediate resale in
      the
      public market. The market price of our common stock could fall due to an
      increase in the number of shares available for sale in the public market.





*If
      we
      do not maintain effectiveness of the registration statements covering the resale
      of the shares issued in our private placements, we may be required to pay
      certain liquidated damages to the investors.*




Pursuant
      to the registration rights agreements we entered into with the investors in
      our
      private placements, we have caused registration statements to be filed with
      the
      Securities and Exchange Commission to permit the resale of the shares of common
      stock issued or which may be issued to these investors and we agreed to maintain
      effectiveness of such registration statements for at least two years. Monitoring
      an effective registration statement requires substantial continuing expenses
      for
      legal and accounting fees. In addition, if we are unable to maintain the
      effectiveness of the registration statements required by these registration
      rights agreements for the period of time required by such agreements, the
      investors would be entitled to liquidated damages in accordance with the
      provisions of such registration rights agreements. There can be no assurance
      that any of our registration statements will remain current and effective for
      the required period .




26





*Market
      volatility may affect our stock and the value of your
      investment.*





The
      market prices for securities of biopharmaceutical companies in general have
      been
      highly volatile and may continue to be highly volatile in the future. The
      following factors, in addition to other risk factors described in this section,
      may have a significant impact on the market price of our common
      stock:





·
            announcements
                of technological innovations or new products by us or our
                competitors;·
            announcements
                of FDA approval or non-approval of our product candidates or delays
                in the
                FDA review process;·
            actions
                taken by regulatory agencies with respect to our product candidates,
                clinical trials, manufacturing process or sales and marketing
                activities;·
            regulatory
                developments in the United States and foreign
                countries;·
            the
                success of our development efforts to acquire or in-license additional
                products or product candidates;·
            any
                intellectual property infringement action, or any other litigation,
                involving us;·
            non-issuance
                of patents on our, or our licensors’, pending patent applications, or
                invalidation of our, or our licensors’, patents or other intellectual
                property rights;·
            announcements
                concerning our competitors, or the biotechnology or biopharmaceutical
                industries in general;·
            actual
                or anticipated fluctuations in our operating results;·
            changes
                in financial estimates or recommendations by securities
                analysts;·
            sales
                of large blocks of our common stock;·
            sales
                of our common stock by our executive officers, directors and significant
                stockholders; and·
            the
                loss of any of our key scientific or management
                personnel.





The
      occurrence of one or more of these factors may cause our stock price to decline,
      and you may not be able to resell your shares at or above the price you paid
      for
      your shares. In addition, the stock market in general, and the markets for
      biotechnology and biopharmaceutical stocks in particular, have experienced
      extreme volatility that has often been unrelated to the operating performance
      of
      particular companies. These broad market conditions may adversely affect the
      trading price of our common stock.





*We
      are at risk of securities class action litigation.*





In
      the
      past, securities class action litigation has often been brought against a
      company following a decline in the market price of its securities. This risk
      is
      especially relevant for us because biotechnology and biopharmaceutical stocks
      have experienced significant stock price volatility in recent years. If we
      faced
      such litigation, it could result in substantial costs and a diversion of
      management’s attention and resources, which could harm our
      business.





*The
      ownership interests of our officers and directors could conflict with the
      interests of our other stockholders.*





As
      of
      March 1, 2007, our officers and directors beneficially own approximately
      27.5% of our common stock. As a result, these stockholders, acting together,
      will be able to significantly influence all matters requiring approval by our
      stockholders, including the election of directors and the approval of mergers
      or
      other business combination transactions. The interests of this group of
      stockholders may not always coincide with our interests or the interests of
      other stockholders.




27





*Because
      our common stock is a “penny stock” there may be a limited trading
      market.*





Our
      common stock is currently listed for trading on the OTC Bulletin Board which
      is
      generally considered to be a less efficient market than markets such as NASDAQ
      or other national exchanges, and which may cause difficulty in obtaining future
      financing. Further, our securities are subject to the “penny stock rules”
adopted pursuant to Section 15(g) of the Securities Exchange Act of the 1934,
      as
      amended, or Exchange Act. The penny stock rules apply to non-NASDAQ companies
      whose common stock trades at less than $5.00 per share or which have a tangible
      net worth less then $5,000,000 ($2,000,000 if the company has been operating
      for
      three or more years). Such rules require, among other things, that brokers
      who
      trade “penny stock” to persons other than “established customers” complete
      certain documentation, make suitable inquiries of investors and provide
      investors with certain information concerning trading in the security, including
      a risk disclosure document and quote information under certain circumstances.
      Many brokers have decided not to trade “penny stock” because of the requirements
      of the penny stock rules and, as a result, the number of broker-dealers willing
      to act as market makers in such securities is limited. In the event that we
      remain subject to the penny stock rules for any significant period, there may
      develop an adverse impact on the market, if any, for our securities. Because
      our
      securities are subject to the penny stock rules, investors will find it more
      difficult to dispose of our securities. Further, for companies whose securities
      are traded on the OTC Bulletin Board, it is more difficult: (i) to obtain
      accurate quotations, (ii) to obtain coverage for significant new events because
      major wire services, such as the Dow Jones News Service, generally do not
      publish press releases about such companies, and (iii) to obtain needed
      capital.





*A
      sale of a substantial number of shares of our common stock may cause the price
      of our common stock to decline.*





If
      our
      stockholders sell substantial amounts of our common stock in the public market,
      the market price of our common stock could fall. These sales also may make
      it
      more difficult for us to sell equity or equity-related securities in the future
      at a time and price that we deem reasonable or appropriate. As of March 1,
      2007,
      there were approximately 86,663,280 shares of restricted common stock
      outstanding that may be eligible for sale pursuant to Rule 144 under the
      Securities Act of 1933. Rule
      144
      provides, that, in general, a person holding restricted securities for a period
      of one year may, every three months thereafter, sell in brokerage transactions
      an amount of shares which does not exceed the greater of one percent of our
      then
      outstanding common stock or the average weekly trading volume of the common
      stock during the four calendar weeks prior to such sale. Rule 144 also permits,
      under certain circumstances, the sale of shares without any quantity limitations
      by a person who is not an affiliate of ours and was not an affiliate at any
      time
      during the 90 day period prior to sale and who has satisfied a two year holding
      period. Sales of our common stock by certain present stockholders under Rule
      144
      may, in the future, have a depressive effect on the market price of our
      securities. In addition, the sale of shares by officers and directors and other
      affiliated shareholders may also have a depressive effect on the market for
      our
      securities.




*Because
      we do not intend to pay dividends, you will benefit from an investment in our
      common stock only if it appreciates in value.*





We
      have
      paid no cash dividends on any of our capital stock to date, and we currently
      intend to retain our future earnings, if any, to fund the development and growth
      of our business. As a result, we do not expect to pay any cash dividends in
      the
      foreseeable future. The success of your investment in our common stock will
      likely depend entirely upon any future appreciation. There is no guarantee
      that
      our common stock will appreciate in value or even maintain the price at which
      you purchased your shares.




28





*Provisions
      in our charter documents and Delaware law could discourage or prevent a
      takeover, even if an acquisition would be beneficial to our
      stockholders.*




Provisions
      of our certificate of incorporation and bylaws, as well as provisions of
      Delaware law, could make it more difficult for a third party to acquire us,
      even
      if doing so would be beneficial to our stockholders. These provisions
      include:




·
            authorizing
                the issuance of “blank check” preferred that could be issued by our Board
                of Directors to increase the number of outstanding shares and thwart
                a
                takeover attempt;





·
            prohibiting
                cumulative voting in the election of directors, which would otherwise
                allow less than a majority of stockholders to elect director candidates;
                and




·
            advance
                notice provisions in connection with stockholder proposals that may
                prevent or hinder any attempt by our stockholders to bring business
                to be
                considered by our stockholders at a meeting or replace our board
                of
                directors.




*Exercise
      of outstanding options and warrants will dilute stockholders and could decrease
      the market price of our common stock.*




As
      of
      March 23, 2007, we had issued and outstanding options and warrants to purchase
      an aggregate of 25,125,872 additional shares of common stock, including the
      warrants issued in our recent private placement. To the extent that these
      securities are exercised or converted, dilution to our shareholders will occur.
      The exercise of these securities by the holders could existence of the
      outstanding options and warrants may adversely affect the market price of our
      common stock and the terms under which we could obtain additional equity
      capital.





**ITEM
      2. DESCRIPTION OF PROPERTY**





On
      December 20, 2006, we entered into a lease office space at 675 Third Avenue,
      Suite 2200, New York, NY 10017, for approximately 3,400 square feet to serve
      as
      or principal executive offices. This lease commenced in February 2007 and
      expires in March 2012. Our rent obligation for this lease is $15,556 per
      month. In
      addition, in September, 2006, we entered into a twelve month lease for
      approximately 3,100 square feet of office space in the metropolitan
      Philadelphia, Pennsylvania area. Our rent obligation for this lease is $4,458
      per month. We believe that our office space is adequate for our current needs
      and for the next few years, and we expect that additional facilities will be
      available in other locations to the extent that we require new or additional
      space.





**ITEM
      3. LEGAL PROCEEDINGS**




We
      are
      not currently a party to, nor is any of our property currently the subject
      of,
      any pending legal proceeding. None of our directors, officers or affiliates
      is
      involved in a proceeding that is adverse to our business and none of our
      directors, officers or affiliates has a material interest adverse to our
      business.




**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**





Not
      applicable





29




**PART
      II.**





**ITEM
      5** . **MARKET
      FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**





Our
      common stock has traded on the OTC Bulletin Board under the symbol “LEVP.OB”
since February 18, 2005. From April 10, 2002 to February 17, 2005 our common
      stock had been quoted on the OTC Bulletin Board under our prior name “Fun City
      Popcorn, Inc.” under the symbol “FNCY.”





As
      of
      March 1, 2007, there were 616 holders of record. This does not reflect those
      shares held beneficially or those shares held in “street” name.





The
      table
      below sets forth the high and low bid prices per share of the common stock
      for
      each full quarterly period in the last two fiscal years and the year to date
      as
      reported on the OTC Bulletin Board. These prices reflect inter-dealer prices,
      without retail mark-up, markdown or commissions and may not represent actual
      transactions. No prediction can be made as to the effect, if any, that future
      sales of shares of our common stock or the availability of our common stock
      for
      future sale will have on the market price of our common stock prevailing from
      time-to-time.





Quarter
                Ended
            
            High
            
            LowDecember
                31, 2006
            
            $
            1.36
            
            $
            0.71September
                30, 2006
            
            $
            0.90
            
            $
            0.43June
                30, 2006
            
            $
            0.67
            
            $
            0.30March
                31, 2006
            
            $
            0.80
            
            $
            .0.60December
                31, 2005
            
            $
            0.82
            
            $
            0.37September
                30, 2005
            
            $
            1.20
            
            $
            0.57June
                30, 2005
            
            $
            1.50
            
            $
            0.56March
                31, 2005
            
            $
            1.70
            
            $
            1.01





On
      March
      1, 2007, the last reported sale price for the common stock on the OTC Bulletin
      Board was $1.85 per share.





**Dividend
      Policy**





It
      is our
      present policy not to pay cash dividends and to retain future earnings to
      support our growth. We do not anticipate paying any cash dividends in the
      foreseeable future.





**Recent
      Issuances of Unregistered Securities**





During
      the fiscal year ended December 31, 2006, we did not issue any securities
      that were not registered under the Securities Act of 1933, as amended (the
      “Securities Act”) except as disclosed in previous SEC filings. Issuances of
      unregistered equity securities during the current fiscal year are disclosed
      in
      Item 8B of this Annual Report.




30


**Equity
        Compensation Plan Information**


The
      following table shows information with respect to each equity compensation
      plan
      under which our common stock is authorized for issuance as of the fiscal year
      ended December 31, 2006.




Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights
            
            Weighted-average
                exercise price of outstanding options, warrants and rights
            
            Number
                of securities remaining available for future issuance under equity
                compensation plans(excluding securities reflected in column
                (a))(a)
            
            (b)
            
            (c)Equity
                compensation plansapproved
                by security holders
            
            
            5,594,900
            
            $
            0.50
            (1)
            
            4,405,100Equity
                compensation plans not approved by security holders
            
            
            436,341
            (2)
            $
            0.65
            
            
            -N/A-Total
            
            
            6,031,241
            
            $
            0.51
            
            
            4,405,100







(1) The
      weighted-average exercise price information has been adjusted for the repricing,
      from $0.85 to $0.30 per share, of options to purchase 2,854,900 shares during
      2005, see Note I to the Consolidated Financial Statements.





(2)
      Represents warrants to purchase shares of common stock issued to consultants
      for
      services.





31


**ITEM
      6** **.
      MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**





The
      following discussion should be read in conjunction with our financial statements
      and other financial information appearing elsewhere in this Form 10-KSB. In
      addition to historical information, the following discussion and other parts
      of
      this Form 10-KSB contain forward-looking information that involves risks and
      uncertainties.




**Overview**





We
      are a
      development stage biopharmaceutical company that was formed in July 2003 to
      focus on developing and commercializing therapeutic products for the treatment
      of inflammatory diseases. Our product candidates are based on C1-INH, a human
      plasma protein that mediates inflammation and is potentially applicable as
      a
      treatment for a range of medical indications. We initiated a Phase III clinical
      trial of our lead product candidate, C1-INH for the acute treatment of HAE,
      in
      March 2005. In November 2005, we initiated a Phase III clinical trial of C1-INH
      for the prophylactic treatment of HAE. In October 2005, we received fast track
      designation status by the FDA for the treatment of HAE.





On
      January 17, 2007, we announced t hat
      we
      have completed patient treatment in the acute portion of a pivotal Phase III
      clinical trial for our lead product candidate, C1-INH for the treatment of
      HAE
      and on March 14, 2007, we announced positive results from our Phase III clinical
      trial of C1-INH for the acute treatment of HAE. In the acute study, the
      protocol-defined primary endpoint was reached, showing a clinically and
      statistically significant reduction in the time to sustained relief of acute
      HAE
      symptoms. Based on the positive results of this study, we intend to submit
      a BLA
      to the FDA during the second quarter of 2007. We
      are
      also developing C1-INH for the treatment of selective other diseases and
      disorders in which inflammation is known or believed to play an underlying
      role. **** We
      have
      certain rights to C1-INH technology through agreements with Sanquin, an
      Amsterdam-based not-for-profit organization that provides blood and plasma
      products and related services, carries out research and provides education,
      primarily in the Netherlands.





From
      July
      21, 2003 (inception) through December 31, 2006, we have not generated any
      revenue from operations. We expect to incur additional losses to perform further
      research and development activities. We do not currently have any commercial
      biopharmaceutical products, and do not expect to have plan of having a product
      by the next year, subject to FDA approval.





As
      a
      company that does not expects to have limited product revenues and no profits
      over the next year, management of cash flow is extremely important. The most
      significant use of our cash is for research and development activities, which
      include clinical trials and regulatory clearance. During 2006, our research
      and
      development expenses were $7,167,459.





*Merger
      Transactions*





On
      November 5, 2004, FCP, Lev Sub and Old Lev entered into the Agreement. On
      December 29, 2004, the Public Company Merger closed and pursuant to the
      Agreement, Lev Sub merged into Old Lev and the combined entity became a
      wholly-owned subsidiary of FCP. As a result of the Public Company Merger, FCP
      issued 5,029,795 shares of common stock and 4,789,433 shares of Series A
      convertible preferred stock to holders of outstanding Old Lev common
      stock.





On
      December 29, 2004, the Board of Directors and stockholders of FCP approved
      a
      merger of FCP into a newly formed, wholly-owned subsidiary of FCP incorporated
      in Delaware. This merger was undertaken to increase the authorized number of
      shares of common stock to permit the conversion of the Series A preferred stock,
      to reincorporate FCP in the State of Delaware and to change the name of the
      company. On February 17, 2005, the Recapitalization Merger closed and the issued
      and outstanding Series A Preferred Stock of FCP was automatically converted
      into
      an aggregate of 66,767,994 shares of common stock which, along with the
      4,505,530 shares of FCP common stock outstanding prior to the Public Company
      Merger and the 5,029,795 shares of common stock issued to the Old Lev
      stockholders in the Public Company Merger, resulted in a total of 76,303,319
      shares of common stock outstanding as of February 17, 2005. As part of the
      Recapitalization Merger, Old Lev changed its name to Lev Development Corp.
      and
      FCP changed its name to Lev Pharmaceuticals, Inc. As a result of these mergers,
      the stockholders of Old Lev acquired approximately 94% of our outstanding common
      stock.




32





The
      Public Company Merger, which resulted in the stockholders of Old Lev obtaining
      control of FCP, represents a recapitalization of FCP, or a “reverse merger”,
      rather than a business combination. In connection therewith, Old Lev's
      historical capital accounts were retroactively adjusted to reflect the
      equivalent number of shares issued by FCP while Old Lev's historical accumulated
      deficit was carried forward.





*2006
      Financing*





In
      October 2006, we closed on the sale of an aggregate of 32,307,692 shares of
      our common stock and warrants to purchase up to an aggregate of 9,692,308 shares
      of common stock for aggregate proceeds of $21,000,000 to certain institutional
      and accredited investors. The warrants are exercisable at any time until five
      years from the initial closing date at price of $0.84 per share. We have been
      using the net proceeds of approximately $19.6 million for continued funding
      of
      our clinical trials, additional research and development efforts, and general
      working capital purposes. These securities were sold under Section 4(2) of
      the
      Securities Act of 1933, as amended, and Rule 506 of Regulation D, promulgated
      thereunder, on a private placement basis, to institutional and accredited
      investors. We paid approximately $1.4 million in total commissions and expenses
      to broker-dealers engaged to assist it in the financing and also issued warrants
      to purchase up to 1,897,057 shares of common stock as additional compensation
      to
      the broker-dealers, which warrants were issued on substantially similar terms
      as
      the investor Warrants.




*New
      Employment Agreements/Arrangements*





During
      our 2006 fiscal year we entered into employment agreements with our Chief
      Financial Officer, Douglas J. Beck, and two members of our senior management
      team Jason Bablak, who serves as our Vice President, Regulatory Affairs and
      Product Development and Joseph Truitt, our Vice President, Sales and Marketing.
      Subsequently, in January 2007, we entered into amended and restated employment
      agreements with our Chairman, Judson Cooper and our Chief Executive Officer,
      Joshua Schein. In March 2007 we hired Dov Elefant as our Corporate Controller
      pursuant to the terms of an offer letter. The material terms and conditions
      of
      these employment arrangements are summarized below under the caption “Executive
      Compensation - Employment, Severance and Change In Control
      Agreements.”





**Plan
      of Operation**





Our
      plan
      of operation for the next twelve months is to focus primarily on our Phase
      III
      clinical trials of our lead product candidate, C1-INH for the acute and
      prophylactic treatment of HAE, to complete
      the analysis of the data from the Phase III trial for acute treatment of HAE
      and
      submit a BLA requesting the FDA’s approval for commercialization.  In
      addition, we intend to initiate a research program in 2007 for the development
      of a genetically engineered or recombinant version of C1-INH to be used in
      the
      treatment of AMI.





To
      date,
      we have relied solely upon selling equity securities in private placements
      to
      generate cash to implement our plan of operations. Based on our current levels
      of research and development and our business plan, we believe that our cash,
      cash equivalents and investments of $17,887,480 as of December 31, 2006, should
      be sufficient to meet our cash requirements for the next twelve months. As
      we
      expect that our cash used in operations will increase significantly over the
      next several years, we
      expect to need to raise additional
      capital to complete the development and commercialization of our current product
      candidates. We
      will
      pursue equity financing alternatives or other financing in order to raise needed
      funds. To raise additional funds, we intend to either undertake private
      placements of our securities, either as a self-offering or with the assistance
      of registered broker-dealers, or negotiate a private sale of our securities
      to
      one or more institutional investors. However, we currently have no firm
      agreements with any third-parties for any financing arrangements and no
      assurances can be given that we will be successful in raising additional capital
      from any proposed financings. Further, we cannot assure you that any additional
      financing will be available or, even if it is available that it will be on
      terms
      acceptable to us. If we raise additional funds by selling shares of common
      stock
      or convertible securities, the ownership of our existing shareholders will
      be
      diluted. Further, if additional funds are raised though the issuance of equity
      or debt securities, such additional securities may have powers, designations,
      preferences or rights senior to our currently outstanding securities. Any
      inability to obtain required financing on sufficiently favorable terms could
      have a material adverse effect on our business, results of operations and
      financial condition. If we are unsuccessful in raising additional capital and
      increasing revenues from operations, we will need to reduce costs and operations
      substantially.   Further, if expenditures required to achieve our plans are
      greater than projected or if revenues are less than, or are generated more
      slowly than, projected, we will need to raise a greater amount of funds than
      currently expected. We have cash commitments through December 31, 2007 of
      approximately $2,945,000 to primarily fund our clinical research programs,
      leases and executive employment contracts. A significant expense for the Phase
      III clinical trials is the C1-INH product that we purchase from Sanquin.
      However, this does not affect our cash position because Sanquin has granted
      continuing loans to us in the amount of the aggregate purchase price of the
      C1-INH product. The loan balance as of December 31, 2006 was $1,803,554, net
      of
      debt discount. Each loan will be forgiven if regulatory approval is obtained.
      If
      regulatory approval is not received, then each loan is payable on the earlier
      of
      January 16, 2014 or the termination of the Sanquin distribution agreement.
      We
      expect to increase our expenditures for our Phase III clinical trials and
      regulatory matters, including preparation and filing of a BLA, over the next
      twelve months. We also expect that our general and administrative expenses
      and
      will increase for the next year as we hire additional marketing staff and have
      expenditures relating to commercializing of CI-1NH.




33





**Hereditary
      Angioedema**





In
      January 2004 we entered into a distribution and manufacturing services agreement
      with Sanquin relating to the treatment of HAE. Sanquin currently manufactures
      and markets a highly purified preparation of C1-INH in Europe and pursuant
      to
      the agreement, Sanquin agreed to provide us with C1-INH for use in our clinical
      trials and for commercial distribution upon regulatory licensure. Pursuant
      to
      the agreement, we have distribution rights in Israel and all countries in North,
      Central and South America, with the exception of the Dutch Overseas Territories,
      Argentina and Brazil.





Under
      the
      distribution agreement, it is our responsibility to conduct the Phase III
      clinical trials of C1-INH for the treatment of HAE and to prepare and file
      all
      regulatory applications necessary to register the product candidate. Sanquin
      agreed to provide us with the technical data and support necessary to assist
      us
      in preparing and filing all such regulatory applications.





Furthermore,
      Sanquin agreed to supply C1-INH for our Phase III clinical trials. Upon receipt
      of FDA approval for our product candidate for the treatment of HAE, upon
      commercial launch of this product and thereafter during the term of the
      agreement, Sanquin will supply us with our commercial requirements for C1-INH
      for the treatment of HAE in each country where we have received regulatory
      approval. Our purchase of C1-INH from Sanquin is subject to minimum annual
      purchase requirements upon receipt of FDA approval.




34





We
      initiated a Phase III clinical trial of C1-INH for the acute treatment of HAE
      in
      March 2005. In November 2005, we initiated a phase III clinical trial for C1-INH
      for the prophylactic treatment of HAE. In July 2004, we received orphan drug
      designation from the FDA for C1-INH (human), which, upon product licensure
      by
      the FDA, could provide us with a seven-year exclusive right to market our C1-INH
      product as a treatment for HAE in the United States. In October 2005, we
      received fast track designation status from the FDA. On January 17, 2007, we
      announced t hat
      we
      have completed patient treatment in the acute portion of a pivotal Phase III
      clinical trial for our lead product candidate, C1-INH for the treatment of
      HAE . On
      March
      14, 2007, we announced positive results from our Phase III clinical trial of
      C1-INH for the acute treatment of HAE. Based on the positive results of this
      study, we intend to submit a BLA to the FDA during the second quarter of
      2007.




**Acute
      Myocardial Infarction**





We
      entered into a separate license agreement with Sanquin on January 27, 2004
      relating to the treatment of AMI. Under this agreement, we have an exclusive,
      worldwide, royalty-bearing license, with the right to sublicense, to the use
      of
      C1-INH for the treatment of AMI. In connection with the license agreement,
      we
      paid Sanquin certain fees and reimbursed Sanquin for certain expenses. In
      addition, we have an obligation to pay Sanquin royalties on sales of products
      incorporating the licensed technology.





This
      second development program is focused on the use of C1-INH in treating AMI.
      Current treatments for AMI, both surgical and pharmaceutical, are directed
      at
      restoring blood flow to heart tissue or preventing further obstruction. Despite
      a widespread appreciation for the role of inflammation in AMI in both the
      scientific and medical communities, no presently available treatments directly
      target the mechanisms of inflammation. Based on preliminary animal and clinical
      data, we believe that C1-INH may be useful as a treatment for AMI. Based on
      the
      rights obtained from Sanquin, w e
      intend
      to initiate a research program for the development of a genetically engineered
      or recombinant version of C1-INH to be used in the treatment of AMI.





**Off-Balance
      Sheet Arrangements**





We
      had no
      off-balance sheet arrangements as of December 31, 2006 with the
      exception of the lease of our office spaces and a copier.





**Critical
      Accounting Policies**





Financial
      Reporting Release No. 60 requires all companies to include a discussion of
      critical accounting policies or methods used in the preparation of financial
      statements. Our accounting policies are described in Note B of the notes to
      our
      financial statements included in this Form 10-KSB for the fiscal year ended
      December 31, 2006. The methods, estimates and judgments we use in applying
      our
      most critical accounting policies have a significant impact on the results
      we
      report in our financial statements. We evaluate our estimates and judgments
      on
      an ongoing basis. We base our estimates on historical experience and on
      assumptions that we believe to be reasonable under the circumstances. Our
      experience and assumptions form the basis for our judgments about the carrying
      value of assets and liabilities that are not readily apparent from other
      sources. Actual results may vary from what we anticipate, and different
      assumptions or estimates about the future could materially change our reported
      results. We believe the following accounting policies are the most critical
      to
      us, in that they are important to the portrayal of our financial statements
      and
      they require our most difficult, subjective or complex judgments in the
      preparation of our financial statements.




35


*Research
        and development costs*


We
      expense all research and development costs as incurred for which there is no
      alternative future use. Such expenses include licensing fees and costs
      associated with planning and conducting clinical trials.





*Income
      taxes*





We
      account for income taxes in accordance with the provisions of Statement of
      Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS No.
      109”). SFAS No. 109 requires that we recognize deferred tax liabilities and
      assets for the expected future tax consequences of events that have been
      included in the financial statements or tax returns. Under this method, deferred
      tax liabilities and assets are determined on the basis of the difference between
      the tax basis of assets and liabilities and their respective financial reporting
      amounts (“temporary differences”) at enacted tax rates in effect for the years
      in which the temporary differences are expected to reverse. We record an
      estimated valuation allowance on our deferred tax assets if it is not more
      than
      likely that these deferred tax assets will be realized.





*Equity-based
      compensation*





Effective
      January 1, 2006, the Company adopted the provisions of Statement of Financial
      Accounting Standard No. 123(R), “Share Based Payment” (“SFAS No. 123(R)”), which
      requires all stock-based payments, including grants of stock options, to be
      recognized in the Statement of Operations as compensation expense, based on
      their fair values on the grant date. Under SFAS No.123(R), the estimated fair
      value of options granted under the Company’s Employee 2004 Omnibus Incentive
      Compensation Plan (“Plan”) are recognized as compensation expense over the
      option-vesting period. The Company adopted SFAS No. 123(R), using the
      modified-prospective-transition method, in which compensation expense is
      recognized beginning with the effective date of the adoption for all stock-based
      payments (i) granted after the effective date of adoption and
      (ii) granted prior to the effective date of adoption but not vested on the
      date of adoption based upon the grant date fair value estimated in accordance
      with the original provisions of SFAS No. 123.





*Repricing
      of Warrants and Options*





Following
      consummation of the merger transactions under the Agreement, our Board of
      Directors in May 2005 determined that the basis for the exchange of
      warrants and options to purchase common stock of Old Lev that were outstanding
      prior to the mergers for warrants and options to purchase our common stock
      after
      the mergers should be changed. Though the number of shares issuable upon
      exercise of these warrants and options was increased, the parties to the mergers
      did not proportionately reduce the exercise price of these warrants and options
      to account for the increase in the number of shares outstanding after the
      mergers. The reduced exercise price of these warrants and options was calculated
      by multiplying the number of shares issuable upon exercise of these warrants
      and
      options prior to the mergers times the relevant exercise price, and then
      dividing that dollar amount by the new number of shares issuable upon exercise
      of these warrants and options after the mergers.




Prior
      to
      the mergers, warrants to purchase 66,667 and 39,000 shares of common stock
      were
      outstanding with exercise prices of $0.10 and $0.85 per share, respectively.
      After the mergers, pursuant to the exchange ratio in the Agreement, warrants
      to
      purchase 190,327 and 111,341 shares of common stock were outstanding with
      exercise prices of $0.10 and $0.85 per share, respectively. The Board believed
      this was unfair to the holders of the warrants and made a determination to
      treat
      the warrant holders on the same basis as the holders of common stock of Old
      Lev.
      Accordingly, in May 2005, the exercise price of outstanding warrants to purchase
      190,327 shares was reduced from $0.10 to $0.04 per share, and the exercise
      price
      of other outstanding warrants to purchase 111,341 shares was reduced from $0.85
      to $0.30 per share. At the date of this repricing, we recognized a charge to
      operations of approximately $28,000 for the incremental value of these warrants
      based upon the Black Scholes option pricing model. Prior
      to
      the mergers, stock options to purchase 500,000 shares of common stock at an
      exercise price of $0.85 per share were held by each of Joshua D. Schein, Ph.D.,
      our Chief Executive Officer, and by Judson Cooper, our Chairman. After the
      mergers, pursuant to the exchange ratio in the Agreement, each person’s options
      were converted into options to purchase 1,427,450 shares of common stock with
      an
      exercise price of $0.85 per share (an aggregate of 2,854,900 shares). In May
      2005, in addition to repricing the warrants, the Board further determined,
      subject to obtaining stockholder approval at our next annual meeting, to reduce
      the exercise price of these options from $0.85 to $0.30 per share. The Board
      made the determination to seek stockholder approval because it believed that
      stockholder approval was necessary to reduce the exercise price of such options
      under the terms of our 2004 Omnibus Incentive Compensation Plan. In addition,
      the Board believed that the repricing of these options should be subject to
      stockholder approval because the reduction in exercise price of the stock
      options directly benefits our Chief Executive Officer and Chairman. However,
      it
      should be noted that our Chief Executive Officer and Chairman are also principal
      stockholders who voted on this proposal. The stockholders approved this
      repricing at the annual meeting held on December 12, 2005. Messrs. Schein and
      Cooper each own options to purchase 1,427,450 shares of common stock at an
      exercise price of $0.30 per share as opposed to the prior exercise price of
      $0.85 per share. If they exercise all of these options, Messrs. Schein and
      Cooper would realize a cash savings of, and the proceeds received by the Company
      would be reduced by, $785,098 for each of them. A charge of $1,427,450 was
      recorded to our Consolidated Statement of Operations based upon our stock price
      when our stockholders approved the repricing at the stockholders’ meeting and
      subsequent changes to our stock price through December 31, 2005. These charges
      ceased upon the adoption of SFAS 123R on January 1, 2006.




36





The
      fair
      value of warrants granted to non-employees for financing or services are
      included in the financial statements and expensed over the life of the services
      performed, respectively. Warrants issued in connection with services or
      financings were valued at the grant date using the Black Scholes option pricing
      model. The amounts recorded for the years ended December 31, 2006 and December
      31, 2005 were $192,822 and $10,825, respectively.




**Recent
      Accounting Pronouncements**





In
      July
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes - An Interpretation of FASB Statement No. 109,” (FIN 48). FIN 48
      prescribes a recognition threshold and measurement criterion for the financial
      statement recognition and measurement of tax positions taken or expected to
      be
      taken in a tax return, among other items. In addition, FIN 48 provides guidance
      on derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition with respect to uncertainty in income taxes.
      FIN 48 is effective for fiscal years beginning after December 15, 2006. We
      do
      not anticipate that the adoption of this Statement will have a material effect
      on our financial position or results of operation.





On
      September 15, 2006 the Financial Accounting Standards Board (“FASB”) issued
      Statement No. 157, *Fair
      Value Measurements.* The Statement provides guidance for using fair value to measure assets and
      liabilities.  This Statement references fair value as the price that would
      be received to sell an asset or paid to transfer a liability in an orderly
      transaction between market participants in the market in which the reporting
      entity transacts. The Statement applies whenever other standards require (or
      permit) assets or liabilities to be measured at fair value.  The Statement
      does not expand the use of fair value in any new circumstances.  It is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years.  The
      adoption of SFAS No. 157 is not expected to have a material impact on the
      Company’s financial statements.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities Including an Amendment of FASB
      Statement No. 115” (SFAS 159), which permits entities to measure many
      financial instruments and certain other items at fair value.  The objective
      is to improve financial reporting by providing entities with the opportunity
      to
      mitigate volatility in reported earnings caused by measuring related assets
      and
      liabilities differently without having to apply complex hedge accounting
      provisions.  SFAS 159 is effective as of the beginning of fiscal years
      after November 15, 2007.  We are currently evaluating the impact that
      SFAS 159 will have on our consolidated financial position, results of
      operations, and cash flows as of its adoption in 2008.




37





**Results
      of Operations**





*Year
      Ended December 31, 2006 as compared to Year Ended December 31, 2005*





We
      had no
      revenues during the year ended December 31, 2006 because we do not have any
      commercial biopharmaceutical products.





Research
      and development expenses for the years ended December 31, 2006 and December
      31,
      2005 were $7,167,459 and $2,368,834, respectively. The increase of $4,798,625
      is
      primarily due to the progress of our Phase III clinical trials of our lead
      product candidate, C1-INH for the acute treatment of HAE, which commenced in
      March 2005. In addition, in November 2005, we initiated a Phase III clinical
      trial of C1-INH for the prophylactic treatment of HAE. Included in research
      and
      development expense for the year ended December 31, 2006 is employee stock
      option expense of $176,118. In addition, The Company issued warrants for service
      with a fair market value of $134,419 and recorded an additional expenses of
      $194,000 as disclosed in Note G [2] to our Consolidated Financial Statement.
      For
      the year ended December 31, 2006, the Company entered an employment contract
      with its Vice President of Regulatory Affairs and Product Development for
      $200,000 plus bonus and options to purchase 500,000 shares of our common stock,
      see Note H[4] to our Consolidated Financial Statements.





General
      and administrative expenses were $4,835,444 and $4,110,005 for the years ended
      December 31, 2006 and December 31, 2005, respectively. The increase of $725,439
      was due to increased salaries and benefits, marketing, professional fees, travel
      and stock option expense. Employee stock option expense for the year December
      31, 2006 included in general and administrative expense was $281,233. For the
      year ended December 31, 2005, we recorded non-cash compensation expense
      of $1,427,450 for option repricing for the benefit of our Chairman and our
      CEO that was approved by our stockholders, see Note I to our Consolidated
      Financial Statements. During the year ended December 31, 2006, our CFO and
      Vice
      President of Sales and Marketing entered into employment contracts for annual
      salaries of $415,000 in the aggregate, plus bonus and options to purchase
      725,000 shares of our common stock, see Note H [4] to our Consolidated Financial
      Statement.




Interest
      income for the year ended December 31, 2006 and December 31, 2005 was $281,852
      and $181,895, respectively. The increase of $99,957 is attributable to obtaining
      a higher rate of interest and having more cash to invest.





Interest
      expense for the year ended December 31, 2006 and December 31, 2005 was $46,438
      and $11,412, respectively. The increase of $35,026 represents debt discount
      attributable to purchases made on loans computed by the imputed interest method
      related to the loans from Sanquin, our supplier of C1-INH product.





Due
      to
      the factors mentioned above, the net loss for the year ended December 31, 2006
      was $11,767,489 or $0.13 per common share, basic and diluted, based upon
      weighted average shares outstanding of 88,235,294 shares as compared to a loss
      for the year ended December 31, 2005 of $6,308,356 or $0.08 per common share,
      basic and diluted, based upon weighted average shares outstanding of
      79,624,173.




38





**Liquidity
      and Capital Resources**





As
      of
      December 31, 2006 we had cash, cash equivalents and investments of $17,887,480
      and working capital of $15,191,097. Net cash used in operations was $7,599,167
      for the year ended December 31, 2006 and was primarily due to our loss of
      11,767,489. The operating loss was reduced partially by non-cash charges of
      $2,216,400 compensation expense related to the issuance of warrants to a
      consultant, stock based compensation related to the issuance of employee stock
      options, purchases of C1-INH product and amortization of debt discount. Pursuant
      to the Sanquin loan agreement, purchases made during our Phase III clinical
      trials are added to our loan and we are not required to make any principal
      payments. The loan balance as of December 31, 2006 was $1,803,554 will be
      forgiven when regulatory approval from the FDA is received. If we do not receive
      regulatory approval, then the loan is repayable on the earlier of January 16,
      2014, or the termination of the Agreement. The loan does not bear interest
      and
      we compute interest based on the imputed interest method using the effective
      interest rate method. Cash used in investing activities for the year ended
      December 31, 2006 was $7,580,559 resulting from the purchase of investments
      and
      fixed assets. Cash from financing activities for the year ended December 31,
      2006 was $19,584,745 and resulted from the sale of common stock and warrants
      in
      an October 2006 private placement.





In
      October 2006, we received net proceeds of $19,584,745 in a private placement,
      net of issuance costs of $1,415,255 from the sale of 32,307,693 shares of common
      stock at $0.61 per share and five year warrants to purchase 9,692,308 shares
      of
      common from stock at an exercise price of $0.84 per share. The
      Company issued 1,698,538 and 198,519 warrants to purchase common stock to
      registered broker-dealers that assisted us in the financings (the “Agent
      Warrants”). The Agent Warrants are exercisable at $0.84 per share and $1.18 per
      share and expire five years from the date of issue. We paid $1,279,593 to the
      placement agent and to the registered broker dealer.





In
      the
      May 2005 private placement, we received net proceeds of approximately $4,365,100
      from the sale of 100.9 units. Each
      unit
      was sold at a price of $50,000 and consisted of 50,000 shares of common stock
      and a five-year warrant to purchase 25,000 shares of common stock at an exercise
      price of $1.35 per share. We issued an aggregate of 5,044,774 shares of common
      stock and warrants to purchase 2,522,387 shares of common stock to investors
      in
      this private placement. We paid $454,030 to the placement agent and issued
      warrants to the placement agent to purchase 681,044 shares of common stock.
      The
      placement agent warrants are exercisable at $1.35 per share and expire in May
      2010. ****





In
      February and March 2004, we received proceeds of $7,968,495 in a private
      placement, net of issuance costs of $51,465, from the sale of 3,425,879 shares
      of common stock at $0.26 per share and from the sale of 23,913,848 shares of
      common stock at $0.30 per share, respectively. In December 2003, we received
      proceeds in a private placement of $300,000 from the sale of 1,141,960 shares
      of
      common stock at $0.27 per share.





To
      date,
      we have relied solely upon selling equity securities in private placements
      to
      generate cash to implement our plan of operations. Based on our current levels
      of research and development and our business plan, we believe that our cash
      and
      cash equivalents and investments of $17,887,480 as of December 31, 2006 should
      be sufficient to meet our cash requirements for the next twelve months. Our
      capital resources are focused on the clinical development and regulatory
      approval of C1-INH for the treatment of HAE. As
      we
      expect that our cash used in operations will increase significantly over the
      next several years, we
      expect to need to raise additional
      capital to complete the development and commercialization of our current product
      candidates. We
      will
      pursue equity financing alternatives or other financing in order to raise needed
      funds for operations. To raise additional funds, we intend to either undertake
      private placements of our securities, either as a self-offering or with the
      assistance of registered broker-dealers, or negotiate a private sale of our
      securities to one or more institutional investors. However, we currently have
      no
      firm agreements with any third-parties for any financing arrangements and no
      assurances can be given that we will be successful in raising additional capital
      from any proposed financings. Further, we cannot assure you that any additional
      financing will be available or, even if it is available that it will be on
      terms
      acceptable to us. If we raise additional funds by selling shares of common
      stock
      or convertible securities, the ownership of our existing shareholders will
      be
      diluted. Further, if additional funds are raised though the issuance of equity
      or debt securities, such additional securities may have powers, designations,
      preferences or rights senior to our currently outstanding securities. Any
      inability to obtain required financing on sufficiently favorable terms could
      have a material adverse effect on our business, results of operations and
      financial condition. If we are unsuccessful in raising additional capital and
      increasing revenues from operations, we will need to reduce costs and operations
      substantially.   Further, if expenditures required to achieve our plans are
      greater than projected or if revenues are less than, or are generated more
      slowly than, projected, we will need to raise a greater amount of funds than
      currently expected. We have cash commitments through December 31, 2007 of
      approximately $2,945,000 to primarily fund our clinical research programs,
      leases and executive employment contracts. A significant expense for the Phase
      III clinical trials is the C1-INH product that we purchase from Sanquin.
      However, this does not affect our cash position because Sanquin has granted
      continuing loans to us in the amount of the aggregate purchase price of the
      C1-INH product. The loan balance as of December 31, 2006 was $1,803,554, net
      of
      debt discount. Each loan will be forgiven if regulatory approval is obtained.
      If
      regulatory approval is not received, then each loan is payable on the earlier
      of
      January 16, 2014 or the termination of the Sanquin distribution agreement.
      We
      expect to continue to incur costs in continuing our Phase III clinical trials
      for the prophylactic treatment of HAE and in preparing and submitting the BLA
      covering the acute treatment of HAE. We also expect that our general and
      administrative expenses and will increase for the next year as we hire
      additional marketing staff and have expenditures relating to commercializing
      of
      CI-1NH




39





**Contractual
      Obligations and Commitments**





The
      following is a summary of our significant contractual cash obligations for
      the
      periods indicated that existed as of December 31, 2006.


Less
                  than
              
              1
                  -
                  2
              
              3
                  -
                  5
              
              More
                  thanTotal
              
              1
                  year
              
              years
              
              years
              
              5
                  yearsOffice
                  lease
              
              $
              1,016,309
              
              $
              163,684
              
              $
              387,922
              
              $
              464,703
              
              $
              0CRO
                  contract
              
              
              1,272,148
              
              
              1,272,148
              
              
              0
              
              
              0
              
              
              0Executive
                  employment contracts
              
              
              4,510,717
              
              
              1,275,593
              
              
              2,254,990
              
              
              980,134
              
              
              0Research
                  and development contract
              
              
              234,000
              
              
              234,000
              
              
              0
              
              
              0
              
              
              0Total
                  obligations
              
              $
              7,033,174
              
              $
              2,945,425
              
              $
              2,642,912
              
              $
              1,444,837
              
              $
              0




Our
      major contractual
      obligations relate to our office lease, clinical trial costs, research and
      development, purchase commitments and compensation under employment contracts.
      We expect to devote substantial resources to continue our research and
      development efforts, to expand our product pipeline and to support our product
      candidates as they move forward in the clinical development process. Our funding
      requirements will depend on numerous factors, including:





·
            the
                scope and results of our clinical trials;·
            advancement
                of other product candidates into
                development;






40





·
            potential
                acquisition or in-licensing of other product candidates, commercial
                products or technologies;·
            the
                timing of, and the costs involved in, obtaining regulatory
                approvals;·
            the
                cost of manufacturing activities for product
                candidates;·
            the
                costs involved in preparing, filing, prosecuting, maintaining and
                enforcing patent claims and other patent-related costs, including
                litigation costs and the results of such litigation;
                and·
            our
                ability to establish and maintain additional collaborative
                arrangements.





We
      expect
      product development costs to increase in the future as more of our product
      candidates enter clinical trials. In addition, we may be obligated to make
      milestone payments on certain of our product candidates as they progress through
      the clinical trial process.





The
      duration and cost of clinical trials may vary significantly over the life of
      a
      particular project as a result of, among other things, the following
      factors:





·
            the
                length of time required to recruit qualified patients for clinical
                trials;·
            the
                duration of patient dosing and follow-up in light of trial
                results;·
            the
                number of clinical sites required for trials; and·
            the
                number of patients that ultimately
                participate.





The
      Sanquin distribution agreement terminates on December 31, 2007, unless extended
      by us for up to two three-year periods or by mutual agreement of the parties
      prior to its expiration. Commencing with the receipt of FDA regulatory approval
      of C1-INH and thereafter, we must purchase from Sanquin a minimum amount of
      C1-INH valued in Euros equal to approximately $9,900,000 per calendar year.
      In
      addition, during our clinical trial period we purchase C1-INH and our commitment
      is approximately $2,843,000. Such amount is added to our loan agreement with
      Sanquin and will be forgiven if regulatory approval is received. If regulatory
      approval is not received, then the loan is due on the earlier of January 16,
      2014 or the termination of the distribution agreement.




In
      connection with the license agreement with Sanquin for the treatment of AMI
      we
      are required to create a comprehensive research plan for the commercial
      exploitation of the licensed technology. We continue to work with Sanquin on
      the
      design of the research plan. We agreed to commit a minimum of $125,000 per
      annum
      during the first three years following the execution of the license agreement
      toward research on the licensed technology conducted by Sanquin and by other
      parties. To date, we have funded approximately $141,000 to third parties engaged
      in this research. We also have an obligation to pay Sanquin royalties on sales
      of products incorporating the technology.





During
      our 2006 fiscal year we entered into employment agreements with our Chief
      Financial Officer, Douglas J. Beck, and two members of our senior management
      team Jason Bablak, who serves as our Vice President, Regulatory Affairs and
      Product Development and Joseph Truitt, our Vice President, Sales and Marketing.
      Subsequently, in January 2007, we entered into amended and restated employment
      agreements with our Chairman, Judson Cooper and our Chief Executive Officer,
      Joshua Schein. In March 2007 we hired Dov Elefant as our Corporate Controller
      pursuant to the terms of an offer letter. The material terms and conditions
      of
      these employment agreements are summarized below under the caption “Executive
      Compensation - Employment, Severance and Change In Control
      Agreements.”





On
      September 20, 2004, we entered into a services agreement with Compleware
      Corporation, **** a
      CRO, in
      connection with the management and implementation of our Phase III clinical
      trial of C1-INH for the treatment of HAE. On March 1, 2005, we terminated the
      agreement. In 2005, we paid Compleware $100,000. On March 2, 2005, we entered
      into a new CRO services agreement with INC Research which governs INC Research's
      provision of services in connection with the support of clinical investigation,
      management and/or research of our Phase III clinical trial. We
      entered into a separate services agreement with INC Research in September 2006
      which governs INC Research’s provision of additional services in connection with
      our Phase III clinical trials and activities related to the commercialization
      of
      our product candidates. The services provided by INC Research pursuant to both
      contractual arrangements are on a work-order basis and we are invoiced on a
      time
      and materials basis. We have the right to terminate both agreements, and any
      pending work-order, on prior notice and without cause. As of December 31, 2006,
      we have estimated that we will pay INC Research at least $1,272,000 for its
      services under both agreements in 2007. However, du e
      to the
      variability associated with the conduct of clinical trials, we are unable to
      estimate with certainty the future costs we will incur under our CRO agreement.
      We anticipate that these costs will increase significantly above our current
      estimates in future periods as a result of our initiation or expansion of the
      clinical trials.




41




**ITEM
      7. FINANCIAL STATEMENTS**





The
      full
      text of our audited consolidated financial statements for the year ended
      December 31, 2006 and for the period July 21, 2003 (inception) to December
      31,
      2006 begins on page F-1 of this Annual Report on Form 10-KSB.





**ITEM
      8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL
      DISCLOSURE**





None.





**ITEM
      8A. CONTROLS AND PROCEDURES**





*Evaluation
      of Disclosure Controls and Procedures*





Our
      Chief
      Executive Officer and Chief Financial Officer, after evaluating the
      effectiveness of our disclosure controls and procedures (as defined in Rule
      13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period
      covered by this report, have concluded that, based on the evaluation of these
      controls and procedures, our disclosure controls and procedures were effective
      at the reasonable assurance level to
      ensure
      that information required to be disclosed by us in the reports that we file
      or
      submit under the Exchange Act is recorded, processed, summarized and reported,
      within the time periods specified in the SEC’s rules and forms.





*Changes
      in Internal Controls*




There
      has
      not been any change in our internal control over financial reporting during
      our
      quarter ended December 31, 2006, that has materially affected, or is reasonably
      likely to materially affect, our internal control over financial reporting.




We
      do not
      expect that internal controls over financial reporting will prevent all errors
      or all instances of fraud. A control system, no matter how well designed and
      operated, can provide only reasonable, not absolute, assurance that the control
      system’s objectives will be met. Further, the design of a control system must
      reflect the fact that there are resource constraints, and the benefits of
      controls must be considered relative to their costs. Because of the inherent
      limitations in all control systems, no evaluation of controls can provide
      absolute assurance that all control issues and instances of fraud, if any,
      within its company have been detected. These inherent limitations include the
      realities that judgments in decision-making can be faulty, and that breakdowns
      can occur because of simple error or mistake. Controls can also be circumvented
      by the individual acts of some persons, by collusion of two or more people,
      or
      by management override of the controls. The design of any system of controls
      is
      based in part upon certain assumptions about the likelihood of future events,
      and any design may not succeed in achieving its stated goals under all potential
      future conditions. Over time, controls may become inadequate because of changes
      in conditions or deterioration in the degree of compliance with policies or
      procedures. Because of the inherent limitation of a cost-effective control
      system, misstatements due to error or fraud may occur and not be detected.




42





**ITEM
      8B. OTHER INFORMATION**





In
      January, February and through March 16, 2007, warrants for 78,165 shares of
      common stock were exercised and we issued an aggregate of 78,165 shares of
      common stock to the warrant holders. The exercises were effected in reliance
      on
      Section 4(2) of the Securities Act of 1933, as amended.





In
      January and through March 15, 2007, we issued additional options to purchase
      shares of our common stock to certain officers, directors and employees pursuant
      to our 2004 Omnibus Incentive Compensation Plan. The
      transactions were exempt from the registration requirements of Section 5 of
      the
      Securities Act under Sections 4(2) and 4(6) of the Securities Act. Each option
      holder agreed that, if the option is exercised, the option holder would purchase
      his common stock for investment and not for resale to the public. The foregoing
      option grants consisted of the following transactions:





On
      January 17, 2007, in connection with entering into amended and restated
      employment agreements with our Chief Executive Officer and our Chairman, we
      granted each of them options to purchase 1,600,000 shares of common stock.
      These
      options expire
      ten years from the date of grant and are exercisable at an exercise price of
      $1.60, which was equal to the closing price of its common stock on the date
      of
      grant. The options shall vest in equal annual installments of 25% of the total
      option amount until vested in full, subject to the terms and conditions of
      our
      Omnibus Incentive Compensation Plan. These options will immediately
      vest and remain exercisable in the e vent
      of a
      change in control.





On
      February 15, 2007, we granted each of our non-employee directors options to
      purchase 75,000 shares of common stock and granted the Chairman of our newly
      constituted Commercialization Oversight Committee and additional award of 75,000
      options. Each of these option awards (a) vest in equal installments over a
      four
      year period, with the first installment vesting on the one-year anniversary
      of
      the grant date of such options; (b) is exercisable for a period of ten years
      at
      a per share exercise price equal to the market price of our common stock on
      the
      date of grant; and (c) is entitled to immediately vest and remain exercisable
      in
      the event of a change in control.




During
      the quarter ending March 31, 2007, we have granted options to purchase an
      aggregate of 880,000 shares of common stock to new employees of our company
      pursuant to the 2004 Omnibus Incentive Compensation Plan. These option awards
      are exercisable for a seven year term at the fair market value on the date
      of
      grant.





43


**PART
      III.**





**ITEM
      9.** **DIRECTORS
      AND EXECUTIVE OFFICERS OF THE REGISTRANT**




Our
      executive officers, significant employees and directors as of March 20, 2007
      are:





**Name**
            
            **Age**
            
            **Position**Joshua
                D. Schein, Ph.D.
            
            46
            
            Chief
                Executive Officer andDirectorJudson
                Cooper
            
            48
            
            Chairman
                of the Board, Executive Vice President andSecretaryDouglas
                J. Beck
            
            46
            
            Chief
                Financial OfficerScott
                Eagle
            
            47
            
            DirectorEric
                I. Richman
            
            46
            
            DirectorThomas
                Lanier
            
            47
            
            DirectorDov
                Elefant
            
            39
            
            Corporate
                Controller




All
      directors hold office until the next annual meeting of shareholders or until
      their successors are elected and qualify. Officers serve at the discretion
      of
      the Board of Directors. There are no familial relationships between or among
      any
      of our officers or directors. The principal occupations and brief summary of
      the
      background of each director and executive officer is as follows:





*Joshua
      D. Schein, Ph.D.* has been
      our Chief Executive Officer and a Director since December 29, 2004 and Chief
      Executive Officer and a Director of Lev Development Corp., or LDC, since the
      commencement of LDC's operations in July 2003. Dr. Schein is also a founder
      of
      SIGA Technologies, Inc., a publicly traded biotechnology company, and served
      as
      its Chief Executive Officer from August 1998 to April 2001. Dr. Schein also
      served as SIGA's acting Chief Executive Officer from April 1998 to August 1998,
      as Secretary and a Director from December 1995 to April 2001, and as Chief
      Financial Officer from December 1995 until April 1998. Dr. Schein is also a
      founder of DepoMed, Inc., a publicly traded drug delivery company, and served
      as
      a director of the company from December 1995 to June 1998. From January 1996
      to
      August 1998, Dr. Schein was an executive officer and a director of Virologix
      Corporation, a private biotechnology company that he co-founded and which was
      subsequently acquired by Access Pharmaceuticals, a publicly traded biotechnology
      company. From June 1996 to September 1998, Dr. Schein was an executive officer
      and a director of Callisto Pharmaceuticals, Inc., a publicly traded
      biotechnology company that he co-founded. Dr. Schein is also a founder of
      Hemoxymed, Inc., a publicly traded biotechnology company. Since 1997, Dr. Schein
      has been a principal of Prism Ventures LLC, a privately held limited liability
      company focused on the biotechnology industry. From 1994 to 1995, Dr. Schein
      served as a Vice President of Investment Banking at Josephthal, Lyon and Ross,
      Incorporated, an investment banking firm. Dr. Schein received a Ph.D. in
      neuroscience from the Albert Einstein College of Medicine, an MBA from the
      Columbia Graduate School of Business, and a B.A. in biochemistry from Brandeis
      University.





*Judson
      Cooper* has been
      our Chairman of the Board, Executive Vice President and Secretary since December
      29, 2004 and Chairman of LDC since the commencement of operations of LDC in
      July
      2003 and Executive Vice President since November 1, 2004. Mr. Cooper is also
      a
      founder of SIGA Technologies, Inc., a publicly traded biotechnology company,
      and
      served as its Chairman from August 1998 to April 2001. Mr. Cooper also served
      as
      SIGA's acting Chairman from April 1998 to August 1998, as a Director from
      December 1995 to April 2001, as Executive Vice President from November 1996
      to
      April 2001, and as its founding President from December 1995 to November 1996.
      Mr. Cooper is also a founder of DepoMed, Inc., a publicly traded drug delivery
      company and served as a director of the company from December 1995 to June
      1998.
      From January 1996 to August 1998, Mr. Cooper was an executive officer and a
      director of Virologix Corporation, a private biotechnology company that he
      co-founded and which was subsequently acquired by Access Pharmaceuticals, a
      publicly traded biotechnology company. From June 1996 to September 1998, Mr.
      Cooper was an executive officer and a director of Callisto Pharmaceuticals,
      Inc., a publicly traded biotechnology company that he co-founded. Mr. Cooper
      is
      also a founder of Hemoxymed, Inc., a publicly traded biotechnology company.
      Since 1997, Mr. Cooper has been a principal of Prism Ventures LLC, a privately
      held limited liability company focused on the biotechnology industry. Mr. Cooper
      is a graduate of the Kellogg School of Management.




44





*Douglas
      J. Beck* is a CPA
      and has been our Chief Financial Officer since May 23, 2005. He was our
      controller since February 21, 2005. From September 2004 to October 2004, Mr.
      Beck served as a consultant to Pfizer, Inc. From December 2002 to September
      2004, Mr. Beck served in various capacities with Henry Bros. Electronics, Inc.
      (f/k/a Diversified Security Solutions, Inc.), from Director of Finance to Chief
      Financial Officer. From November 2000 to December 2002, Mr. Beck was a financial
      consultant to various companies. From March 2000 to October 2000, Mr. Beck
      served as Director of Financial Reporting for Urbanfetch.com, Inc. and from
      December 1998 to March 2000, Mr. Beck was an audit manager with Andersen LLP.
      Mr. Beck holds a B.S. from the Fairleigh Dickinson University.  He
      serves
      on the Chief Financial Officers and SEC Practice Committee of the New York
      Society for Certified Public Accountants.





*Scott
      Eagle* has
      served as a Director of our company since December 29, 2004. Since November
      1998, Mr. Eagle has been at Claria Corporation, a leading behavioral online
      marketing firm where he currently is Chief Operating Officer, a position he
      has
      held since January 2, 2007. Mr. Eagle has also served as Claria’s Executive Vice
      President and CMO. Prior to joining Claria, Mr. Eagle was the Vice President
      of
      marketing at Concentric Network Corporation from 1996 to 1998. Before
      Concentric, from 1993 to 1996, Mr. Eagle served as Vice President of Marketing
      at MFS Communications where he launched regional marketing campaigns for the
      start-up MFS Intelenet subsidiary. Mr. Eagle began his career at Procter &
Gamble in marketing and new product development for consumer packaged goods,
      managing brands such as Formula 44 and Chloraseptic. Mr. Eagle holds a B.S.
      from
      the University of Pennsylvania, Wharton School.





*Eric
      I. Richman* has
      served as a Director of our company since December 29, 2004. Since October
      2004,
      Mr. Richman has been Vice President, Business Development and Strategic Planning
      at PharmAthene, Inc., a private biotechnology company. From 2001 to 2003, he
      was
      Vice President, Corporate Development at MaxCyte, Inc., a private biotechnology
      company. Mr. Richman was part of the founding team at MedImmune, Inc., a
      publicly-traded biotechnology company, holding various administrative,
      financial, strategic planning, marketing and international positions between
      1987 and 2000, including Director, International Commercialization with
      MedImmune, Inc. (1998-2000), and Senior Director of Transplantation Products
      (1993-1998). He was a key member on the launch teams for MedImmune's
      biotechnology products, both domestically and internationally. Mr. Richman
      received a B.S. degree in Biomedical Science in 1984 from the Sophie Davis
      School of Biomedical Education (CUNY Medical School) and a Masters of
      Business Administration from the American Graduate School of International
      Management in 1987.




*Thomas
      Lanier*has
      served as a Director of our company since December 29, 2004. Since 1996,
      Mr. Lanier has served as an International Advisor for the U.S. Department
      of the Treasury; during this time he co-wrote the U.S. Treasury's guide to
      external debt issuance for emerging market borrowers. Mr. Lanier also served
      as
      Financial Attache in the Office of International Affairs, U.S. Treasury, Moscow,
      from 2003 to 2005. From 1988 until 1996, Mr. Lanier worked for Chemical Bank
      as
      a U.S. Government Bond Trader (1988-1993), Emerging Markets Salesperson
      (1993-1994) and Emerging Markets Debt Trader (1994-1996). In 1981, Mr. Lanier
      graduated from the United States Military Academy at West Point with a Bachelor
      of Science Degree. Prior to leaving the Army in 1986, he also graduated from
      the
      U.S. Army Airborne School and the U.S. Army Flight School and was responsible
      for planning, organizing and controlling logistical operations on an
      international project for the Army Chief of Staff. In 1988, Mr. Lanier received
      a Masters of Business Administration with an emphasis in finance and marketing
      from the Fuqua School of Business, Duke University.




45





*Dov
      Elefant* became
      our Corporate Controller as of March 16, 2007. Prior to joining Lev
      Pharmaceuticals, Dov S. Elefant held numerous financial positions from December
      1999 to March 2007 at EpiCept Corporation, a publicly-traded pharmaceutical
      company. Most recently, Mr. Elefant was the Controller and Vice President of
      Finance and Administration from April 2004 to March 2007. Mr. Elefant’s
      other positions with EpiCept included Chief Financial Officer and Vice President
      of Finance and Administration. From October 1998 until December 1999,
      Mr. Elefant was Assistant Controller of Alteon Inc., a publicly traded
      biopharmaceutical company. Prior to that, he served as Director of Accounting
      and Finance of Innapharma, Inc., a biopharmaceutical company. Mr. Elefant
      received his B.S. in Accounting from the Sy Syms School of Business of Yeshiva
      University in New York.





**Significant
      Employees**





*Jason
      Bablak* has
      served as our Vice President, Regulatory Affairs and Product Development since
      June 2006 and was our Vice President , Product Development from January 2004
      until June 2006. From 2000 to 2003, Mr. Bablak served as Vice President, Public
      Policy and Legal Affairs for the Immune Deficiency Foundation (“IDF”), a
      national healthcare and patient advocacy organization, and as Vice-President
      and
      General Counsel of Primaryimmune Services Inc., a wholly-owned subsidiary of
      IDF
      which was created to manage clinical trials. From 1997 to 2000, Mr. Bablak
      served as Director, Regulatory Affairs for the Plasma Protein Therapeutics
      Association, an international pharmaceutical trade association representing
      plasma derivative manufacturers, and from 1995 to 1997 Mr. Bablak served as
      Regulatory Counsel for the Voluntary Protection Programs Participants’
Association. From 1993 to 1995, Mr. Bablak was a contract attorney for Popham,
      Haik, Schnobrich & Kaufman. Mr. Bablak received his B.S. degree in biology
      and environmental science from Allegheny College and his J.D. degree from the
      University of Pittsburgh School of Law. Mr. Bablak is 40 years old.





*Joseph
      Truitt* joined
      us
      as our Vice President, Sales and Marketing on July 31, 2006. Mr. Truitt has
      over
      17 years experience in pharmaceutical sales and marketing.  In his most
      recent position prior to joining us, Mr. Truitt was the Vice President, Sales
      and Operation at Ora Pharma, Inc., a Johnson & Johnson company, from June
      2000 to July 2006, where he directed its commercial operations. His experience
      includes various sales, marketing and national account positions at both IMS
      Heath and TAP Pharmaceuticals.  Mr. Truitt holds a BS degree in Marketing
      from LaSalle University and a MBA from St. Joseph’s University Haub School of
      Business.  He also served honorably as an Officer in the United States
      Marine Corps. Mr. Truitt is 42 years old.





**Compensation
      of Directors**





Upon
      their appointment to the Board of Directors, each of our three independent
      directors received a grant of options to purchase 225,000 shares of common
      stock
      at an exercise price of $0.80 per share which vest over a period of three years
      from the date of grant. The
      following Director Compensation Table summarizes the compensation of our
      non-employee directors for services rendered to us during the year ended
      December 31, 2006:





46




**Director
      Compensation Table**





**Name**
            
            **Fees
                Earned or**
              **Paid
                in**
              **Cash**
              **($)**
            
            **Stock**
              **Awards**
              **($)**
            
            **Option**
              **Awards**
              **($)**
            
            **Non-Equity**
              **Incentive
                Plan**
              **Compensation**
              **($)**
            
            **Change
                in**
              **Pension**
              **Value
                and**
              **Nonqualified**
              **Deferred**
              **Compensation**
              **Earnings**
            
            **All
                Other**
              **Compensation**
              **($)**
            
            **Total**
              **($)**(a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)
            
            (f)
            
            (g)
            
            (h)Eric
                Richman
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0Scott
                Eagle
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0Thomas
                Lanier
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0







(1)
            Represents
                fair market value of options granted during the year ended
                December 31, 2006, calculated using the Black-Scholes option pricing
                model and related assumptions as disclosed in Note B [11] of our
                financial
                statements.





(2)
            At
                December 31, 2006, Mr. Richman owned 225,000
                options.





(3)
            At
                December 31, 2006, Mr.  Eagle owned 225,000
                options.





(4)
            At
                December 31, 2006, Mr. Lanier owned 225,000
                options.





On
      February 15, 2007, our Board approved the adoption of a cash compensation policy
      applicable to our non-employee directors. Pursuant to this policy, our
      non-employee directors are eligible to earn a cash fee for special assignments
      authorized by our Chief Executive Officer or Chairman to provide advisory
      services to us as a member of the Board of directors, but in addition to
      ordinary board and/or committee duties, at the rate of $1,000 per day with
      a
      maximum of $60,000 per annum. Unless otherwise approved by the Board, no
      non-employee director is eligible for a special assignment if the assignment
      or
      payment of compensation for the assignment would prevent the director from
      being
      considered independent. On such date the Board also approved the grant of 75,000
      options to each of our non-employee directors. Each option (a) vests in equal
      installments over a four year period, with the first installment vesting on
      the
      one-year anniversary of the grant date of such options; (b) is exercisable
      for a
      period of ten years at a per share exercise price equal to the market price
      of
      our common stock on the date of grant; and (c) is entitled to immediately vest
      and remain exercisable in the event of a Change in Control, as defined in our
      2004 Omnibus Incentive Compensation Plan.





In
      connection with the establishment of our Commercialization Oversight Committee,
      the Board approved the grant of 75,000 options to non-employee directors that
      serve on this Committee, which options vest in four equal annual installments
      commencing on the one year anniversary of the date of grant. These options
      are
      exercisable for a period of ten years at a per share exercise price equal to
      the
      market price of our common stock on the date of grant and are entitled to
      immediately vest and remain exercisable in the event of a Change in Control,
      as
      defined in our 2004 Omnibus Incentive Compensation Plan. Of the initial members
      of this committee, only Mr. Richman is eligible to receive this option
      award.





**Committees
      of the Board of Directors**





**Audit
      Committee**





The
      Audit
      Committee currently consists of Mr. Thomas Lanier. Our Board of Directors has
      determined that Mr. Lanier is “independent” as that term is defined under
      applicable SEC rules. We currently do not have an audit committee financial
      expert serving on our Audit Committee because we have not been able to identify
      a suitable candidate. However, we are interviewing candidates and expect to
      shortly appoint a director who qualifies as an “audit committee financial
      expert” as defined in Item 401(e) of Regulation S-B promulgated by the
      SEC. **** The
      Board
      of Directors has adopted a written charter setting forth the authority and
      responsibilities of the Audit Committee. A copy of this charter is available
      on
      our web site www.levpharma.com.




47





The
      Audit
      Committee's responsibilities include: (i) reviewing the independence,
      qualifications, services, fees, and performance of the independent auditors,
      (ii) appointing, replacing and discharging the independent auditors, (iii)
      pre-approving the professional services provided by the independent auditors,
      (iv) reviewing the scope of the annual audit and reports and recommendations
      submitted by the independent auditors, (v) reviewing the financial statements
      contained in the annual report and quarterly reports and (vi) reviewing our
      financial reporting and accounting policies, including any significant changes,
      with management and the independent auditors. The Audit Committee also prepares
      the Audit Committee report that is required pursuant to the rules of the
      SEC.





**Compensation
      Committee**





We
      have a
      Compensation Committee currently consisting of Mr. Eric Richman and Mr. Scott
      Eagle. The Board of Directors has determined both of the members of the
      Compensation Committee are “independent.” The Board of Directors has adopted a
      written charter setting forth the authority and responsibilities of the
      Compensation Committee. A copy of this charter is available on our web site
      at www.levpharma.com .
      Mr.
      Richman serves as the chairman of this committee.





The
      Compensation Committee has responsibility for assisting the Board of Directors
      in, among other things, evaluating and making recommendations regarding the
      compensation of the executive officers and directors of our Company; assuring
      that the executive officers are compensated effectively in a manner consistent
      with the stated compensation strategy of our Company; producing an annual report
      on executive compensation in accordance with the rules and regulations
      promulgated by the SEC; and periodically evaluating the terms and administration
      of our incentive plans and benefit programs.





**Commercialization
      Oversight Committee**





On
      February 15, 2007, our Board approved the establishment of a new Board
      committee, called the Commercialization Oversight Committee. The primary
      functions of this committee are to review and recommend to the Board
      critical decisions pertaining to the commercialization of our product candidates
      and to originate, review and recommend to the Board new business opportunities
      and collaborations and new product candidates. The committee will also, as
      may
      be appropriate, review and make recommendations to the Board regarding our
      business plan. The initial members of this committee are Mr. Eric Richman,
      Mr.
      Joshua D. Schein, and Mr. Judson Cooper. Mr. Richman, who is an independent
      member of our Board, will serve as the initial Chairman of this committee.





**Code
      of Ethics**





We
      have
      adopted a Code of Business Conduct and Ethics for Officers, Directors and
      Employees that applies to all of our officers, directors and employees. The
      Code
      of Business Conduct and Ethics is available on our website at
      www.levpharma.com.




**Compliance
      with Section 16(a) of the Exchange Act**




Section
      16(a) of the Securities Exchange Act of 1934 requires our directors and
      executive officers and persons who beneficially own more than ten percent of
      our
      common stock to file with the SEC initial reports of ownership and reports
      of
      change in ownership of common stock and other equity securities of our Company.
      Officers, directors and greater than ten percent stockholders are required
      by
      SEC regulations to furnish us with copies of all Section 16(a) forms they file.
      To our knowledge, none of our directors, executive officers or persons who
      beneficially own ten percent or more of our common stock have failed to file,
      on
      a timely basis, the identified reports required by Section 16(a) of the Exchange
      Act during the most recent fiscal year.




48




**ITEM
      10. EXECUTIVE COMPENSATION**




**Summary
      Compensation Table**





The
      following table sets forth information concerning the total compensation that
      we
      have paid or that has accrued on behalf of our chief executive officer and
      other
      executive officers (the “Named Executive Officers”) with annual compensation
      exceeding $100,000 during the fiscal year ended December 31, 2006.





**Summary
      Compensation Table**


Name
                  and Principal Position
              
              Year
              
              Salary
                ($)
              
              Bonus
                ($)
              
              Stock
                  Awards
                ($)
              
              Option
                  Awards
                ($)
              
              All
                  Other Compensation
                ($)
              
              Total
                  ($)(a)
              
              (b)
              
              (c)
              
              (d)
              
              (e)
              
              (f)
              
              (i)
              
              (j)Joshua
                  D. Schein, Ph.D.
                Chief
                  Executive Officer
              
              
              2006
              
              $
              338,038
              (1)
              $
              202,823
              
              
              0
              
              
              0
              
              
              25,401
              (2)
              
              566,262Judson
                  Cooper,
                Chairman,
                  Executive Vice President and Secretary
              
              
              2006
              
              $
              338,038
              (1)
              $
              202,823
              
              
              0
              
              
              0
              
              
              25,401
              (2)
              
              566,262Douglas
                  J. Beck,
                Chief
                  Financial Officer
              
              
              2006
              
              $
              164,525
              
              $
              0
              
              
              38,700
              
              
              0
              
              
              25,401
              (2)
              
              228,626







(1)
      Includes auto allowance of $ 6,000.




(2)
      Consists of premiums paid for medical, dental and vision insurance
      coverages.





For
      a
      discussion of the material terms of our employment agreements with our Named
      Executive Officers, please see the disclosure under the caption “Employment,
      Severance and Change In Control Agreements” below in this Annual Report.





**Outstanding
      Equity Awards at Fiscal Year-End**




The
      following table sets forth certain information concerning outstanding equity
      awards held by our Named Executive Officers as of the year ended December 31,
      2006.




**Option
                Awards**
            
            **Stock
                Awards****Name**
            
            **Number**
              **of**
              **Securities
                Underlying Unexercised Options**
              **(#)**
              **Exercisable**
            
            **Number**
              **of**
              **Securities
                Underlying Unexercised Options**
              **(#)**
              **Unexercisable**
            
            **Equity
                Incentive Plan Awards: Number of Securities Underlying Unexercised
                Unearned Options**
              **(#)**
            
            **Option
                Exercise Price**
              **($)**
            
            **Option
                Expiration Date**
            
            **Number
                of Shares or Units of Stock That Have Not Vested**
              **(#)**
            
            **Market
                Value of Shares or Units of Stock That Have Not
                Vested**
              **($)**
            
            **Equity
                Incentive Plan Awards: Number of Unearned Shares, Units or Other
                Rights
                That Have Not Vested**
              **(#)**
            
            **Equity
                Incentive Plan Awards: Market or Payout Value of Unearned Shares,
                Units or
                Other Rights That Have Not Vested**
              **($)**(a)
            
            (b)
            
            (c)
            
            (d)
            
            (e)
            
            (f)
            
            (g)
            
            (h)
            
            (i)
            
            (j)Joshua
                D. Schein
            
            
            1,427,450
            
            
            0
            
            
            0
            
            $
            0.30(1
            )
            
            11/01/2014
            
            
            __
            
            
            __
            
            
            __
            
            
            __Judson
                Cooper
            
            
            1,427,450
            
            
            0
            
            
            0
            
            $
            0.30(1
            )
            
            11/01/2014
            
            
            __
            
            
            __
            
            
            __
            
            
            __Douglas
                Beck
            
            
            50,000
            
            
            50,000
            (2)
            
            0
            
            $
            1.20
            
            
            03/11/2015
            
            
            __
            
            
            __
            
            
            __
            
            
            __Douglas
                Beck
            
            
            0
            
            
            125,000
            (3)
            
            0
            
            $
            0.50
            
            
            06/07/2016







(1) In
      May
      2005, the Board of Directors determined to reduce the option exercise price
      from
      $0.85 to $0.30 per share. On December 12, 2005, the stockholders approved the
      repricing at the annual stockholders’ meeting. The Company recorded a
      compensation charge of $1,427,450. See (i) Management’s Discussion and Analysis
      and Plan of Operation - Equity and (ii) Note I to our Consolidated Financial
      Statements in this Form 10-KSB. No
      other
      options were granted during the fiscal year ended December 31, 2005.




49




(2)
      Options vested on March 11, 2007.




(3) These
      options vest as follows: 62,500 vest on June 7, 2007 and 62,500 vest on June
      7,
      2008.





**Employment,
      Severance and Change In Control Agreements**





*Employment
      Agreements with Joshua D. Schein and Judson Cooper*





We
      entered into four year employment agreements with each of Joshua D. Schein
      and
      Judson Cooper, effective as of November 1, 2004. Pursuant to the respective
      employment agreements, each of Mr. Schein and Mr. Cooper receives a base salary
      of $312,500 with an annual 5% increase each November ($344,531 effective
      November 1, 2006 to October 31, 2007), options to purchase up to 1,427,450
      shares of our common stock with an exercise price of $0.85 per share and
      customary benefits and reimbursements. In the event Messrs. Schein or Cooper
      are
      terminated in connection with a change in control of our Company, each will
      receive his salary for the remainder of the term of the employment agreement
      and
      all other amounts due pursuant to the employment agreement plus a tax gross-up
      payment. The exercise price of the options was reduced to $0.30 by the Board
      of
      Directors in May 2005, and was approved by the stockholders at the annual
      stockholder meeting on December 12, 2005.





On
      January 23, 2007, we entered into amended and restated employment agreements
      with each of our Chief Executive Officer, Mr. Joshua D. Schein, and Executive
      Vice President and Chairman, Mr. Judson Cooper. Both employment agreements
      are
      effective as of January 17, 2007, are identical in all material respects and
      are
      summarized as follows. As used in the following summary, the term “Executive(s)”
shall refer to Messrs. Schein and Cooper.





·
            The
                employment agreements are for an initial term of four years and at
                the end
                of the initial term renew automatically for additional one year terms
                unless sooner terminated or not renewed. Under the employment agreements,
                the Executives will be entitled to a base salary of $425,000 beginning
                as
                of January 1, 2007. Base salary shall increase at the end of each
                year of
                service (commencing at the end of 2007) by the greater of (i) 4%
                or (ii) a
                percentage equal to the increase, if any, in the United States Department
                of Labor Consumer Price Index (or comparable index, if available)
                for the
                New York metropolitan area over the previous 12 months.






50





·
            Bonus
                potential for 2007 is targeted at 30% of base salary upon achievement
                of
                performance measures to be mutually agreed upon by the Registrant
                and the
                Executives. The Executives shall be eligible to receive a bonus in
                excess
                of the targeted amount, in the discretion of the Compensation Committee
                of
                the Board of Directors. Pursuant to the terms of the employment agreement,
                the Registrant also awarded each of the Executives a cash bonus for
                the
                2006 fiscal year of 60% of their 2006 base salary.





·
            TheExecutives
                were each granted options to purchase 1,600,000 shares of our common
                stock, which options expire ten years from the date of grant and
                which are
                exercisable at an exercise price of $1.60, which was equal to the
                closing
                price of its common stock on the date of grant (January 17, 2007).
                The
                options shall vest in equal annual installments of 25% of the total
                option
                amount until vested in full, subject to the terms and conditions
                of our
                Omnibus Incentive Compensation Plan.





·
            Inthe
                event of the termination of employment by the Registrant without
“cause”
                or by an Executive for “good reason,” as those terms are defined in the
                employment agreements,or
                in the event that the Registrant determines not to renew the employment
                agreements, the Executive would be entitled to: (A) a lump sum payment
                equal to the greater of (x) or (y): (x) (1) two times base salary in
                effect at the date of termination plus (2) two times the greater
                of (the
                “Applicable Bonus”) the bonus paid for the fiscal year prior to the date
                of termination or 60% of his Base Salary in effect at the date of
                termination plus (3) a pro rated bonus for the year of termination
                based
                upon the Applicable Bonus; or (y) (1) base salary as if the Executive
                remained in the employ of the Registrant through December 31, 2010
                plus
                (2) bonus payments as if he remained in the employ of the Registrant
                through December 31, 2010 based upon the Applicable Bonus; (B) continued
                participation in the Registrant’s health and welfare plans for a
                period equal to the greater of two years from the date of termination
                and
                December 31, 2010 or, earlier if the Executive is eligible for comparable
                coverage with a subsequent employer; (C) the options shall be deemed
                fully
                vested on the date of termination and the options shall remain outstanding
                through the expiration of the original ten year term; and (D) all
                compensation accrued but not paid as of the termination date.





·
            The
                definition of “good reason” includes the resignation by the Executives
                after six months following a change in control of the Registrant.





·
            The
                benefits described in the immediately preceding paragraph would also
                be
                paid to an Executive in the event the Registrant terminates the employment
                agreement for death or disability (as defined in the employment
                agreement), provided, however, that in the event of the termination
                due to
                death, the lump sum payment shall be the amount described in clause
                (A)(x)
                above.





·
            If
                the Executive’s employment is terminated by the Registrant for “cause” or
                by him without “good reason,” he is not entitled to any additional
                compensation or benefits other than his accrued and unpaid compensation.With
                respect to the options granted to the Executives under the employment
                agreements, in the event their employment is terminated by the Registrant
                without “cause” or by the Executive for “good reason,” or in the event the
                Registrant elects not to renew the employment agreement, or in the
                event
                of a “Change in Control” as defined in the employment agreements, the
                options granted to the Executives shall be deemed immediately vested
                and
                exercisable for the duration of their term.





·
            The
                employment agreements contain a tax gross-up provision relating to
                any
                excise tax that the Executive incurs by reason of his receipt of
                any
                payment that constitutes an excess parachute payment as defined in
                Section 280G of the Internal Revenue Code, provided that the event
                which caused the imposition of the excise tax arises out of a Change
                in
                Control of the Registrant, as described in the employment agreements.






51





·
            Pursuant
                to the employment agreements, each Executive is subject to customary
                confidentiality and non-competition obligations that survive the
                termination of the employment agreements.




*Employment
      Agreement with Douglas J. Beck*





We
      entered into an employment agreement with Douglas J. Beck, our Chief Financial
      Officer, dated as of June 7, 2006 pursuant to which Mr. Beck will continue
      to
      serve as our Chief Financial Officer for an employment period to June 7, 2008.
      The additional terms and conditions were agreed to in the employment
      agreement:





·
            Mr.
                Beck will receive an annual base salary of $175,000 for the initial
                twelve
                months under the employment agreement and a base salary of $183,500
                for
                the second twelve months under the employment agreement.





·
            In
                connection with his entering into the employment agreement, Mr. Beck
                was
                granted options to purchase 125,000 shares of our common stock at
                an
                exercise price of $0.50 per share, which options vest as follows:
                62,500
                shares vest on the one-year anniversary of the date of grant and
                the
                balance shall vest on the second anniversary of the date of grant.
                In the
                event of a change of control (as defined in our 2004 Omnibus Incentive
                Compensation Plan), the options shall become immediately vested and
                exercisable in accordance with, and subject to, the terms and conditions
                of such plan.





·
            If
                Mr. Beck’s employment is terminated by us without “cause” (as defined
                in the employment agreement), he would be entitled to:
                (i) continuation of his base salary, at the rate then in effect, for
                a period equal to the lesser of six months or the balance of the
                term of
                his employment agreement and (ii) the continued participation in our
                benefit plans (or comparable plans) for the period of time from the
                date
                of termination until the end of the month in which the final severance
                payment is made. If his employment is terminated by us due to his
                disability he would be entitled to a severance payment equal to six
                months
                of his base salary and the continuation of his benefits for an equivalent
                period.





·
            If
                Mr. Beck’s employment is terminated by us for “cause”, he
                (a) would not be entitled to any further compensation or benefits and
                (b) would not be entitled to any additional rights or vesting with
                respect
                to the stock options following the date of termination.





·
            Mr. Beck
                is subject to customary confidentiality obligations, non-solicitation
                and
                non-competition that survive the termination of the employment
                agreement.





*Employment
      Agreement with Jason Bablak*





We
      entered into an employment agreement with Jason Bablak, our Vice President
      -
      Regulatory Affairs and Product Development, dated as of June 7, 2006 pursuant
      to
      which Mr. Bablak will continue to serve as our Vice President - Regulatory
      Affairs and Product Development for an employment period to June 7, 2009. In
      addition, the additional terms and conditions were agreed to in the employment
      agreement:





·
            Mr.
                Bablak will receive an annual base salary of $200,000 during the
                term of
                the agreement and will be entitled to an annual bonus of $20,000
                on each
                anniversary date of the commencement date of the agreement provided
                he
                remains an employee and satisfactorily performs his obligations under
                the
                employment agreement.






52





·
            In
                connection with his entering into the employment agreement, Mr. Bablak
                was
                granted options to purchase 500,000 shares of our common stock at
                an
                exercise price of $0.50 per share, which options vest as follows:
                100,000
                shares vest on the commencement date of the employment agreement,
                options
                to purchase an additional 300,000 shares shall vest in equal amounts
                of
                100,000 on each of the first three anniversary dates of the commencement
                date, and a further amount of options to purchase 100,000 shares
                shall
                vest upon the occurrence of the milestone event specified in the
                employment agreement. In the event of a change of control (as defined
                in
                our 2004 Omnibus Incentive Compensation Plan), the options shall
                become
                immediately vested and exercisable in accordance with, and subject
                to, the
                terms and conditions of such plan.





·
            If
                Mr. Bablak’s employment is terminated by us without “cause” (as
                defined in the employment agreement), he would be entitled to:
                (i) continuation of his base salary, at the rate then in effect, for
                a period equal to the lesser of six months or the balance of the
                term of
                his employment agreement and (ii) the continued participation in our
                benefit plans (or comparable plans) for the period of time from the
                date
                of termination until the end of the month in which the final severance
                payment is made. If his employment is terminated by us due to his
                disability he would be entitled to a severance payment equal to six
                months
                of his base salary and the continuation of his benefits for an equivalent
                period.





·
            If
                Mr. Bablak’s employment is terminated by us for “cause”, he
                (a) would not be entitled to any further compensation or benefits and
                (b) would not be entitled to any additional rights or vesting with
                respect
                to the stock options following the date of termination.





·
            Mr. Bablak
                is subject to customary confidentiality obligations, non-solicitation
                and
                non-competition that survive the termination of the employment
                agreement.





*Employment
      Agreement with Joseph Truitt*





On
      August
      2, 2006, we entered into an employment agreement with Joseph Truitt, our Vice
      President - Marketing and Sales, pursuant to which:




·
            Mr.
                Truitt will serve as our Vice President - Sales and Marketing on
                an
                at-will basis and receive an annual base salary of $240,000 during
                the
                term of the agreement and will be eligible to receive an annual bonus
                of
                up to 35% of his base salary subject to his attainment of performance
                criteria to be approved by the Board. In addition, we awarded Mr.
                Truitt a
                one-time signing bonus of $30,000 upon the execution of the employment
                agreement.





·
            In
                connection with his entering into the employment agreement, Mr. Truitt
                was
                granted options to purchase 600,000 shares of our common stock at
                an
                exercise price equal to the closing price of our common stock, as
                reported
                on the OTC Bulletin Board on the effective date of the employment
                agreement. These options vest as follows: 200,000 shares vest on
                the
                commencement date of the employment agreement, options to purchase
                an
                additional 400,000 shares shall vest in equal amounts of 100,000
                on each
                of the first four anniversary dates of the commencement date. In
                the event
                of a Change of Control (as defined in our 2004 Omnibus Incentive
                Compensation Plan), the options shall become immediately vested and
                exercisable in accordance with, and subject to, the terms and conditions
                of such plan.





·
            If
                Mr. Truitt’s employment is terminated by us without “cause” (as
                defined in the employment agreement), he would be entitled to:
                (i) continuation of his base salary, at the rate then in effect, for
                a period of twelve months and (ii) the continued participation in our
                benefit plans (or comparable plans) for the period of time from the
                date
                of termination until the end of the month in which the final severance
                payment is made.






53





·
            If
                Mr. Truitt’s employment is terminated by us for “cause”, he
                (a) would not be entitled to any further compensation or benefits and
                (b) would not be entitled to any additional rights or vesting with
                respect
                to the stock options following the date of
                termination.





·
            Mr. Truitt
                is subject to customary confidentiality obligations, non-solicitation
                and
                non-competition that survive the termination of the employment
                agreement.





*Offer
      Letter with Dov Elefant*





On
      March
      16, 2007, we entered into an employment relationship with Dov Elefant, our
      Corporate Controller, pursuant to which:




·
            Mr.
                Elefant will serve as our Corporate Controller on an at-will basis
                and
                receive an annual base salary of $195,000 during the term of the
                agreement
                and will be eligible to receive an annual bonus of $20,000 in the
                discretion of the compensation committee of our board of directors.





·
            In
                connection with his employment, Mr. Elefant was granted options to
                purchase 200,000 shares of our common stock at an exercise price
                equal to
                the closing price of our common stock, as reported on the OTC Bulletin
                Board on the date of grant, which was March 19, 2007. These options
                vest
                over a three year period, with 1/3 of the option award vesting on
                the
                one-year anniversary date and the balance vesting in equal monthly
                installments of 1/24 of the remaining option award over the following
                24
                months.





·
            If
                Mr. Elefant’s employment is terminated by us without “cause” within
                three years of his start date (as defined in the offer letter), he
                would
                be entitled to a severance payment of six months of his then-current
                base
                salary.





·
            Mr. Elefant
                is subject to customary confidentiality obligations, non-solicitation
                and
                non-competition that survive the termination of the employment
                agreement.





**2004
      Omnibus Incentive Compensation Plan**





We
      rely
      on incentive compensation in the form of stock options to retain and motivate
      directors, executive officers, employees and consultants. Incentive compensation
      in the form of stock options is designed to provide long-term incentives to
      directors, executive officers employees and consultants, to encourage them
      to
      remain with us and to enable them to develop and maintain an ownership position
      in our common stock.





*Share
      Reserve* .
      A total
      of 10,000,000 shares of our common stock have been reserved for issuance under
      the 2004 Omnibus Incentive Compensation Plan (the “2004 Plan”). As of December
      31, 2006, options for 5,594,900 shares were outstanding under the 2004
      Plan.





*Eligibility
      and Terms of Awards* .
      The
      2004 Plan permits the grant of cash-based awards, options, stock appreciation
      rights, restricted stock units, performance shares, performance units, covered
      employee annual incentive awards, restricted stock awards and other stock-based
      awards to our employees and directors. Options will be either incentive stock
      options, or ISOs, as defined under the Internal Revenue Code of 1986, as
      amended, or the Code, which may be granted solely to employees (including
      officers); or nonstatutory stock options, or NSOs, that do not qualify as
      incentive stock options within the meaning of Section 422 of the Code and which
      may be granted to employees (including officers), directors and
      consultants.




54





*Administration* .
      Our
      Board of Directors administers the 2004 Plan unless it delegates administration
      of the plan to a committee. In either case, the plan administrator determines
      the recipients and terms and conditions applicable to each award made under
      the
      2004 Plan, including the exercise or purchase price, the vesting schedule and
      the ability to exercise an award prior to vesting and the provisions related
      to
      the impact of a termination of employment or service on outstanding awards.
      The
      plan administrator may also amend the terms of the 2004 Plan and outstanding
      equity awards, except that no amendment may adversely affect an award without
      the recipient's written consent. Subject to certain exceptions, **** the
      plan
      administrator may not amend an option to lower its exercise price or exchange
      an
      option for an option with a lower exercise price, another equity award, cash,
      or
      any other consideration or take any other action that is treated as a repricing
      under United States generally accepted accounting principles without the prior
      approval of our stockholders. Amendments to the 2004 Plan are subject to
      stockholder approval to the extent required by law, rule or
      regulation.





*Stock
      Options* .
      Stock
      options are granted pursuant to stock option agreements. The plan administrator
      determines the exercise price for a stock option subject, in the case of ISOs,
      to the requirements of Section 422 of the Code. Options granted under the 2004
      Plan vest at the rate specified in the option agreement.





The
      plan
      administrator determines the term of stock options granted under the 2004 Plan.
      Generally, the term of these stock options may not exceed ten years. The plan
      administrator determines the extent to which the optionee shall have the right
      to exercise the stock option following termination of the optionee's employment
      or provision of services to our Company. In no event may an option be exercised
      after the maximum term provided for in the stock option agreement.





Acceptable
      consideration for the purchase of common stock issued under the 2004 Plan will
      be determined by the plan administrator and may include cash, common stock
      previously owned by the optionee, consideration received in a “cashless”
exercise program implemented by us and other legal consideration approved by
      the
      plan administrator.





Generally,
      an optionee may not transfer a stock option other than by will or the laws
      of
      descent and distribution unless the stock option agreement provides otherwise.
      However, an optionee may designate a beneficiary who may exercise the option
      following the optionee's death.





*Restricted
      Stock Awards* .
      Restricted stock awards may be purchased through a restricted stock purchase
      agreement. The purchase price for restricted stock awards must be at least
      the
      par value of the stock. The purchase price for a restricted stock award may
      be
      payable in cash, the recipient's past services performed for our Company, or
      any
      other form of legal consideration acceptable to the plan
      administrator.




*Stock
      Appreciation Rights* .
      A stock
      appreciation right may be granted pursuant to a stock appreciation right
      agreement. The plan administrator determines the strike price and term for
      a
      stock appreciation right granted under the 2004 Plan. A stock appreciation
      right
      granted under the 2004 Plan vests at the rate specified in the stock
      appreciation right agreement. If an awardee's service relationship with us,
      or
      any of our affiliates, ceases, then the awardee, or his or her beneficiary,
      may
      exercise any vested stock appreciation right after the date such service
      relationship ends for the period of time provided in the stock appreciation
      right agreement. Different post-termination exercise periods may be provided
      in
      the stock appreciation right agreement for specific types of terminations such
      as death, disability or retirement. Our payment to a participant in settlement
      of a stock appreciation right may be made by the delivery of shares of our
      common stock, cash, or any combination of the two.




55





*Effect
      of a Change in Control* .
      Our
      standard form of stock option agreement provides that following specified change
      in control transactions, the equity awards granted under the 2004 Plan will
      be
      fully vested and exercisable if the optionee ceases to perform services for
      the
      surviving or acquiring company within 12 months after the close of the change
      in
      control transaction and the optionee is terminated by the surviving or acquiring
      company for any reason except cause.




**Report
      on Repricing of Options**





Following
      consummation of the Public Company Merger and the Recapitalization Merger,
      our
      Board of Directors in May 2005 determined that the basis for the exchange of
      warrants and options to purchase common stock of Old Lev that were outstanding
      prior to the mergers for warrants and options to purchase our common stock
      after
      the mergers should be changed. Though the number of shares issuable upon
      exercise of these warrants and options was increased, the parties to the mergers
      did not proportionately reduce the exercise price of these warrants and options
      to account for the increase in the number of shares outstanding after the
      mergers. The reduced exercise price of these warrants and options was calculated
      by multiplying the number of shares issuable upon exercise of these warrants
      and
      options prior to the mergers times the relevant exercise price, and then
      dividing that dollar amount by the new number of shares issuable upon exercise
      of these warrants and options after the mergers.




Prior
      to
      the mergers, stock options to purchase 500,000 shares of common stock at an
      exercise price of $0.85 per share were held by each of Joshua D. Schein, Ph.D.,
      our Chief Executive Officer, and by Judson Cooper, our Chairman. After the
      mergers, pursuant to the exchange ratio in the Agreement, each person’s options
      were converted into options to purchase 1,427,450 shares of common stock with
      an
      exercise price of $0.85 per share (an aggregate of 2,854,900 shares). In May
      2005, in addition to repricing certain warrants, the Board further determined,
      subject to obtaining stockholder approval at our next annual meeting, to reduce
      the exercise price of these options from $0.85 to $0.30 per share. The Board
      made the determination to seek stockholder approval because it believed that
      stockholder approval was necessary to reduce the exercise price of such options
      under the terms of our 2004 Omnibus Incentive Compensation Plan. In addition,
      the Board believed that the repricing of these options should be subject to
      stockholder approval because the reduction in exercise price of the stock
      options directly benefits our Chief Executive Officer and Chairman. However,
      it
      should be noted that our Chief Executive Officer and Chairman are also principal
      stockholders who voted on this proposal. The stockholders approved this
      repricing at the annual meeting held on December 12, 2005.





As
      a
      result of the option repricing, Messrs. Schein and Cooper each own options
      to
      purchase 1,427,450 shares of common stock at an exercise price of $0.30 per
      share as opposed to the prior exercise price of $0.85 per share. If they
      exercise all of these options, Messrs. Schein and Cooper would realize a cash
      savings of, and the proceeds received by the Company would be reduced by,
      $785,098 for each of them. A charge of $1,427,450 was recorded to our
      Consolidated Statement of Operations based upon our stock price when our
      stockholders approved the repricing at the stockholders’ meeting and subsequent
      changes to our stock price through December 31, 2005. These charges ceased
      upon
      the adoption of SFAS No. 123R on January 1, 2006.





**ITEM
      11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT**





The
      following table indicates beneficial ownership of our common stock as of March
      1, 2007:





·
            By
                each person or entity known by us to beneficially own more than 5%
                of the
                outstanding shares of our common
                stock;






56






·
            By
                each of our executive officers and directors; and·
            By
                all of our executive officers and directors as a
                group.




Unless
      otherwise indicated, the address of each beneficial owner listed below is c/o
      Lev Pharmaceuticals, Inc., 675 East Third Avenue, Suite 2200, New York, New
      York, 10017. Beneficial ownership is determined in accordance with the rules
      of
      the Securities and Exchange Commission and generally includes voting or
      investment power with respect to securities. Percentage of beneficial ownership
      is based on 114,054,401 shares of our common stock issued and outstanding as
      of
      March 1, 2007.





**Name
                of Beneficial Owner**
            
            **Number
                of**
              **Shares**
            
            **Percentage**
              **of
                Shares**
              **Beneficially**
              **Owned**Judson
                Cooper (1)
            
            
            29,340,102
            
            
            25.4
            %Joshua
                D. Schein, Ph.D. (2)
            
            
            29,901,372
            
            
            25.9
            %Douglas
                J. Beck (3)
            
            
            50,000
            
            
            *Scott
                Eagle (4)
            
            
            150,000
            
            
            *Eric
                I. Richman (5)
            
            
            150,000
            
            
            *Thomas
                Lanier (4)
            
            
            221,372
            
            
            *All
                Directors and Executive Officers as a Group (6 persons)
            
            
            32,339,429
            
            
            27.5
            %Prism
                Ventures, LLC (6)
            
            
            27,473,417
            
            
            24.1
            %Emigrant
                Capital Corp. (7)
            
            
            16,276,116
            
            
            13.7
            %Richard
                Stone (8)
            
            
            6,147,571
            
            
            5.4
            %Southpoint
                Capital Advisors, LP (9)
            
            
            16,000,000
            
            
            13.6
            %Hound
                Partners, LLC (10)
            
            
            10,000,000
            
            
            8.6
            %Alexandra
                Global Master Fund, Ltd. (11)
            
            
            8,602,500
            
            
            7.4
            %







*
      less
      than 1%





(1)
      Consists of (i) 11,000 shares of common stock; (ii) 1,427,450 shares of common
      stock issuable upon exercise of stock options, (iii) 27,473,417 shares of common
      stock owned by Prism Ventures, LLC and the limited liability companies referred
      to in Note 5 below, each of which is owned by Prism Ventures, LLC, a limited
      liability company in which Mr. Cooper owns a 50% interest, and (iv) 428,235
      shares of common stock owned by certain family members of Mr. Cooper. Excludes
      1,600,000 unvested stock options.





(2)
      Includes (i) 1,427,450 shares of common stock issuable upon exercise of stock
      options and (ii) 27,473,417 shares of common stock owned by Prism Ventures,
      LLC
      and the limited liability companies referred to in Note 5 below, each of which
      is owned by Prism Ventures, LLC, a limited liability company in which Mr. Schein
      owns a 50% interest. Excludes 1,600,000 unvested stock options.





(3)
      Includes 50,000 options that vested under the 2004 Stock Option Plan. Does
      not
      include unvested options to purchase 175,000 shares of common
      stock.




57





(4)
      Includes 150,000 options that vested under the 2004 Stock Option Plan. Does
      not
      include unvested options to purchase 75,000 shares of common stock granted
      in
      December 2004 and an additional amount of unvested options to purchase 75,000
      shares of common stock granted in February 2007.





(5)
      Includes 150,000 options that vested under the 2004 Stock Option Plan. Does
      not
      include unvested options to purchase 75,000 shares of common stock granted
      in
      December 2004 and an additional amount of unvested options to purchase 150,000
      shares of common stock granted in February 2007.




(6)
      Includes an aggregate of 20,621,658 shares of common stock owned by Newton
      Partners LLC, Windsor Ventures LLC, Sapphire Ventures LLC, Tudor Technology
      Ventures LLC and Entry Point Capital LLC, each of which is owned by Prism
      Ventures, LLC. Each of Judson Cooper and Joshua D. Schein own a 50% interest
      in
      Prism Ventures, LLC. The address of Prism Ventures, LLC is 524 Clubhouse Road,
      Woodmere, New York 11598.





(7)
      The
      address of Emigrant Capital Corp. is 6 East 43rd Street, New York, New York
      10017.





(8)
      A
      consultant to us.





(9)
      Based
      on Schedule 13G filed October 25, 2005. Robert W. Butts and John S. Clark II
      are
      the managing members of Southpoint Capital Advisors LLC, a Delaware limited
      liability company (“Southpoint CA LLC”) and of Southpoint GP, LLC, a Delaware
      limited liability company (“Southpoint GP LLC”). Southpoint CA LLC is the
      general partner of Southpoint Capital Advisors LP, a Delaware limited
      partnership (“Southpoint Advisors”). Southpoint GP LLC is the general partner of
      Southpoint GP, LP, a Delaware limited partnership (“Southpoint GP”). Southpoint
      GP is the general partner of Southpoint Fund LP, a Delaware limited partnership,
      Southpoint Qualified Fund LP, a Delaware limited partnership, and Southpoint
      Master Fund, LP, a Cayman Islands exempted limited partnership (the “Master
      Fund”). Southpoint Offshore Fund, Ltd., a Cayman Island exempted company, is
      also a general partner of the Master Fund. Southpoint CA LLC, Southpoint GP
      LLC,
      Southpoint Advisors, Southpoint GP, Robert W. Butts and John S. Clark II may
      be
      deemed the beneficial owners of 16,000,000 shares of Common Stock of Lev
      Pharmaceuticals, 12,307,692 of which are shares of Common Stock and 3,692,308
      are shares of Common Stock issuable upon conversion of warrants. The principal
      business address of Southpoint CA LLC, Southpoint GP LLC, Southpoint Advisors,
      Southpoint GP, Robert W. Butts and John S. Clark II is 623 Fifth Avenue, Suite
      2503, New York, NY 10022.





(10)
      Based on Schedule 13G filed October 25, 2005. Jonathan Auerbach is the managing
      member of Hound Performance, LLC (“Hound Performance”) and Hound Partners, LLC
      (“Hound Partners LLC”), investment management firms that serve as the general
      partner and investment manager, respectively, to Hound Partners, LP (“Hound
      Partners LP”) and Hound Partners Offshore Fund, LP (“Hound Offshore”). Hound
      Partners LP may be deemed to be the beneficial owner of, and has the shared
      power to vote, dispose, or direct the voting or disposition of, 4,939,000 shares
      of common stock of Lev Pharmaceuticals, Inc. (including warrants to purchase
      1,139,769 shares of common stock).  Hound Offshore may be deemed to be the
      beneficial owner of, and has the shared power to vote, dispose, or direct the
      voting or disposition of, 5,061,000 shares of common stock of Lev
      Pharmaceuticals, Inc. (including warrants to purchase 1,167,923 shares of common
      stock).  Jonathan Auerbach, as managing member of Hound Performance and
      Hound Partners LLC has the power to vote, dispose, or direct the voting or
      disposition of, the 10,000,000 shares of common stock of Lev Pharmaceuticals,
      Inc. The principal business address of Hound Partners, LLC, Hound Performance,
      LLC, and Jonathan Auerbach is 101 Park Avenue, 48th Floor, New York, New York
      10178.





(11)
      Based on Schedule 13G filed October 30, 2005. Alexandra Investment Management,
      LLC, a Delaware limited liability company (“AIM”), serves as investment adviser
      to Alexandra Global Master Fund Ltd., a British Virgin Islands company
      (“Alexandra”). By reason of such relationship, AIM may be deemed to share
      dispositive power over the shares of common stock stated as beneficially owned
      by Alexandra. AIM disclaims beneficial ownership of such shares of common stock.
      Mr. Mikhail A. Filimonov (“Filimonov”) is the Chairman, Chief Executive Officer,
      Chief Investment Officer and a managing member of AIM. By reason of such
      relationships, Filimonov may be deemed to share dispositive power over the
      shares of common stock stated as beneficially owned by Alexandra. Filimonov
      disclaims beneficial ownership of such shares of common stock. Alexandra's
      address is c/o AIM, 767 Third Avenue, 39 th Floor,
      New York, New York 10017.





**ITEM
      12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**





See
      the
      discussion above under the caption “Executive Compensation - Employment,
      Severance and Change in Control Agreements ”
for
      the
      terms and conditions of the employment agreements we entered into with our
      executive officers and other members of our senior management team.




58





On
      August
      6, 2004, Timothy E. Evon, Thomas T. Evon and William H. Hamen (“Sellers”) sold
      an aggregate of 1,441,027 shares of FCP common stock to Earnest Mathis, Gary
      McAdam and Gary A. Agron, each former principal stockholders of our company
      (“Purchasers”). Messrs. Mathis, McAdam and Agron acquired 480,342 shares,
      480,342 shares and 480,343 shares, respectively. The purchase price for the
      shares was $300,000 plus the assumption by the Purchasers of approximately
      $66,800 of our liabilities. The Purchasers also agreed to pay the Sellers a
      portion of any profits earned by the Purchasers upon any resale of the shares.
      The purchase price was satisfied by the delivery to Sellers from Purchasers
      of a
      non-interest bearing $300,000 promissory note due no later than February 6,
      2006
      and the assumption by the Purchasers of the aforesaid liabilities of our company
      in the approximate amount of $66,800. On October 2, 2004, Gary J. McAdam, Gary
      A. Agron and Mathis Family Partners, Ltd., each a former principal stockholder,
      agreed to provide FCP a line of credit up to an aggregate of $100,000. Any
      borrowings were to bear interest at 6% per annum, any outstanding amounts were
      due on demand and the obligation of the lenders to loan any funds terminated
      upon the Public Company Merger. There were no borrowings under the line of
      credit. In consideration for the line of credit, FCP issued to each of Gary
      J.
      McAdam, Gary A. Agron and Mathis Family Partners, Ltd. 871,317 shares of FCP's
      common stock or an aggregate of 2,613,951 shares.





In
      March
      2004, we entered into a consulting agreement with Richard Stone  a nd
      granted to Mr. Stone a fully vested warrant in consideration for assisting
      us in
      developing our strategic business plan, obtaining the Sanquin license and
      consulting on our corporate structure. The warrant was for the purchase of
      7,327,576 shares of common stock at an exercise price of $0.10 per share,
      expiring in March 2014.On August 23, 2004, Mr. Stone exercised these warrants
      on
      a “cashless exercise” transaction pursuant to which we issued a total of
      6,297,571 shares of common stock. On April 1, 2005, w e
      entered
      into a one year consulting agreement commencing April 1, 2005 with Richard
      Stone. We renewed this agreement with Mr. Stone in April 2006. Mr. Stone is
      paid
      $120,000 per year for his services, with payments made quarterly. Mr. Stone
      beneficially owns 5.4% of our outstanding common stock.





**ITEM
      13. EXHIBITS**





Exhibit
              Number
            
            Description2.1
            
            Agreement
                and Plan of Merger by and among Fun City Popcorn, Inc., Lev Acquisition
                Corp. and Lev Pharmaceuticals, Inc., dated November 5, 2004 (incorporated
                by reference herein to Exhibit 2.1 to Form 8-K filed November 10,
                2004).2.2
            
            Amendment
                No. 1 to Agreement and Plan of Merger by and among Fun City Popcorn,
                Inc.,
                Lev Acquisition Corp. and Lev Pharmaceuticals, Inc., dated as of
                December
                8, 2004 (incorporated by reference herein to Exhibit 2.2 to the Form
                10-K/SB filed December 29, 2004).3.1
            
            Certificate
                of Incorporation (incorporated by reference herein to Exhibit A to
                the
                Information Statement on Schedule 14C filed January 26,
                2005).3.2
            
            Bylaws
                (incorporated by reference herein to Exhibit B to the Information
                Statement on Schedule 14C filed January 26, 2005).4.1*
            
            2004
                Omnibus Incentive Compensation Plan (incorporated by reference herein
                to
                Exhibit 4.1 to Form 8-K filed January 4, 2005).4.2
            
            Form
                of Investor Warrant issued in connection with May 2005 Private Placement
                (incorporated by reference herein to Exhibit 4.1 to Form 8-K filed
                May 9, 2005).4.3
            
            Form
                of Agent Warrant issued in connection with May 2005 Private Placement
                (incorporated by reference herein to Exhibit 4.2 to Form 8-K filed
                May 9, 2005).4.4
            
            Warrant
                issued to Ashton Partners dated March 17, 2004 (incorporated by reference
                herein to Exhibit 4.4 to Registration Statement on Form SB-2/A filed
                on
                October 24, 2005).4.5
            
            Warrant
                issued to Lawler Scientific, LLC dated August 9, 2004 (incorporated
                by
                reference herein to Exhibit 4.5 to Registration Statement on Form
                SB-2/A
                filed on October 24, 2005).






59






4.6
            
            Form
                of Warrant issued in connection with October 2006 Private Placement
                (incorporated by reference herein to Exhibit 4.1 to Form 8-K filed
                October 20, 2006).10.1*
            
            Employment
                Agreement dated as of November 1, 2004 between Lev Pharmaceuticals,
                Inc.
                and Judson Cooper (incorporated by reference herein to Exhibit 10.1
                to
                Form 8-K filed January 4, 2005).10.2*
            
            Employment
                Agreement dated as of November 1, 2004 between Lev Pharmaceuticals,
                Inc.
                and Joshua D. Schein (incorporated by reference herein to Exhibit
                10.2 to
                Form 8-K filed January 4, 2005).10.3
            
            Distribution
                and Manufacturing Services Agreement between Lev Pharmaceuticals,
                Inc. and
                Sanquin Blood Supply Foundation dated as of January 16, 2004 (incorporated
                by reference herein to Exhibit 10.3 to Form 10-KSB filed March 31,
                2005).#10.3.1
            
            First
                Amendment to the Distribution and Manufacturing Services Agreement
                between
                Lev Development Corp. and Sanquin Blood Supply Foundation dated as
                of
                January 30, 2006(incorporated
                by reference herein to Exhibit 10.3.1 to Form 10-KSB filed March
                31,
                2006).10.3.2
            
            Amendment
                No. 2 to Distribution and Manufacturing Services Agreement between
                Lev
                Development Corp. and Sanquin Blood Supply Foundation dated as of
                January
                31, 2006(incorporated
                by reference herein to Exhibit 10.3.2 to Form 10-KSB filed March
                31,
                2006).#10.4
            
            Exclusive
                License Agreement between Lev Pharmaceuticals, Inc. and Sanquin Blood
                Supply Foundation dated as of January 27, 2004 (incorporated by reference
                herein to Exhibit 10.4 to Form 10-KSB filed March 31, 2005).#10.5
            
            Registration
                Rights Agreement dated as of March 19, 2004 (incorporated by reference
                herein to Exhibit 10.5 to Registration Statement on Form SB-2/A filed
                on
                October 24, 2005).10.5.1
            
            Form
                of Amendment No. 1 to 2004 Registration Rights Agreement dated as
                of July
                21, 2005 (incorporated by reference herein to Exhibit 10.5.1 to
                Registration Statement on Form SB-2/A filed on October 24,
                2005).10.6
            
            Form
                of Investor Registration Rights Agreement dated as of May 3, 2005
                (incorporated by reference herein to Exhibit 10.1 to Form 8-K filed
                May 9, 2005).10.6.1
            
            Form
                of Amendment No. 1 to Registration Rights Agreement dated as of July
                18,
                2005 (incorporated by reference herein to Exhibit 10.6.1 to Registration
                Statement on Form SB-2/A filed on October 24, 2005).10.7
            
            Form
                of Placement Agent Registration Rights Agreement dated as of May
                3, 2005
                (incorporated by reference herein to Exhibit 10.2 to Form 8-K filed
                May 9, 2005).10.7.1
            
            Form
                of Amendment No. 1 to Placement Agent Registration Rights Agreement
                dated
                as of June 14, 2006 (incorporated by reference herein to Exhibit
                10.7.1 to
                Post-Effective Amendment No. 1 to Registration Statement on Form
                SB-2
                filed on June 16, 2006).10.8
            
            Investor
                Rights Agreement dated as of March 19, 2004 (incorporated by reference
                herein to Exhibit 10.8 to Registration Statement on Form SB-2/A filed
                on
                October 24, 2005).10.9*
            
            Employment
                Agreement dated as of June 7, 2006 between Lev Pharmaceuticals, Inc.
                and
                Douglas Beck (incorporated by reference herein to Exhibit 10.1 to
                Form 8-K
                filed June 12, 2006).10.10*
            
            Employment
                Agreement dated as of June 7, 2006 between Lev Pharmaceuticals, Inc.
                and
                Jason Bablak (incorporated by reference herein to Exhibit 10.2 to
                Form 8-K
                filed June 12, 2006).10.11*
            
            Employment
                Agreement dated as of August 2, 2006 between Lev Pharmaceuticals,
                Inc. and
                Joseph Truitt (incorporated by reference herein to Exhibit 10.2 to
                Form
                8-K filed August 3, 2006).10.12
            
            Form
                of Securities Purchase Agreement dated as of October 16, 2006
                (incorporated by reference herein to Exhibit 10.1 to Form 8-K filed
                on
                October 20, 2006).10.13
            
            Form
                of Registration Rights Agreement dated as of October 16, 2006
                (incorporated by reference herein to Exhibit 10.2 to Form 8-K filed
                on
                October 20, 2006).10.14
            
            Form
                of Lease Agreement dated as of December 20, 2006 between Lev
                Pharmaceuticals, Inc. and DOLP 675 Properties II, LLC (incorporated
                by
                reference herein to Exhibit 10.1 to Form 8-K filed on December 22,
                2006).10.15*§
            
            Employment
                Agreement dated as of January 17, 2007 between Lev Pharmaceuticals,
                Inc.
                and Judson Cooper.10.16*§
            
            Employment
                Agreement dated as of January 17, 2007 between Lev Pharmaceuticals,
                Inc.
                and Joshua D. Schein.10.17*§
            
            Offer
                Letter dated March 16, 2007 between Lev Pharmaceuticals, Inc. and
                Dov
                Elefant14.1
            
            Code
                of Ethics (incorporated by reference herein to Exhibit 14.1 to Form
                10-KSB
                filed March 31, 2005).21.1
            
            Subsidiary
                of the Registrant (incorporated by reference herein to Exhibit 21.1
                to
                Form 10-KSB filed March 31, 2005).






60




31.1§
            
            Certification
                of Chief Executive Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200231.2§
            
            Certification
                of Chief Financial Officer pursuant to Section 302 of the
                Sarbanes-Oxley Act of 200232.1§
            
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.32.2§
            
            Certification
                of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
                adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002.









*
      Management contract or compensatory plan or arrangement required.




§
Filed
      herewith.




# Confidential
      treatment has been granted with respect to portions of this document pursuant
      to
      Rule 24b-2 of the Securities Exchange Act. The redacted portions of this
      document were filed separately with the Securities and Exchange
      Commission.





61


**ITEM
      14.    PRINCIPAL ACCOUNTANT FEES AND
      SERVICES** ****




**Audit
      Fees.**




The
      aggregate fees billed and unbilled for professional services rendered by the
      Company’s principal accountants for the audits and reviews of the Company’s
      financial statements including the financial statements contained in this Form
      10-KSB were $97,337 for the year ended December 31, 2006, which includes reviews
      of the Form 10-QSB and $70,000 for the year ended December 31, 2006 and December
      31, 2005, respectively.




**Audit-Related
      Fees.**




For
      the
      years ended December 31, 2006 and December 31, 2005, we were billed $37,470
      and
      $38,572, respectively, for non-audit fees related to the Company’s registration
      statements and attending the 2005 stockholders’ meeting.




**Tax
      and Other Fees.**




The
      Company was billed $19,082 during December 31, 2006 by its principal accountant
      for tax compliance matters and other services and was not billed for such
      services during December 31, 2005.




**Policy
      on Audit Committee Pre-Approval of Audit, Audit-Related and Permissible
      Non-Audit Services of the Independent Registered Public
      Accountants**




Consistent
      with SEC policies and guidelines regarding audit independence, the Audit
      Committee is responsible for the pre-approval of all audit and permissible
      non-audit services provided by our principal accountants on a case-by-case
      basis. Our Audit Committee has established a policy regarding approval of all
      audit and permissible non-audit services provided by our principal accountants.
      Our Audit Committee pre-approves these services by category and service. Our
      Audit Committee has pre-approved all of the services provided by our principal
      accountants.





62


**SIGNATURES**





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


**LEV
                PHARMACEUTICALS, INC.**March
                30, 2007
            By:
            /s/
                Joshua D. ScheinJoshua
                D. ScheinChief
                Executive Officer




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





**NAME**
            
            **TITLE**
            
            **DATE**/s/
                Joshua D. Schein
            
            Chief
                Executive Officer and
            
            March
                30, 2007Joshua
                D. Schein
            
            Director (Principal
              Executive Officer)/s/
                Judson Cooper
            
            Chairman
                of the Board, Executive
            
            March
                30, 2007Judson
                Cooper
            
            Vice
                President and Secretary/s/
                Douglas J. Beck
            
            Chief
                Financial Officer
            
            March
                30, 2007Douglas
                J. Beck
            
            (Principal
                Financial and Accounting Officer)/s/
                Scott Eagle
            
            Director
            
            March
                30, 2007Scott
                Eagle/s/
                Eric I. Richman
            
            Director
            
            March
                30, 2007Eric
                I. Richman/s/
                Thomas Lanier
            
            Director
            
            March
                30, 2007Thomas
                Lanier/s/
                Dov Elefant
            
            Corporate
                Controller
            
            March
                30, 2007Dov
                Elefant











**CONSOLIDATED
      FINANCIAL STATEMENTS**




Contents
            
            PageReport
                of independent registered public accounting firm
            
            
            F-2Consolidated
                Balance sheet as of December 31, 2006
            
            
            F-3Consolidated
                Statements of operations for the period from July 21, 2003 (inception)
                to
              December
                31, 2006 and for the years ended December 31, 2006 and
                2005
            
            
            F-4Consolidated
                Statements of changes in stockholders' equity for the year ended
                December
                31,
              2006
                and the period from July 21, 2003 (inception) to December 31,
                2006
            
            
            F-5Consolidated
                Statements of cash flows for the period from July 21, 2003 (inception)
                to
              December
                31, 2006 and for the years ended December 31, 2006 and
                2005
            
            
            F-6Notes
                to financial statements
            
            
            F-7




F-1





**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





Board
      of
      Directors and Stockholders


Lev
      Pharmaceuticals, Inc.





We
      have
      audited the accompanying consolidated balance sheet of Lev Pharmaceuticals,
      Inc.
      and subsidiary (the “Company”) (a development stage enterprise) as of December
      31, 2006, the related consolidated statements of operations and cash flows
      for
      the periods from July 21, 2003 (inception) to December 31, 2006 and for each
      of
      the years ended December 31, 2006 and December 31, 2005 and the consolidated
      statements of changes in stockholders’ equity for each of the years ended
      December 31, 2006 and 2005 and for the period from July 21, 2003 (inception)
      to
      December 31, 2004. 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 audits 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 enumerated above present fairly, in all
      material respects, the consolidated financial position of Lev Pharmaceuticals,
      Inc. and subsidiary as of December 31, 2006, and the consolidated results of
      their operations and their consolidated cash flows for the periods from July
      21,
      2003 (inception) to December 31, 2006 and for each of the years ended December
      31, 2006 and December 31, 2005, in conformity with accounting principles
      generally accepted in the United States of America.





As
      discussed in Note B[11] to the Consolidated Financial Statements, the Company
      changed its method of accounting for stock-based compensation effective January
      1, 2006.





**/s/
      Eisner LLP**





New
      York,
      New York


March
      23,
      2007





F-2





**LEV
      PHARMACEUTICALS, INC. AND SUBSIDIARY**


(a
      development stage enterprise)





**Consolidated
      Balance Sheet**


**December
      31, 2006**





**ASSETS**Current
                assets:Cash
                and cash equivalents
            
            $
            7,887,635Investments
                - held to maturity
            
            
            9,999,845Prepaid
                expenses
            
            
            378,786Other
                assets
            
            
            82,030Total
                current assets
            
            
            18,348,296Fixed
                assets, net of accumulated depreciation
            
            
            131,094Other
            
            
            93,335$
            18,572,725**LIABILITIES**Current
                liabilities:Accounts
                payable
            
            $
            1,662,651Accrued
                expenses
            
            
            1,494,548Total
                current liabilities
            
            
            3,157,199Loan
                payable, net of discount
            
            
            1,803,554Total
                liabilities
            
            
            4,960,753Commitments
                and contingencies**STOCKHOLDERS'
                EQUITY**Preferred
                stock - $0.01 par value, 20,000,000 authorized,no
                shares issued and outstandingCommon
                stock - $0.01 par value, 200,000,000 shares authorized,114,010,237
                shares issued and outstanding
            
            
            1,140,102Additional
                paid-in capital
            
            
            35,660,209Deficit
                accumulated during the development stage
            
            
            (23,188,339
            )Total
                stockholders' equity
            
            
            13,611,972$
            18,572,725




See
        notes
        to consolidated financial statements


F-3




**LEV
        PHARMACEUTICALS, INC. AND SUBSIDIARY**
 (a
        development stage enterprise)


**Consolidated
      Statements of Operations**




Period
                From July 21, 2003 (Inception) to December 31,
            
            Year
                Ended December 31,2006
            
            2006
            
            2005Costs
                and expenses:Research
                and development
            
            $
            10,670,226
            
            $
            7,167,459
            
            $
            2,368,834Merger
                cost payments to certain Fun City Popcorn,Inc.
                shareholders
            
            
            283,732General
                and administrative
            
            
            12,321,081
            
            
            4,835,444
            
            
            4,110,005Loss
                before other income (expense)
            
            
            (23,275,039
            )
            
            (12,002,903
            )
            
            (6,478,839
            )Other
                income (expense):Interest
                income
            
            
            514,659
            
            
            281,852
            
            
            181,895Interest
                expense
            
            
            (57,904
            )
            
            (46,438
            )
            
            (11,412
            )Net
                loss
            
            $
            (22,818,284
            )
            $
            (11,767,489
            )
            $
            (6,308,356
            )Net
                loss per share - basic and diluted
            
            
            
            
            
            ($0.13
            )
            
            ($0.08
            )Weighted
                average shares - basic and diluted
            
            
            
            
            
            88,235,294
            
            
            79,624,173




See
        notes
        to consolidated financial statements


F-4




**LEV
      PHARMACEUTICALS, INC. AND SUBSIDIARY**


(a
      development stage enterprise)


**Consolidated
      Statements of Changes in Stockholders' Equity (Notes A, G and
      I)**


**Year
        Ended December 31, 2006 and 2005 and the Period From July 21, 2003 (Inception)
        to December 31, 2004**
 **Deficit****Accumulated****Additional**
                
                
                
                **During
                    the****Preferred
                    Stock**
                
                **Common
                    Stock**
                
                **Paid-in**
                
                **Subscription**
                
                **Development****Shares**
                
                **Amount**
                
                **Shares**
                
                **Amount**
                
                **Capital**
                
                **Receivable**
                
                **Stage**
                
                **Total**Issuance
                    of founders’ shares ($0.01 per share) issued July 22, 2003
                
                
                
                
                
                
                
                
                37,018,531
                
                $
                370,185
                
                
                
                
                $
                (130
                )
                $
                (370,055
                )
                $
                0Sale
                    of shares in December 2003 at $0.26 per share
                
                
                
                
                
                
                
                
                1,141,960
                
                
                11,420
                
                $
                288,580
                
                
                
                
                
                
                
                
                300,000Proceeds
                    from subscription receivable in December 2003
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                130
                
                
                
                
                
                130Net
                    loss for the period from July 21, 2003 (inception) to December
                    31,
                    2003
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (120,225
                )
                
                (120,225
                )Balance
                    - December 31, 2003
                
                
                
                
                
                
                
                
                38,160,491
                
                
                381,605
                
                
                288,580
                
                
                0
                
                
                (490,280
                )
                
                179,905Sale
                    of common stock in February 2004 at $0.26 per share
                
                
                
                
                
                
                
                
                3,425,879
                
                
                34,259
                
                
                865,741
                
                
                
                
                
                
                
                
                900,000Sale
                    of common stock in February and March 2004 at $0.30 per share,
                    net of
                    issuance costs of $51,465
                
                
                
                
                
                
                
                
                23,913,848
                
                
                239,138
                
                
                6,829,357
                
                
                
                
                
                
                
                
                7,068,495Issuance
                    of warrants to purchase 7,327,576 shares of common stock to consultants
                    at
                    fair value, in March 2004
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,985,562
                
                
                
                
                
                
                
                
                1,985,562Issuance
                    of warrants to purchase 111,341 shares of common stock to consultant
                    at
                    fair value, in August 2004
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                19,968
                
                
                
                
                
                
                
                
                19,968Cashless
                    exercise of warrants in August 2004
                
                
                
                
                
                
                
                
                6,297,571
                
                
                62,976
                
                
                (62,976
                )
                
                
                
                
                
                
                
                0Shares
                    deemed issued in connection with Fun City Popcorn, Inc. merger
                    on December
                    29, 2004
                
                
                
                
                
                
                
                
                4,505,530
                
                
                45,055
                
                
                (109,518
                )
                
                
                
                
                
                
                
                (64,463
                )Issuance
                    of Series A preferred stock and automatic conversion into common
                    shares in
                    connection with the merger of Fun City Popcorn, Inc. on December
                    29, 2004
                    (Note A)Modification
                    of options and warrants in connection with merger treated as
                    compensation
                    expense
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                75,201
                
                
                
                
                
                
                
                
                75,201Net
                    loss for the year ended December 31, 2004
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (4,622,214
                )
                
                (4,622,214
                )Balance
                    - December 31, 2004
                
                
                
                
                
                
                
                
                76,303,319
                
                
                763,033
                
                
                9,891,915
                
                
                0
                
                
                (5,112,494
                )
                
                5,542,454Issuance
                    of common stock and warrants in May 2005, at $1.00 per share,
                    net of
                    issuance cost of $679, 677
                
                
                
                
                
                
                
                
                5,044,774
                
                
                50,448
                
                
                4,314,649
                
                
                
                
                
                
                
                
                4,365,097Repricing
                    of warrant (Note I) in May 2005
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                27,819
                
                
                
                
                
                
                
                
                27,819Cashless
                    exercise of warrant in September 2005
                
                
                
                
                
                
                
                
                179,451
                
                
                1,794
                
                
                (
                    1,794
                )
                
                
                
                
                
                
                
                0Issuance
                    of warrants for services to purchase 50,000 shares of common
                    stock at fair
                    value in October 2005
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                11,329
                
                
                
                
                
                
                
                
                11,329Repricing
                    of vested options to executive officers in December 2005
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                1,427,450
                
                
                
                
                
                
                
                
                1,427,450Net
                    loss for the year ended December 31, 2005
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (6,308,356
                )
                
                (6,308,356
                )Balance
                    - December 31, 2005
                
                
                
                
                
                
                
                
                81,527,544
                
                
                815,275
                
                
                15,671,368
                
                
                0
                
                
                (11,420,850
                )
                
                5,065,793Issuance
                    of warrants to purchase 275,000 shares of common stock at fair
                    value in
                    January and June 2006 for services rendered
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                58,403
                
                
                
                
                
                
                
                
                58,403Issuance
                    of common stock in May 2006 at $0.45 per share for services rendered
                
                
                
                
                
                
                
                
                175,000
                
                
                1,750
                
                
                77,000
                
                
                
                
                
                
                
                
                78,750Stock
                    based compensation
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                457,351
                
                
                
                
                
                
                
                
                457,351Issuance
                    of common stock and warrants in October 2006, net of issuance
                    costs:
                    $1,415,255
                
                
                
                
                
                
                
                
                32,307,693
                
                
                323,077
                
                
                19,261,668
                
                
                
                
                
                
                
                
                19,584,745Value
                    of 125,000 vested warrants at fair value in December 2006 for
                    services
                    rendered
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                134,419
                
                
                
                
                
                
                
                
                134,419Net
                    loss for the year ended December 31, 2006
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (11,767,489
                )
                
                (11,767,489
                )Balance
                    - December 31, 2006
                
                
                
                
                
                
                
                
                114,010,237
                
                $
                1,140,102
                
                $
                35,660,209
                
                $
                0
                
                $
                (23,188,339
                )
                $
                13,611,972




See
      notes
      to consolidated financial statements




F-5




**LEV
      PHARMACEUTICALS, INC. AND SUBSIDIARY**


(a
      development stage enterprise)




**Consolidated
      Statements of Cash Flows**




Cumulative
                Period From July 21, 2003 (Inception) to December 31,
            
            Year
                Ended December 31,2006
            
            2006
            
            2005**Cash
                flows from operating activities:**Net
                loss
            
            $
            (22,818,284
            )
            $
            (11,767,489
            )
            $
            (6,308,356
            )Adjustments
                to reconcile net loss to net cash usedin
                operating activities:Repricing
                of options and warrants
            
            
            1,455,269
            
            
            
            
            
            1,455,269Compensation
                to consultants from issuance of warrants
            
            
            2,209,177
            
            
            192,822
            
            
            10,825Option
                and warrants modification resulting from merger
            
            
            75,201Stock
                issued for services
            
            
            78,750
            
            
            78,750Depreciation
                expense
            
            
            30,302
            
            
            19,542
            
            
            10,474Supplier
                purchase funding
            
            
            788,796
            
            
            749,979
            
            
            38,817Amortization
                of debt discount
            
            
            1,014,758
            
            
            737,498
            
            
            277,260Accretion
                of investment income
            
            
            (12,610
            )
            
            (12,610
            )Stock
                compensation to employees
            
            
            457,351
            
            
            457,351Changes
                in:Prepaid
                expenses and other assets
            
            
            (553,647
            )
            
            (200,424
            )
            
            (31,028
            )Accounts
                payable
            
            
            1,
                662,651
            
            
            1,005,421
            
            
            657,230Accrued
                expenses
            
            
            1,494,548
            
            
            1,142,512
            
            
            108,411Income
                tax liability
            
            
            (64,463
            )
            
            
            
            
            (82,916
            )Deferred
                lease liability
            
            
            
            
            
            (2,519
            )
            
            (2,338
            )Net
                cash used in operating activities
            
            
            (14,182,201
            )
            
            (7,599,167
            )
            
            (3,866,352
            )**Cash
                flows from investing activities:**Purchase
                of fixed assets
            
            
            (161,396
            )
            
            (80,714
            )
            
            (73,246
            )Purchase
                of investments
            
            
            (9,987,235
            )
            
            (7,499,845
            )
            
            (2,487,390
            )Net
                cash used in investment activities
            
            
            (10,148,631
            )
            
            (7,580,559
            )
            
            (2,560,636
            )**Cash
                flows from financing activities:**Proceeds
                from notes payable to stockholder
            
            
            18,000Repayment
                of notes payable to stockholder
            
            
            (18,000
            )Net
                proceeds from sale of common stock and warrants
            
            
            32,218,337
            
            
            19,584,745
            
            
            4,365,097Proceeds
                from stock subscription receivable
            
            
            130Net
                cash provided by financing activities
            
            
            32,218,467
            
            
            19,584,745
            
            
            4,365,097**Net
                increase (decrease) in cash and cash equivalents**
            
            
            7,887,635
            
            
            4,405,019
            
            
            (2,061,891
            )Cash
                and cash equivalents - beginning of period
            
            
            
            
            
            3,482,616
            
            
            5,544,507**Cash
                and cash equivalents - end of period**
            
            $
            7,887,635
            
            $
            7,887,635
            
            $
            3,482,616




**Supplemental
        non-cash investing and financing activities:**





Issuance
      of 179,451 shares of common stock in connection with the cashless exercise
      of a
      warrant to purchase 190,327 shares in September 2005 (Note G).





See
      notes
      to consolidated financial statements


F-6


**LEV
        PHARMACEUTICALS, INC. AND SUBSIDIARY**
 (a
        development stage enterprise)




**N** **OTES** **T** **O** **C** **ONSOLIDATED** **F** **INANCIAL** **S** **TATEMENTS**
 **N** **OTE** **A** **-** **O** **RGANIZATION** **A** **ND** **B** **USINESS**





Fun
      City
      Popcorn, Inc. (“FCP”), a non-operating public company, was incorporated on
      September 18, 1985 in the State of Nevada.





On
      November 5, 2004, FCP entered into an agreement and plan of merger (the
“Agreement”) with Lev Development Corp., formerly known as Lev Pharmaceuticals,
      Inc. (“Lev”), which was incorporated on July 21, 2003 in the State of Delaware.
      Lev is a development stage company which is engaged in developing and
      commercializing therapeutic products for the treatment of inflammatory diseases.
      On December 29, 2004, the merger closed and pursuant to the Agreement, FCP
      acquired 100% of the outstanding capital stock of Lev through its subsidiary
      Lev
      Acquisition Corp. (“LAC”). In connection with the merger, FCP subsequently
      changed its name to Lev Pharmaceuticals, Inc. and increased its authorized
      common stock to 200,000,000 shares and its authorized preferred stock to
      20,000,000 shares. Under the terms of the Agreement, the stockholders of Lev
      exchanged all of their issued and outstanding shares of common stock for
      5,029,795 shares of FCP common stock, and 4,789,433 shares of FCP Series A
      voting convertible preferred stock (the “Exchange”). Each Series A voting
      convertible preferred share was converted automatically into 13.940668 shares
      of
      FCP common stock (an aggregate of 66,767,994 common shares). The 71,797,789
      shares of common stock represented approximately 94.10% of the ownership
      interests in FCP following the merger. In addition, 4,505,530 shares of common
      stock of FCP were deemed issued and outstanding in connection with the Exchange.
      In addition, all of the outstanding Lev options and warrants immediately prior
      to the merger were exchanged for 2,854,900 FCP options and 301,668 FCP warrants.
      The Exchange, which resulted in the stockholders of Lev having control of FCP,
      represents a recapitalization of FCP, or a “reverse merger” rather than a
      business combination. In connection therewith, FCP's historical capital accounts
      were retroactively adjusted to reflect the equivalent number of shares issued
      by
      FCP in the Exchange while Lev's historical accumulated deficit was carried
      forward. The statement of operations reflects the activities of Lev from the
      commencement of its operations on July 21, 2003. In connection with the
      Agreement, Lev agreed to acquire FCP for $350,000. In December 2004, Lev paid
      certain FCP stockholders $283,731 which represents the acquisition price of
      $350,000 less the assumption of a tax liability of $66,269. In connection with
      the Exchange, the exercise price of the outstanding warrants and options
      remained the same. The Company recorded a charge of approximately $75,000 for
      the change in value of the Company's outstanding options and warrants as of
      December 29, 2004 as a result of the increase in the number of common shares
      into which these equity instruments are exercisable based on the exchange ratio
      used in the merger, since the aggregate intrinsic value of the warrants and
      options after the Exchange is greater than before. The Black-Scholes
      option-pricing model was used to calculate the value of certain options and
      warrants and the related charge based upon the following weighted average
      assumptions to determine fair value: risk-free interest rate of 3.58%; expected
      life of 5 years; dividend yield of 0%; and expected volatility of
      70%.





As
      a
      development stage enterprise, the Company's primary efforts are devoted to
      conducting research and development for the treatment of inflammatory diseases.
      As the Company has limited capital resources and has experienced net losses
      and
      negative cash flows from operations since inception and expects these conditions
      to continue for the foreseeable future the Company has needed to raise capital
      from the sales of its securities to sustain operations. As of December 31,
      2006,
      the Company had approximately $17.9 million in cash, cash equivalents and
      short-term investments. Management believes that cash, cash equivalents and
      short-term investments as of December 31, 2006 should be sufficient to fund
      operations through December 31, 2007. In October 2006, the Company raised net
      proceeds of $19,584,745 in a private placement, see Note G.
      However, the Company will be required to raise additional funds to meet
      long-term planned goals. There can be no assurance that such funds, if available
      at all, can be obtained on terms reasonable to the Company.




F-7


**LEV
          PHARMACEUTICALS, INC. AND SUBSIDIARY**
 (a
          development stage enterprise)
  **N** **OTES** **T** **O** **C** **ONSOLIDATED** **F** **INANCIAL** **S** **TATEMENTS**
 **N** **OTE** **A** **-** **O** **RGANIZATION** **A** **ND** **B** **USINESS** (continued)


In
      addition to the normal risks associated with a new business venture, there
      can
      be no assurance that the Company's research and development will be successfully
      completed or that any product will be approved or commercially viable. The
      Company is subject to risks common to companies in the biotechnology industry
      including, but not limited to, dependence on collaborative arrangements,
      development by the Company or its competitors of new technological innovations,
      dependence on key personnel, protection of proprietary technology, and
      compliance with FDA and other governmental regulations and approval
      requirements.




**Note
      B - Summary of Significant Accounting Policies**





**[1]**
            **Basis
                of presentation:**





The
      consolidated financial statements include the accounts of Lev Pharmaceuticals,
      Inc. and its wholly-owned subsidiary, Lev Development Corp. All significant
      intercompany transactions and balances have been eliminated in consolidation.
      There has been no revenue generated from sales, license fees or royalties.
      The
      Company's financial statements are presented as statements of a development
      stage enterprise.





**[2]**
            **Cash
                and cash equivalents:**





The
      Company considers all highly liquid investments which have original maturities
      of three months or less, to be cash equivalents.





**[3]**
            **Patents:**





The
      Company has applied or is applying for a number of patents to protect
      proprietary inventions. **** All
      costs
      associated with patents are expensed as incurred.





**[4]**
            **Research
                and development costs:**





The
      Company expenses all research and development costs as incurred including
      equipment for which there is no alternative future use. Such expenses include
      licensing fees and costs associated with planning and conducting clinical
      trials.





**[5]**
            **Investments:**





Securities
      that the Company has the positive intent and ability to hold to maturity are
      classified as held-to-maturity and are carried at amortized cost on the balance
      sheet.





F-8


**LEV
          PHARMACEUTICALS, INC. AND SUBSIDIARY**
 (a
          development stage enterprise)
 **N** **OTES** **T** **O** **C** **ONSOLIDATED** **F** **INANCIAL** **S** **TATEMENTS**
 **N** **OTE** **B** **-** **S** **UMMARY** **O** **F** **S** **IGNIFICANT** **A** **CCOUNTING** **P** **OLICIES
          (CONTINUED)**


**[6]**
            **Concentration
                of credit risk:**





Financial
      instruments which potentially subject the Company to concentrations of credit
      risk consist of cash and cash equivalents. As of December 31, 2006, the Company
      had approximately $9,453,926 over the FDIC limit.





**[7]**
            **Fixed
                Assets:**





Fixed
      assets are stated at cost less accumulated depreciation. Depreciation is
      calculated using the straight-line method over the asset's estimated useful
      life, which is five years.





**[8]**
            **Income
                taxes:**





The
      Company accounts for income taxes in accordance with the provisions of Statement
      of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS
      No. 109”). SFAS No. 109 requires that the Company recognize deferred tax
      liabilities and assets for the expected future tax consequences of events that
      have been included in the financial statements or tax returns. Under this
      method, deferred tax liabilities and assets are determined on the basis of
      the
      difference between the tax basis of assets and liabilities and their respective
      financial reporting amounts (“temporary differences”) at enacted tax rates in effect
      for the years in which the temporary differences are expected to reverse. The
      Company records an estimated valuation allowance on its deferred income tax
      assets if it is not more than likely that these deferred income tax assets
      will
      be realized.





**[9]**
            **Use
                of estimates:**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosures of contingent assets and liabilities at the date
      of
      the financial statements, and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those estimates.





**[10]**
            **Equity
                issuance costs:**





Costs
      incurred to issue the Company's common stock may be temporarily recorded as
      deferred offering costs. Upon issuance of the securities, those costs are
      reclassified as a reduction of the offering proceeds. In the event that an
      offering is not completed within a reasonable time, those costs would be
      expensed in the period the offering is determined to be
      unsuccessful.





**[11]**
            **Stock-based
                compensation:**





Effective
      January 1, 2006, the Company adopted the provisions of Statement of Financial
      Accounting Standard No. 123(R), “Share Based Payment” (“SFAS No. 123(R)”), which
      requires all stock-based payments, including grants of stock options, to be
      recognized in the Statement of Operations as compensation expense, based on
      their fair values on the grant date. Under SFAS No.123(R), the estimated fair
      value of options granted under the Company’s Employee 2004 Omnibus Incentive
      Compensation Plan (“Plan”) are recognized as compensation expense over the
      option-vesting period. The Company adopted SFAS No. 123(R), using the
      modified-prospective-transition method, in which compensation expense is
      recognized beginning with the effective date of the adoption for all stock-based
      payments (i) granted after the effective date of adoption and
      (ii) granted prior to the effective date of adoption but not vested on the
      date of adoption, based upon the grant date fair value estimated in accordance
      with the original provisions of SFAS No. 123. During the year ended December
      31,
      2006, the Company recorded $457,351 of stock-based employee compensation
      expense.


F-9
  **LEV
            PHARMACEUTICALS, INC. AND SUBSIDIARY**
 (a
            development stage enterprise)
 **N** **OTES** **T** **O** **C** **ONSOLIDATED** **F** **INANCIAL** **S** **TATEMENTS**
 **N** **OTE** **B** **-** **S** **UMMARY** **O** **F** **S** **IGNIFICANT** **A** **CCOUNTING** **P** **OLICIES
            (CONTINUED)**


**[11]**
            **Stock-based
                compensation (continued):**




Prior
      to
      January 1, 2006, the Company applied APB Opinion No. 25, *Accounting
      for Stock Issued to Employees,* in
      accounting for its stock option plans. Under the provisions of APB 25, no
      compensation expense was recognized when stock options were granted with
      exercise prices equal to or greater than market value on the date of grant,
      provided that pro forma net loss and net loss per share disclosures were made
      as
      required by the original provisions of SFAS No. 123. The following table
      illustrates the effect on net loss and loss per share if the fair value method
      had been applied under SFAS No. 123 to the prior period.




**Year
                Ended**
              **December
                31, 2005**Net
                loss applicable to common shareholders, as reported
            
            $
            (6,308,356
            )Add:
                Total stock-based employee compensation
              expense
                determined under fair value method
            
            
            (470,051
            )Less:
                Stock based employee compensation related to
              repricing
                including in net loss as recorded
            
            $
            1,427,450Pro
                forma net loss
            
            $
            (5,350,957
            )Basic
                and diluted loss per shareAs
                reported
            
            $
            (0.08
            )Pro
                forma
            
            $
            (0.07
            )





The
      following table illustrates the breakdown of total stock compensation expense
      by
      function for the year ended December 31, 2006:





**Stock
      option expense by function:**




**Year
                Ended**
              **December
                31,  2006**Research
                and development expense before stock option expense
            
            $
            6,991,341Stock
                option expense
            
            
            176,118Research
                and development expense
            
            $
            7,167,459General
                and administrative expense before stock option expense
            
            $
            4,554,211Stock
                option expense
            
            
            281,233General
                and administrative expense
            
            $
            4,835,444




F-10


**LEV
        PHARMACEUTICALS, INC. AND SUBSIDIARY**
 (a
        development stage enterprise)
 **N** **OTES** **T** **O** **C** **ONSOLIDATED** **F** **INANCIAL** **S** **TATEMENTS**
 **N** **OTE** **B** **-** **S** **UMMARY** **O** **F** **S** **IGNIFICANT** **A** **CCOUNTING** **P** **OLICIES
          (CONTINUED)**


**[11]**
            **Stock-based
                compensation (continued):**





Under
      the
      modified prospective method of transition under SFAS No. 123(R), the Company
      is
      not required to restate its prior period financial statements to reflect
      expensing of stock-based compensation under SFAS


No.
      123(R). Therefore, the results for the year ended December 31, 2006 are not
      directly comparable to the same period in the prior year.




Prior
      to
      the adoption of SFAS No. 123(R), the Company presented cash flows resulting
      from
      the tax benefits of deductions resulting from the exercise of stock options
      as
      operating cash flows in the


Consolidated
      Statement of Cash Flows. SFAS No. 123(R) requires cash flows resulting from
      the
      tax benefits resulting from tax deductions in excess of the compensation cost
      recognized for those options (excess tax benefits) to be classified as financing
      cash flows. The Company did not realize any tax benefits from stock options
      during the year ended December 31, 2006.




For
      purposes of the disclosure in the foregoing table and for purposes of
      determining estimated fair value under SFAS No.123(R), the Company has computed
      the estimated fair values of all share-based compensation using the
      Black-Scholes option -pricing model and has applied the assumptions set forth
      in
      the following table. The Company calculated expected volatility based upon
      comparable companies in the industry for 2005 and historical volatility of
      the
      Company’s common stock in 2006. The weighted-average fair value of options
      granted in 2005 and 2006 was approximately $0.73 and $0.64, respectively. The
      following table illustrates the assumptions used in the Company’s Black-Scholes
      option pricing model to determine the stock option expense for the years ended
      December 31, 2006 and December 31, 2005.





**Risk
                Free Interest Rate**
            
            **Dividend**
              **Yield**
            
            **Volatility
                Factor**
            
            **Estimated
                Life (Years)**
            
            **Weighted
                Average**
              **Remaining
                Contractual Life (Months)**For
                the year ended December 31, 2005
            
            3.58%
                - 4.39%
            
            0%
            
            70.0%
            
            5
            
            108For
                the year ended December 31, 2006
            
            4.77%
                - 4.99%
            
            0%
            
            132%-157%
            
            4.50-6.25
            
            104




The
      Black-Scholes option-pricing model requires the input of highly subjective
      assumptions. Because the Company’s employee stock options have characteristics
      significantly different from those of traded options, and because changes in
      the
      subjective input assumptions can materially affect the fair value estimate,
      in
      management’s opinion, the existing models may not provide a reliable single
      measure of the fair value of its employee stock options. In addition, management
      will continue to assess the assumptions and methodologies used to calculate
      estimated fair value of share-based compensation. Circumstances may change
      and
      additional data may become available over time, which can result in changes
      to
      these assumptions and methodologies, which could materially impact the Company’s
      fair value determination.





F-11


**LEV
        PHARMACEUTICALS, INC. AND SUBSIDIARY**
 (a
        development stage enterprise)
 **N** **OTES** **T** **O** **C** **ONSOLIDATED** **F** **INANCIAL** **S** **TATEMENTS**
 **N** **OTE** **B** **-** **S** **UMMARY** **O** **F** **S** **IGNIFICANT** **A** **CCOUNTING** **P** **OLICIES
          (CONTINUED)**


**[11]**
            **Stock-based
                compensation (continued):**





A
      summary
      of option activity under the Plan as of December 31, 2006 and changes during
      the
      year then ended is presented below.




Number
                of Options
            
            Weighted
                Average Exercise Price
            
            Weighted
                Average Remaining Contractual
              Life
                (Years)
            
            Aggregate
                Intrinsic Value**Outstanding,
                December 31, 2004**
            
            
            3,529,900
            
            $
            0.84**Granted**
            
            
            2,954,900
            
            
            0.33**Cancelled**
            
            
            (2,854,900
            )
            
            (0.85
            )**Outstanding,
                December 31, 2005**
            
            
            3,629,900
            
            $
            0.42**Granted**
            
            
            1,965,000
            
            
            0.66**Outstanding,
                December 31, 2006**
            
            
            5,594,900
            
            $
            0.50
            
            
            8.41
            
            $
            4,792,894**Vested
                and expected to vest, December 31, 2006**
            
            
            5,594,900
            
            
            0.50
            
            
            8.41
            
            $
            4,792,894**Exercisable
                shares as of December 31, 2006**
            
            
            3,779,900
            
            $
            0.40
            
            
            8.50
            
            $
            3,618,442




**Summary
      Details for**  **Plan:**




There
      were no options canceled or exercised during the year ended December 31, 2006.
      Additionally, the weighted average, grant date fair value of options granted
      during the year was approximately $1,248,491or $0.60 per share using the Black
      Scholes option pricing model. For the year ended December 31, 2006 the Company
      recorded $127,863 as research and development expense for the value of
      performance-based options to purchase 120,000 shares of common stock since
      the
      performance measure was met during the year. A summary of the status of the
      Company’s unvested options as of December 31, 2006, and changes during the year
      then ended is presented below.




**Unvested
        options issued under the Plan:**


**Number of**
              **Options**
            
            **Weighted
                Average**
              **Exercise Price**
            
            **Weighted
                Average**
              **Remaining
                Contractual**
              **Life
                (Years)**
            
            **Aggregate**
              **Intrinsic**
              **Value**Unvested
                balance, December 31, 2005
            
            
            550,000
            
            $
            0.87Granted
            
            
            1,965,000
            
            
            0.66Vested
            
            
            (700,000
            )
            
            0.69Unvested
                balance, December 31, 2006
            
            
            1,815,000
            
            $
            0.71
            
            
            8.51
            
            $
            1,174,452




F-12


**LEV
          PHARMACEUTICALS, INC. AND SUBSIDIARY**
 (a
          development stage enterprise)
 **N** **OTES** **T** **O** **C** **ONSOLIDATED** **F** **INANCIAL** **S** **TATEMENTS**
 **N** **OTE** **B** **-** **S** **UMMARY** **O** **F** **S** **IGNIFICANT** **A** **CCOUNTING** **P** **OLICIES
            (CONTINUED)**
 **[11]**
              **Stock-based
                  compensation
                  (Continued):**





As
      of
      December 31, 2006, there was $692,944 of total unrecognized compensation expense
      related to unvested share-based compensation arrangements granted under the
      Plan. This expense is expected to be recognized over a weighted-average period
      of 22 months.





The
      following chart shows the effect of stock option expense on the Consolidated
      Statement of Operations:





**Year
                Ended**
              **December
                31, 2006**Loss
                before other income (expense) and stock option expense
            
            $
            (11,545,552
            )Stock
                option expense
            
            
            (457,351
            )Loss
                before other income (expense)
            
            $
            (12,002,903
            )Net
                loss before stock option expense
            
            $
            (11,310,138
            )Stock
                option expense
            
            
            (457,351
            )Net
                loss
            
            $
            (11,767,489
            )Basic
                and diluted loss per share before
              Stock
                option expense
            
            $
            (0.13
            )Stock
                option expense per share
            
            
            (0.00
            )Basic
                and diluted loss per share
            
            $
            (0.13
            )




The
      fair
      value of warrants issued to non-employees for services are included in the
      financial statements and expensed when services are performed. Warrants issued
      in connection with services or financings were valued at the grant date using
      the Black-Scholes option-pricing model.





**[12]**
            **New
                Accounting Pronouncements**:****





In
      July
      2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes - An Interpretation of FASB Statement No. 109,” (FIN 48). FIN 48
      prescribes a recognition threshold and measurement criterion for the financial
      statement recognition and measurement of tax positions taken or expected to
      be
      taken in a tax return, among other items. In addition, FIN 48 provides guidance
      on derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition with respect to uncertainty in income taxes.
      FIN 48 is effective for fiscal years beginning after December 15, 2006. We
      do
      not anticipate that the adoption of this Statement will have a material effect
      on our financial position or results of operation.


F-13


**LEV
        PHARMACEUTICALS, INC. AND SUBSIDIARY**
 (a
        development stage enterprise)
 **N** **OTES** **T** **O** **C** **ONSOLIDATED** **F** **INANCIAL** **S** **TATEMENTS**
 **N** **OTE** **B** **-** **S** **UMMARY** **O** **F** **S** **IGNIFICANT** **A** **CCOUNTING** **P** **OLICIES
          (CONTINUED)**


**[12]**
            **New
                Accounting Pronouncements
                (Continued):**





On
      September 15, 2006 the Financial Accounting Standards Board (“FASB”) issued
      Statement No. 157, *Fair
      Value Measurements.* The Statement provides guidance for using fair value to measure assets and
      liabilities.  This Statement references fair value as the price that would
      be received to sell an asset or paid to transfer a liability in an orderly
      transaction between market participants in the market in which the reporting
      entity transacts. The Statement applies whenever other standards require (or
      permit) assets or liabilities to be measured at fair value.  The Statement
      does not expand the use of fair value in any new circumstances.  It is
      effective for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years.  The
      adoption of SFAS No. 157 is not expected to have a material impact on the
      Company’s financial statements.





In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities Including an Amendment of FASB
      Statement No. 115” (SFAS 159), which permits entities to measure many
      financial instruments and certain other items at fair value.  The objective
      is to improve financial reporting by providing entities with the opportunity
      to
      mitigate volatility in reported earnings caused by measuring related assets
      and
      liabilities differently without having to apply complex hedge accounting
      provisions.  SFAS 159 is effective as of the beginning of fiscal years
      after November 15, 2007.  We are currently evaluating the impact that
      SFAS 159 will have on our consolidated financial position, results of
      operations, and cash flows as of its adoption in 2008.





**[13]**
            **Net
                loss per share:**





Basic
      net
      loss per share is computed on the basis of net loss for the period divided
      by
      the weighted average number of shares of common stock outstanding during the
      period. There were potentially dilutive common shares of 20,824,037 and
      6,994,672 as of December 31, 2006 and December 31, 2005, respectively,
      related to stock options and warrants, which were excluded from the diluted
      loss
      per share calculation since their effect would have been
      anti-dilutive.





**[14]**
            **Fair
                Value of financial
                instruments:**




The
      carrying amounts of certain of the Company’s financial instruments, including
      cash and cash equivalents, short-term investments, accounts payable and accrued
      expenses are shown at cost which approximates fair value due to the short-term
      nature of these instruments. The fair value of the debt approximates the
      carrying value as the interest rates are generally variable based on market
      interest rates and reflect current market rates available to the Company.





**NOTE
      C - INVESTMENTS**





Investments
      with original maturities of 91 days to one year are considered short term
      investments and are carried at amortized cost. Investments consist of
      $4,999,845 in an Adjustable Rate Preferred Security and a Certificate of Deposit
      for $5,000,000. amortized




F-14


**LEV
        PHARMACEUTICALS, INC. AND SUBSIDIARY**
 (a
        development stage enterprise)
 **N** **OTES** **T** **O** **C** **ONSOLIDATED** **F** **INANCIAL** **S** **TATEMENTS**
 **NOTE
          D - FIXED
          ASSETS**





Fixed
      assets as of December 31, 2006 consist of the following:




Office
                equipment
            
            $
            149,750Lab
                equipment
            
            
            11,645161,395Accumulated
                depreciation
            
            
            (30,301
            )$
            131,094




Depreciation
      expense for the year ended December 31, 2006 and December 31, 2005 was $
      19,542 and $10,474.




**NOTE
      E - ACCRUED
      EXPENSES**





Accrued
      expenses as of December 31, 2006 consist of the following:





Research
                and development - sponsored research
            
            $
            234,000Research
                and development - other
            
            
            653,540Research
                and development - payroll
            
            
            28,756Professional
                fees - general and administrative
            
            
            60,000Payroll
                - general and administrative
            
            
            487,380Other
                - general and administrative
            
            
            30,872Total
            
            $
            1,494,548





**NOTE
      F - LOAN
      PAYABLE**





The
      Company purchases its C1-INH product from the Sanquin Blood Supply Foundation
      (“Sanquin”). Under the agreement with Sanquin, Sanquin provides a loan to the
      Company for the value of C1-INH purchased. The loans are subject to a purchase
      money security interest. **** Upon
      regulatory approval, Sanquin will forgive each loan and release all security
      interests. If regulatory approval is not obtained, then each loan is payable
      on
      the earlier of January 16, 2014 or the termination of the agreement. The
      principal loan balance outstanding as of December 31, 2006 was $1,803,554 net
      of
      debt discount of $959,140. This debt discount relates to interest imputed on
      the
      original loan balance as it is non-interest bearing and was recorded as a
      reduction to product costs that were included as research and development
      expense. The loans are payable in Euros and any currency differences are
      recorded in our Consolidated Statement of Operations. The Company has recorded
      interest expense using the effective interest rate method. Interest rates range
      from 4.31% to 7.64%. For the years ended December 31, 2006 and December 31.
      2005, interest expense was $46,438 and $11,412 respectively. The amount included
      in research and development expense for product cost for the years ended,
      December 31 2006 and December 31, 2005 was $1,441,079 and $306,858,
      respectively.





F-15




**LEV
      PHARMACEUTICALS, INC. AND SUBSIDIARY**


(a
      development stage enterprise)


**N** **OTES** **T** **O** **C** **ONSOLIDATED** **F** **INANCIAL** **S** **TATEMENTS**
 **NOTE
      G - STOCKHOLDERS’
      EQUITY**





**[1]**
            **Common
                stock:**




Lev
      issued 37,018,531 shares of common stock at $0.01 par value to its founders
      (the
“Founders' Shares”) effective July 22, 2003 and recorded subscriptions
      receivable of $130. The Company increased its accumulated deficit by $370,055
      in
      connection with the par value differential of the shares relating to
      FCP.





In
      December 2003, Lev received proceeds of $300,000 through the sale of
      1,141,960 shares of common stock to a single investor at $0.26 per share and
      received the payment of the $130 subscription receivable.





Between
      February and March 2004, Lev received proceeds of approximately
      $7,968,000, net of issuance costs of approximately $51,000, from the sale of
      3,425,879 shares of common stock at $0.26 per share and of 23,913,848 shares
      of
      common stock at $0.30 per share.





In
      February 2005, Lev increased its authorized common stock to 200,000,000 shares
      and its authorized preferred stock to 20,000,000 shares.





In
      May
      2005, Lev completed a private placement of units and raised gross proceeds
      of
      $5,044,774 from the sale of 100.9 units. Each unit was sold at a price of
      $50,000 and consisted of 50,000 shares of common stock and a five-year warrant
      to purchase 25,000 shares of common stock at an exercise price of $1.35 per
      share. Lev’s net proceeds were $4,365,097 after payment of fees and expenses,
      including the estimated costs of registering the shares of common stock for
      resale. Lev paid $454,030 to the placement agent and issued warrants to the
      placement agent to purchase 681,044 shares of common stock. These warrants
      are
      exercisable at $1.35 per share and expire in May 2010. The Company issued an
      aggregate of 5,044,774 shares of common stock and warrants to purchase 2,522,387
      shares of common stock to investors in this private placement, not including
      the
      warrants issued to the placement agent. The Company entered into a registration
      rights agreement in connection with a private placement that requires the
      Company to file a registration statement for the resale of shares of common
      stock and common stock issuable upon the exercise of warrants. The Company
      was
      required to use commercially reasonable efforts to have the registration
      statement declared effective by October 24, 2005. The Securities and Exchange
      Commission declared the registration statement effective on October 24, 2005.
      In
      addition, the Company is required to use its commercially reasonable efforts
      to
      maintain the effectiveness of the registration statement until the earlier
      date when all registrable securities (a) have been sold pursuant to the
      registration statement or an exemption from the registration requirements of
      the
      Securities Act, or (b) two years from the date of the effectiveness of the
      registration statement. If the Company fails to maintain the effectiveness
      of
      the registration statement pursuant to the registration rights agreement then
      the Company is required to make a cash payment of liquidated damages to the
      investors of 1% of the amount paid by the investors for each 30 day period,
      until such deficiency is cured.





The
      Company has accounted for the registration rights agreement as a separate
      freestanding instrument and treated the liquidated damages provision as a
      derivative liability subject to SFAS No. 133. Accordingly, the liability is
      recordable at its estimated fair value. The amount of the liability determined
      by the Company was immaterial.





On
      May 4,
      2006, the Company entered into a one-year consulting agreement for services
      from
      an investor relations firm. The Company issued 175,000 shares of common stock
      at
      a fair value of $78,750. An additional
      175,000 shares were issuable in six months if the agreement was not cancelled.
      The Company cancelled this agreement on November 1, 2006. The monthly fee was
      $10,000.




F-16


**LEV
        PHARMACEUTICALS, INC. AND SUBSIDIARY**
 (a
        development stage enterprise)
 **N** **OTES** **T** **O** **C** **ONSOLIDATED** **F** **INANCIAL** **S** **TATEMENTS**
 **NOTE
        G - STOCKHOLDERS’
        EQUITY** **(CONTINUED)**




**[1]**
            **Common
                stock (Continued):**




On
      October 16 and October 20, 2006, the Company closed on a private placement
      for
      the sale of a combined aggregate of $21,000,000 million of its securities sold
      in units to certain institutional and other accredited investors. The units
      consist of 32,307,693 shares of the Company’s common stock and warrants to
      purchase 9,692,308 shares of common stock, at a purchase price of $0.65 per
      share. The warrants are exercisable at any time until five years from the
      initial closing date at a price of $0.84 per share. The Company paid commissions
      of $1,279,593 and issued 1,698,538 and 198,519 warrants to registered
      broker-dealers that assisted in the financings (the “Agent Warrants”). The Agent
      Warrants were issued at $0.84 and $1.18 per share, respectively, and expire
      five years from the date of issuance. The Company paid $1,415,255 in expenses
      and the net proceeds were $19,584,745. A registration rights agreement was
      entered into in connection with the private placement that required the Company
      to file a registration statement for the resale of shares of common stock and
      common stock issuable upon the exercise of the warrants. The Company was
      required to use commercially reasonable efforts to have the registration
      statement declared effective within 120 days from the filing date, or 180 days
      from such date if the SEC undertakes a full review of the registration
      statement. In addition, the Company is required to maintain effectiveness for
      two years. If the Company failed to have the registration statement declared
      effective within the proscribed time period, then the Company would have been
      required to issue 630,000 warrants as liquidated damages to the investors.





The
      Company accounts for the registration rights agreement as a separate
      freestanding instrument and accounts for the liquidated damages provision as
      a
      derivative liability subject to SFAS 133. Accordingly, the liability is
      recordable at its estimated fair value. The amount of the liability determined
      by the Company was immaterial. The Securities and Exchange Commission declared
      the registration statement effective on December 11, 2006.





**[2]**
            **Warrants:**





In
      February, 2004, the Company entered into an engagement agreement (the
“Engagement Agreement”) with a placement agent (the “Placement Agent”), under
      which the Placement Agent was engaged to raise funds and assist the Company
      in
      an initial public offering. The Engagement Agreement also provided for the
      sale
      to the Placement Agent of a contingent warrant for $100,000 to purchase up
      to
      35,686,243 shares of common stock. The Placement Agent raised approximately
      $550,000 for the Company in February 2004. In June, 2004, the Company entered
      into an amended and restated engagement agreement (the “Amended Engagement
      Agreement”) which replaced the Engagement Agreement. In connection with the
      Amended Engagement Agreement, the warrant to purchase 35,686,243 shares of
      common stock was cancelled and terminated, and the Placement Agent would receive
      a defined number of warrants, exercisable at $0.85 per share to purchase up
      to a
      maximum of 7,137,249 shares of the Company's common stock based on the amount
      of
      funds raised from investors introduced by the Placement Agent. In addition,
      the
      Placement Agent would receive a defined amount of cash compensation. The Company
      was responsible for all expenses in connection with the private placement.
      No
      funds were raised under the Amended Engagement Agreement, which expired on
      September 1, 2004 and no warrants were issued thereunder.




F-17


**LEV
        PHARMACEUTICALS, INC. AND SUBSIDIARY**
 (a
        development stage enterprise)
 **N** **OTES** **T** **O** **C** **ONSOLIDATED** **F** **INANCIAL** **S** **TATEMENTS**
 **NOTE
        G - STOCKHOLDERS’
        EQUITY** **(CONTINUED)**




**[2]**
            **Warrants
                (continued):**





In
      March
      2004, the Company granted fully vested warrants to two consultants, who had
      assisted the Company with developing its strategic business plan, obtaining
      its
      license for the C1-INH product and consulting on its corporate structure. The
      warrants are for the purchase of 7,327,576 shares of common stock at an exercise
      price of $0.10 per share, expiring in March 2014. The aggregate fair value
      of
      the warrants using the Black-Scholes option-pricing model, totaled approximately
      $1,986,000. The weighted-average assumptions used to determine the fair values
      of the warrants are as follows: risk-free interest rate of 2.64%; expected
      warrant life of 5 years; dividend yield of 0% and expected volatility of 70%.
      On
      August 23, 2004, one of the consultants exercised warrants covering
      7,137,249 shares of common stock in a net share settlement. The
      warrant exercise price of $250,000 was satisfied by reducing the number of shares
      exercised. The Company issued 6,297,571 shares of common stock. On September
      12,
      2005, one of the consultants exercised on a cashless basis warrants to purchase
      190,327 shares of common stock and the Company
      issued 179,451 shares of stock. See Note I - Stock Options and Warrants. The
      warrant exercise price was satisfied by reducing the number of shares
      exercisable.





In
      August
      2004, the Company granted to a consultant, who had assisted the Company with
      its
      development programs and clinical trial design, warrants to purchase 111,341
      shares of common stock at an exercise price of $0.85 per share, expiring in
      August 2014. The aggregate fair value of the warrants on their issuance date,
      using the Black-Scholes
      option-pricing mode l,
      was
      approximately $20,000. The weighted-average assumptions used to determine the
      fair values of the warrants are as follows: risk-free interest rate of 3.38%;
      expected warrant life of 5 years; dividend yield of 0% and expected volatility
      of 70%.





In
      October 2005, the Company entered an agreement for public and investor relation
      services which was subsequently cancelled during 2006. The consultant was
      compensated partly in cash and partly through the issuance of a warrant to
      purchase 50,000 shares of common stock at $1.10 per share that vested
      immediately and expires in three years. The
      fair
      value of the warrant, using the Black-Scholes option pricing model was $11,329.
      The weighted-average assumptions used to determine the fair value of the
      warrants were as follows: risk-free interest rate of 4.23%; warrant life of
      3
      years; dividend yield of 0% and expected volatility of 70%. In connection with
      these services, $10,825 and $504 was charged to operations for the years ended
      December 31, 2006 and December 31, 2005, respectively.





In
      January 2006, the Company entered into an agreement with an investor relations
      firm to provide services and was subsequently cancelled. The Company issued
      warrants to purchase 50,000 shares of common stock at $1.10 per share that
      will
      expire in three years. The fair value of warrants was $14,524 based on the
      Black Scholes option pricing model and was charged to expense. The weighted
      average assumptions used to determine fair market value of the warrants are
      as
      follows: interest rate of 4.34%, expected warrant life of 3 years, dividend
      yield of 0% and expected volatility of 70%.





In
      June
      2006, the Company issued to a consultant for research and development services
      to be rendered through March 31, 2007, warrants to purchase an aggregate of
      225,000 shares of common stock at an exercise price of $0.62 per share and
      which
      expire in seven years. Warrants to purchase 100,000 of these shares vested
      on
      the date of issuance and the remainder will vest only if the consultant
      satisfies a milestone performance obligation as specified in the consultant’s
      agreement. In addition, a maximum of 80,000 additional warrants will be granted
      to this consultant in the event he satisfies additional performance milestones.
      The consultant is due $100,000 through February 2007 and can earn an additional
      $180,000 for the attainment of an additional milestone as defined in the
      consulting agreement. The Company valued the 100,000 vested warrants at $43,879
      based upon the Black Scholes option pricing model. The weighted average
      assumptions used to determine fair market value of the warrants is as follows:
      interest rate of 5.23%; expected warrant life of 7 years; dividend yield of
      0%
      and expected volatility of 149%. In September 2006, the Company recorded the
      value of 125,000 unvested warrants at $85,297 based upon the Black Scholes
      option pricing model related to the performance condition because the Company
      deemed it more probable than not that the performance criteria would be met.
      The
      weighted average assumptions used to determine fair market value of the warrants
      is as follows: interest rate of 4.60%; expected warrant life: 7 years; dividend
      yield of 0% and expected volatility of 138%. In addition, the Company incurred
      $194,000 of expenses related to this agreement through December 31, 2006 which
      includes $100,000 for the expected milestone. For subsequent periods, the value
      of the warrant will be credited or charged to the Consolidated Statement of
      Operations at each reporting period to reflect subsequent changes in value
      until
      the milestone has been met. If the milestone has not been met, then cumulative
      charges will be credited to income in the Consolidated Statement of Operations.




F-18


**LEV
          PHARMACEUTICALS, INC. AND SUBSIDIARY**
 (a
          development stage enterprise)
 **N** **OTES** **T** **O** **C** **ONSOLIDATED** **F** **INANCIAL** **S** **TATEMENTS**
 **NOTE
          G - STOCKHOLDERS’
          EQUITY** **(CONTINUED)**


**[2]**
            **Warrants
                (Continued):**




In
      December 2006, the Company recorded an expense for the issuance of an additional
      125,000 warrants relating to the June 2006 grant for research and development
      services for the attainment of a performance condition. The additional expense
      recorded upon reaching the vesting criteria in December 2006 was $49,122 and
      the
      aggregated expense was $134,419. The weighted average assumptions used to
      determine fair market value of the warrants is as follows: interest rate of
      4.54%, expected warrant life: 7 years; dividend yield of 0% and expected
      volatility of 133.46%.





The
      weighed average fair value at the date of grant for warrants granted during
      the
      years ended December 31, 2006 and December 31, 2005 was $0.70 and $0.26,
      respectively, using the Black-Scholes pricing option model.





Warrant
      activity is summarized as follows:





**Weighted-Average****Shares**
            
            **Exercise
                Price**Warrants
                outstanding and exercisableas
                of December 31, 2004
            
            
            301,668
            
            $
            0.38Granted
                (1)
            
            
            3,555,099
            
            $
            1.24Exercised
                (2)
            
            
            (190,327
            )
            $
            0.04Cancelled
                (1)
            
            
            (301,668
            )
            $
            0.38Warrants
                outstanding and exercisable as ofDecember
                31, 2005
            
            
            3,364,772
            
            $
            1.31Granted
            
            
            11,864,365
            
            $
            0.84Warrants
                outstanding and exercisable as ofDecember
                31, 2006
            
            
            15,229,137
            
            $
            0.95




F-19


**LEV
            PHARMACEUTICALS, INC. AND SUBSIDIARY**
 (a
            development stage enterprise)
 **N** **OTES** **T** **O** **C** **ONSOLIDATED** **F** **INANCIAL** **S** **TATEMENTS**
 **NOTE
            G - STOCKHOLDERS’
            EQUITY** **(CONTINUED)**
 **[2]**
              **Warrants
                  (Continued):**





(1)
            Includes
                repriced warrants of 301,668, see Note
                I.


(2)
            Exercised
                on a cashless basis for a net share issuance of 179,451 shares in
                September, 2005.





The
      following table summarizes information about warrants outstanding at December
      31, 2006:





**Weighted****Average****Number**
            
            **Remaining****Outstanding**
            
            **Contractual****Exercise**
            
            **And**
            
            **Life****Price**
            
            **Exercisable**
            
            **(In
                Years)**$0.30
                - $0.62
            
            
            336,341
            
            
            7.1$
                0.84
            
            
            11,390,846
            
            
            4.8$
                1.10 - $1.18
            
            
            298,519
            
            
            2.9$1.35
            
            
            3,203,431
            
            
            3.415,229,137




**N** **OTE** **H** **-** **C** **OMMITMENTS** **A** **ND** **C** **ONTINGENCIES**


**[1]**
            **Sanquin
                Blood Supply Foundation:**





Sanquin
      is an Amsterdam-based not-for- profit organization that provides blood and
      plasma products and related services, and carries out research and education
      in
      the Netherlands. **** The
      Company has a series of agreements (the “Sanquin Agreements”) with Sanquin,
      including an option agreement, a distribution and manufacturing services
      agreement and a license agreement. The Sanquin Agreements are intended to


allow
      the
      Company to conduct clinical trials of the C1-INH (the “Product”) manufactured
      and supplied by Sanquin, and to sell the Product following regulatory
      approval.





(a)
            Option
                agreement:





In
      September 2003, the Company and Sanquin entered into an option agreement (the
      “Option Agreement”) under which Sanquin granted to the Company an option for an
      exclusive, world-wide license to certain Sanquin technology and underlying
      patents. The Company paid Sanquin a non-refundable fee of $25,000 in exchange
      for the rights to this option. In January, 2004, the Company exercised its
      option under the Option Agreement (see License Agreement below).





(b)
            Distribution
                and manufacturing services
                agreement:





In
      January 2004, the Company and Sanquin entered into a distribution and
      manufacturing services agreement (the “Distribution Agreement”) under which
      Sanquin agreed to manufacture and supply agreed-upon quantities of the Product
      to the Company, as soon as Sanquin obtained an export license during 2005,
      for
      an agreed-upon minimum price, which is subject to change. In connection with
      quantities supplied for the clinical trial prior to regulatory approval, Sanquin
      has provided a loan to the Company in the amount of the Product purchased,
      which
      is subject to a purchase money interest in the Product.
      The Company expects to purchase approximately $2,850,000 of Product for use
      in
      the clinical trial and such future purchases will be added to our loan account.
      Upon regulatory approval, Sanquin will forgive the loan and release any and
      all
      security interests. If regulatory approval is not obtained, the loan is payable
      on January 16, 2014. Title to the Product transfers to the Company upon
      delivery. The Product is being used to conduct Phase III clinical trials.
      Sanquin also granted to the Company the exclusive right to distribute, market
      and sell the Product in the U.S. and certain other countries, upon receiving
      regulatory approval to do so in each respective country.




F-20


**LEV
          PHARMACEUTICALS, INC. AND SUBSIDIARY**
 (a
          development stage enterprise)
 
 **N** **OTES** **T** **O** **C** **ONSOLIDATED** **F** **INANCIAL** **S** **TATEMENTS**
 **OTE** **H** **-** **C** **OMMITMENTS** **A** **ND** **C** **ONTINGENCIES** **(CONTINUED)**


**[1]**
            **Sanquin
                Blood Supply Foundation
                (Continued):**




The
      Distribution Agreement terminates on December 31, 2007, unless extended by
      the Company for up to two three-year periods or by mutual agreement of the
      parties prior to its expiration. In addition, either party may terminate the
      Distribution Agreement upon breach, as defined, by the other party that is
      not
      cured within 30 days of written notice. Commencing with the commercial launch
      of
      the product and thereafter, the Company must purchase from Sanquin a minimum
      of
      approximately $9,900,000 of the Product per calendar year.





(c)
            License
                agreement:





In
      January, 2004, the Company obtained an exclusive world-wide license agreement
      (the “License Agreement”) with Sanquin, thus exercising its option under the
      Option Agreement. The Company has the right to grant sub-licenses under the
      License Agreement. The License Agreement gives the Company the right to perform
      research for, make, use and sell the licensed technology and licensed products,
      as defined.





In
      consideration for the granting of the license, the Company agreed to pay
      Sanquin, within 60 days of execution of the License Agreement, $82,000, the
      agreed-upon amount of expenses incurred by Sanquin for the preparation, filing
      and maintenance of the underlying patents through the date of execution of
      the
      License Agreement. In addition, the Company shall make the following payments
      to
      Sanquin during the course of the License Agreement: (i) royalties on net sales,
      as defined, of therapeutic products or diagnostic products, as defined; (ii)
      a
      non-refundable, non-creditable one-time license access fee of $175,000 within
      60
      days of execution of the License Agreement; (iii) minimum annual royalties
      beginning in the first year of commercialization, as defined; and (iv) 10%
      of
      the consideration received from patent infringement settlements. In addition,
      the Company is required to create a comprehensive research plan for the
      commercial exploitation of the licensed technology. The Company is continuing
      to
      work with Sanquin on the design of the research plan for AMI. The Company agreed
      to commit a minimum of $125,000 per annum during the first three years following
      the execution of the License Agreement toward research on the licensed
      technology conducted by Sanquin and other parties. In February 2004, the
      Company paid $257,000 in connection with execution of the License Agreement
      and
      such amounts were recorded in the Consolidated Statement of Operations for
      the
      year ended December 31, 2004 as research and development expense.




F-21


**LEV
        PHARMACEUTICALS, INC. AND SUBSIDIARY**
 (a
        development stage enterprise)
 
 **N** **OTES** **T** **O** **C** **ONSOLIDATED** **F** **INANCIAL** **S** **TATEMENTS**
 **OTE** **H** **-** **C** **OMMITMENTS** **A** **ND** **C** **ONTINGENCIES** **(CONTINUED)**


**[1]**
            **Sanquin
                Blood Supply Foundation
                (Continued):**


The
        License Agreement will terminate upon the expiration of the last to expire
        patent underlying the related technology. In the event of expiration of the
        License Agreement, the Company will have a royalty-free, fully paid-up,
        non-exclusive license to the technology. Either party may terminate the License
        Agreement upon breach by the other party that is not cured within 30 days
        of
        written notice. The Company will have the right to terminate the License
        Agreement for any reason, with 90 days written notice to Sanquin at which
        time
        the Company will be responsible to pay certain defined outstanding obligations.
        Sanquin may terminate the License Agreement if the Company does not perform,
        as
        defined, under the License Agreement and such failure to perform is not cured
        within 60 days after written notice to the Company.
 **[2]**
                **Service
                    agreements:**


In
      March,
      2005, the Company entered into an agreement with a clinical research
      organization (“CRO”) for the design, management and implementation of clinical
      development programs. The Company made a payment of approximately $57,000 as
      a
      deposit against monthly invoices. Based on existing commitments, the estimated
      fees for the services to be provided are approximately $1,272,000 in 2007.
      No
      assurances can be given that the total fees we incur under this agreement will
      not exceed the Company’s estimates. Approximately $687,000 has been incurred and
      recorded through December 31, 2006. Lev entered into a separate service
      agreement with the CRO in September 2006. which governs the CRO’s provision of
      additional services in connection with our Phase III clinical trials and
      activities related to the commercialization of our product candidates. Pursuant
      to the September 2006 service agreement, Lev entered into three separate work
      orders, each pertaining to following aspects of the Phase III clinical trials:
      open label prophylaxis treatment of HAE, pharmacokinetics and open label acute
      treatment of HAE. The services provided by the CRO pursuant to both contractual
      arrangements are on a work order basis and Lev is invoiced on time and materials
      basis. Although these work orders may continue through the completion of the
      clinical trials, which Lev has estimated will occur during the fourth fiscal
      quarter of 2007, Lev has the right to terminate both contract, and any pending
      work order, on prior notice and without cause.





**[3]**
            **Operating
                lease:**





On
      October 25, 2006, the Company entered into a month-to-month lease for office
      space for its New York City location. On September 25, 2006, the Company entered
      into a lease agreement for one-year for its office space in the metropolitan
      area of Philadelphia, Pennsylvania. The Company utilized space provided by
      a
      founder/officer and certain of its employees without remuneration. During the
      years ended December 31, 2006 and December 31, 2005, rent expense was
      $78,575 and $60,166, respectively before sublease income. In addition, the
      Company had sublet a portion of its New York City office space to third parties
      on a month-to-month basis. Rental income from this sublease amounted to $20,691
      and $28,065 for the years ended December 31, 2006 and December 31, 2005,
      respectively. On December 20, 2006, the Company entered into a new lease for
      office space for its New York City location that expires in March 2012. In
      connection with this lease, the Company entered a letter of credit for $93,355
      that is collateralized by a certificate of deposit.




F-22


**LEV
        PHARMACEUTICALS, INC. AND SUBSIDIARY**
 (a
        development stage enterprise)
 
 **N** **OTES** **T** **O** **C** **ONSOLIDATED** **F** **INANCIAL** **S** **TATEMENTS**
 NOTEH-COMMITMENTSANDCONTINGENCIES(CONTINUED)


**[3]**
                    **Operating
                        Lease
                        (Continued):**





Future
      minimum rental payments under operating leases are as follows:





**Year
                Ending****December
                31,**
            
            **Operating****Lease**2007
            
            $
            184,0002008
            
            
            190,0002009
            
            
            198,0002010
            
            
            204,0002011
            
            
            208,000Thereafter
            
            
            52,000Total
            
            $
            1,036,000





**[4]**
            **Employment
                Agreements**





On
      November 1, 2004, the Company entered into employment agreements (the
“Employment Agreements”), expiring on October 31, 2008 (the “Initial
      Term”), with the Chief Executive Officer and with the Chairman and Executive
      Vice President of the Company (the “Employees”), who are also significant
      stockholders of the Company. Under the terms of the Employment Agreements,
      the
      Employees each receive annual base compensation of $312,500, (increased to
      $344,531 on November 1, 2006) which will
      increase every year by the greater of 5% or the percentage increase of the
      Labor
      Consumer Price Index, and fully vested options to purchase 1,427,450 shares
      of
      the Company's common stock exercisable at $0.85 per share, which will expire
      on
      November 1, 2014. Under the provisions of the Employment Agreements, the
      Employees will receive a cash payment equal to their salary for the remainder
      of
      the term of the Employment Agreements upon any occurrence of a change in control
      of the Company, as defined in the Employment Agreements. The Employment
      Agreements will be automatically renewed for additional one-year periods (the
      “Renewal Terms”) unless either party notifies the other in writing of its
      intention not to renew within 90 days prior to the expiration of the Initial
      Term or any Renewal Terms (the Initial Term together with the Renewal Terms
      are
      referred to as the “Term”). Upon termination, as defined in the Employment
      Agreements, the Employees will continue to receive compensation through the
      end
      of the current Term, unless such Term is reduced. On January 23, 2007, the
      Company entered into Amended and Restated Employment Agreements with each of
      the
      Employees. The material terms of the Amended and Restated Employment Agreements
      are described in Note K to these financial statements.





The
      Company entered into employment agreements with its Chief Financial Officer
      (“CFO”) and Vice President - Regulatory Affairs and Product Development, on June
      7, 2006 for two and three year terms, respectively. The Company’s CFO will
      receive an annual base salary of $175,000 for the initial year and increasing
      to
      $183,500 for the second year. The CFO was granted options to purchase 125,000
      shares of common stock at an exercise price of $0.50 per share, the fair market
      value at the date of grant, 62,500 options vest on the first anniversary date
      of
      the grant and the remainder vests on the second anniversary of the grant. The
      Company’s Vice President - Regulatory Affairs and Product Development will
      receive an annual base salary of $200,000 during the term of the agreement
      and
      will be entitled to an annual bonus of $20,000
      on each anniversary date. In addition, our Vice President- Regulatory Affairs
      and Product Development was
      granted options to purchase 500,000 shares of the Company’s common stock at an
      exercise price of $0.50 per share, the fair market value at the date of grant,
      which options vest as follows: 100,000 shares vest on the commencement date
      of
      the employment agreement, 300,000 shares shall vest equally over three years
      and
      100,000 shares shall vest upon the occurrence of the milestone event specified
      in the employment agreement. The option agreements contain a change of control
      provision. The employment agreements provide for a severance payment if the
      employee is terminated without cause.




F-23


**LEV
          PHARMACEUTICALS, INC. AND SUBSIDIARY**
 (a
          development stage enterprise)
 
 **N** **OTES** **T** **O** **C** **ONSOLIDATED** **F** **INANCIAL** **S** **TATEMENTS**
 NOTEH-COMMITMENTSANDCONTINGENCIES(CONTINUED)


**[4]**
              **Employment
                  Agreements (Continued):**


The
      Company entered into an at-will employment agreement with its Vice President
      -
      Marketing and Sales on August 2, 2006. Pursuant to this agreement, the Company’s
      Vice President - Sales and Marketing receives an annual base salary of $240,000
      during the term of the agreement and will be eligible to receive an annual
      bonus
      of up to 35% of the base salary subject to his attainment of performance
      criteria to be approved by the Board. In addition, the Company awarded the
      Vice
      President - Sales and Marketing a one-time signing bonus of $30,000 upon the
      execution of the employment agreement. In connection with the employment
      agreement, the Vice President - Sales and Marketing was granted options to
      purchase 600,000 shares of the Company’s common stock at an exercise price equal
      of $0.65 per share, the fair value at the date of grant. These options vest
      as
      follows: 200,000 shares vest on the commencement date of the employment
      agreement, and options to purchase an additional 400,000 shares shall vest
      in
      equal amounts of 100,000 on each of the first four anniversary dates of the
      commencement date. The option agreement provides for a change of control
      provision. The employment contract provides for a severance payment if the
      employee is terminated without cause.





**N** **OTE** **I** **-** **S** **TOCK** **O** **PTIONS** **A** **ND** **W** **ARRANTS:**


In
      March,
      2004 (the “Effective Date”), the Company's Board and stockholders adopted the
      2004 Omnibus Incentive Compensation Plan (the “Plan”). The Plan has been adopted
      as a means of attracting, motivating, and retaining the best available personnel
      for positions of substantial responsibility within the Company, and in order
      to
      provide additional incentive to directors, employees, and other eligible
      individuals (the “Awardees”). Under the Plan, the initial maximum number of
      options to acquire shares of the Company's common stock that were available
      for
      issuance to Awardees was 3,500,000.





Awards
      include options, restricted shares, stock appreciation rights, performance
      shares and cash-based awards (the “Awards”). The Plan contains certain
      anti-dilution provisions in the event of a stock split, stock dividend or other
      capital adjustment, as defined. The Plan provides for the Board or a Committee
      of the Board (the “Committee”) to grant Awards to Awardees and to determine the
      exercise price, vesting term, expiration date and all other terms and conditions
      of the Awards, including acceleration of the vesting of an Award at any time.
      All options granted under the Plan are intended to be non-qualified (“NQO”)
      unless specified by the Committee to be incentive stock options
      (“ISO”), as defined by the Internal Revenue Code. NQOs may be granted to
      employees, consultants or other individuals at an exercise price, equal to,
      below or above the fair value of the common stock on the date of grant. ISOs
      may
      only be granted to employees of the Company and may not be granted at exercise
      prices below fair value of the common stock on the date of grant (110% of fair
      value for employees who own 10% or more the
      Company). Under the Plan, following the termination of an Awardee's employment
      or active involvement with the Company, the Committee shall determine the extent
      to which the Awardee has the right
      to
      exercise outstanding options. The Plan will terminate at the earliest of (i)
      its
      termination by the Committee
      or (ii) March 18, 2014. Awards granted before termination of the Plan will
      continue under the Plan until exercised, cancelled or expired.




F-24


**LEV
            PHARMACEUTICALS, INC. AND SUBSIDIARY**
 (a
            development stage enterprise)
 
 **N** **OTES** **T** **O** **C** **ONSOLIDATED** **F** **INANCIAL** **S** **TATEMENTS**
 **N** **OTE** **I** **-** **S** **TOCK** **O** **PTIONS** **A** **ND** **W** **ARRANTS** (Continued):


On
      December 29, 2004, the Company increased the number of shares available for
      issuance under the Plan from 3,500,000 to 10,000,000. In addition, on such
      date
      the Company issued options to purchase 675,000 shares of common stock under
      the
      Plan to three directors at an exercise price of $0.80 per share that vest
      equally over three years. On March 11, 2005, the Company issued options to
      purchase 100,000 shares of stock under the Plan to its Chief Financial Officer
      at an exercise price of $1.20 that vest equally over two years.





Following
      the merger between Lev and a subsidiary of FCP, in May 2005 the Company's Board
      of Directors determined that the basis for the exchange of options and warrants
      to purchase common stock of Lev outstanding prior to the merger for options
      and
      warrants to purchase common stock of the Company should be changed. Though
      the
      number of shares issuable upon exercise of these options and warrants was
      increased, the parties to the merger did not proportionately reduce the exercise
      price of these options and warrants to account for the increase in the number
      of
      shares outstanding after the merger. Accordingly, in May 2005, the exercise
      price of outstanding warrants to purchase 190,327 shares was reduced from $0.10
      to $0.04 per share. Also, the exercise price of outstanding warrants to purchase
      111,341 shares was reduced from $0.85 to $0.30 per share. At the date of this
      repricing, the Company recognized a charge to the Statement of Operations of
      $27,819 for the incremental fair values of these warrants using the
      Black-Scholes option pricing model. The  weighted-average
      assumptions used to determine the fair values of the warrants are as follows:
      risk-free interest rate of 3.83%; expected warrant life of 3 years; dividend
      yield of 0% and expected volatility of 70%.





In
      July
      2005, the Board further determined to obtain stockholder approval on
      December 12, 2005, to reduce the exercise price, from $0.85 to $0.30, of
      outstanding options to purchase 1,427,450 shares of common stock held by each
      of
      the Chief Executive Officer and the Chairman, respectively (an aggregate of
      2,854,900 shares). The stockholders approved the repricing. The Company recorded
      a charge to the Consolidated Statement of Operations at the repricing date
      and
      at each reporting date, based upon subsequent changes in values of the price
      of
      Company’s stock and recorded an aggregate charge for these employee stock
      options of $1,427,450.





As
      of
      December 31, 2006, there are 4,405,100 options available to grant under the
      Plan.





F-25


**LEV
          PHARMACEUTICALS, INC. AND SUBSIDIARY**
 (a
          development stage enterprise)
 
 **N** **OTES** **T** **O** **C** **ONSOLIDATED** **F** **INANCIAL** **S** **TATEMENTS**
 **N** **OTE** **I** **-** **S** **TOCK** **O** **PTIONS** **A** **ND** **W** **ARRANTS** (Continued):


The
      following table summarizes information about stock options outstanding as of
      December 31, 2006:





**Weighted****Average****Remaining****Contractual****Exercise**
            
            **Number**
            
            **Life**
            
            **Number****Price**
            
            **Outstanding**
            
            **(In
                Years)**
            
            **Exercisable**$0.30
            
            
            2,854,900
            
            
            7.8
            
            
            2,854,900$0.80
            
            
            675,000
            
            
            8.0
            
            
            225,000$0.50
            
            
            625,000
            
            
            9.4
            
            
            200,000$0.65
            
            
            600,000
            
            
            9.6
            
            
            200,000$0.90
            
            
            300,000
            
            
            9.8
            
            
            0$0.69
            
            
            300,000
            
            
            9.7
            
            
            0$1.20
            
            
            100,000
            
            
            8.2
            
            
            0$0.95
            
            
            100,000
            
            
            9.8
            
            
            0$0.63
            
            
            40,000
            
            
            6.6
            
            
            25,0005,594,900
            
            
            
            
            
            3,779,900




**N** **OTE** **J** **-** **I** **NCOME** **T** **AXES**


There
      is
      no provision (benefit) for federal or state income taxes for the years ended
      December 31, 2006 and December 31, 2005 since the Company has incurred
      operating losses and has established a valuation allowance equal to the total
      deferred tax asset.





The
      tax
      effect of temporary differences and net operating losses as of December 31,
      2006
      are as follows :




Deferred
                tax asset and valuation allowance:Research
                and development cost
            
            $
            4,245,000Research
                and development credits
            
            
            525,000Net
                operating loss carryforwards
            
            
            3,525,000Options
                and warrants
            
            
            817,000Contributions
            
            
            141,000Other
            
            
            70,000Total
                deferred tax asset
            
            
            9,323,000Valuation
                allowance
            
            
            (9,323,000
            )Net
                deferred tax asset
            
            $
            0





At
      December 31, 2006, the Company has available, for tax purposes, unused net
      operating loss carryforwards of approximately $8,993,000 that expire from 2023
      to 2026. The Company has approximately $525,000 of research and development
      credits that expire from 2024 to 2026. The increase to the valuation allowance
      from December 31, 2005 to December 31, 2006 was $4,522,000. Pursuant
      to Sections 382 and 383 of the Internal Revenue Code, annual use of the
      Company's net operating loss and credit carryforwards prior to August 23, 2004
      was limited due to a cumulative change in ownership of more than 50% that
      occurred within a three-year period.




F-26


**LEV
        PHARMACEUTICALS, INC. AND SUBSIDIARY**
 (a
        development stage enterprise)
 
 **N** **OTES** **T** **O** **C** **ONSOLIDATED** **F** **INANCIAL** **S** **TATEMENTS**
 **N** **OTE** **J** **-** **I** **NCOME** **T** **AXES** **(CONTINUED)**





A
      reconciliation of the effect of applying the federal statutory rate and the
      effective income tax rate used to calculate the Company's income tax provision
      is as follows:





December
                31,2006
            
            2005Statutory
                federal income tax rate
            
            
            (34)
            %
            
            (34)
            %State
                income tax rate, net of federal taxes
            
            
            (0
            )
            
            (0
            )Permanent
                difference
            
            
            (0.2
            )
            
            (0.3
            )Valuation
                allowance
            
            
            34.2
            
            
            34.3Income
                tax provision
            
            
            0
            %
            
            0
            %




**N** **OTE** **K** **-** **S** **UBSEQUENT** **E** **VENTS**


On
      January 23, 2007, the Company entered into amended and restated employment
      agreements with each of its Chief Executive Officer, Mr. Joshua D. Schein,
      and
      its Executive Vice President and Chairman, Mr. Judson Cooper. Both employment
      agreements are effective as of January 17, 2007. The employment agreements
      are
      identical in all material respects and are summarized as follows. As used in
      the
      following summary, the term “Executive(s)” shall refer to Messrs. Schein and
      Cooper. The employment agreements are
      for
      an initial term of four years and at the end of the initial term renew
      automatically for additional one year terms unless sooner terminated or not
      renewed. Under the employment agreements, the Executives will be entitled to
      a
      base salary of $425,000 beginning as of January 1, 2007. The base salary
      increases at the end of each year of service (commencing at the end of 2007)
      by
      the greater of (i) 4% or (ii) a percentage equal to the increase, if any, in
      the
      United States Department of Labor Consumer Price Index (or comparable index,
      if
      available) for the New York metropolitan area over the previous 12 months.
      In
      addition, the Executives are entitled to a bonus as defined in the employment
      agreements. The Executives were each granted options to purchase 1,600,000
      shares of the Company common stock, which options expire ten years from the
      date
      of grant and which are exercisable at an exercise price of $1.60, which was
      equal to the closing price of its common stock on the date of grant (January
      17,
      2007). The options vest in equal annual installments of 25% of the total option
      amount until vested in full, subject to the terms and conditions of the
      Company’s 2004 Omnibus Incentive Compensation Plan. In the event of the
      termination of employment by the Company without “cause” or by an Executive for
“good reason,” there is a lump sum settlement payable as defined in the
      employment agreements. There is a provision for change of control.




F-27


**LEV
          PHARMACEUTICALS, INC. AND SUBSIDIARY**
 (a
          development stage enterprise)
 
 **N** **OTES** **T** **O** **C** **ONSOLIDATED** **F** **INANCIAL** **S** **TATEMENTS**
 **N** **OTE** **K** **-** **S** **UBSEQUENT** **E** **VENTS** **(CONTINUED)**


Effective
      March 16, 2007, the Company entered into an employment relationship with Mr.
      Dov
      S. Elefant for Mr. Elefant to serve as its Corporate Controller. Pursuant to
      the
      terms of an offer letter executed by the Company and Mr. Elefant, Mr. Elefant
      will serve as Corporate Controller on an at-will basis and earn an annual salary
      at the rate of $195,000. Mr. Elefant will be eligible for an annual bonus of
      $20,000 in the discretion of the compensation committee of the Board. In the
      event Mr. Elefant’s employment is terminated by the Company without cause within
      three years of his start date, the Company will pay him a severance payment
      of
      six months of his then-current base salary. In addition, pursuant to the
      Company’s 2004 Omnibus Incentive Compensation Plan and subject to the terms and
      conditions therein, on March 19, 2007, the Company granted Mr. Elefant options
      to purchase 200,000 shares of the common stock, which options are exercisable
      for a period of seven years at a per share price of $1.75 and which options
      vest over
      a
      three year period, with 1/3 of the option award vesting on the one-year
      anniversary of the date of grant and the balance vesting in equal monthly
      installments of 1/24  of
      the
      remaining option award over the following 24 months.




F-28