**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      D.C. 20549**




**FORM
      10-Q**




(Mark
      One)


x QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934




For
      the
      quarterly period ended June 30, 2008




OR




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




For
        the
        transition period from ____ to ____


Commission
        file number 001- 32954
  **CLEVELAND
        BIOLABS, INC.**
 (Exact
        name of registrant as specified in its charter)




**DELAWARE**
            
            **20-0077155**(State
                or other jurisdiction of incorporation or organization)
            
            (I.R.S.
                Employer Identification No.)**73
                High Street, Buffalo,****New
                York******
            
            **14203**(Address
                of principal executive offices)
            
            (Zip
                Code)




(Registrant’s
        telephone number, including area code) **** **(716)
        849-6810**
  _______________________________________________
 (Former
        name, former address and former fiscal year,
 if
        changed since last report)




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




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer, or a smaller reporting company.
      See
      the definitions of “large accelerated filer,” “accelerated filer” and “smaller
      reporting company” in Rule 12b-2 of the Exchange Act. (Check one):




Large
                accelerated filer ̈
            Accelerated
                filer ̈Non-accelerated
                filer ̈
            Smaller
                reporting companyx




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




As
      of
      August 12, 2008, there were 13,605,806 **** shares
      outstanding of registrant's common stock, par value $0.005 per
      share.









CLEVELAND
      BIOLABS INC


10-Q


8/12/2008




TABLE
        OF
        CONTENTS
 
 PAGEPART
                  I - FINANCIAL INFORMATIONITEM
                  1:
              
              Financial
                  StatementsBalance
                  Sheets as of June 30, 2008 and December 31, 2007
              
              3Statements
                  of Operations For Three and Six Months Ended June 30, 2008 and
                  2007
              
              5Statements
                  of Cash Flows For Six Months Ended June 30, 2008 and 2007
              
              6Statement
                  of Stockholders' Equity from January 1, 2007 to December 31, 2007and
                  to
                  June 30, 2008
              
              7Notes
                  to Financial Statements
              
              10ITEM
                  2:
              
              Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              
              21ITEM
                  3:
              
              Quantitative
                  and Qualitative Disclosures About Market Risk
              
              36ITEM
                  4:
              
              Controls
                  and Procedures
              
              36PART
                  II - OTHER INFORMATIONITEM
                  1:
              
              Legal
                  Proceedings
              
              37ITEM
                  2:
              
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              
              37ITEM
                  3:
              
              Defaults
                  Upon Senior Securities
              
              37ITEM
                  4:
              
              Submission
                  of Matters to a Vote of Securities Holders
              
              37ITEM
                  5:
              
              Other
                  Information
              
              38ITEM
                  6:
              
              Exhibits
              
              38Signatures
              
              
              
              39


In
      this
      report, “Cleveland BioLabs,” “CBLI,” “we,” “us” and “our” refer to Cleveland
      BioLabs, Inc. Our common
      stock, par value $0.005 per share is
      referred to as “common stock.”


2


CLEVELAND
        BIOLABS, INC.
  BALANCE
        SHEETS
  June
        30,
        2008 (unaudited) and December 31, 2007


June
                  30 2008
              
              December
                  31 2007ASSETS
              
              (unaudited)CURRENT
                  ASSETSCash
                  and equivalents
              
              $
              6,252,471
              
              $
              14,212,189Short-term
                  investments
              
              
              1,000,000
              
              
              1,000,000Accounts
                  receivable:Trade
              
              
              912,980
              
              
              163,402Interest
              
              
              38,016
              
              
              50,042Other
                  prepaid expenses
              
              
              306,223
              
              
              325,626Total
                  current assets
              
              
              8,509,690
              
              
              15,751,259EQUIPMENTComputer
                  equipment
              
              
              279,136
              
              
              258,089Lab
                  equipment
              
              
              1,073,705
              
              
              966,517Furniture
              
              
              274,903
              
              
              274,9031,627,744
              
              
              1,499,509Less
                  accumulated depreciation
              
              
              470,554
              
              
              313,4891,157,190
              
              
              1,186,020OTHER
                  ASSETSIntellectual
                  property
              
              
              679,083
              
              
              459,102Deposits
              
              
              26,327
              
              
              25,445705,410
              
              
              484,547TOTAL
                  ASSETS
              
              $
              10,372,290
              
              $
              17,421,826


3




CLEVELAND
        BIOLABS, INC.
 
 BALANCE
        SHEETS
 
 June
        30,
        2008 (unaudited) and December 31, 2007
 
 June
                  30
              
              December
                  312008
              
              2007LIABILITIES
                  AND STOCKHOLDERS' EQUITY
              
              (unaudited)CURRENT
                  LIABILITIESAccounts
                  payable
              
              $
              588,306
              
              $
              710,729Milestone
                  payable
              
              
              50,000
              
              
              —Deferred
                  revenue
              
              
              2,515,898
              
              
              1,670,610Dividends
                  payable
              
              
              305,251
              
              
              396,469Accrued
                  expenses
              
              
              301,870
              
              
              449,774Total
                  current liabilities
              
              
              3,761,325
              
              
              3,227,582STOCKHOLDERS'
                  EQUITYSeries
                  B convertible preferred stock, $.005 par valueAuthorized
                  - 10,000,000 shares at June 30, 2008and
                  December 31, 2007Issued
                  and outstanding 3,315,973 and 3,870,267shares
                  at June 30, 2008 and December 31, 2007, respectively
              
              
              16,580
              
              
              19,351Additional
                  paid-in capital
              
              
              20,894,414
              
              
              24,383,695Common
                  stock, $.005 par valueAuthorized
                  - 40,000,000 shares at June 30, 2008and
                  December 31, 2007Issued
                  and outstanding 13,575,146 and 12,899,241shares
                  at June 30, 2008 and December 31, 2007, respectively
              
              
              67,876
              
              
              64,496Additional
                  paid-in capital
              
              
              35,028,355
              
              
              30,764,914Accumulated
                  other comprehensive income (loss)
              
              
              —
              
              
              —Accumulated
                  deficit
              
              
              (49,396,260
              )
              
              (41,038,212
              )Total
                  stockholders' equity
              
              
              6,610,965
              
              
              14,194,244TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY
              
              $
              10,372,290
              
              $
              17,421,826
 4


CLEVELAND
        BIOLABS, INC.
 
 STATEMENT
        OF OPERATIONS
  Three
        Months and Six Months Ending June 30, 2008 and 2007 (unaudited)
 
 Three
                  Months Ended
              
              Six
                  Months EndedJune
                  30
              
              June
                  30
              
              June
                  30
              
              June
                  302008
              
              2007
              
              2008
              
              2007(unaudited)
              
              (unaudited)
              
              (unaudited)
              
              (unaudited)REVENUESGrant
                  and contract
              
              $
              674,376
              
              $
              516,007
              
              $
              1,230,700
              
              $
              787,453Service
              
              
              —
              
              
              120,000
              
              
              120,000
              
              
              170,000674,376
              
              
              636,007
              
              
              1,350,700
              
              
              957,453OPERATING
                  EXPENSESResearch
                  and development
              
              
              2,682,703
              
              
              3,966,711
              
              
              6,234,089
              
              
              7,557,726Selling,
                  general and administrative
              
              
              1,992,536
              
              
              4,782,257
              
              
              3,185,650
              
              
              5,776,577Total
                  operating expenses
              
              
              4,675,239
              
              
              8,748,968
              
              
              9,419,739
              
              
              13,334,303LOSS
                  FROM OPERATIONS
              
              
              (4,000,863
              )
              
              (8,112,961
              )
              
              (8,069,039
              )
              
              (12,376,850
              )OTHER
                  INCOMEInterest
                  income
              
              
              50,016
              
              
              359,651
              
              
              195,143
              
              
              456,080Buffalo
                  relocation reimbursement
              
              
              220,000
              
              
              —
              
              
              220,000
              
              
              —Sublease
                  revenue
              
              
              2,657
              
              
              —
              
              
              5,313
              
              
              —Gain
                  on disposal of fixed assets
              
              
              —
              
              
              —
              
              
              1,394
              
              
              —Gain
                  on investment
              
              
              —
              
              
              —
              
              
              3,292
              
              
              —Total
                  other income
              
              
              272,673
              
              
              359,651
              
              
              425,142
              
              
              456,080OTHER
                  EXPENSECorporate
                  relocation
              
              
              79,361
              
              
              —
              
              
              133,705
              
              
              —Interest
                  expense
              
              
              —
              
              
              —
              
              
              —
              
              
              1,087Total
                  other expense
              
              
              79,361
              
              
              —
              
              
              133,705
              
              
              1,087NET
                  LOSS
              
              $
              (3,807,551
              )
              $
              (7,753,310
              )
              $
              (7,777,602
              )
              $
              (11,921,857
              )DIVIDENDS
                  ON CONVERTIBLE PREFERRED STOCK
              
              
              (264,160
              )
              
              —
              
              
              (580,446
              )
              
              —NET
                  LOSS AVAILABLE TO COMMON SHAREHOLDERS
              
              $
              (4,071,711
              )
              $
              (7,753,310
              )
              $
              (8,358,048
              )
              $
              (11,921,857
              )NET
                  LOSS AVAILABLE TO COMMON SHAREHOLDERSPER
                  SHARE OF COMMON STOCK - BASIC ANDDILUTED
              
              $
              (0.30
              )
              $
              (0.64
              )
              $
              (0.63
              )
              $
              (1.00
              )WEIGHTED
                  AVERAGE NUMBER OF SHARES USEDIN
                  CALCULATING NET LOSS PER SHARE, BASIC ANDDILUTED
              
              
              13,491,493
              
              
              12,024,549
              
              
              13,318,744
              
              
              11,939,759
  5


CLEVELAND
        BIOLABS, INC.
  STATEMENTS
        OF CASH FLOWS
  For
        the
        Six Months Ended June 30, 2008 and 2007 (unaudited)
 
 June
                  30
              
              June
                  302008
              
              2007(unaudited)
              
              (unaudited)CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  loss
              
              $
              (7,777,602
              )
              $
              (11,921,857
              )Adjustments
                  to reconcile net loss to net cashused
                  by operating activities:Depreciation
              
              
              157,066
              
              
              61,681Noncash
                  salaries and consulting expense
              
              
              770,931
              
              
              3,891,458Changes
                  in operating assets and liabilities:Accounts
                  receivable - trade
              
              
              (749,578
              )
              
              (509,454
              )Accounts
                  receivable - interest
              
              
              12,026
              
              
              (229,014
              )Other
                  prepaid expenses
              
              
              19,403
              
              
              (98,250
              )Deposits
              
              
              (881
              )
              
              (1,422
              )Accounts
                  payable
              
              
              (122,423
              )
              
              507,024Deferred
                  revenue
              
              
              845,288
              
              
              2,000,000Accrued
                  expenses
              
              
              (147,904
              )
              
              163,440Milestone
                  payments
              
              
              50,000
              
              
              200,000Total
                  adjustments
              
              
              833,928
              
              
              5,985,463Net
                  cash (used in) provided by operatingactivities
              
              
              (6,943,674
              )
              
              (5,936,394
              )CASH
                  FLOWS FROM INVESTING ACTIVITIESSale
                  of short-term investments
              
              
              —
              
              
              2,000,000Purchase
                  of short-term investments
              
              
              —
              
              
              (17,999,965
              )Issuance
                  of notes receivable
              
              
              —
              
              
              (250,000
              )Purchase
                  of equipment
              
              
              (128,236
              )
              
              (195,679
              )Costs
                  of patents pending
              
              
              (219,980
              )
              
              (119,038
              )Net
                  cash (used in) provided by investing activities
              
              
              (348,216
              )
              
              (16,564,682
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESIssuance
                  of preferred stock
              
              
              —
              
              
              30,020,984Financing
                  costs
              
              
              —
              
              
              (1,152,857
              )Dividends
              
              
              (671,664
              )
              
              —Issuance
                  of common stock
              
              
              —
              
              
              158,616Exercise
                  of stock options
              
              
              3,836
              
              
              —Net
                  cash (used in) provided by financing activities
              
              
              (667,828
              )
              
              29,026,743INCREASE
                  (DECREASE) IN CASH AND EQUIVALENTS
              
              
              (7,959,718
              )
              
              6,525,667CASH
                  AND EQUIVALENTS AT BEGINNING OF PERIOD
              
              
              14,212,189
              
              
              3,061,993CASH
                  AND EQUIVALENTS AT END OF PERIOD
              
              $
              6,252,471
              
              $
              9,587,660Supplemental
                  disclosures of cash flow information:Cash
                  paid during the period for interest
              
              $
              —
              
              $
              —Cash
                  paid during the year for income taxes
              
              $
              —Supplemental
                  schedule of noncash financing activities:Conversion
                  of preferred stock to common stock
              
              $
              3,492,052
              
              $
              —Issuance
                  of stock options to employees, consultants, and independent board
                  members
              
              $
              1,573,632
              
              $
              2,350,158Expense
                  recapture of expense for options expensed in 2007 but issued in
                  2008
              
              $
              1,459,425
              
              $
              —Issuance
                  of shares to consultants and employees
              
              $
              563,200
              
              $
              1,541,300Accrual
                  of preferred stock dividends
              
              $
              305,251
              
              $
              —Amortization
                  of restricted shares issued to employees and consultants
              
              $
              93,525
              
              $
              —
 6




CLEVELAND
      BIOLABS, INC.





STATEMENTS
      OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS





Period
      From January 1, 2007 to December 31, 2007 and to


June
      30,
      2008 (unaudited)





Stockholders'
                EquityCommon
                StockPaid-in
            
            AdditionalShares
            
            Amount
            
            CapitalBalance
                at January 1, 2007
            
            
            11,826,389
            
            $
            59,132
            
            $
            18,314,097Issuance
                of options
            
            
            —
            
            
            —
            
            
            3,401,499Options
                to be issued in 2008
            
            
            —
            
            
            —
            
            
            2,687,355Issuance
                of shares - Series B financing
            
            
            —
            
            
            —
            
            
            —Fees
                associated with Series B Preferred offering
            
            
            —
            
            
            —
            
            
            —Issuance
                of restricted shares
            
            
            190,000
            
            
            950
            
            
            1,699,500Exercise
                of options
            
            
            126,046
            
            
            630
            
            
            110,650Exercise
                of warrants
            
            
            48,063
            
            
            240
            
            
            90,275Conversion
                of Series B Preferred Shares to Common
            
            
            708,743
            
            
            3,544
            
            
            4,461,537Dividends
                on Series B Preferred shares
            
            
            —
            
            
            —
            
            
            —Net
                Loss
            
            
            —
            
            
            —
            
            
            —Other
                comprehensive incomeUnrealized
                gains (losses) on short term investmentsChanges
                in unrealized holding gains (losses)arising
                during period
            
            
            —
            
            
            —
            
            
            —Less
                reclassification adjustment for (gains) lossesincluded
                in net loss
            
            
            —
            
            
            —
            
            
            —Comprehensive
                lossBalance
                at December 31, 2007
            
            
            12,899,241
            
            $
            64,496
            
            $
            30,764,914Issuance
                of options
            
            
            —
            
            
            —
            
            
            1,573,633Partial
                recapture of expense for options expensed in 2007
            
            
            —
            
            
            —
            
            
            (1,459,425
            )but
                issued in 2008Issuance
                of restricted shares
            
            
            115,000
            
            
            575
            
            
            562,625Amortization
                of restricted shares
            
            
            —
            
            
            —
            
            
            93,525Exercise
                of options
            
            
            6,611
            
            
            33
            
            
            3,803Conversion
                of Series B Preferred Shares to Common
            
            
            554,294
            
            
            2,771
            
            
            3,489,281Dividends
                on Series B Preferred shares
            
            
            —
            
            
            —
            
            
            —Net
                Loss
            
            
            —
            
            
            —
            
            
            —Other
                comprehensive incomeUnrealized
                gains (losses) on short term investmentsChanges
                in unrealized holding gains (losses)arising
                during period
            
            
            —
            
            
            —
            
            
            —Less
                reclassification adjustment for (gains) lossesincluded
                in net loss
            
            
            —
            
            
            —
            
            
            —Comprehensive
                lossBalance
                at June 30, 2008
            
            
            13,575,146
            
            $
            67,876
            
            $
            35,028,355





7




CLEVELAND
        BIOLABS, INC.
 STATEMENTS
        OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
 Period
        From January 1, 2007 to December 31, 2007 and to
 June
        30,
        2008 (unaudited)




Stockholders'
                    EquityPreferred
                  StockAdditionalPaid-inShares
              
              Amount
              
              CapitalBalance
                  at January 1, 2007
              
              
              —
              
              $
              —
              
              $
              —Issuance
                  of options
              
              
              —
              
              
              —
              
              
              —Options
                  to be issued in 2008
              
              
              —
              
              
              —
              
              
              —Issuance
                  of shares - Series B financing
              
              
              4,579,010
              
              
              22,895
              
              
              32,030,175Fees
                  associated with Series B Preferred offering
              
              
              —
              
              
              —
              
              
              (3,184,943
              )Issuance
                  of restricted shares
              
              
              —
              
              
              —
              
              
              —Exercise
                  of options
              
              
              —
              
              
              —
              
              
              —Exercise
                  of warrants
              
              
              —
              
              
              —
              
              
              —Conversion
                  of Series B Preferred Shares to Common
              
              
              (708,743
              )
              
              (3,544
              )
              
              (4,461,537
              )Dividends
                  on Series B Preferred shares
              
              
              —
              
              
              —
              
              
              —Net
                  Loss
              
              
              —
              
              
              —
              
              
              —Other
                  comprehensive incomeUnrealized
                  gains (losses) on short term investmentsChanges
                  in unrealized holding gains (losses)arising
                  during period
              
              
              —
              
              
              —
              
              
              —Less
                  reclassification adjustment for (gains) lossesincluded
                  in net loss
              
              
              —
              
              
              —
              
              
              —Comprehensive
                  lossBalance
                  at December 31, 2007
              
              
              3,870,267
              
              $
              19,351
              
              $
              24,383,695Issuance
                  of options
              
              
              —
              
              
              —
              
              
              —Partial
                  recapture of expense for options expensed in 2007
              
              
              —
              
              
              —
              
              
              —but
                  issued in 2008Issuance
                  of restricted shares
              
              
              —
              
              
              —
              
              
              —Amortization
                  of restricted shares
              
              
              —
              
              
              —
              
              
              —Exercise
                  of options
              
              
              —
              
              
              —
              
              
              —Conversion
                  of Series B Preferred Shares to Common
              
              
              (554,294
              )
              
              (2,771
              )
              
              (3,489,281
              )Dividends
                  on Series B Preferred shares
              
              
              —
              
              
              —
              
              
              —Net
                  Loss
              
              
              —
              
              
              —
              
              
              —Other
                  comprehensive incomeUnrealized
                  gains (losses) on short term investmentsChanges
                  in unrealized holding gains (losses)arising
                  during period
              
              
              —
              
              
              —
              
              
              —Less
                  reclassification adjustment for (gains) lossesincluded
                  in net loss
              
              
              —
              
              
              —
              
              
              —Comprehensive
                  lossBalance
                  at June 30, 2008
              
              
              3,315,973
              
              $
              16,580
              
              $
              20,894,414




8




CLEVELAND
        BIOLABS, INC.
  STATEMENTS
        OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
  Period
        From January 1, 2007 to December 31, 2007 and to
 June
        30,
        2008 (unaudited)


Stockholders'
                  EquityOther
              
              
              
              
              
              ComprehensiveComprehensive
              
              Accumulated
              
              
              
              IncomeIncome/(Loss)
              
              Deficit
              
              Total
              
              (Loss)Balance
                  at January 1, 2007
              
              $
              (4,165
              )
              $
              (12,775,910
              )
              $
              5,593,154Issuance
                  of options
              
              
              —
              
              
              —
              
              
              3,401,499Options
                  to be issued in 2008
              
              
              —
              
              
              —
              
              
              2,687,355Issuance
                  of shares - Series B financing
              
              
              —
              
              
              —
              
              
              32,053,070Fees
                  associated with Series B Preferred offering
              
              
              —
              
              
              —
              
              
              (3,184,943
              )Issuance
                  of restricted shares
              
              
              —
              
              
              —
              
              
              1,700,450Exercise
                  of options
              
              
              —
              
              
              —
              
              
              111,280Exercise
                  of warrants
              
              
              —
              
              
              —
              
              
              90,515Conversion
                  of Series B Preferred Shares to Common
              
              
              —
              
              
              —
              
              
              —Dividends
                  on Series B Preferred shares
              
              
              —
              
              
              (1,265,800
              )
              
              (1,265,800
              )Net
                  Loss
              
              
              —
              
              
              (26,996,502
              )
              
              (26,996,502
              )
              
              (26,996,502
              )Other
                  comprehensive incomeUnrealized
                  gains (losses) on short term investmentsChanges
                  in unrealized holding gains (losses)arising
                  during period
              
              
              —
              
              
              —
              
              
              —
              
              $
              —Less
                  reclassification adjustment for (gains) lossesincluded
                  in net loss
              
              
              4,165
              
              
              —
              
              
              4,165
              
              $
              4,165Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              $
              (26,992,337
              )Balance
                  at December 31, 2007
              
              $
              —
              
              $
              (41,038,212
              )
              $
              14,194,244Issuance
                  of options
              
              
              —
              
              
              —
              
              
              1,573,633Partial
                  recapture of expense for options expensed in 2007
              
              
              —
              
              
              —
              
              
              (1,459,425
              )but
                  issued in 2008Issuance
                  of restricted shares
              
              
              —
              
              
              —
              
              
              563,200Amortization
                  of restricted shares
              
              
              —
              
              
              —
              
              
              93,525Exercise
                  of options
              
              
              —
              
              
              —
              
              
              3,836Conversion
                  of Series B Preferred Shares to Common
              
              
              —
              
              
              —
              
              
              —Dividends
                  on Series B Preferred shares
              
              
              —
              
              
              (580,446
              )
              
              (580,446
              )Net
                  Loss
              
              
              —
              
              
              (7,777,602
              )
              
              (7,777,602
              )
              
              (7,777,602
              )Other
                  comprehensive incomeUnrealized
                  gains (losses) on short term investmentsChanges
                  in unrealized holding gains (losses)arising
                  during period
              
              
              —
              
              
              —
              
              
              —
              
              $
              —Less
                  reclassification adjustment for (gains) lossesincluded
                  in net loss
              
              
              —
              
              
              —
              
              
              —
              
              $
              —Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              $
              (7,777,602
              )Balance
                  at June 30, 2008
              
              $
              —
              
              $
              (49,396,260
              )
              $
              6,610,965




9




**CLEVELAND
      BIOLABS, INC.**




**NOTES
      TO FINANCIAL STATEMENTS**




**Note
      1. Organization**




Cleveland
      BioLabs, Inc. (“CBLI” or the “Company”) is engaged in the discovery, development
      and commercialization of products for cancer treatment and protection of normal
      tissues from radiation and other stresses. The Company was incorporated under
      the laws of the State of Delaware on June 5, 2003 and is headquartered in
      Buffalo, New York. The Company's initial technological development efforts
      are
      intended to be used as powerful antidotes with a broad spectrum of applications
      including protection from cancer treatment side effects, radiation and hypoxia.
      A significant discovery found that one of its compounds increases the number
      of
      progenitor (originator) stem cells in mouse bone marrow. To date, the Company
      has not developed any commercial products. The Company has developed and
      produced biological compounds under a single commercial development
      contract.




**Note
      2. Summary of Significant Accounting Policies**





A.
            Basis
                of Presentation - The information at June 30, 2008 and June 30, 2007,
                and
                for the quarter and six-months ended June 30, 2008 and June 30, 2007,
                is
                unaudited. In the opinion of management, these financial statements
                include all adjustments, consisting of normal recurring adjustments,
                necessary for a fair presentation of the results for the interim
                periods
                presented. Interim results are not necessarily indicative of results
                for a
                full year. These financial statements should be read in conjunction
                with
                CBLI’s audited financial statements for the year ended December 31, 2007,
                which were contained in the Company’s Annual Report on Form 10-K filed
                with the U.S. Securities and Exchange
                Commission.





B.
            Cash
                and Equivalents - The Company considers highly liquid investments
                with a
                maturity date of three months or less to be cash equivalents. In
                addition,
                the Company maintains cash and equivalents at financial institutions,
                which may exceed federally insured amounts at times and which may,
                at
                times, significantly exceed balance sheet amounts due to outstanding
                checks.




C.
            Marketable
                Securities and Short Term Investments - The Company considers investments
                with a maturity date of more than three months to be short-term
                investments and has classified these securities as available-for-sale.
                Such investments are carried at fair value, with unrealized gains
                and
                losses included as accumulated other comprehensive income (loss)
                in
                stockholders' equity. The cost of available-for-sale securities sold
                is
                determined based on the specific identification
                method.




D.
            Accounts
                Receivable - The Company extends unsecured credit to customers under
                normal trade agreements, which generally require payment within 30
                days.
                Management estimates an allowance for doubtful accounts which is
                based
                upon management's review of delinquent accounts and an assessment
                of the
                Company's historical evidence of collections. There is no allowance
                for
                doubtful accounts as of June 30, 2008 and December 31,
                2007.





E.
            Equipment
                - Equipment is stated at cost and depreciated over the estimated
                useful
                lives of the assets (generally five years) using the straight-line
                method.
                Leasehold improvements are depreciated on the straight-line method
                over
                the shorter of the lease term or the estimated useful lives of the
                assets.
                Expenditures for maintenance and repairs are charged to expense as
                incurred. Major expenditures for renewals and betterments are capitalized
                and depreciated. Depreciation expense was $80,256, and $34,016 for
                the
                quarters ended June 30, 2008 and 2007, respectively. Depreciation
                expense
                was $157,066 and $61,861 for the six months ended June 30, 2008 and
                2007,
                respectively.




F.
            Impairment
                of Long-Lived Assets - In accordance with Statements of Financial
                Accounting Standards, or SFAS, No. 144, Accounting for the Impairment
                or
                Disposal of Long-Lived Assets, long-lived assets to be held and used,
                including equipment and intangible assets subject to depreciation
                and
                amortization, are reviewed for impairment whenever events or changes
                in
                circumstances indicate that the carrying amounts of the assets or
                related
                asset group may not be recoverable. Determination of recoverability
                is
                based on an estimate of discounted future cash flows resulting from
                the
                use of the asset and its eventual disposition. In the event that
                such cash
                flows are not expected to be sufficient to recover the carrying amount
                of
                the asset or asset group, the carrying amount of the asset is written
                down
                to its estimated net realizable
                value.




10




G.
            Intellectual
                Property - The Company capitalizes the costs associated with the
                preparation, filing, and maintenance of certain intellectual property
                rights. Capitalized intellectual property is reviewed annually for
                impairment.





A
      portion
      of this intellectual property is owned by the Cleveland Clinic Foundation,
      or
      CCF, and granted to the Company through an exclusive licensing agreement. As
      part of the licensing agreement, CBLI agrees to bear the costs associated with
      the preparation, filing and maintenance of patent applications relating to
      this
      intellectual property. If the patent application is approved, the costs paid
      by
      the Company are amortized on a straight-line basis over the shorter of 17 years
      or the anticipated useful life of the patent. If the patent application is
      not
      approved, the costs associated with the preparation, filing and maintenance
      of
      the patent application by the Company on behalf of CCF will be expensed as
      part
      of selling, general and administrative expenses. Gross capitalized patents
      pending costs were $614,082 and $407,425 for these 13 patent applications as
      of
      June 30, 2008 and December 31, 2007, respectively. All of the CCF patent
      applications are still pending approval.





The
      Company also has submitted four patent applications as a result of intellectual
      property exclusively developed and owned by the Company. If the patent
      applications are approved, costs paid by the Company associated with the
      preparation, filing, and maintenance of the patents will be amortized on a
      straight-line basis over the shorter of 17 years or the anticipated useful
      life
      of the patent. If the patent application is not approved, the costs associated
      with the preparation, filing and maintenance of the patent application will
      be
      expensed as part of selling, general and administrative expenses at that time.
      Gross capitalized patents pending costs were $65,001 and $51,677 for these
      four
      patent applications as of June 30, 2008 and December 31, 2007, respectively.
      The
      patent applications are still pending approval.





H.
            Line
                of Credit - The Company has a working capital line of credit that
                is fully
                secured by short-term investments. This fully-secured, working capital
                line of credit carries an interest rate of prime minus 1%, a borrowing
                limit of $1,000,000, and expires on September 25, 2008. At June 30,
                2008,
                there were no outstanding borrowings under this credit
                facility.




I.
            Fair
                Value of Financial Instruments - Financial instruments, including
                cash and
                equivalents, accounts receivable, notes receivable, accounts payable
                and
                accrued liabilities, are carried at net realizable value.





In
      September 2006, The Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value
      Measurements.” SFAS No. 157 provides enhanced guidance for using fair value to
      measure assets and liabilities and expands disclosure with respect to fair
      value
      measurements. This statement was originally effective for fiscal years beginning
      after November 15, 2007. In February 2008, the FASB issued FSP157-2 which allows
      companies to elect a one-year deferral of adoption of SFAS No. 157 for
      non-recurring assets and non-financial liabilities that are recognized or
      disclosed at fair value in the financial statements on a non-recurring basis.
      The Company has adopted SFAS No. 157 as of January 1, 2008.





SFAS
      No.
      157 establishes a valuation hierarchy for disclosure of the inputs to valuation
      used to measure fair value. This hierarchy prioritizes the inputs into three
      broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active
      markets for identical assets or liabilities; Level 2 inputs are quoted prices
      for similar assets and liabilities in active markets or inputs that are
      observable for the asset or liability, either directly or indirectly; and Level
      3 inputs are unobservable inputs in which little or no market data exists,
      therefore requiring a company to develop its own assumptions. The Company does
      not have any significant assets or liabilities measured at fair value using
      Level 1 or Level 3 inputs as of June 30, 2008.




J.
            Use
                of Estimates - The preparation of financial statements in conformity
                with
                accounting principles generally accepted in the U.S. requires management
                to make estimates and assumptions that affect the reported amounts
                of
                assets and liabilities and disclosure of contingent assets and liabilities
                at the date of the financial statements and the reported amounts
                of
                revenues and expenses during the reporting period. The Company bases
                its
                estimates on historical experience and on various other assumptions
                that
                the Company believes to be reasonable under these circumstances.
                Actual
                results could differ from those
                estimates.





K.
            Revenue
                Recognition - The Company recognizes revenue in accordance with Staff
                Accounting Bulletin No. 104, “Revenue Recognition”, or SAB 104, and
                Statement of Financial Accounting Standards No. 116, or SFAS 116.
                Revenue
                sources consist of government grants, government contracts and commercial
                development contracts.





11


Revenues
      from government grants and contracts are for research and development purposes
      and are recognized in accordance with the terms of the award and the government
      agency per SAB 104. Grant revenue is recognized in one of two different ways
      depending on the grant. Cost reimbursement grants require us to submit proof
      of
      costs incurred that are invoiced by us to the government agency, which then
      pays
      the invoice. In this case, grant revenue is recognized at the time of submitting
      the invoice to the government agency. Fixed cost grants require no proof of
      costs and are paid as a request for payment is submitted for expenses. The
      grant
      revenue under these fixed costs grants is recognized using a
      percentage-of-completion method, which uses assumptions and estimates. These
      assumptions and estimates are developed in coordination with the principal
      investigator performing the work under the government fixed-cost grants to
      determine key milestones, expenses incurred, and deliverables to perform a
      percentage-of-completion analysis to ensure that revenue is appropriately
      recognized. Critical estimates involved in this process include total costs
      incurred and anticipated to be incurred during the remaining life of the grant.





Government
      contract revenue is recognized periodically upon delivery of an invoice for
      allowable R&D expenses according to the terms of the contract. The Company
      has recognized grant revenue from the following agencies: the Department of
      Defense (DoD), the Defense Threat Reduction Agency (DTRA), the U.S. Army
      (DARPA), National Aeronautics and Space Administration (NASA), the National
      Institutes of Health (NIH) and the Department of Health and Human Services
      (HHS).





The
      Company recognizes revenue related to the funds received in 2007 from the State
      of New York under the sponsored research agreement with the Roswell Park Cancer
      Institute (RPCI) in accordance with SFAS 116. The principles of SFAS 116 result
      in the recognition of revenue as allowable costs are incurred. The Company
      recognizes revenue on research laboratory services and the purchase and
      subsequent use of related equipment. The amount paid as a payment toward future
      services related to the equipment is recognized as a prepaid asset and will
      be
      recognized as revenue as the services are performed and the prepaid asset is
      recognized as expense.





Commercial
      development revenues are recognized when the service or development is
      delivered.




L.
            Deferred
                  Revenue - Deferred revenue results when payment is received in
                  advance of
                  revenue being earned. The Company makes a determination as to whether
                  the
                  revenue has been earned by applying a percentage-of-completion
                  analysis to
                  compute the need to recognize deferred revenue. The percentage
                  of
                  completion method is based upon (1) the total income projected
                  for the
                  project at the time of completion and (2) the expenses incurred
                  to date.
                  The percentage-of-completion can be measured using the proportion
                  of costs
                  incurred versus the total estimated cost to complete the
                  contract.




The
      Company received $2,000,000 in funds from the State of New York through the
      Roswell Park Cancer Institute during the second quarter of 2007. The Company
      received an additional $1,000,000 in funds from the State of New York through
      the Roswell Park Cancer Institute during the second quarter of 2008. The Company
      is recognizing this revenue over the terms and conditions of the sponsored
      research agreement. The Company recognizes revenue on research laboratory
      services and the purchase and subsequent use of related equipment. The amount
      paid as a payment toward future services related to the equipment is recognized
      as a prepaid asset and will be recognized as revenue as the services are
      performed and the prepaid asset is recognized as expense. For the six-months
      ended June 30, 2008, the Company recognized $154,711 as revenue resulting in
      a
      balance of deferred revenue of $2,515,898 at June 30, 2008. At December 31,
      2007, the balance in deferred revenue was $1,670,610.




M.
            Research
                and Development - Research and development expenses consist primarily
                of
                costs associated with salaries and related expenses for personnel,
                costs
                of materials used in R&D, costs of facilities and costs incurred in
                connection with third-party collaboration efforts. Expenditures relating
                to research and development are expensed as
                incurred.




N.
            2006
                Equity Incentive Plan - On May 26, 2006, the Company's Board of Directors
                adopted the 2006 Equity Incentive Plan (“Plan”) to attract and retain
                persons eligible to participate in the Plan, motivate participants
                to
                achieve long-term Company goals, and further align participants'
                interests
                with those of the Company's other stockholders. The Plan expires
                on May
                26, 2016 and the aggregate number of shares of stock which may be
                delivered under the Plan shall not exceed 2,000,000 shares. On February
                14, 2007, these 2,000,000 shares were registered with the SEC by
                filing a
                Form S-8 registration statement. On April 29, 2008, the stockholders
                of
                the Company approved an amendment and restatement of the Plan (the
                “Amended Plan”). The Amended Plan increases the number of shares available
                for issuance by an additional 2,000,000 shares, clarifies other aspects
                of
                the 2006 Plan, and contains updates that reflect changes and developments
                in federal tax laws. For the quarter ended June 30, 2008, there were
                194,976 stock options and 25,000 shares granted under the Amended
                Plan,
                and as of June 30, 2008 there were 1,619,924 stock options and 335,000
                shares granted under the Amended Plan leaving 2,045,076 shares of
                stock to
                be awarded under the Amended Plan.




12




O.
            Stock-Based
                Compensation - The FASB issued SFAS No. 123(R) (revised December
                2004),
                Share Based Payment, which is a revision of SFAS No. 123 Accounting
                for
                Stock-Based Compensation. SFAS 123(R) requires all share-based payments
                to
                employees, including grants of employee stock options, to be recognized
                in
                the statement of operations based on their fair values. The Company
                values
                employee stock-based compensation under the provisions of SFAS 123(R)
                and
                related interpretations.




The
      fair
      value of each stock option granted is estimated on the grant date. The Black
      Scholes model is used for standard stock options, but if market conditions
      are
      present within the stock options, the Company utilizes Monte Carlo simulation
      to
      value the stock options. The assumptions used to calculate the fair value of
      options granted are evaluated and revised, as necessary, to reflect the
      Company's experience. The Company uses a risk-free rate published by the St.
      Louis Federal Reserve at the time of the option grant, assumes a forfeiture
      rate
      of zero, assumes an expected dividend yield rate of zero based on the Company's
      intent not to issue a dividend in the foreseeable future, uses an expected
      life
      based on the safe harbor method, and computes an expected volatility based
      on
      similar high-growth, publicly-traded, biotechnology companies. In 2008, the
      Company began to include the use of its own stock in the volatility calculation
      and is layering in the volatility of the stock of the Company with that of
      comparable companies since there is not an adequate trading history to rely
      solely on the volatility of the Company. The Company recognizes the fair value
      of stock-based compensation in net income on a straight-line basis over the
      requisite service period.





The
      assumptions used to value these option and warrant grants using the
      Black-Scholes option valuation model are as follows:


2008
                  YTD
              
              2007Risk-free
                  interest rate
              
              
              2.61-3.58
              %
              
              3.38-5.11
              %Expected
                  dividend yield
              
              
              0
              %
              
              0
              %Expected
                  life
              
              
              5-6
                  years
              
              
              2.74-6
                  yearsExpected
                  volatility
              
              
              64.31-80.25
              %
              
              71.86-76.29
              %





During
      the quarter ended June 30, 2008, the Company granted 194,976 additional stock
      options pursuant to stock award agreements. The Company recognized a total
      of
      $845,555 in expense related to stock options for the quarter ended June 30,
      2008. During the quarter ended June 30, 2007, the Company granted 405,500 stock
      options pursuant to stock award agreements to certain employees and key
      consultants and recognized a total of $1,974,858 in expense related to
      options.





During
      the six-months ended June 30, 2008, the Company granted 914,924 additional
      stock
      options pursuant to stock award agreements. The Company recognized a total
      of
      $1,573,632 in expense related to stock options for the six-months ended June
      30,
      2008. The Company also recaptured $1,459,425 of previously recognized expense
      due to the stock options awarded under the 2007 Executive Compensation Plan.
      These options were originally expensed based on the December 31, 2007 variables,
      but were not issued until February 4, 2008. The change in dates resulted in
      a
      difference in valuation assumptions used in the Black-Scholes model causing
      a
      reduction in the grant date fair value. This reduction in the grant date fair
      value from $5.34 to $2.44 per share resulted in the recapture of $1,459,425
      in
      expense and a net expense for options for the six-months ended June 30, 2008
      of
      $114,207.





During
      the six-months ended June 30, 2007, the Company granted 525,000 stock options
      pursuant to stock award agreements and expensed $2,350,158 related to stock
      options.




13





The
      weighted average, estimated grant date fair values of stock options granted
      during the quarters ended June 30, 2008 and 2007 was $3.26 and $5.95,
      respectively.




The
      following tables summarize the stock option activity for the six-months ended
      June 30, 2008 and June 30, 2007, respectively.


Weighted
              
              WeightedAverage
              
              AverageExercise
              
              RemainingPrice
              
              Contractualper
              
              TermShares
              
              Share
              
              (in
                  Years)Outstanding,
                  December 31, 2007
              
              
              1,011,740
              
              $
              7.29Granted
              
              
              914,924
              
              $
              4.93Exercised
              
              
              11,874
              
              $
              1.75Forfeited,
                  Canceled
              
              
              0
              
              
              n/aOutstanding,
                  June 30, 2008
              
              
              1,914,790
              
              $
              6.20
              
              
              8.94Exercisable,
                  June 30, 2008
              
              
              1,559,503
              
              $
              5.44
              
              
              8.91
  Weighted
              
              WeightedAverage
              
              AverageExercise
              
              RemainingPrice
              
              Contractualper
              
              TermShares
              
              Share
              
              (in
                  Years)Outstanding,
                  December 31, 2006
              
              
              483,490
              
              $
              2.17Granted
              
              
              525,000
              
              $
              9.79Exercised
              
              
              69,000
              
              $
              1.28Forfeited,
                  Canceled
              
              
              0
              
              
              n/aOutstanding,
                  June 30, 2007
              
              
              939,490
              
              $
              6.50
              
              
              9.02Exercisable,
                  June 30, 2007
              
              
              637,680
              
              $
              6.02
              
              
              9.03


The
      Company also recognized $42,200 in expense for shares issued under the Plan
      to a
      consultant during the quarter ended June 30, 2008. In addition, the Company
      recognized $76,007 in consulting expense related to the amortization of
      restricted shares.





For
      the
      six-months ended June 30, 2008, the Company recognized a total of $563,200
      in
      expense for shares issued under the Plan and a total of $93,525 in expense
      related to the amortization of restricted shares. For the six-months ended
      June
      30, 2007 the Company recognized a total of $1,541,300 in expense for shares
      issued under the Plan to various consultants.




P.
            Net
                Loss Per Share - Basic and diluted net loss per share has been computed
                using the weighted-average number of shares of common stock outstanding
                during the period.





The
      following table presents the calculation of basic and diluted net loss per
      share
      for the three and six-months ended June 30, 2008 and 2007:




14




Quarter
                  Ended
                June
                  30, 2008
              
              Quarter
                  Ended
                June
                  30, 2007
              
              Six-Months
                  Ended
                June
                  30, 2008
              
              Six-Months
                  Ended
                June
                  30, 2007Net
                  loss available to common stockholders
              
              $
              (4,071,711
              )
              $
              (7,753,310
              )
              $
              (8,358,048
              )
              $
              (11,921,857
              )Net
                  loss per share, basic and diluted
              
              $
              (0.30
              )
              $
              (0.64
              )
              $
              (0.63
              )
              $
              (1.00
              )Weighted-average
                  shares used in computing net
              
              
              13,491,493
              
              
              12,024,549
              
              
              13,318,744
              
              
              11,939,759loss
                  per share, basic and diluted




The
      Company has excluded all outstanding warrants and options from the calculation
      of diluted net loss per share because all such securities are antidilutive
      for
      all applicable periods presented.




The
      total
      number of shares excluded from the calculations of diluted net loss per share,
      prior to application of the treasury stock method for *warrants* ,
      was
      3,453,268 and 3,456,768 for the periods ended June 30, 2008 and 2007,
      respectively. Such securities, had they been dilutive, would have been included
      in the computation of diluted earnings per share.




The
      total
      number of shares excluded from the calculations of diluted net loss per share,
      prior to the application of the treasury stock method for *options* ,
      was
      1,914,790 and 939,490 for the periods ended June 30, 2008 and 2007,
      respectively. Such securities, had they been dilutive, would have been included
      in the computation of diluted earnings per share.





Q.
            Concentrations
                of Risk - Grant revenue was comprised wholly from grants and contracts
                issued by the federal and NY state government and accounted for 100.0%
                and
                81.1% of total revenue for the quarter ended June 30, 2008 and 2007,
                respectively. Grant revenue accounted for 91.1% and 82.2% for the
                six
                months ended June 30, 2008 and 2007, respectively. Although the Company
                anticipates ongoing federal grant and contract revenue, there is
                no
                guarantee that this revenue stream will continue in the future.





Financial
      instruments that potentially subject us to a significant concentration of credit
      risk consist primarily of cash and cash equivalents and securities
      available-for-sale. The Company maintains deposits in federally insured
      institutions in excess of federally insured limits. The Company does not believe
      it is exposed to significant credit risk due to the financial position of the
      depository institutions in which those deposits are held. Additionally, the
      Company has established guidelines regarding diversification of its investment
      portfolio and maturities of investments, which are designed to meet safety
      and
      liquidity.




R.
            Foreign
                Currency Exchange Rate Risk - The Company has entered into a manufacturing
                agreement to produce one of its drug compounds and into an agreement
                for
                assay development and validation with foreign third parties and is
                required to make payments in the foreign currency. As a result, the
                Company's financial results could be affected by changes in foreign
                currency exchange rates. Currently, the Company's exposure primarily
                exists with the Euro and the Great British Pound, or GBP. As of June
                30,
                2008, the Company is obligated to make payments under the agreements
                of
                49,250 Euros and 144,323 GBP. The Company has established means to
                purchase forward contracts to hedge against this risk. As of June
                30,
                2008, the Company has not
                purchased any forward contracts for Euros
                or GBP.




S.
            Comprehensive
                Income/(Loss) - The Company applies Statement of Financial Accounting
                Standards (SFAS) No. 130, “Reporting Comprehensive Income.” SFAS No. 130
                requires disclosure of all components of comprehensive income on
                an annual
                and interim basis. Comprehensive income is defined as the change
                in equity
                of a business enterprise during a period from transactions and other
                events and circumstances from non-owner sources.





**Note
      3. Stock Transactions**




On
      February 1, 2006, the Company paid a common stock dividend of 91,776 shares
      to
      holders of the Series A preferred stock to satisfy the dividend requirement
      of
      the preferred stock issuance.





On
      March
      1, 2006, the Company issued 116,750 stock options to various employees and
      consultants of the Company under non-qualified stock option agreements. These
      options allow for the purchase of 116,750 shares of common stock at a price
      of
      $4.50. These options have a three-year vesting schedule and expire on February
      29, 2016.




15





On
      June
      21, 2006, after the expiration of the 115-day extension and an additional 30-day
      period, the Company incurred one additional penalty period in which 60,000
      shares of Series A preferred stock were earned at $120,000 and 15,295 shares
      of
      common stock were earned at $30,590. The Company has not incurred any further
      obligation to issue penalty shares since these issuances.





On
      July
      20, 2006, the Company sold 1,700,000 shares of common stock in its initial
      public offering at $6.00 per share. The net proceeds to the Company from this
      offering were approximately $8,300,000. Beginning July 21, 2006, the Company’s
      shares were quoted on the NASDAQ Capital Market and listed on the Boston Stock
      Exchange under the symbols “CBLI” and “CFB” respectively. On August 28, 2007,
      trading of the Company’s common stock moved from the NASDAQ Capital
      Market to the NASDAQ Global
      Market. In September 2007, we ceased our listing on the Boston Stock Exchange.
      In connection with its initial public offering, the Company sold warrants to
      purchase 170,000 shares of common stock to the underwriters and their designees
      at a cost of $100.00. The warrants have an exercise price of $8.70 per
      share.





On
      July
      20, 2006, the effective date of the Company’s initial public offering, the
      Company issued 92,407 shares of common stock as accumulated dividends to the
      Series A preferred stockholders. On the same date, all of the Company’s Series A
      Preferred shares automatically converted on a one-for-one basis into 3,351,219
      shares of common stock and notes of the Company in the principal amount of
      $283,500 plus accrued interest of $29,503 automatically converted into 124,206
      shares of common stock. In connection with their appointment to the Board,
      the
      Company issued to each of the Company’s three new independent directors, options
      to purchase 15,000 shares of common stock with an exercise price of $6.00 per
      share.





On
      September 21, 2006, the SEC declared effective a registration statement of
      the
      Company registering up to 4,453,601 shares of common stock for resale from
      time
      to time by the selling stockholders named in the prospectus contained in the
      registration statement. The Company will not receive any proceeds from the
      sale
      of the underlying shares of common stock, although to the extent the selling
      stockholders exercise warrants for the underlying shares of common stock, the
      Company will receive the exercise price of those warrants. The registration
      statement was filed to satisfy registration rights that the Company had
      previously granted.




On
      November 16, 2006 the Company issued 50,000 warrants to an outside consultant.
      These warrants are immediately exercisable into common shares of the Company
      and
      have an exercise price of $6.00 per share and an expiration date of November
      16,
      2011.





On
      February 14, 2007, the Company issued 99,500 stock options to various employees
      and consultants of the Company under non-qualified stock option agreements.
      These options allow for the purchase of 99,500 shares of common stock at a
      price
      of $9.14. These options have various vesting schedules from immediate vesting
      to
      three years and expire on February 14, 2017.




On
      February 26, 2007, the Company issued 55,000 warrants at an exercise price
      of
      $9.19 per share, to a placement agent as incentive for work on the private
      placement offering.




On
      March
      16, 2007, the Company entered into a Securities Purchase Agreement with various
      accredited investors (the Buyers), pursuant to which the Company agreed to
      sell
      to the Buyers Series B Convertible Preferred Stock (Series B Preferred)
      convertible into an aggregate of 4,288,712 shares of common stock and Series
      B
      Warrants that are exercisable for an aggregate of 2,144,356 shares of common
      stock. The Series B Preferred have an initial conversion price of $7.00 per
      share, and in the event of a conversion at such conversion price, one share
      of
      Series B Preferred would convert into one share of common stock. The Series
      B
      Warrants have an exercise price of $10.36 per share, the closing bid price
      on
      the day prior to the private placement. To the extent, however, that the
      conversion price of the Series B Preferred or the exercise price of the Series
      B
      Warrants is reduced as a result of certain anti-dilution protections, the number
      of shares of common stock into which the Series B Preferred are convertible
      and
      for which the Series B Warrants are exercisable may increase.




The
      Company also issued to the placement agents in the private placement (the
      Agents), as compensation for their services, Series B Preferred, Series B
      Warrants, and Series C Warrants. The Agents collectively received Series B
      Preferred that are convertible into an aggregate of 290,298 shares of common
      stock, Series B Warrants that are exercisable for an aggregate of 221,172 shares
      of the Company’s common stock, and Series C Warrants that are exercisable for
      267,074 shares of the Company’s common stock. The Series C Warrants have an
      exercise price of $11.00 per share, and are also subject to anti-dilution
      protections that could increase the number of shares of common stock for which
      they are exercisable.




16




In
      total,
      the securities issued in the private placement will be convertible into, or
      exercisable for, up to approximately 7,211,612 shares of common stock, which
      amount is subject to adjustment in the event of certain corporate events such
      as
      stock splits or issuances of securities at a price below the conversion price
      of
      the Series B Preferred or exercise price of the warrants, as the case may be.
      On
      September 13, 2007, the Company paid $807,913 to the Series B Preferred stockholders for the
      semiannual dividend.




On
      March
      19, 2007, the Company issued 20,000 stock options to members of the Scientific
      Advisory Board of the Company under non-qualified stock option agreements.
      These
      options are immediately exercisable and allow for the purchase of 20,000 shares
      of common stock at a price of $8.82. These options expire on March 18, 2017.




On
      April
      6, 2007, the Company issued 152,500 stock options to officers and consultants
      under non-qualified stock option agreements. These options are immediately
      exercisable and allow for the purchase of 152,500 shares of common stock at
      a
      price of $8.36. These options expire on April 5, 2017.
      The Company also issued 115,000 shares of common stock to consultants under
      the
      Plan.




On
      June
      12, 2007, the Company issued 140,000 stock options to four independent members
      of the Board of Directors of the Company under non-qualified stock option
      agreements. These options are immediately exercisable and allow for the purchase
      of 140,000 shares of common stock at a price of $9.40. These options expire
      on
      June 11,
      2 017.




On
      June
      15, 2007, the Company issued 110,000 stock options to various key employees
      and
      consultants under non-qualified stock option agreements. These options have
      various vesting schedules including immediate vesting, up to three year vesting,
      and vesting upon the company stock price obtaining certain levels. These options
      allow for the purchase of 110,000 shares of common stock at a price ranging
      from
      $9.93 to $17.00. These options expire on June 14, 2017.
      The
      Company also issued 30,000 shares of common stock to the same consultants under
      the Plan.




On
      June
      21, 2007, the Company issued 3,000 stock options to a consultant under a
      non-qualified stock option agreement. These options vest over a six month period
      and allow for the purchase of 3,000 shares of common stock at a price of $10.84.
      These options expire on June 20, 2017.




On
      June
      27, 2007, the Company issued 30,000 shares of common stock to various outside
      consultants under the Plan.




On
      July
      18, 2007, the Company issued 15,000 shares of common stock to an outside
      consultant under the Plan. On that date, the Company also issued 18,000 stock
      options to another consultant under a non-qualified stock option agreement.
      These options are immediately exercisable and allow for the purchase of 18,000
      shares of common stock at a price of $10.61. These options expire on December
      31, 2012.




On
      December 4, 2007, the Company issued 117,000 stock options to various key
      employees and consultants under non-qualified stock option agreements. These
      options have up to three year vesting. These options allow for the purchase
      of
      117,000 shares of common stock at an exercise price of $10.00 per share. These
      options expire on or before December 3, 2017.




On
      December 11, 2007, the SEC declared effective a registration statement of the
      Company registering up to 5,514,999 shares of common stock for resale from
      time
      to time by the selling stockholders named in the prospectus contained in the
      registration statement. This number represents 5,514,999 shares of common stock
      issuable upon the conversion or exercise of the securities issued the Company’s
      March 2007 private placement at the current conversion and exercise prices.
      Of
      these 5,514,999 shares of common stock, 3,717,515 shares are issuable upon
      conversion of Series B Preferred and 1,797,484 shares are issuable upon exercise
      of the Series B Warrants. The Company will not receive any proceeds from the
      sale of the underlying shares of common stock, although to the extent the
      selling stockholders exercise warrants for the underlying shares of common
      stock, the Company will receive the exercise price of those warrants. The
      registration statement was filed to satisfy registration rights that the Company
      had previously granted. Subsequent to the effectiveness of the registration
      statement, 708,743 Series B Preferred were converted and $61,418 in dividends
      earned were paid as of December 31, 2007. At December 31, 2007, $396,469 in
      dividends were accrued on the outstanding Series B Preferred.





On
      January 1, 2008, the Company issued 100,000 options to a recently-hired employee
      and 60,000 options to a key consultant of the Company under the Plan. The
      options vest over a period from one to three years and allow for the purchase
      of
      160,000 shares of common stock at a price of $8.00 per share. These options
      expire on December 31, 2017.




17





On
      January 4, 2008, the Company issued 20,000 restricted shares of common stock.
      These shares vest over a three-year period with 25% vested on issuance and
      25%
      vesting on the anniversary date of the agreement for each of the next three
      years.





On
      February 4, 2008, the Company issued options to purchase 503,250 shares of
      common stock under non-qualified stock option agreements to the executive
      management team under the 2007 Executive Compensation Plan. These options were
      originally expensed in 2007 at the December 31, 2007 closing price of $8.80.
      These options vest immediately, contain an exercise price of $4.00 per share,
      and expire on February 4, 2018. The Company also issued options to purchase
      34,398 shares of common stock to various employees under non-qualified stock
      option agreements under an employee bonus program. These options vest
      immediately, contain an exercise price of $4.00 per share, and expire on
      February 3, 2018. Finally, the Company issued stock options to various key
      employees under non-qualified stock option agreements. These options have up
      to
      three years vesting. These options allow for the purchase of 21,300 shares
      of
      common stock at an exercise price of $4.00 per share. These options expire
      on
      February 3, 2018.




On
      March
      12, 2008, the Company issued 1,000 stock options to a consultant under a
      non-qualified stock option agreement. These options vest immediately and allow
      for the purchase of 1,000 shares of common stock at an exercise price of $4.81
      per share. These options expire on March 11, 2018.




On
      March
      14, 2008, the Company issued 100,000 unrestricted shares of common stock to
      a
      key consultant under the Plan.




On
      April
      8, 2008, the Company issued 40,000 stock options to three consultants under
      non-qualified stock option agreements. These options vest immediately and allow
      for the purchase of 40,000 shares of common stock at an exercise price of $4.18
      per share. These options expire on April 7, 2018. On April 8, 2008, the Company
      also issued 25,000 restricted shares of common stock. These shares vest over
      a
      three-month period with 40% vested on issuance and 60% vesting three months
      from
      the date of the agreement.




On
      April
      29, 2008, the Company issued 140,000 stock options to four independent members
      of the Board of Directors of the Company under non-qualified stock option
      agreements. These options vest immediately and allow for the purchase of 140,000
      shares of common stock at an exercise price of $5.88 per share. These options
      expire on April 28, 2018.




On
      May 7,
      2008, the Company issued 14,976 stock options to various employees under
      non-qualified stock option agreements. These options vest immediately and allow
      for the purchase of 14,976 shares of common stock at an exercise price of $5.28
      per share. These options expire on May 6, 2018.




For
      the
      six -months ending
      June 30, 2008, Series B Preferred Shares were converted into 554,294 shares
      of
      common stock. At June 30, 2008, there were 3,315,973 outstanding Series B
      Preferred for which $305,251 in dividends had been accrued.




**Note
      4. Commitments and Contingencies**





The
      Company has entered into various agreements with third parties and certain
      related parties in connection with the research and development activities
      of
      its existing product candidates as well as discovery efforts on potential new
      product candidates. These agreements include costs for research and development
      and license agreements that represent the Company's fixed obligations payable
      to
      sponsor research and minimum royalty payments for licensed patents. These
      amounts do not include any additional amounts that the Company may be required
      to pay under its license agreements upon the achievement of scientific,
      regulatory and commercial milestones that may become payable depending on the
      progress of scientific development and regulatory approvals, including
      milestones such as the submission of an investigational new drug application
      to
      the FDA, similar submissions to foreign regulatory authorities and the first
      commercial sale of the Company's products in various countries. These agreements
      include costs related to manufacturing, clinical trials and preclinical studies
      performed by third parties.





The
      Company is also party to three agreements that require it to make milestone
      payments, royalties on net sales of the Company's products and payments on
      sublicense income received by the Company. As of June 30, 2008, $300,000 in
      milestone payments have been made under one of these agreements and an
      additional $50,000 has been accrued under one of these agreements.




From
      time
      to time, the Company may have certain contingent liabilities that arise in
      the
      ordinary course of business. The Company accrues for liabilities when it is
      probable that future expenditures will be made and such expenditures can be
      reasonably estimated. For all periods presented, the Company is not a party
      to
      any pending material litigation or other material legal
      proceedings.




18




The
      Company currently has operating lease commitments in place for facilities in
      Buffalo, New York and Chicago, Illinois as well as office equipment. The Company
      recognizes rent expense on a straight-line basis over the term of the related
      operating leases. The operating lease expenses recognized were $83,008, and
      $44,334 for the quarters ended June 30, 2008 and 2007, respectively, and the
      operating lease expense recognized were $166,053 and $87,932 for the six months
      ended June 30, 2008 and 2007, respectively.





Annual
      future minimum lease payments under present lease commitments are as
      follows.


OperatingLeases2008
              
              
              Remaining
                  Two Quarters
              
              $
              166,5312009
              
              
              
              
              
              349,7822010
              
              
              
              
              
              343,6572011
              
              
              
              
              
              311,8032012
              
              
              
              
              
              144,375$
              1,316,148




The
      Company has entered into stock option agreements with key employees, board
      members and consultants with exercise prices ranging from $0.66 to $17.00.
      These
      awards were approved by the Company’s Board of Directors. The options expire ten
      years from the date of grant, subject to the terms applicable in the
      agreement.




The
      following tables summarize the stock option activity for the six -months ended
      June 30, 2008 and 2007:




Shares
              
              Weighted
                  Average
                Exercise
                  Price Per ShareOutstanding,
                  December 31, 2007
              
              
              1,011,740
              
              $
              7.29Granted
              
              
              914,924
              
              $
              4.93Exercised
              
              
              11,874
              
              $
              1.75Forfeited,
                  Canceled
              
              
              0
              
              
              n/aOutstanding,
                  June 30, 2008
              
              
              1,914,790
              
              $
              6.20


Shares
              
              Weighted
                  Average
                Exercise
                  Price Per ShareOutstanding,
                  December 31, 2006
              
              
              483,490
              
              $
              2.17Granted
              
              
              525,000
              
              $
              9.79Exercised
              
              
              69,000
              
              $
              1.28Forfeited,
                  Canceled
              
              
              0
              
              
              n/aOutstanding,
                  June 30, 2007
              
              
              939,490
              
              $
              6.50





The
      Company has entered into warrant agreements with strategic partners, consultants
      and investors with exercise prices ranging from $1.13 to $11.00. These awards
      were approved by the Company’s Board of Directors. The warrants expire between
      five and six years from the date of grant, subject to the terms applicable
      in
      the agreement. A list of the total warrants awarded and exercised appears
      below:




19


Warrants
              
              Weighted
                  Average
                Exercise
                  Price Per ShareOutstanding,
                  December 31, 2007
              
              
              3,453,268
              
              $
              8.86Granted
              
              
              0
              
              
              n/aExercised
              
              
              0
              
              
              n/aForfeited,
                  Canceled
              
              
              0
              
              
              n/aOutstanding,
                  June 30, 2008
              
              
              3,453,268
              
              $
              8.86




Warrants
              
              Weighted
                  Average
                Exercise
                  Price Per ShareOutstanding,
                  December 31, 2006
              
              
              814,424
              
              $
              3.36Granted
              
              
              2,687,602
              
              $
              10.40Exercised
              
              
              45,258
              
              $
              2.00Forfeited,
                  Canceled
              
              
              -
              
              
              n/aOutstanding,
                  June 30, 2007
              
              
              3,456,768
              
              $
              8.85




The
      Company has entered into employment agreements with three key executives who,
      if
      terminated by the Company without cause as described in these agreements, would
      be entitled to severance pay.




The
      Company is not currently a party to any pending legal actions. From time to
      time
      in the ordinary course of business, the Company may be subject to claims brought
      against it. It is not possible to state the ultimate liability, if any, in
      these
      matters.




**Note
      5. Subsequent Events**




No
      material subsequent events have occurred since the balance sheet date of June
      30, 2008.




20


**Item
      2: Management's Discussion and Analysis of Financial Condition and Results
      of
      Operations**




*This
      management's discussion and analysis of financial condition and results of
      operations and other portions of this filing contain forward-looking information
      that involves risks and uncertainties. Our actual results could differ
      materially from those anticipated by the forward-looking information. Factors
      that may cause such differences include, but are not limited to, availability
      and cost of financial resources, results of our* *research
      and development, or R&D* *,* *efforts and clinical trials, product demand, market acceptance and other factors
      discussed in the Company's other SEC filings under the heading “Risk
      Factors.* *”* ** *This
      management's discussion and analysis of financial condition and results of
      operations should be read in conjunction with our financial statements and
      the
      related notes included elsewhere in this filing and in our Annual Report on
      Form
      10-K for the year ended December 31, 2007.*




**OVERVIEW**





CBLI
      was
      incorporated in Delaware and commenced business operations in June 2003 as
      a
      development-stage, biotechnology company, with a very specific and targeted
      focus on radiation drug discovery. We have devoted substantially all of our
      resources to the identification, development and commercialization of new types
      of drugs for protection of normal tissues from exposure to radiation and other
      stresses, such as toxic chemicals and cancer treatments. CBLI’s pipeline
      includes products from two primary families of compounds: protectans and
      curaxins. We are developing protectans as drug candidates that protect healthy
      tissues from acute stresses such as radiation, chemotherapy and ischemia
      (pathologies developed as a result of blocking blood flow to a part of the
      body). Curaxins are being developed as anticancer agents that could act as
      mono-therapy drugs or in combination with other existing anticancer
      therapies.





On
      July
      20, 2006, we sold 1,700,000 shares of common stock, par value $0.005 per share,
      in our initial public offering at a per share price of $6 .00. Our common
      stock is
      currently listed
      on the NASDAQ Global Market
      under the symbol “CBLI. ”





***Technology***





Our
      development efforts are based on discoveries made in connection with the
      investigation of the cell-level process known as apoptosis. Apoptosis is a
      highly specific and tightly regulated form of cell death that can occur in
      response to external events such as exposure to radiation, toxic chemicals
      or
      internal stresses. Apoptosis is a major determinant of tissue damage caused
      by a
      variety of medical conditions including cerebral stroke, heart attack and acute
      renal failure. Conversely, apoptosis is also an important protective mechanism
      that allows the body to shed itself of defective cells, which otherwise can
      cause cancerous growth.





Research
      has demonstrated that apoptosis is sometimes suppressed naturally. For example,
      most cancer cells develop resistance to apoptotic death caused by drugs or
      natural defenses of the human body. Our research is geared towards identifying
      the means by which apoptosis can be affected and manipulated depending on the
      need.





If
      the
      need is to protect healthy tissues against an external event such as exposure
      to
      radiation, we focus our research efforts on attempting to temporarily and
      reversibly suppress apoptosis in those healthy tissues, thereby imitating the
      apoptotic-resistant tendencies displayed by cancer cells. A drug with this
      effect would also be useful in ameliorating the toxicities of
      anticancer drugs and radiation that cause collateral damage to healthy tissues
      during cancer treatment. Because the severe toxicities of
      anticancer drugs and radiation often limit their dosage in cancer patients,
      an
      apoptosis suppressant drug may enable a more aggressive treatment regimen using
      anticancer drugs and radiation and thereby increase their
      effectiveness.





On
      the
      other hand, if the need is to destroy cancerous cells, we focus our research
      efforts on restoring apoptotic mechanisms that are suppressed in tumors, so
      that
      those cancerous cells will once again become vulnerable to apoptotic death.
      In
      this regard, we believe that our drug candidates could have significant
      potential for improving, and becoming vital to, the treatment of cancer
      patients.





We
      have
      acquired rights to develop and commercialize the following prospective
      drugs:





·
            Protectans
                - modified factors of microbes and tumors that protect cells from
                apoptosis, and which therefore have a broad spectrum of potential
                applications. The potential applications include both non-medical
                applications such as protection from exposure to radiation, whether
                as a
                result of military or terrorist action or as a result of a nuclear
                accident, as well as medical applications such as reducing cancer
                treatmenttoxicities.




21




·
            Curaxins
                - small molecules designed to kill tumor cells by simultaneously
                targeting
                two regulators of apoptosis. Initial test results indicate that curaxins
                can be effective against a number of malignancies, including renal
                cell
                carcinoma, or RCC (a highly fatal form of kidney cancer), soft-tissue
                sarcoma, and hormone-refractory prostate
                cancer.





In
      the
      area of radiation protection, we have achieved high levels of protection in
      animal models. With respect to cancer treatment, the biology of cancer is such
      that there is no single drug that can be successfully used to treat 100% or
      even
      50% of all cancer patients. This means that there likely will be a need for
      additional anticancer drugs for each type of cancer.




These
      drug candidates demonstrate the value of our scientific foundation. Based on
      the
      expedited approval process currently available for non-medical applications
      such
      as protection from exposure to radiation, our most advanced drug candidate,
      Protectan CBLB502, may be approved for such applications within 24 to 36 months.
      Another drug candidate, Curaxin CBLC102, entered Phase IIa clinical trials
      earlier last year. The results of this trial are anticipated to be available
      in
      the fourth quarter of 2008.




**STRATEGIES
      AND OBJECTIVES**




Our
      primary objective is to become a leading developer of drugs for the protection
      of human tissues against radiation and other stresses and for cancer treatment.
      Key elements of our strategy include:





·
            *Aggressively
                working towards the commercialization of Protectan
                CBLB502*.
                Our most advanced drug candidate, Protectan CBLB502, offers the potential
                to protect normal tissues against exposure to radiation. Because
                of the
                potential military and defense implications of such a drug, the normally
                lengthy FDA approval process for these non-medical applications is
                substantially abbreviated resulting in a large cost savings to us.
                We
                anticipate having a developed drug submitted for FDA approval for
                these
                non-medical applications within 18-30 months.





·
            *Leveraging
                our relationship with leading research and clinical development
                institutions.*The Cleveland Clinic Foundation, one of the top research medical
                facilities in the world, is one of our co-founders. In addition to
                providing us with drug leads and technologies, the Cleveland Clinic
                will
                share valuable expertise with us as clinical trials are performed
                on our
                drug candidates. In January 2007, we entered into a strategic research
                partnership with Roswell Park Cancer Institute, or RPCI, in Buffalo,
                New
                York. This partnership will enhance the speed and efficiency of our
                clinical research and provide us with access to the state-of-the-art
                clinical development facilities of a globally recognized cancer research
                center.





·
            *Utilizing
                governmental initiatives to target our markets**and
                help fund our programs**.*Our focus on drug candidates such as Protectan CBLB502, which has
                applications that have been deemed useful for military and defense
                purposes, provides us with a built-in market for our drug
                candidates,
                as well as an additional resource for funding.
                This enables us to invest less in costly retail and marketing resources.
                In an effort to improve our responsiveness to military and defense
                needs,
                we have established a collaborative relationship with the Armed Forces
                Radiobiology Research Institute.





·
            *Utilizing
                other strategic relationships.*We
                have collaborative relationships with other leading organizations
                that
                enhance our drug development and marketing efforts. For example,
                one of
                our founders, with whom we maintain a strategic partnership, is ChemBridge
                Corporation. Known for its medicinal chemistry expertise and synthetic
                capabilities, ChemBridge provides valuable resources to our drug
                development research.




**PRODUCTS
      IN DEVELOPMENT**





**Protectans**




22




We
      are
      exploring a new natural source of factors that suppress the programmed cell
      death (apoptosis) response in human cells, which can be rapidly developed into
      therapeutic products. These inhibitors are anti-apoptotic factors developed
      by
      microorganisms of human microflora throughout millions of years of co-evolution
      with mammalian host. We are using the same strategy that was applied for the
      discovery of antibiotics, one of the biggest medical achievements of the
      20 th century.
      We have established a technological process for screening of such factors,
      named
      protectans, and their rapid preclinical evaluation. These inhibitors can be used as protection from cancer treatment toxicities and
      antidotes against injuries induced by radiation and other stresses associated
      with severe pathologies (i.e., heart attack or stroke).





Ten
      families of patents have been filed over the past five years around various
      aspects and qualities of the protectan family of compounds. The first of these
      patents was recently granted by the Eurasian Patent Organization and two other
      countries totaling eleven overall. The issued patent covers the method of
      protecting a mammal from radiation using flagellin or its derivatives, including
      Protectan CBLB502.





***Protectan
      CBLB502***




Protectan
      CBLB502 is our leading radioprotectant molecule in the protectans series.
      Protectan CBLB502 represents a rationally-designed derivative of the microbial
      protein, flagellin. Flagellin is secreted by *Salmonella
      typhimurium* and
      many
      other Gram-negative bacteria, and in nature, arranges itself in a hollow
      cylinder to form the filament in bacterial flagellum **** and
      acts
      as a natural activator of NF-kB (nuclear factor-kappa B), a protein complex
      widely used by cells as a regulator of genes that control cell proliferation
      and
      cell survival. Thus, Protectan CBLB502 reduces injury from acute stresses by
      mobilizing several natural cell protective mechanisms, including inhibition
      of
      apoptosis, reduction of oxidative damage and induction of factors (cytokines)
      that induce protection and regeneration of stem cells in bone marrow and the
      intestines.





Protectan
      CBLB502 is a single
      agent anti-radiation therapy with significant survival benefits at a single
      dose. Animal studies indicate that Protectan  CBLB502
      protects mice without increasing the risk of radiation-induced cancer
      development.  The
      remarkably strong radioprotective abilities of Protectan CBLB502 are the result
      of a combination of several mechanisms of action. Potential
      applications for Protectan CBLB502 include reduction of radiation therapy or
      chemotherapy toxicities in cancer patients, protection from Acute Radiation
      Syndrome (ARS) in defense scenarios, and protection from acute organ failure.
      Protectan CBLB502 is administered through intramuscular injection.




*Non-medical* ** *Applications*





Our
      scientists have demonstrated that injecting Protectan CBLB502 into mice, rats
      and non-human primates protects them from lethal doses of total body gamma
      radiation. An important advantage of Protectan CBLB502, above any other
      radioprotectant known to us, is the ability to effectively protect not only
      the
      hematopoietic system, but also the gastrointestinal, or GI, tract, which are
      among the most sensitive areas of the human body to radiation. High levels
      of
      radiation, among other effects, induce moderate to severe bone marrow damage.
      The immune and blood stem cells are also depleted and death is caused by anemia,
      infection, bleeding and poor wound healing. GI damage often occurs at higher
      doses of radiation, and may result in death through sepsis as a result of
      perforation of the gastrointestinal tract. Protectan CBLB502’s ability to
      effectively protect the hematopoietic system and GI tract may make Protectan
      CBLB502 uniquely useful as a radioprotective antidote. Protectan CBLB502 was
      shown to be safe at its therapeutic doses in rodents and non-human primates.
      In
      addition, Protectan CBLB502 has proved to be a stable compound for storage
      purposes. It can be stored at temperatures close to freezing, room temperature
      or extreme heat. Manufacturing of Protectan CBLB502 is relatively inexpensive,
      due to its high yield bacterial producing strain and simple purification
      process.




We
      have
      successfully established cGMP quality manufacturing for Protectan CBLB502
      and plan to initiate the first of two Phase I human safety studies for Protectan
      CBLB502 in ARS. Protectan
      CBLB502 is being developed under the FDA's animal efficacy rule to treat
      radiation injury following exposure to radiation from nuclear or radiological
      weapons, or from nuclear accident. This approval pathway requires demonstration
      of efficacy in two animal species and safety and drug metabolism testing in
      a
      representative sample of healthy human volunteers. Protectan CBLB502 has
      demonstrated activity as a radioprotectant in several animal species, including
      non-human primates. Phase
      I
      is the only stage of human testing required for approval in this
      indication.




23




The
      first
      dose escalation human safety study will start in the third quarter of 2008
      now
      that the FDA has allowed our IND application and given us permission to start
      testing on humans. The initial safety study will involve single injections
      of
      Protectan CBLB502 in ascending dose groups of six healthy volunteers each.
      Participants in the study will be assessed for adverse side effects over a
      two-week time period and blood samples will be obtained to assess the effects
      of
      Protectan CBLB502 on various biomarkers. The study is currently projected to
      take approximately six months to complete. The second safety study in a larger
      number of healthy volunteers is planned to start in the first half of
      2009.




We
      are
      working towards filing a
      Biologic License Application for FDA
      approval of Protectan CBLB502 for non-medical applications in 18 months.





In
      March
      2008, the U.S. Department of Defense, or DoD, awarded us a contract valued
      at up
      to $8.9 million through the Chemical Biological Medical Systems Joint Project
      Management Office Broad Agency Announcement, or BAA, for selected tasks in
      the
      advanced development of Protectan CBLB502 as a Medical Radiation Countermeasure
      to treat radiation injury following exposure to radiation from nuclear or
      radiological weapons.





We
      also
      recently submitted a proposal for the BAA for "Therapies for Hematopoietic
      Syndrome, Bone Marrow Stromal Cell Loss, and Vascular Injury Resulting from
      Acute Exposure to Ionizing Radiation" published on March 6, 2008, by the
      Biomedical Advanced Research and Development Authority (BARDA) of the Department
      of Health and Human Services (HHS). BARDA seeks to acquire developed medical
      countermeasures that will be clinically useful in a civilian medical emergency
      situation that results from or involves exposure of a large population to the
      effects of a nuclear detonation, a radiologic dispersive device (such as a
      dirty
      bomb), or exposure to radioactive material with or without combined injury
      or
      trauma. Among certain other criteria, the BAA specified that any medical
      countermeasures submitted must be efficacious when administered at or later
      than
      24 hours after exposure. According to the BAA, it is anticipated that multiple
      awards will result from the announcement and those awards will be multi-year,
      cost-reimbursement, completion type contracts. BARDA anticipates awarding 5-6
      contracts on or about September 16, 2008. BARDA estimates that the total cost
      (direct and indirect cost combined) for these contracts (estimate to be 3 years
      in duration) will be up to $13.5 million per contract, out of which up to $3.4
      million will be available in the first year of the contract.




Protectan
      CBLB502 is a candidate for procurement by the DoD, HHS/BARDA and other countries
      facing even more imminent threats. The HHS opportunity substantially expands
      the
      potential market, as its mandate is to protect the U.S. civilian population
      in
      the event of a radiological emergency, involving stockpiling of radiation
      countermeasures for mass distribution. Our recent contract award from the DoD
      and the solicitation from BARDA emphasize the government’s focus on acquiring
      adequate protection against nuclear and radiation threats for military and
      civilian populations. Upon FDA approval, our Protectan CBLB502 will be well
      positioned to fulfill both of these needs, with its demonstrated unprecedented
      efficacy and survival benefits, unique ability to address both hematopoietic
      and
      gastrointestinal damage, broad window of efficacy relative to radiation
      exposure, and suitability for both military and civilian delivery scenarios. We
      believe that  Protectan
      CBLB502 is the only radiation countermeasure with these capabilities in advanced
      development that can be self or buddy-administered, without the need of
      additional supportive care in a battlefield or civilian community
      setting.




*Medical
      Applications*




In
      addition to its military or other non-medical applications, we have found that
      Protectan CBLB502 has been observed to dramatically increase the efficacy of
      radiotherapy on experimental tumors in mice. Protectan CBLB502 appears to
      increase the tolerance of mice to radiation while having no effect on the
      radiosensitivity of tumors, thus opening the possibility of combining
      radiotherapy with Protectan CBLB502 treatment to improve the overall anticancer
      efficacy of radiotherapy. Our animal efficacy studies have demonstrated that
      up
      to 100% of mice treated with Protectan CBLB502 prior to being exposed to
      radiation survived without any associated signs of toxicity. This compares
      to a
      100% mortality rate in the animal group that received a placebo drug.




Protectan
      CBLB502 has demonstrated the ability to reduce the toxicities of a
      chemotherapeutic drug, Platinol (cisplatin), broadly used for the treatment
      of
      ovarian, endometrial, head and neck, lung, stomach and other types of cancer
      in
      animal models. Platinol treatment was used in the study as an example of
      chemotherapy-associated toxicity. Platinol injected at toxic doses is known
      to
      induce myelosuppression (suppression of bone marrow) and nephrotoxicity (kidney
      damage ).




24




The
      prospect of increasing patients' tolerance to chemotherapeutic drugs and
      optimizing treatment regimens would be a significant paradigm shift in cancer
      treatment. It is estimated that approximately 40% of the roughly $50 billion
      annually spent on cancer treatment represents supportive care addressing
      toxicities of various treatments, including chemotherapy.




Consistent
      with this strategy, we plan to initiate a Phase I/II study for Protectan CBLB502
      in head and neck cancer patients in early 2009. The endpoint of the study will
      be the reduction of toxicities of radiation and chemotherapy, such as mucositis
      (a painful inflammation and ulceration of oral mucosa causing difficulties
      with
      speaking and eating). Mucositis weakens the patient by not allowing for the
      oral
      intake of nutrients and fluids and forces the temporary suspension of
      radiotherapy and chemotherapy until the tissues of the mouth and throat have
      healed. Due to the ability of head and neck cancer cells to regrow during
      periods of interrupted treatment, any interruption in radiotherapy should be
      avoided. Since the main cause of treatment interruptions in radiotherapy or
      combinations of chemotherapy and radiotherapy treatment regimens of head and
      neck cancer is acute mucositis, the ability to prevent mucositis, and therefore,
      interruptions in treatment, could potentially result in better outcomes for
      patients with cancers of the head and neck.




In
      other
      studies, we have demonstrated the potential of Protectan CBLB502 to be
      applicable to ischemic conditions. Our researchers, in collaboration with
      investigators from Cleveland Clinic, have demonstrated that a single injection
      of Protectan CBLB502 effectively prevents acute renal failure and subsequent
      death in a mouse model of ischemia-reperfusion renal injury.


Moreover,
        recent studies conducted at the Cleveland Clinic have demonstrated Protectan
        CBLB502’s ability to accelerate limb recovery in an animal model of
        tourniquet-mediated injury simulating the situation occurring in human. It
        has
        been demonstrated that injection of Protectan CBLB502 within 30 minutes of
        tourniquet removal leads to a marked reduction in the severity of injury,
        including reductions in tissue edema, pro-inflammatory cytokine production
        and
        leukocyte infiltration leading to accelerated recovery of limb
        function.


In
      contrast to the non-medical applications of CBLB502, the use of Protectan
      CBLB502 to ameliorate the toxicities of radiation treatment and anticancer
      drugs
      will be subject to the full FDA approval process.





***Protectan
      CBLB612***




Protectan
      CBLB612 is a modified lipopeptide mycoplasma that acts as a powerful stimulator
      and mobilizer of hematopoietic (bone marrow/blood production) stem cells, or
      HSC, to peripheral blood. Potential applications for Protectan CBLB612 include
      accelerated hematopoietic recovery during chemotherapy and during donor
      preparation for bone marrow transplantation.




Our
      research indicates that Protectan CBLB612 is not only a potent stimulator of
      bone marrow stem cells, but also causes their mobilization and proliferation
      throughout the blood. A single administration of Protectan CBLB612 resulted
      in a
      three-fold increase in the number of progenitor stem cells in mouse bone marrow
      within 24 hours after administration. Furthermore, the number of these stem
      cells in peripheral blood was increased ten-fold within four days of
      administration.





Protectan
      CBLB612 was also found to be highly efficacious in stimulating proliferation
      and
      mobilization of HSC into peripheral blood in primate model (Rhesus macaques). A
      single
      injection of CBLB612 in Rhesus macaques resulted in a 20-fold increase of
      hematopoietic progenitor cells in blood.  At the peak of the effect (48-72
      hours post-injection) the proportion of free-floating CD34+ cells in the total
      white blood cell count reached 30% (compared with 1.5% in normal blood).
 CD34 is a molecule present
      on certain cells within the human body.  Cells expressing CD34, otherwise
      known as CD34+ cells, are normally found in the umbilical
      cord and bone
      marrow as
      hematopoetic cells.





This
      discovery opens a new and innovative way for us to address a broad spectrum
      of
      human diseases, some of which currently lack effective treatment. Direct
      comparisons of Protectan CBLB612 and G-CSF (Neupogen®, Amgen, Inc., Thousand
      Oaks, California), the market leading drug used for stimulation of blood
      regeneration, demonstrated that Protectan CBLB612 showed a stronger efficacy
      as
      a propagator and mobilizer of HSC in peripheral blood. In mice experimental
      models, a single injection of Protectan CBLB612 gave several
      times higher yields of HSC in peripheral blood that the standard course of
      G-CSF treatment.




Protectan
      CBLB612 also has been shown to provide protection in a mouse model from lethal
      hematopoietic-induced ARS when administered between 48 hours prior and 24 hours
      after radiation exposure. Protectan CBLB612 does not display any significant
      toxicity at its therapeutic doses in rodents and non-human primates.




With
      efficacy and non-GLP safety already studied in mice and monkeys, Protectan
      CBLB612 entered formal pre-clinical safety and manufacturing development in
      February 2008. We expect to file an IND application with the FDA in the first
      half of 2009. The development of our Protectan CBLB612 has been supported by
      a
      grant from the Defense Advanced Research Projects Agency of the Department
      of
      Defense.




25




**Curaxins**




Curaxins
      are small molecules that destroy tumor cells by simultaneously targeting two
      regulators of apoptosis. Our initial test results indicate that curaxins can
      be
      effective against a number of malignancies, including renal cell carcinoma,
      or
      RCC, soft-tissue sarcoma, and hormone-refractory prostate cancer.





The
      original focus of our drug development program was to develop drugs to treat
      one
      of the most treatment-resistant types of cancer, RCC. Unlike many cancer types
      that frequently mutate or delete p53, one of the major tumor suppressor genes,
      RCC belongs to a rare category of cancers that typically maintain a wild type
      form of this protein. Nevertheless, RCC cells are resistant to apoptosis,
      suggesting that in spite of its normal structure, p53 is functionally disabled.
      The work of our founders has shown that p53 function is indeed inhibited in
      RCC
      by an unknown dominant factor. We have established a drug discovery program
      to
      identify small molecules that selectively destroy tumor cells by restoring
      the
      normal function to functionally impaired p53 in RCC. This program yielded a
      series of chemicals with the desirable properties named curaxins (CBLC100
      series). We have isolated three chemical classes of curaxins. One of them
      includes relatives of 9-aminoacridine, the compound that is the core structure
      of many existing drugs. Pre-existing information about this compound has allowed
      us to bypass the preclinical development and Phase I studies and bring one
      of
      our drug candidates into Phase IIa clinical trials, saving years of R&D
      efforts and improving the probability of success.




One
      of
      the most important outcomes of this drug discovery program was the
      identification of the mechanism by which curaxins deactivate NF-kB. This
      mechanism of action makes curaxins potent inhibitors of the production and
      the
      activity of NF-kB not only in its stimulated form, but also in its basal form.
      The level of active NF-kB is usually also increased in cancer cells. Moreover,
      due to curaxin-dependent functional conversion of NF-kB-DNA complexes, the
      cells
      with the highest basal or induced NF-kB activity are supposed to be the most
      significantly affected by curaxins. Clearly, this paradoxical activity makes
      deactivation of NF-kB by curaxins more advantageous compared to conventional
      strategies targeting NF-kB activators.





The
      discovery of the mechanism of action of curaxins allowed us to predict and
      later
      experimentally verify that curaxins could be used for treatment of multiple
      forms of cancers, including hormone-refractory prostate cancer, hepatocellular
      carcinoma, multiple myeloma, acute lymphocytic leukemia, acute myeloid leukemia,
      soft-tissue sarcomas and several others.





**Curaxin
      CBLC102**




One
      of
      the curaxins from the 9-aminoacridine group is a long-known, anti-infective
      compound known as quinacrine, which we refer to as Curaxin CBLC102. It has
      been
      used for over 40 years to treat malaria, osteoarthritis and autoimmune
      disorders. However, we have discovered new mechanisms of action for quinacrine
      in the area of apoptosis. Through assay testing performed at Dr. Andrei Gudkov’s
      laboratories at the Cleveland Clinic beginning in 2002, which included testing
      in a variety of human tumor-derived cell lines representing cancers of different
      tissue origin (including RCC, sarcomas, prostate, breast and colon carcinomas),
      we have observed that Curaxin CBLC102 behaves as a potent NF-kB suppressor
      and
      activator of p53 in these types of cancer cells. It has favorable
      pharmacological and toxicological profiles and demonstrates the anticancer
      effect in transplants of human cancer cells into primates. These features make
      Curaxin CBLC102 our prime IND drug candidate among other curaxins.




We
      have
      applied for a patent covering the use of Curaxin CBLC102 as an anticancer agent
      based on a newly-discovered mechanism of action.  We
      have
      an agreement with Regis Technologies, Inc., a GMP manufacturer, to produce
      sufficient quantities of Curaxin CBLC102 according to the process previously
      used for the production of this drug when it was in common use.





A
      Phase
      II efficacy clinical trial using Curaxin CBLC102 in patients with advanced
      hormone-refractory (androgen-independent) prostate cancer started in January
      2007 at the University of Chicago, Cleveland Clinic, University of Pittsburgh
      and Case Western Reserve University Hospitals. We are applying CBLC102 as the
      monotherapy to patients who have failed to respond satisfactorily after
      undergoing established cancer treatments and will use the suppression of tumor
      growth and prolonged patient survival as major endpoints. Reducing the
      prostate-specific antigen, or PSA, level is an additional endpoint (elevated
      PSA
      levels are indicative of the progression of prostate cancer).




26





The
      planned enrollment of 32 patients was completed on April 29, 2008. The results
      of this trial are anticipated to be available in the fourth quarter of 2008.




**Other
      Curaxins**




As
      mentioned above, screening of the chemical library for compounds capable of
      restoring normal function to wild type p53 in the context of RCC yielded three
      chemical classes of compounds. Generation of focused chemical libraries around
      the hits from one of these classes and their structure-activity optimization
      brought about a new generation of curaxins. As the part of this program
      performed in the partnership with ChemBridge Corporation, more than 800
      proprietary compounds were screened for p53 activation, efficacy in animal
      tumor
      models, selective toxicity and metabolic stability in the presence of rat and
      human microsomes. The most active compounds were efficacious in preventing
      tumor
      growth in models for colon carcinoma, melanoma, ovarian cancer, RCC, and breast
      cancer. In February 2008, three lead candidates were chosen for preclinical
      development based on their efficacy, low toxicity profiles, high stability
      and
      suitability for human administration. We expect to file an IND application
      with
      the FDA in 2009 for one of these three lead candidates.





**FINANCIAL
      OVERVIEW**





We were  incorporated
      in Delaware and commenced business operations in June 2003. Beginning July
      21,
      2006, our common stock was listed on the NASDAQ Capital Market and on the Boston
      Stock Exchange under the symbols “CBLI” and “CFB” respectively. On August 28,
      2007, trading of our stock moved from the NASDAQ Capital Market to the NASDAQ
      Global Market. In September 2007, we ceased our listing on the Boston Stock
      Exchange.




On
      March
      16, 2007, we consummated a transaction with various accredited investors
      pursuant to which we agreed to sell to the investors, in a private placement,
      an
      aggregate of approximately 4,288,712 shares of Series B Convertible Preferred
      Stock, par value $0.005 per share, and Series B Warrants to purchase
      approximately 2,144,356 shares of our common stock pursuant to a Securities
      Purchase Agreement of the same date. The aggregate purchase price paid by the
      investors for the Series B Preferred and Series B Warrants was approximately
      $30,000,000. After **** related
      fees and expenses, we received net proceeds of approximately $29,000,000. We
      intend to use the proceeds for general corporate and working capital purposes.





The
      Series B Preferred have an initial conversion price of $7.00 per share, and
      in
      the event of a conversion at such conversion price, one share of Series B
      Preferred would convert into one share of common stock. Based on the closing
      price of our common  stock
      on
      March 16, 2007 of $10.19, the Series B Preferred sold to investors and issued
      to
      certain of the Agents had a market value of $46,660,112. The Series B Warrants
      have an exercise price of $10.36 per share, the closing bid price on the day
      prior to the private placement. To the extent, however, that the conversion
      price of the Series B Preferred or the exercise price of the Series B Warrants
      is reduced as a result of certain anti-dilution protections, the number of
      shares of common stock into which the Series B Preferred are convertible and
      for
      which the Series B Warrants are exercisable may increase.





We
      also
      issued to the placement agents in the private placement, as compensation for
      their services, Series B Preferred, Series B Warrants, and Series C Warrants.
      The agents collectively received Series B Preferred that are convertible into
      an
      aggregate of 290,298 shares of common stock, Series B Warrants that are
      exercisable for an aggregate of 221,172 shares of our common stock, and Series
      C
      Warrants that are exercisable for 267,074 shares of our common stock. The Series
      C Warrants have an exercise price of $11.00 per share, and are also subject
      to
      antidilution protections that could increase the number of shares of common
      stock for which they are exercisable.




In
      total,
      the securities issued in the private placement were convertible into, or
      exercisable for, up to approximately 7,211,612 shares of common stock (subject
      to adjustments for stock splits, anti-dilution, etc.). As of June
      30, 2008 the
      securities issued in the transaction, in the aggregate, were convertible into
      or
      exercisable for approximately **** 5,948,575
      shares of common stock (subject to adjustments for stock splits, anti-dilution,
      etc.).





Proceeds
      from these transactions, together with grants we have received, have supported
      our R&D activities to date. We are actively seeking new grants and
      co-development contacts with premier pharmaceutical partners to support further
      development of other promising leads resulting from our R&D
      program.




27




On
      December 11, 2007, the SEC declared effective a registration statement of the
      Company registering up to 5,514,999 shares of common stock for resale from
      time
      to time by the selling stockholders named in the prospectus contained in the
      registration statement. This number represents 5,514,999 shares of common stock
      issuable upon the conversion or exercise of the securities issued the Company’s
      March 2007 private placement at the current conversion and exercise prices.
      Of
      these 5,514,999 shares of common stock, 3,717,515 shares are issuable upon
      conversion of Series B Preferred and 1,797,484 shares are issuable upon exercise
      of the Series B Warrants. We will not receive any proceeds from the sale of
      the
      underlying shares of common stock, although to the extent the selling
      stockholders exercise warrants for the underlying shares of common stock, we
      will receive the exercise price of those warrants. Subsequent to the
      effectiveness of the registration statement, 1,263,037 Series B Preferred were
      converted and $732,453 in dividends earned were paid as of June 30, 2008. At
      June 30, 2008 there were 3,315,973 remaining outstanding Series B Preferred
      shares for which $305,251 in dividends had been accrued.





**Critical
      Accounting Policies and the Use of Estimates**




Our
      management's discussion and analysis of our financial condition and results
      of
      operations is based upon our financial statements, which have been prepared
      in
      accordance with generally accepted accounting principles in the U.S., or GAAP.
      The preparation of these financial statements requires us to make estimates
      and
      judgments that affect the reported amounts of our assets, liabilities, revenues,
      expenses and other reported disclosures. We base our estimates on historical
      experience and on various other assumptions that we believe are reasonable
      under
      the circumstances.




Note
      2 to
      our financial statements includes disclosure of our significant accounting
      policies. While all decisions regarding accounting policies are important,
      we
      believe that our policies regarding revenue recognition, R&D expenses,
      intellectual property related costs and stock-based compensation expense could
      be considered critical.




***Revenue
      Recognition***





We
      recognize revenue in accordance with Staff Accounting Bulletin No. 104, “Revenue
      Recognition”, and Statement of Financial Accounting Standards No. 116, or SFAS
      116. Our revenue sources consist of government grants, government contracts
      and
      a commercial development contract.





Grant
      revenue is recognized using two different methods depending on the type of
      grant. Cost reimbursement grants require us to submit proof of costs incurred
      that are invoiced by us to the government agency, which then pays the invoice.
      In this case, grant revenue is recognized at the time of submitting the invoice
      to the government agency.





Fixed-cost
      grants require no proof of costs and are paid as a request for payment is
      submitted for expenses. The grant revenue under these fixed cost grants is
      recognized using a percentage-of-completion method, which uses assumptions
      and
      estimates. These assumptions and estimates are developed in coordination with
      the principal investigator performing the work under the government fixed-cost
      grants to determine key milestones, expenses incurred, and deliverables to
      perform a percentage-of-completion analysis to ensure that revenue is
      appropriately recognized. Critical estimates involved in this process include
      total costs incurred and anticipated to be incurred during the remaining life
      of
      the grant.





We
      recognize revenue related to the funds received in 2007 from the State of New
      York under the sponsored research agreement with the Roswell Park Cancer
      Institute in accordance with SFAS 116. The principles of SFAS 116 result in
      the
      recognition of revenue as allowable costs are incurred. The Company recognizes
      revenue on research laboratory services and the purchase and subsequent use
      of
      related equipment. The amount paid as a payment toward future services related
      to the equipment is recognized as a prepaid asset and will be recognized as
      revenue as the services are performed and the prepaid asset is recognized as
      expense.





Government
      contract revenue is recognized periodically upon delivery of an invoice for
      allowable R&D expenses according to the terms of the contract. Commercial
      development revenues are recognized when the service or development is
      delivered.





***R&D
      Expenses***





R&D
      costs are expensed as incurred. These expenses consist primarily of our
      proprietary R&D efforts, including salaries and related expenses for
      personnel, costs of materials used in our R&D, costs of facilities and costs
      incurred in connection with our third-party collaboration efforts. Pre-approved
      milestone payments made by us to third parties under contracted R&D
      arrangements are expensed when the specific milestone has been achieved. As
      of
      June 30 ,
      2008 , $50,000
      has been paid for milestone payments relating to the filing of an IND with
      the
      FDA for Curaxin CBLC102 and $250,000 has been paid as a result of commencing
      Phase II clinical trials for Curaxin CBLC102. An additional $50,000 has been
      accrued for a milestone payment relating to the filing of an IND with the FDA
      for Protectan CBLB502. Once a drug receives regulatory approval, we will record
      any subsequent milestone payments in identifiable intangible assets, less
      accumulated amortization, and amortize them evenly over the remaining agreement
      term or the expected drug life cycle, whichever is shorter. We expect our
      R&D expenses to increase as we continue to develop our drug candidates.





28





***Intellectual
      Property Related Costs***




We
      capitalize costs associated with the preparation, filing and maintenance of
      our
      intellectual property rights. Capitalized intellectual property is reviewed
      annually for impairment. If a patent application is approved, costs paid by
      us
      associated with the preparation, filing and maintenance of the patent will
      be
      amortized on a straight line basis over the shorter of 17 years or the
      anticipated useful life of the patent. If the patent application is not
      approved, costs paid by us associated with the preparation, filing and
      maintenance of the patent will be expensed as part of selling, general and
      administrative expenses at that time.




Through
      December 31, 2007, we have capitalized $459,102 in expenditures associated
      with
      the preparation, filing and maintenance of certain of our patents, which were
      incurred through the year ended December 31, 2007. We capitalized an additional
      $219,981 relating to these costs incurred for the six months ended June 30,
      2008, totaling $679,083.




***Stock-based
      Compensation***




We
      value
      stock-based compensation pursuant to the provisions of SFAS 123(R). Accordingly,
      effective January 1, 2005, all stock-based compensation, including grants of
      employee stock options, are recognized in the statement of operations based
      on
      their fair values.





The
      Financial Accounting Standards Board (FASB) issued SFAS No. 123(R) requiring
      all
      share-based payments to employees, including grants of employee stock options,
      be recognized in the statement of operations based at their fair values. The
      Company values employee stock-based compensation under the provisions of SFAS
      123(R) and related interpretations.




The
      fair
      value of each stock option granted is estimated on the grant date using accepted
      valuation techniques such as the Black Scholes Option Valuation model or Monte
      Carlo Simulation depending on the terms and conditions present within the
      specific option being valued. The assumptions used to calculate the fair value
      of options granted are evaluated and revised, as necessary, to reflect our
      experience. We use a risk-free rate based on published rates from the St. Louis
      Federal Reserve at the time of the option grant; assume a forfeiture rate of
      zero; assume an expected dividend yield rate of zero based on our intent not
      to
      issue a dividend in the foreseeable future; use an expected life based on the
      safe harbor method; and presently compute an expected volatility based on a
      method layering in the volatility of the Company along with that of similar
      high-growth, publicly-traded, biotechnology companies due to the limited trading
      history of the Company. Compensation expense is recognized using the
      straight-line amortization method for all stock-based awards.





During
      the six-months ended June 30, 2008, the Company granted 914,924 additional
      stock
      options pursuant to stock award agreements. The Company recognized a total
      of
      $1,573,632 in expense related to options for the six-months ended June 30,
      2008.
      The Company also recaptured $1,459,425 of previously recognized expense due
      to
      the stock options awarded under the 2007 Executive Compensation Plan. These
      options were originally expensed based on the December 31, 2007 variables,
      but
      were not issued until February 4, 2008. The change in dates resulted in a
      difference in valuation assumptions used in the Black-Scholes model causing
      a
      reduction in the grant date fair value. This reduction in the grant date fair
      value from $5.34 to $2.44 per share resulted in the recapture of $1,459,425
      in
      expense and a net expense for options for the six-months ended June 30, 2008
      of
      $114,207.





During
      the six-months ended June 30, 2007, the Company granted 525,000 stock options
      pursuant to stock award agreements and expensed $2,350,158 related to stock
      options.





For
      the
      six-months ended June 30, 2008 the Company also recognized a total of $563,200
      in expense for shares issued under the Plan and a total of $93,525 in expense
      related to the amortization of restricted shares. For the six-months ended
      June
      30, 2007, the Company recognized a total of $1,541,300 in expense for shares
      issued under the Plan to various consultants.




29





During
      the quarters ended June 30, 2008 and June 30, 2007, the Company granted 194,976
      and 405,500 additional stock options pursuant to stock award agreements,
      respectively. We recognized a total of $845,555 and $1,974,858 in expense
      related to options for the quarters ended June 30, 2008 and June 30, 2007,
      respectively. The weighted average, estimated grant date fair values of stock
      options granted during the quarters ended June 30, 2008 and 2007 was $3.26
      and
      5.95, respectively.





**Impact
      of Recently Issued Accounting Pronouncements**





In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standard (“SFAS”) No. 157, “Fair Value
      Measurements. ” SFAS No.
      157 provides enhanced guidance for using fair value to measure assets and
      liabilities and expands disclosure with respect to fair value measurement.
      This
      statement was originally effective for fiscal years beginning after November
      15,
      2007. In February 2008, the FASB issued Staff Position FSP 157-2 which allows
      companies to elect a one year deferral of adoption of SFAS No. 157 for
      non-financial assets and non-financial liabilities that are recognized or
      disclosed at fair values in the financial statements on a non-recurring basis.
      The Company has adopted SFAS No. 157 as of January 1, 2008. There has been
      no
      material impact to our financial statements due to the adoptions of SFAS No. 157.





In
      March
      2008, the FASB issued SFAS No. 161.  “Disclosures about Derivative
      Instruments and Hedging Activities,” (SFAS No. 161).  SFAS No. 161 amends
      and expands the disclosure requirements of SFAS No. 133, “Accounting for
      Derivative Instruments and Hedging Activities.”  SFAS No. 161 requires
      qualitative disclosures about objectives and strategies for using derivatives,
      quantitative disclosures about fair value amounts of gains and losses on
      derivative instruments and disclosures about credit-risk-related contingent
      features in derivative agreements.  SFAS No. 161 is intended to improve
      financial reporting about derivative instruments and hedging activities by
      requiring enhanced disclosures to enable investors to better understand their
      effects on an entity's financial position, financial performance, and cash
      flows. This statement is effective for financial statements issued for fiscal
      years beginning after November 15, 2008.  The adoption of SFAS No.161 will
      not affect our consolidated financial condition and results of operations,
      but
      may require additional disclosures if we enter into derivative and hedging
      activities.




**Results
      of Operations**




Our
      operating results for the past three fiscal years have been nominal. The
      following table sets forth our statement of operations data for the quarter
      and
      six-months ended June 30, 2008 and June 30, 2007, and the years ended December
      31, 2007 and December 31, 2006, and should be read in conjunction with our
      financial statements and the related notes appearing elsewhere in this filing
      and in our Annual Report on Form 10-K for the year ended December 31, 2007.




**Quarter**
                **Ended**
                **30-Jun-08**
              
              **Quarter**
                **Ended**
                **30-Jun-07**
              
              **Six
                  Months****Ended**
                **30-Jun-08**
              
              **Six
                  Months****Ended**
                **30-Jun-07**
              
              **Year
                  Ended December 31, 2007**
              
              **Year
                  Ended December 31, 2006****(unaudited)**
              
              **(unaudited)**
              
              **(unaudited)**
              
              **(unaudited)**Revenues
              
              $
              674,376
              
              $
              636,007
              
              $
              1,350,700
              
              $
              957,453
              
              $
              2,018,558
              
              $
              1,708,214Operating
                  expenses
              
              
              4,675,239
              
              
              8,748,968
              
              
              9,419,739
              
              
              13,334,303
              
              
              27,960,590
              
              
              9,126,315Other
                  expense (income)
              
              
              (143,296
              )
              
              -
              
              
              (96,294
              )
              
              -
              
              
              2,058,236
              
              
              -Net
                  interest expense (income)
              
              
              (50,016
              )
              
              (359,651
              )
              
              (195,143
              )
              
              (454,993
              )
              
              (1,003,766
              )
              
              (195,457
              )Net
                  income (loss)
              
              $
              (3,807,551
              )
              $
              (7,753,310
              )
              $
              (7,777,602
              )
              $
              (11,921,857
              )
              $
              (26,996,502
              )
              $
              (7,222,644
              )





**Three
      Months Ended June 30, 2008 Compared to Three Months Ended June 30,
      2007**




***Revenue***




Revenue
      increased from $636,007 for the three-months ended June 30, 2007 to $674,376
      for
      the three-months ended June 30, 2008 representing an increase of $38,369 or
      6.0%
      resulting primarily from an increase in revenue from various federal grants
      and
      contracts including the Collaborative Research Agreement with the Roswell Park
      Cancer Institute and contracts with federal government agencies.




30





See
      the
      table below for further details regarding the sources of our government grant
      and contract revenue:


**Agency**
              
              **Program**
              
              **Amount**
              
              **Period
                  of Performance**
              
              **Revenue**
                **2008**
                **(April
                  1 thru**
                **June
                  30)**
              
              **Revenue**
                **2007**
                **(April
                  1 thru**
                **June
                  30)**
              
              **Revenue**
                **2007****unaudited)**
              
              **(unaudited)****DoD**
              
              
              DTRA
                  Contract
              
              $
              1,263,836
              
              
              03/2007-02/2009
              
              $
              290,075
              
              $
              351,370
              
              $
              466,322**NY
                  State/RPCI**
              
              
              Sponsored
                  Research Agreement
              
              $
              3,000,000
              
              
              03/2007-02/2012
              
              $
              63,962
              
              $
              -
              
              $
              329,390**NIH**
              
              
              Phase
                  II NIH SBIR program
              
              $
              750,000
              
              
              07/2006-06/2008
              
              $
              0
              
              $
              $0
              
              $
              459,621**NIH**
              
              
              NCI
                  Contract
              
              $
              750,000
              
              
              09/2006-08/2008
              
              $
              93,438
              
              $
              131,441
              
              $
              440,028**NASA**
              
              
              Phase
                  I NASA STTR program
              
              $
              100,000
              
              
              01/2006-01/2007
              
              $
              
              
              $
              33,196
              
              $
              33,197**DOD**
              
              
              DOD
                  Contract
              
              $
              8,900,000
              
              
              05/2008
                  - 09/2009
              
              $
              226,901
              
              $
              -
              
              $
              0Totals
              
              $
              674,376
              
              $
              516,007
              
              $
              1,728,558




We
      anticipate our revenue over the next year to be derived mainly from government
      grants and contracts. In addition, it is common in our industry for companies
      to
      enter into licensing agreements with large pharmaceutical companies. To the
      extent we enter into such licensing arrangements, we may receive additional
      revenue from licensing fees.




***Operating
      Expenses***




Operating
      expenses have historically consisted of costs relating to R&D and general
      and administrative expenses. R&D expenses have consisted mainly of
      supporting our R&D teams, process development, sponsored research at the
      Roswell Park Cancer Institute and Cleveland Clinic, clinical trials and
      consulting fees. General and administrative expenses include all corporate
      and
      administrative functions that serve to support our current and future operations
      while also providing an infrastructure to support future growth. Major items
      in
      this category include management and staff salaries, rent/leases, professional
      services and travel-related expenses. We anticipate these expenses to increase
      as a result of increased legal and accounting fees anticipated in connection
      with our compliance with ongoing reporting and accounting requirements of the
      SEC and the expansion of our business.




Operating
      expenses decreased from $8,748,968 for the three-months ended June 30, 2007
      to
      $4,675,239 for the three-months ended June 30, 2008, a decrease of $4,073,729
      or
      46.5%. We recognized a total of $1,029,358 of non-cash, stock-based compensation
      for the three-months ended June 30, 2008 compared to $3,516,158 for the
      three-months ended June 30, 2007. If these non-cash, stock-based compensation
      expenses were excluded, operating expenses would have decreased from
      $5,232,810 fo r
      the
      three-months ended June 30, 2007 to $3,645,881 for the three-months ended June
      30, 2008. This represents a decrease in operating expenses of $1,586,929 or
      30.3%.





Research
      and development costs decreased from $3,966,711 for the three-months ended
      June
      30, 2007 to $2,682,703 for the three-months ended June 30, 2008. This represents
      a decrease of $1,284,008 or 32.4%. We recognized a total of $168,040 of R&D
      non-cash, stock based compensation for the three-months ended June 30, 2008
      compared to $299,112 for the three-months ended June 30, 2007. Without the
      non-cash, stock-based compensation, the R&D expenses decreased from
      $3,667,599 for the three-months ended June 30, 2007 to $2,514,663 for the
      three-months ended June 30, 2008; a decrease of $1,152,936 or 31.4%.





Selling,
      general and administrative costs decreased from $4,782,257 for the three-months
      ended June 30, 2007 to $1,992,536 for the three-months ended June 30, 2008.
      This
      represents a decrease of $2,789,721 or 58.3%. We recognized a total of $861,318
      of non-cash, stock-based compensation under selling, general and administrative
      costs for the three-months ended June 30, 2008 compared to $3,217,046 for the
      three-months ended June 30, 2007. Without the non-cash, stock-based
      compensation, the selling, general and administrative expenses decreased from
      $1,565,211 for the three-months ended June 30, 2007 to $1,131,218 for the three
      months ended June 30 2008; a decrease of $433,993 or 27.7%. The lower general
      and administrative expenses were incurred as a result of cost containment
      efforts on the part of the Company.




31




Until
      we
      introduce a product to the market, we expect these expenses in the categories
      mentioned above will be the largest categories in our income
      statement.





**Six
      Months Ended June 30, 2008 Compared to Six Months Ended June 30,
      2007**




***Revenue***




Revenue
      increased from $957,453 for the six-months ended June 30, 2007 to $1,350,700
      for
      the six-months ended June 30, 2008 representing an increase of $393,247 or
      41.1%
      resulting primarily from an increase in revenue from various federal grants
      and
      contracts including the Collaborative Research Agreement with the Roswell Park
      Cancer Institute, the DTRA contract, the NCI contract, and the DOD contract.





See
      the
      table below for further details regarding the sources of our government grant
      and contract revenue:


**Revenue**
              
              
              **Revenue****2008**
              
              
              **2007****Period
                  of**
              
              
              **(thru**
              
              
              **(thru**
              
              
              **Revenue****Agency**
              
              
              **Program**
              
              
              **Amount**
              
              
              **Performance**
              
              
              **June
                  30)**
              
              
              **June
                  30)**
              
              
              **2007****(unaudited)**
              
              
              **(unaudited)****DoD**
              
              
              DTRA
                  Contract
              
              $
              1,263,836
              
              
              03/2007-02/2009
              
              $
              323,826
              
              $
              351,370
              
              $
              466,322**NY
                  State/RPCI**
              
              
              Sponsored
                  Research Agreement
              
              $
              3,000,000
              
              
              03/2007-02/2012
              
              $
              154,711
              
              $
              -
              
              $
              329,390**NIH**
              
              
              Phase
                  II NIH SBIR program
              
              $
              750,000
              
              
              07/2006-06/2008
              
              $
              77,971
              
              $
              140,594
              
              $
              459,621**NIH**
              
              
              NCI
                  Contract
              
              $
              750,000
              
              
              09/2006-08/2008
              
              $
              157,216
              
              $
              262,293
              
              $
              440,028**NASA**
              
              
              Phase
                  I NASA STTR program
              
              $
              100,000
              
              
              01/2006-01/2007
              
              $
              290,075
              
              $
              33,196
              
              $
              33,197**DOD**
              
              
              DOD
                  Contract
              
              $
              8,900,000
              
              
              05/2008
                  - 09/2009
              
              $
              226,901
              
              $
              -
              
              $
              0Totals
              
              $
              1,230,700
              
              $
              787,453
              
              $
              1,728,558


We
      anticipate our revenue over the next year to be derived mainly from government
      grants and contracts. In addition, it is common in our industry for companies
      to
      enter into licensing agreements with large pharmaceutical companies. To the
      extent we enter into such licensing arrangements, we may receive additional
      revenue from licensing fees.





***Operating
      Expenses***




Operating
      expenses decreased from $13,334,303 for the six-months ended June 30, 2007
      to
      $9,419,739 for the six-months ended June 30, 2008, a decrease of $3,914,564
      or
      29.4%. We recognized a total of $770,931 of non-cash, stock-based compensation
      for the six-months ended June 30, 2008 compared to $3,891,458 for the six-months
      ended June 30, 2007. If these non-cash, stock-based compensation expenses were
      excluded, operating expenses would have decreased from $9,442,845 fo r
      the
      six-months ended June 30, 2007 to $8,648,808 for the six-months ended June
      30,
      2008. This represents a decrease in operating expenses of $794,037 or 8.4%.





Research
      and development costs decreased from $7,557,726 for the six-months ended June
      30, 2007 to $6,234,089 for the six-months ended June 30, 2008. This represents
      a
      decrease of $1,323,637 or 17.5%. We recognized a total of $214,901 of R&D
      non-cash, stock based compensation for the six-months ended June 30, 2008
      compared to $614,742 for the six-months ended June 30, 2007. Without the
      non-cash, stock-based compensation, the R&D expenses decreased from
      $6,942,984 for the six-months ended June 30, 2007 to $6,018,188 for the
      six-months ended June 30, 2008; a decrease of $924,796 or 13.3%.





Selling,
      general and administrative costs decreased from $5,776,577 for the six-months
      ended June 30, 2007 to $3,185,650 for the six-months ended June 30, 2008. This
      represents a decrease of $2,590,927 or 44.9%. We recognized a total of $566,030
      of non-cash, stock-based compensation under selling, general and administrative
      costs for the six-months ended June 30, 2008 compared to $3,276,716 for the
      six-months ended June 30, 2007. Without the non-cash, stock-based compensation,
      the selling, general and administrative expenses increased from $2,499,861
      for
      the six-months ended June 30, 2007 to $2,619,620 for the six months ended June
      30, 2008; an increase of $119,759 or 4.8%. The higher general and administrative
      expenses were incurred as a result of increased investor relations activities
      and continuing to improve the infrastructure of the Company




32




Until
      we
      introduce a product to the market, we expect these expenses in the categories
      mentioned above will be the largest categories in our income
      statement.




**Year
      Ended December 31, 2007 Compared to Year Ended December 31,
      2006**




***Revenue***





Revenue
      increased from $1,708,214 for the year ended December 31, 2006 to $2,018,558
      for
      the year ended December 31, 2007, representing an increase of $310,344 or 18.2%,
      resulting primarily from an increase in revenue from various grants including
      the sponsored research agreement with RPCI, the DTRA contract, and the NCI
      contract. As the term of the BioShield grant ended, the proceeds from the
      BioShield grant were $0 for the year ended December 31, 2007 as compared to
      $1,100,293 for the year ended December 31, 2006.




***Operating
      Expenses***





Operating
      expenses have historically consisted of costs relating to R&D and general
      and administrative expenses. R&D expenses have consisted mainly of
      supporting our R&D teams, process development, sponsored research at the
      Roswell Park Cancer Institute and the Cleveland Clinic, clinical trials and
      consulting fees. General and administrative expenses include all corporate
      and
      administrative functions that serve to support our current and future operations
      while also providing an infrastructure to support future growth. Major items
      in
      this category include management and staff salaries, rent/leases, professional
      services and travel-related expenses. We expect these expenses to increase
      as a
      result of increased legal and accounting fees anticipated in connection with
      our
      compliance with ongoing reporting and accounting requirements of the SEC and
      also to support the expansion of our business.





Operating
      expenses increased from $9,126,315 for the year ended December 31, 2006 to
      $27,960,590 for the year ended December 31, 2007. This represents an increase
      of
      $18,834,275 or 206.4%. We recognized a total of $7,789,305 of non-cash
      compensation for stock based compensation for the year December 31, 2007
      compared to $506,078 for the year ended December 31, 2006. If these non-cash
      stock based compensation expenses were excluded, operating expenses would have
      increased from $8,620,237 for the year ended December 31, 2006 to $20,171,285
      for the year ended December 31, 2007. This represents an increase in operating
      expenses of $11,551,048 or 134.0%.





This
      increase resulted primarily from an increase in R&D expenses from $6,989,804
      for the year ended December 31, 2006 to $17,429,652 for the year ended December
      31, 2007, an increase of $10,439,848 or 149.4%. The higher R&D expenses were
      incurred as a result of increasing the number of research and development
      personnel, commencing clinical trials for CBLC102 and completing the cGMP
      manufacturing of CBLB502. We recognized a total of $250,682 of non-cash
      compensation for R&D stock based compensation for the year ended December
      31, 2006 compared to $1,836,787 for the year ended December 31, 2007. Without
      the non-cash stock based compensation, the R&D expenses increased from
      $6,739,122 for the year ended December 31, 2006 to $15,592,865 for the year
      ended December 31, 2007; an increase of $8,853,743 or 131.4%.




In
      addition, general and administrative expenses increased from $2,136,511 for
      the
      year ended December 31, 2006 to $10,530,938, for the year ended December 31,
      2007. This represents an increase of $8,394,427 or 392.9%. These higher general
      and administrative expenses were incurred as a result of creating and improving
      the infrastructure of the company and the costs associated with being a publicly
      traded company. We recognized a total of $255,396 of non-cash stock-based
      compensation for general and administrative compensation for the year ended
      December 31, 2006 compared to $5,952,517 for the year ended December 31, 2007.
      Without the non-cash stock based compensation, the general and administrative
      expenses increased from $1,881,115 for the year ended December 31, 2006 to
      $4,578,421 for the year ended December 31, 2007; an increase of $2,697,306
      or
      143.4%.




33




**Liquidity
      and Capital Resources**




We
      have
      incurred annual operating losses since our inception, and, as of June 30, 2008,
      we had an accumulated deficit of $49,396,260. Our principal sources of liquidity
      have been cash provided by sales of our securities and government grants,
      contracts and agreements. Our principal uses of cash have been R&D and
      working capital. We expect our future sources of liquidity to be primarily
      government grants, equity financing, licensing fees and milestone payments
      in
      the event we enter into licensing agreements with third parties, and research
      collaboration fees in the event we enter into research collaborations with
      third
      parties.




Net
      cash
      used in operating activities totaled $6,943,674 for the six-months ended June
      30, 2008, compared to $5,936,394 used in operating activities for the six-months
      ended June 30, 2007. Net cash used in operating activities totaled $16,607,922
      for the year ended December 31, 2007, compared to $6,653,602 used in operating
      activities for the same period in 2006. For all periods, the increase in cash
      used was primarily attributable to increased R&D activities and maintaining
      and improving the infrastructure necessary to support these R&D
      activities.




Net
      cash
      used in investing activities was $348,216 for the six months ended June 30,
      2008
      and net cash used in investing activities was $16,564,862 for the six months
      ended June 30, 2007. The decrease in cash used in investing activities resulted
      primarily from a reduction in the purchase of short term investments of
      $17,999,965 from the funds received from the issuance of Series B Preferred
      in
      connection with our private placement offering that took place in the first
      quarter of 2007. Net cash used in investing activities was $442,523 for the
      year
      ended December 31, 2007 and $14,281 used for the same period in 2006. The
      increase in cash used for investing activities resulted primarily from the
      maturing of short-term investments that converted to cash.




Net
      cash
      used in financing activities totaled $667,828 for the six-months ended June
      30,
      2008, compared to net cash provided by financing activities of $29,026,743
      for
      the six-months ended June 30, 2007. The decrease in cash provided by financing
      activities was attributed to the payment of dividends in the first six months
      of
      2008 as compared to the proceeds from the issuance of preferred stock and
      warrants in the private placement offering which occurred during the first
      six
      months of 2007. Net cash provided by financing activities totaled $28,200,591
      for the year ended December 31, 2007, compared to $8,523,414 provided by
      financing activities for the year ended December 31, 2006. The increase in
      cash
      provided by financing activities was attributed to the proceeds from the
      issuance of Series B Preferred in connection with our private placement
      offering.





Under
      our
      exclusive license agreement with CCF, we may be responsible for making milestone
      payments to CCF in amounts ranging from $50,000 to $4,000,000. The milestones
      and corresponding payments for Protectan CBLB502 and Curaxin CBLC102 are set
      forth below:


File
                  IND application for Protectan CBLB502 (completed February
                  2008)
              
              $
              50,000Complete
                  Phase I studies for Protectan CBLB502
              
              $
              100,000File
                  NDA application for Protectan CBLB502
              
              $
              350,000Receive
                  regulatory approval to sell Protectan CBLB502
              
              $
              1,000,000File
                  IND application for Curaxin CBLC102 (completed May 2006)
              
              $
              50,000Commence
                  Phase II clinical trials for Curaxin CBLC102 (completed January
                  2007)
              
              $
              250,000Commence
                  Phase III clinical trials for Curaxin CBLC102
              
              $
              700,000File
                  NDA application for Curaxin CBLC102
              
              $
              1,500,000Receive
                  regulatory approval to sell Curaxin CBLC102
              
              $
              4,000,000


As
      of
      June 30, 2008, we have paid $50,000 for the milestone payment relating to the
      filing of the IND application for Curaxin CBLC102 and $250,000 for commencing
      Phase II clinical trials for Curaxin CBLC102. The $50,000 milestone payment
      was
      made May 3, 2007 and the $250,000 milestone was paid on August 21, 2007 as
      per
      the terms of the agreement. In addition, the Company has accrued an additional
      $50,000 related to the filing of an IND application related to Protectan CBLB502
      that occurred in February 2008.




Our
      agreement with the CCF also provides for payment by us to CCF of royalty
      payments calculated as a percentage of the net sales of the drug candidates
      ranging from 1-2%, and sublicense royalty payments calculated as a percentage
      of
      the royalties received from the sublicenses ranging from 5-35%. However, any
      royalty payments and sublicense royalty payments assume that we will be able
      to
      commercialize our drug candidates, which are subject to numerous risks and
      uncertainties, including those associated with the regulatory approval process,
      our R&D process and other factors. Each of the above milestone payments,
      royalty payments and sublicense royalty payments was accrued until CCF owns
      less
      than five percent of our common stock on a fully-diluted basis or we receive
      more than $30,000,000 in funding and/or revenues from sources other than CCF,
      which have occurred with the completion of the private offering.




34





Although
      we believe that existing cash resources will be sufficient to finance our
      currently planned operations for the near-term (6-18 months), such amounts
      will
      not be sufficient to meet our longer-term cash requirements, including our
      cash
      requirements for the commercialization of certain of our drug candidates
      currently in development. We may be required to issue equity or debt securities
      or enter into other financial arrangements, including relationships with
      corporate and other partners, in order to raise additional capital. Depending
      upon market conditions, we may not be successful in raising sufficient
      additional capital for our long-term requirements. In such event, our business,
      prospects, financial condition and results of operations could be materially
      adversely affected.





The
      following factors, among others, could cause actual results to differ from
      those
      indicated in the above forward-looking statements: the results of our R&D
      efforts, the timing and success of preclinical testing, the timing and success
      of any clinical trials we may commence in the future, the timing of and
      responses to regulatory submissions, the amount of cash generated by our
      operations, the amount of competition we face and how successful we are in
      obtaining any required licenses and entering into collaboration
      arrangements.





***Impact
      of Inflation***




We
      believe that our results of operations are not dependent upon moderate changes
      in inflation rates.





***Impact
      of Exchange Rate Fluctuations***




We
      believe that our results of operations are somewhat dependent upon moderate
      changes in foreign currency exchange rates. We have entered into a manufacturing
      agreement with a foreign third party to produce one of its drug compounds and
      are required to make payments in the foreign currency. Currently, our exposure
      primarily exists with the Euro and the Great British Pound or GBP. As of June
      30, 2008, we are obligated to make payments under the agreement of
      49,250
      Euros and 144,323 GBP .
      We also
      expect to enter into additional agreements with foreign third parties,
      increasing the risk. As a result, our financial results could be affected by
      changes in foreign currency exchange rates. We have established means to
      purchase forward contracts to hedge against this risk. As of June 30, 2008,
      the
      Company has not
      purchased any forward contracts for Euros or GBP




***Off-Balance
      Sheet Arrangements***




We
      have
      not entered into any off-balance sheet arrangements.




35


**Item
      3:** **Quantitative
      and Qualitative Disclosures About Market Risk**





Not
      applicable.





**Item
      4:** **Controls
      and Procedures**





**Effectiveness
      of Disclosure**





Our
      management, with the participation of our chief executive officer and chief
      financial officer, evaluated the effectiveness of our disclosure controls and
      procedures as of June 30, 2008 as defined in Rules 13a-15(e) and 15d-15(e)
      under
      the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Our
      management recognizes that any controls and procedures, no matter how well
      designed and operated, can provide only reasonable assurance of achieving their
      objectives and management necessarily applies its judgment in evaluating the
      cost-benefit relationship of possible controls and procedures. Based on the
      evaluation of our disclosure controls and procedures as of June 30, 2008, our
      chief executive officer and chief financial officer concluded that, as of such
      date, our disclosure controls and procedures were effective to assure that
      information required to be declared by us in reports that we file or submit
      under the Exchange Act is (1) recorded, processed, summarized, and reported
      within the periods specified in the SEC's rules and forms and (2) accumulated
      and communicated to our management, including our chief executive officer and
      chief financial officer, as appropriate, to allow timely decisions regarding
      required disclosure.





**Changes
      in Internal Control over Financial Reporting**





No
      change
      in our internal control over financial reporting (as defined in Rules 13a-15(f)
      and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended
      June 30, 2008 that has materially affected, or is reasonably likely to
      materially affect, our internal control over financial
      reporting.


36


**PART
      II** **-** **O** **ther
      Information**





**Item
      1. Legal Proceedings**




As
      of June 30,
      2008, we were not
      a party to
      any litigation or other legal proceeding.




**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds**





None .





**Item
      3. Defaults Upon Senior Securities**




None .




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





At
      the
      April 29, 2008 annual stockholders meeting, the vote of the outstanding shares
      of capital stock entitled to vote and cast in person or by proxy was as
      follows:




**Election
      of Directors:**


**For**
              
              **Withheld**James
                  J. Antal
              
              13,510,123
              
              28,308Paul
                  E. DiCorleto
              
              13,510,828
              
              27,603Michael
                  Fonstein
              
              13,511,125
              
              27,306Andrei
                  Gudkov
              
              13,511,730
              
              26,701Bernard
                  L. Kasten
              
              13,511,018
              
              27,413Yakov
                  Kogan
              
              13,510,725
              
              27,706H.
                  Daniel Perez
              
              13,511,833
              
              26,598




**Ratification
      of selection of Meaden & Moore Ltd. as Independent Registered Public
      Accounting Firm:**


**For**
              
              **Against**
              
              **Abstain**13,520,849
              
              4,759
              
              12,823




**Approval
      of the amendment and restatement of the Cleveland BioLabs, Inc. 2006 Equity
      Incentive Plan:**





**For**
            
            **Against**
            
            **Abstain**
            
            **Broker
                Non-Votes**9,540,824
            
            456,196
            
            34,345
            
            3,507,066




37


**Item
      5. Other Information**





None.





**Item
      6. Exhibits**




(a)
      The
      following exhibits are included as part of this report:




**Exhibit**
              **Number**
            
            **Description
                of Document**31.1
            
            Certification
                of Michael Fonstein, Chief Executive Officer, pursuant to Section
                302 of
                the Sarbanes Oxley Act of 2002.31.2
            
            Certification
                of John A. Marhofer, Jr., Chief Financial Officer, pursuant to Section
                302
                of the Sarbanes Oxley Act of 2002.32.1
            
            Certification
                Pursuant To 18 U.S.C. Section 1350




38


**Signatures**




In
      accordance with the requirements of the Securities Exchange Act of 1934, the
      Registrant has duly  caused
      this report to be signed on its behalf by the undersigned thereunto duly
      authorized.




CLEVELAND
                BIOLABS, INC.Dated:
                August 12, 2008
            By:
            /s/
                MICHAEL FONSTEINMichael
                Fonstein
              Chief
                Executive Officer
              (Principal
                Executive Officer)Dated:
                August 12, 2008
            By:
            /s/
                JOHN A. MARHOFER, JR.John
                A. Marhofer, Jr.
              Chief
                Financial Officer
              (Principal
                Financial Officer)




39