**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**




**WASHINGTON,
      D.C. 20549**




**FORM
      10-Q**





(Mark
      One)





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


SECURITIES
      EXCHANGE ACT OF 1934





For
      the
      quarterly period ended September 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 companyþ





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
      November 14, 2008, there were 13,695,676 **** shares
      outstanding of registrant's common stock, par value $0.005 per
      share.








CLEVELAND
        BIOLABS INC
 10-Q
 11/14/2008




TABLE
      OF
      CONTENTS





PAGEPART
                I - FINANCIAL INFORMATIONITEM
                1:
            Financial
                StatementsBalance
                Sheets as of September 30, 2008 and December 31, 2007
            3Statements
                of Operations For Three and Nine Months Ended September 30, 2008
                and 2007
            5Statements
                of Cash Flows For Nine Months Ended September 30, 2008 and 2007
            6Statement
                of Stockholders' Equity from January 1, 2007 to December 31, 2007
                and to
                September 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
            42ITEM
                4:
            Controls
                and Procedures
            42PART
                II - OTHER INFORMATIONITEM
                1:
            Legal
                Proceedings
            43ITEM
                2:
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            43ITEM
                3:
            Defaults
                Upon Senior Securities
            43ITEM
                4:
            Submission
                of Matters to a Vote of Securities Holders
            43ITEM
                5:
            Other
                Information
            43ITEM
                6:
            Exhibits
            43Signatures
            44





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





September
      30, 2008 (unaudited) and December 31, 2007





September 30
            
            December 312008
            
            2007(unaudited)ASSETSCURRENT
                ASSETSCash
                and equivalents
            
            $
            3,666,169
            
            $
            14,212,189Short-term
                investments
            
            
            1,000,000
            
            
            1,000,000Accounts
                receivable:Trade
            
            
            1,368,618
            
            
            163,402Interest
            
            
            5,399
            
            
            50,042Other
                prepaid expenses
            
            
            575,373
            
            
            325,626Total
                current assets
            
            
            6,615,559
            
            
            15,751,259EQUIPMENTComputer
                equipment
            
            
            295,025
            
            
            258,089Lab
                equipment
            
            
            1,081,729
            
            
            966,517Furniture
            
            
            276,009
            
            
            274,9031,652,763
            
            
            1,499,509Less
                accumulated depreciation
            
            
            552,828
            
            
            313,4891,099,935
            
            
            1,186,020OTHER
                ASSETSIntellectual
                property
            
            
            722,386
            
            
            459,102Deposits
            
            
            23,482
            
            
            25,445745,868
            
            
            484,547TOTAL
                ASSETS
            
            $
            8,461,362
            
            $
            17,421,826





See
      accompanying notes





3




CLEVELAND
      BIOLABS, INC.





BALANCE
      SHEETS





September
      30, 2008 (unaudited) and December 31, 2007





September 30
            
            December 312008
            
            2007(unaudited)LIABILITIES
                AND STOCKHOLDERS' EQUITYCURRENT
                LIABILITIESAccounts
                payable
            
            $
            1,771,536
            
            $
            710,729Deferred
                revenue
            
            
            2,431,107
            
            
            1,670,610Dividends
                payable
            
            
            44,320
            
            
            396,469Accrued
                expenses
            
            
            351,926
            
            
            449,774Total
                current liabilities
            
            
            4,598,889
            
            
            3,227,582STOCKHOLDERS'
                EQUITYSeries
                B convertible preferred stock, $.005 par valueAuthorized
                - 10,000,000 shares at September 30, 2008 and December 31,
                2007Issued
                and outstanding 3,301,373 and 3,870,267 shares at September 30, 2008
                and
                December 31, 2007, respectively
            
            
            16,507
            
            
            19,351Additional
                paid-in capital
            
            
            20,792,287
            
            
            24,383,695Common
                stock, $.005 par valueAuthorized
                - 40,000,000 shares at September 30, 2008 and December 31,
                2007Issued
                and outstanding 13,635,406 and 12,899,241 shares at September 30,
                2008 and
                December 31, 2007, respectively
            
            
            68,177
            
            
            64,496Additional
                paid-in capital
            
            
            35,530,556
            
            
            30,764,914Accumulated
                deficit
            
            
            (52,545,054
            )
            
            (41,038,212
            )Total
                stockholders' equity
            
            
            3,862,473
            
            
            14,194,244TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            8,461,362
            
            $
            17,421,826




See accompanying notes




4




CLEVELAND
      BIOLABS, INC.





STATEMENT
      OF OPERATIONS





Three
      Months and Nine Months Ending September 30, 2008 and 2007 (unaudited)





Three Months Ended
            
            Nine Months EndedSeptember 30
            
            September 30
            
            September 30
            
            September 302008
            
            2007
            
            2008
            
            2007(unaudited)
            
            (unaudited)
            
            (unaudited)
            
            (unaudited)REVENUESGrant
                and contract
            
            $
            1,851,419
            
            $
            540,544
            
            $
            3,082,119
            
            $
            1,327,996Service
            
            
            -
            
            
            120,000
            
            
            120,000
            
            
            290,0001,851,419
            
            
            660,544
            
            
            3,202,119
            
            
            1,617,996OPERATING
                EXPENSESResearch
                and development
            
            
            3,485,430
            
            
            4,105,480
            
            
            9,719,519
            
            
            11,663,054Selling,
                general and administrative
            
            
            1,240,142
            
            
            1,442,669
            
            
            4,425,792
            
            
            6,968,565Total
                operating expenses
            
            
            4,725,572
            
            
            5,548,149
            
            
            14,145,311
            
            
            18,631,619LOSS
                FROM OPERATIONS
            
            
            (2,874,153
            )
            
            (4,887,605
            )
            
            (10,943,192
            )
            
            (17,013,623
            )OTHER
                INCOMEInterest
                income
            
            
            49,450
            
            
            305,568
            
            
            244,593
            
            
            761,648Buffalo
                relocation reimbursement
            
            
            -
            
            
            -
            
            
            220,000
            
            
            -Sublease
                revenue
            
            
            2,656
            
            
            1,771
            
            
            7,970
            
            
            1,771Gain
                on disposal of fixed assets
            
            
            -
            
            
            -
            
            
            1,394
            
            
            -Gain
                on investment
            
            
            -
            
            
            -
            
            
            3,292
            
            
            -Total
                other income
            
            
            52,106
            
            
            307,339
            
            
            477,249
            
            
            763,419OTHER
                EXPENSECorporate
                relocation
            
            
            8,933
            
            
            901,964
            
            
            142,638
            
            
            1,152,643Loss
                on Investment
            
            
            -
            
            
            305,479
            
            
            -
            
            
            305,479Interest
                expense
            
            
            -
            
            
            -
            
            
            -
            
            
            1,087Total
                other expense
            
            
            8,933
            
            
            1,207,443
            
            
            142,638
            
            
            1,459,209NET
                LOSS
            
            $
            (2,830,980
            )
            $
            (5,787,709
            )
            $
            (10,608,581
            )
            $
            (17,709,413
            )DIVIDENDS
                ON CONVERTIBLE PREFERRED STOCK
            
            
            (317,814
            )
            
            (807,913
            )
            
            (898,260
            )
            
            (807,913
            )NET
                LOSS AVAILABLE TO COMMON SHAREHOLDERS
            
            $
            (3,148,794
            )
            $
            (6,595,622
            )
            $
            (11,506,841
            )
            $
            (18,517,326
            )NET
                LOSS AVAILABLE TO COMMON SHAREHOLDERS PER SHARE OF COMMON STOCK -
                BASIC
                AND DILUTED
            
            $
            (0.23
            )
            $
            (0.54
            )
            $
            (0.86
            )
            $
            (1.54
            )WEIGHTED
                AVERAGE NUMBER OF SHARES USED IN CALCULATING NET LOSS PER SHARE,
                BASIC AND
                DILUTED
            
            
            13,605,822
            
            
            12,148,718
            
            
            13,415,376
            
            
            12,010,177


See accompanying notes


5





CLEVELAND
      BIOLABS, INC.





STATEMENTS
      OF CASH FLOWS





For
      the
      Nine Months Ended September 30, 2008 and 2007 (unaudited)





September 30
            
            September 302008
            
            2007(unaudited)
            
            (unaudited)CASH FLOWS FROM OPERATING
                ACTIVITIESNet
                loss
            
            $
            (10,608,581
            )
            $
            (17,709,413
            )Adjustments
                to reconcile net loss to net cash used by operating
                activities:Depreciation
            
            
            239,339
            
            
            110,979Noncash
                salaries and consulting expense
            
            
            1,150,692
            
            
            4,445,737Loss
                on investments
            
            
            -
            
            
            305,479Changes
                in operating assets and liabilities:Accounts
                receivable - trade
            
            
            (1,205,216
            )
            
            (484,789
            )Accounts
                receivable - interest
            
            
            44,643
            
            
            (7,008
            )Other
                prepaid expenses
            
            
            (249,748
            )
            
            167,907Deposits
            
            
            1,964
            
            
            (12,392
            )Accounts
                payable
            
            
            1,060,807
            
            
            320,563Deferred
                revenue
            
            
            760,497
            
            
            1,846,763Accrued
                expenses
            
            
            (97,848
            )
            
            269,424Milestone
                payments
            
            
            -
            
            
            (50,000
            )Total
                adjustments
            
            
            1,705,130
            
            
            6,912,663Net
                cash (used in) provided by operating activities
            
            
            (8,903,451
            )
            
            (10,796,750
            )CASH
                FLOWS FROM INVESTING ACTIVITIESSale
                of short-term investments
            
            
            -
            
            
            19,999,968Purchase
                of short-term investments
            
            
            -
            
            
            (19,003,837
            )Issuance
                of notes receivable
            
            
            -
            
            
            (250,000
            )Purchase
                of equipment
            
            
            (153,253
            )
            
            (831,430
            )Costs
                of patents pending
            
            
            (263,284
            )
            
            (153,417
            )Net
                cash (used in) provided by investing activities
            
            
            (416,537
            )
            
            (238,716
            )CASH
                FLOWS FROM FINANCING ACTIVITIESIssuance
                of preferred stock
            
            
            -
            
            
            30,020,984Financing
                costs
            
            
            -
            
            
            (1,152,857
            )Dividends
            
            
            (1,250,410
            )
            
            (807,913
            )Issuance
                of common stock
            
            
            -
            
            
            -Exercise
                of stock options
            
            
            24,378
            
            
            101,300Exercise
                of warrants
            
            
            -
            
            
            90,515Net
                cash (used in) provided by financing activities
            
            
            (1,226,032
            )
            
            28,252,029INCREASE
                (DECREASE) IN CASH AND EQUIVALENTS
            
            
            (10,546,020
            )
            
            17,216,563CASH
                AND EQUIVALENTS AT BEGINNING OF PERIOD
            
            
            14,212,189
            
            
            3,061,993CASH
                AND EQUIVALENTS AT END OF PERIOD
            
            $
            3,666,169
            
            $
            20,278,556Supplemental
                disclosures of cash flow information:Cash
                paid during the period for interest
            
            $
            -
            
            $
            1,087Cash
                paid during the year for income taxes
            
            $
            -Supplemental
                schedule of noncash financing activities:Conversion
                of preferred stock to common stock
            
            $
            3,594,242
            
            $
            -Issuance
                of stock options to employees, consultants, and independent board
                members
            
            $
            1,929,432
            
            $
            2,745,287Expense
                recapture of expense for options expensed in 2007 but issued in
                2008
            
            $
            1,459,425
            
            $
            -Issuance
                of shares to consultants and employees
            
            $
            626,500
            
            $
            1,700,450Amortization
                of restricted shares issued to employees and consultants
            
            $
            54,185
            
            $
            -Accrual
                of preferred stock dividends
            
            $
            44,320
            
            $
            -


See accompanying notes


6





CLEVELAND
      BIOLABS, INC.





STATEMENTS
      OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS





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


September
      30, 2008 (unaudited)





Stockholders' EquityCommon StockAdditionalPaid-inShares
            
            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
            
            
            -
            
            
            -
            
            
            1,929,433Partial
                recapture of expense for options expensed in 2007 but issued in
                2008
            
            
            -
            
            
            -
            
            
            (1,459,425
            )Issuance
                of restricted shares
            
            
            130,000
            
            
            650
            
            
            625,850Restricted
                stock awards
            
            
            -
            
            
            -
            
            
            54,185Exercise
                of options
            
            
            37,271
            
            
            186
            
            
            24,191Conversion
                of Series B Preferred Shares to Common
            
            
            568,894
            
            
            2,844
            
            
            3,591,408Dividends
                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) losses included in net
                loss
            
            
            -
            
            
            -
            
            
            -Comprehensive
                lossBalance
                at September 30, 2008
            
            
            13,635,406
            
            $
            68,177
            
            $
            35,530,556


See accompanying notes


7





CLEVELAND
      BIOLABS, INC.




STATEMENTS
      OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS




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


September
      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) losses included 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
                2008
            
            
            -
            
            
            -
            
            
            -Issuance
                of restricted shares
            
            
            -
            
            
            -
            
            
            -Restricted
                stock awards
            
            
            -
            
            
            -
            
            
            -Exercise
                of options
            
            
            -
            
            
            -
            
            
            -Conversion
                of Series B Preferred Shares to Common
            
            
            (568,894
            )
            
            (2,844
            )
            
            (3,591,408
            )Dividends
                on Series B Preferred shares
            
            
            -
            
            
            -
            
            
            -Net
                Loss
            
            
            -
            
            
            -
            
            
            -Other
                comprehensive incomeUnrealized
                gains (losses) on short term investments
            
            
            -
            
            
            -
            
            
            -Changes
                in unrealized holding gains (losses) arising during periodLess
                reclassification adjustment for (gains) losses included in net
                loss
            
            
            -
            
            
            -
            
            
            -Comprehensive
                lossBalance
                at September 30, 2008
            
            
            3,301,373
            
            $
            16,507
            
            $
            20,792,287


See accompanying notes


8




CLEVELAND
      BIOLABS, INC.




STATEMENTS
      OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS




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


September
      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) losses included 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
            
            
            -
            
            
            -
            
            
            1,929,433Partial
                recapture of expense for options expensed in 2007 but issued in
                2008
            
            
            -
            
            
            -
            
            
            (1,459,425
            )Issuance
                of restricted shares
            
            
            -
            
            
            -
            
            
            626,500Restricted
                stock awards
            
            
            -
            
            
            -
            
            
            54,185Exercise
                of options
            
            
            -
            
            
            -
            
            
            24,378Conversion
                of Series B Preferred Shares to Common
            
            
            -
            
            
            -
            
            
            -Dividends
                on Series B Preferred shares
            
            
            -
            
            
            (898,261
            )
            
            (898,261
            )Net
                Loss
            
            
            -
            
            
            (10,608,581
            )
            
            (10,608,581
            )
            
            (10,608,581
            )Other
                comprehensive incomeUnrealized
                gains (losses) on short term investmentsChanges
                in unrealized holding gains (losses) arising during period
            
            
            -
            
            
            -
            
            
            -
            
            $
            -Less
                reclassification adjustment for (gains) losses included in net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            $
            -Comprehensive
                loss
            
            
            
            
            
            
            
            
            
            
            $
            (10,608,581
            )Balance
                at September 30, 2008
            
            $
            -
            
            $
            (52,545,054
            )
            $
            3,862,473


See accompanying notes


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 the Company’s 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 September 30, 2008 and September
                30,
                2007, and for the quarter and nine months ended September 30, 2008
                and
                September 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 September 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 $82,252, and $49,298 for
                the
                quarters ended September 30, 2008 and 2007, respectively. Depreciation
                expense was $239,317 and $110,979 for the nine months ended September
                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 20 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 $656,693 and $407,425 for these 13 patent applications as
      of
      September 30, 2008 and December 31, 2007, respectively. All of the CCF patent
      applications are still pending approval.





The
      Company also has submitted five 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 20 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 $65,693 and $51,677 for these
      five
      patent applications as of September 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, 2009. At September
                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 September 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.




11




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.




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 during the period that
      the costs were incurred according to the terms of the government grant. Fixed
      cost grants require no proof of costs and grant revenue is recognized during
      the
      period that the costs were incurred according to the terms of the government
      grant. 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 as allowable research and development expenses
      are incurred during the period and according to the terms of the government
      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 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 nine months
      ended September 30, 2008, the Company recognized $760,497 as revenue resulting
      in a balance of deferred revenue of $2,431,107 at September 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 research and development, costs of facilities
                and
                costs incurred in connection with third-party collaboration efforts.
                Expenditures relating to research and development are expensed as
                incurred.




12




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 September 30, 2008, there
                were
                43,456 stock options and granted under the Amended Plan, and as of
                September 30, 2008 there were 1,663,380 stock options and 335,000
                shares
                granted under the Amended Plan leaving 2,001,620 shares of stock
                to be
                awarded under the Amended Plan.




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 September 30, 2008, the Company granted 43,456 additional
      stock options pursuant to stock award agreements. The Company recognized a
      total
      of $355,800 in expense related to stock options for the quarter ended September
      30, 2008. During the quarter ended September 30, 2007, the Company granted
      18,000 stock options pursuant to stock award agreements to certain employees
      and
      key consultants and recognized a total of $395,129 in expense related to
      options.





During
      the nine months ended September 30, 2008, the Company granted 958,380 additional
      stock options pursuant to stock award agreements. The Company recognized a
      total
      of $1,929,433 in expense related to stock options for the nine months ended
      September 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
      nine months ended September 30, 2008 of $470,008.




13




During
      the nine months ended September 30, 2007, the Company granted 543,000 stock
      options pursuant to stock award agreements and expensed $2,745,287 related
      to
      stock options.





The
      weighted average, estimated grant date fair values of stock options granted
      during the quarters ended September 30, 2008 and 2007 was $2.76 and $4.95,
      respectively.




The
      following tables summarize the stock option activity for the nine months ended
      September 30, 2008 and September 30, 2007, respectively.





Weighted
            
            WeightedAverage
            
            AverageExercise
            
            RemainingPrice per
            
            ContractualShares
            
            Share
            
            Term (in Years)Outstanding,
                December 31, 2007
            
            
            1,011,740
            
            $
            7.29Granted
            
            
            958,380
            
            $
            4.89Exercised
            
            
            42,534
            
            $
            1.04Forfeited,
                Canceled
            
            
            -
            
            
            n/aOutstanding,
                September 30, 2008
            
            
            1,927,586
            
            $
            6.23
            
            
            8.75Exercisable,
                September 30, 2008
            
            
            1,577,799
            
            $
            5.55
            
            
            8.72








Weighted
            
            WeightedAverage
            
            AverageExercise
            
            RemainingPrice per
            
            ContractualShares
            
            Share
            
            Term (in Years)Outstanding,
                December 31, 2006
            
            
            483,490
            
            $
            2.17Granted
            
            
            543,000
            
            $
            9.82Exercised
            
            
            124,000
            
            $
            1.35Forfeited,
                Canceled
            
            
            -
            
            
            n/aOutstanding,
                September 30, 2007
            
            
            902,490
            
            $
            6.89
            
            
            8.77Exercisable,
                September 30, 2007
            
            
            599,930
            
            $
            6.58
            
            
            8.78




The
      Company also recognized $5,627 in expense for shares issued under the Amended
      Plan to a consultant during the quarter ended September 30, 2008. In addition,
      the Company recognized $18,333 in consulting expense related to the amortization
      of restricted shares.





For
      the
      nine months ended September 30, 2008, the Company recognized a total of $626,500
      in expense for shares issued under the Amended Plan and a total of $54,185
      in
      expense related to the amortization of restricted shares. For the nine months
      ended September 30, 2007 the Company recognized a total of $1,700,450 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.





14




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




Quarter Ended
            
            Quarter Ended
            
            Nine-Months Ended
            
            Nine-Months EndedSeptember 30, 2008
            
            September 30, 2007
            
            September 30, 2008
            
            September 30, 2007Net loss available to
                common stockholders
            
            $
            (3,148,794
            )
            $
            (6,595,622
            )
            $
            (11,506,841
            )
            $
            (18,517,326
            )Net
                loss per share, basic and diluted
            
            $
            (0.23
            )
            $
            (0.54
            )
            $
            (0.86
            )
            $
            (1.54
            )Weighted-average
                shares used in computing net loss per share, basic and
                diluted
            
            
            13,605,822
            
            
            12,148,718
            
            
            13,415,376
            
            
            12,010,177





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 for both periods ended September 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
      1,927,586 and 902,490 for the periods ended September 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
                81.8% of total revenue for the quarter ended September 30, 2008 and
                2007,
                respectively. Grant revenue accounted for 96.3% and 82.1% for the
                nine
                months ended September 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 September
                30, 2008, the Company is obligated to make payments under the agreements
                of 1,033,262 Euros and 281,548 GBP. As of September 30, 2008, the
                Company
                has commitments for 100,000 Euros and 0 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.




15




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.





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.




17




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.





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.




On
      July
      15, 2008, the Company issued 28,456 stock options to various employees under
      non-qualified stock option agreements. These options vest immediately and allow
      for the purchase of 28,456 shares of common stock at an exercise price of $3.98
      per share. These options expire on July 15, 2018.




On
      September 22 2008, the Company issued 15,000 stock options to a new employee
      under non-qualified stock option agreements. These options vest over a
      three-year period and allow for the purchase of 15,000 shares of common stock
      at
      an exercise price of $4.51 per share. These options expire on September 22,
      2018.




For
      the
      nine months ending September 30, 2008, Series B Preferred Shares were converted
      into 568,894 shares of common stock. At September 30, 2008, there were 3,301,373
      outstanding Series B Preferred for which $44,320 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.




18




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 September 30, 2008, $350,000
      in
      milestone payments have been made 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.




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 $83,213 and
      $79,054 for the quarters ended September 30, 2008 and 2007, respectively and
      the
      operating lease expense recognized were $249,267 and $166,986 for the nine
      months ended September 30, 2008 and 2007, respectively.





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





OperatingLeases2008  Remaining
                Quarter
            
            
            
            
            $
            83,3172009
            
            
            
            
            
            349,7822010
            
            
            
            
            
            343,6572011
            
            
            
            
            
            311,8032012
            
            
            
            
            
            144,375$
            1,232,934





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 nine months ended
      September 30, 2008 and 2007:





Weighted AverageShares
            
            Exercise Price Per ShareOutstanding,
                December 31, 2007
            
            
            1,011,740
            
            $
            7.29Granted
            
            
            958,380
            
            $
            4.89Exercised
            
            
            42,534
            
            $
            1.04Forfeited,
                Canceled
            
            
            0
            
            
            n/aOutstanding,
                September 30, 2008
            
            
            1,927,586
            
            $
            6.23





19





Weighted AverageShares
            
            Exercise Price Per ShareOutstanding,
                December 31, 2006
            
            
            483,490
            
            $
            2.17Granted
            
            
            543,000
            
            $
            9.82Exercised
            
            
            124,000
            
            $
            1.35Forfeited,
                Canceled
            
            
            0
            
            
            n/aOutstanding,
                September 30, 2007
            
            
            902,490
            
            $
            6.89





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:





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





Weighted AverageWarrants
            
            Exercise Price Per ShareOutstanding,
                December 31, 2006
            
            
            814,424
            
            $
            3.36Granted
            
            
            2,687,602
            
            $
            10.40Exercised
            
            
            48,758
            
            $
            2.00Forfeited,
                Canceled
            
            
            -
            
            
            n/aOutstanding,
                September 30, 2007
            
            
            3,543,268
            
            $
            8.86





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
      September 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,* *efforts
      and clinical trials, product demand, market acceptance and other factors
      discussed below and in the Company's other SEC filings. 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 discovery and development of drugs that control cell death. 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:




21




·
            Protectans
                - modified factors of microbes that protect cells from apoptosis,
                and
                which therefore have a broad spectrum of potential applications including
                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
                treatment toxicities.





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





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 21 to 33 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. From our inception to September 30, 2008, we spent
      $39,815,429 on research and development.




**RESEARCH
      AND DEVELOPMENT**





We
      are
      highly dependent on the success of our research and development efforts and,
      ultimately, upon regulatory approval and market acceptance of our products
      under
      development.





Our
      ability to complete our research and development on schedule is, however,
      subject to a number of risks and uncertainties. Factors affecting our research
      and development include, but are not limited to:





·  the
      number and outcome of clinical studies we are planning to conduct; for example,
      our research and development expenses may increase based on the number of
      late-stage clinical studies that we may be required to conduct;





·  the
      performance of our research and development collaborators; if any research
      collaborator fails to commit sufficient resources, our preclinical or clinical
      development programs related to this collaboration could be delayed or
      terminated:





·  the
      ability to maintain and/or obtain licenses; we may have to develop alternatives
      to avoid infringing upon the patents of others, potentially causing increased
      costs and delays in product development;





·  the
      number of products entering development from late-stage research; there is
      no
      guarantee that internal research efforts will succeed in generating sufficient
      data for us to make a positive development decision or that an external
      candidate will be available on terms acceptable to us, and some promising
      candidates may not yield sufficiently positive pre-clinical results to meet
      our
      stringent development criteria;





·  the
      number of new grants and contracts awarded in the future; if the availability
      of
      research grants and contracts were curtailed, our ability to fund future
      research and development and implement technological improvements would be
      diminished, which would negatively impact our ability to fund research and
      development efforts;





·  in-licensing
      activities, including the timing and amount of related development funding
      or
      milestone payments; for example, we may enter into agreements requiring us
      to
      pay a significant up-front fee for the purchase of in-process research and
      development that we may record as research and development expense;
      or





22




·  future
      levels of revenue; research and development as a percentage of future potential
      revenues can fluctuate with the changes in future levels of revenue and lower
      revenues can lead to less spending on research and development
      efforts.





In
      addition, we have sustained losses from operations in each fiscal year since
      our
      inception in June 2003, and we may exhaust our financial resources and be unable
      to complete the development of our products due to the substantial investment
      in
      research and development, that will be required for the next several years.
      We
      expect to spend substantial additional sums on the continued research and
      development of proprietary products and technologies with no certainty that
      losses will not increase or that we will ever become profitable as a result
      of
      these expenditures.





Many
      of
      our projects are in the early stages of drug development which carry their
      own
      set of risks. Projects that appear promising in the early phases of development
      may fail to reach the market for several reasons including:





·
            pre-clinical
                or clinical study results that may show the product to be less effective
                than desired (e.g., the study failed to meet its primary objectives)
                or to
                have harmful or problematic side
                effects;





·
            failure
                to receive the necessary regulatory approvals or a delay in receiving
                such
                approvals. Among other things, such delays may be caused by slow
                enrollment in clinical studies, length of time to achieve study endpoints,
                additional time requirements for data analysis or aNew
                Drug Application/Biologic License Application,
                preparation, discussions with the Food and Drug Administration (or
                FDA),
                an FDA request for additional pre-clinical or clinical data or unexpected
                safety or manufacturing issues;





·
            manufacturing
                costs, pricing or reimbursement issues, or other factors that make
                the
                product not economical; and





·
            the
                proprietary rights of others and their competing products and technologies
                that may prevent the product from being
                commercialized.





The
      testing, marketing and manufacturing of any product for use in the United States
      will require approval from the FDA. We cannot predict with any certainty the
      amount of time necessary to obtain such FDA approval and whether any such
      approval will ultimately be granted. Preclinical and clinical trials may reveal
      that one or more products are ineffective or unsafe, in which event further
      development of such products could be seriously delayed or terminated. Moreover,
      obtaining approval for certain products may require testing on human subjects
      of
      substances whose effects on humans are not fully understood or documented.
      Delays in obtaining FDA or any other necessary regulatory approvals of any
      proposed product and failure to receive such approvals would have an adverse
      effect on the product’s potential commercial success and on our business,
      prospects, financial condition and results of operations. In addition, it is
      possible that a product may be found to be ineffective or unsafe due to
      conditions or facts that arise after development has been completed and
      regulatory approvals have been obtained. In this event, we may be required
      to
      withdraw such product from the market. To the extent that our success will
      depend on any regulatory approvals from government authorities outside of the
      United States that perform roles similar to that of the FDA, uncertainties
      similar to those stated above will also exist.





There
      are
      significant risks and uncertainties inherent in the preclinical and clinical
      studies associated with our research and development projects. As a result,
      the
      costs to complete such projects, as well as the period in which net cash
      outflows from such programs are expected to be incurred, may not be reasonably
      estimable.




**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 15-27 months.




23




·
            *Leveraging
                our relationship with leading research and clinical development
                institutions.*The Cleveland Clinic Foundation, or CCF, 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**




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
      sets
      of patent applications 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 nine members of the Eurasian Patent
      Organization and two additional countries totaling eleven overall. The issued
      patent covers the method of protecting a mammal from radiation using flagellin
      or its derivatives, including Protectan CBLB502.





We
      spent
      $11,828,423 and $4,185,678 on research and development for Protectans overall
      in
      the fiscal years ended December 31, 2007 and December 31, 2006, respectively.
      For the quarters ended September 30, 2008 and 2007 we spent $2,295,574 and
      $2,734,261, respectively. For the nine months ended September 30, 2008 and
      September 30, 2007 we spent $6,064,505 and $7,987,478, respectively. From our
      inception to September 30, 2008, we spent $23,256,915 on research and
      development for Protectans.





***Protectan
      CBLB502***




Protectan
      CBLB502 is our leading radioprotectant molecule in the protectans family.
      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.




24




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.




We
      spent
      $10,701,175 and $3,718,962 on research and development for Protectan CBLB502
      in
      the fiscal years ended December 31, 2007 and December 31, 2006, respectively.
      For the quarters ended September 30, 2008 and 2007 we spent $2,007,124 and
      $2,576,698 respectively on research and development for Protectan CBLB502.
      For
      the nine months ended September 30, 2008 and September 30, 2007, we spent
      $5,189,400 and $7,337,462 respectively on R&D for Protectan CBLB502. From
      our inception to September 30, 2008, we spent $20,546,485 on research and
      development for the biodefense applications of Protectan CBLB502.





We
      intend
      to enter into contracts to purchase Protectan CBLB502 with various U.S. and
      international government agencies as soon as the FDA approves the BLA. Future
      sales to U.S. government agencies will depend, in part, on our ability to meet
      federal contract requirements. Also, if the U.S. government makes significant
      future contract awards for the supply of its emergency stockpile to our
      competitors, our business will be harmed and it is unlikely that we will be
      able
      to ultimately commercialize our competitive product.





*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 GI 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.




Prior
        to
        our receiving final FDA approval for Protectan CBLB502 for biodefense or
        non-medical applications, we will need to complete several interim steps,
        including:
 
 ·
              Performing
                  a Phase I dose-escalation human study on a small number of volunteers.
                  We
                  expect to complete this study in March 2009 at an approximate cost
                  of
                  $1,500,000.
 
 ·
              Conducting
                  pivotal animal efficacy studies with the GMP manufactured drug
                  candidate.
                  We expect to complete these studies in mid 2010. At the present
                  time, the
                  costs of these studies cannot be approximated with any level of
                  certainty.
 
 ·
              Performing
                  a human safety study in a larger number of volunteers using the
                  dose of
                  Protectan CBLB502 previously shown to be safe in humans and efficacious
                  in
                  animals. We estimate completion of this study in late 2010 at an
                  approximate cost of $5,300,000 based on 500 subjects tested in
                  four
                  locations.
 
 ·
              Filing
                  a Biologic License Application, or BLA which we expect to complete
                  in late
                  2010. At the present time, the costs of the filing cannot be approximated
                  with any level of certainty.


25




We
      have
      successfully established cGMP quality manufacturing for Protectan CBLB502
      and it 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.




The
      FDA
      gave us permission to start safety testing on humans on August 7, 2008. The
      first healthy volunteer in the dose escalation safety study was dosed on
      October 14, 2008 .
      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 mid-2009.





We
      are
      working towards filing a
      Biologic License Application for FDA
      approval of Protectan CBLB502 for non-medical applications in 15-27 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.





On
      September 12, 2008, we were awarded
      a
      $774,183 grant from the National Institute of Allergy and Infectious Diseases
      (NIAID) of the National Institutes of Health (NIH), to further study certain
      mitigating properties of Protectan CBLB502 in the context of hematopoietic
      damage from radiation exposure. The grant program, Medical Countermeasures
      to
      Enhance Platelet Regeneration and Increase Survival Following Radiation
      Exposure, is funded through the Project BioShield Act of 2004 and administered
      by the Department of Health and Human Services.





On
      September 16, 2008, the
      Biomedical Advanced Research and Development Authority (BARDA) of the Department
      of Health and Human Services (DHHS) awarded us a contract under the Broad Agency
      Announcement titled, "Therapies for Hematopoietic Syndrome, Bone Marrow Stromal
      Cell Loss, and Vascular Injury Resulting from Acute Exposure to Ionizing
      Radiation," for selected tasks in the advanced development of Protectan CBLB502.
      The total contract value including all milestone-based options is $13.3 million
      over a three-year period, with the first year's award of $3.4 million. 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.





Protectan
      CBLB502's unprecedented efficacy, unique ability to address both hematopoietic
      and gastrointestinal damage, broad time window of use, and mitigation effects
      that do not require additional supportive care and set it apart from any other
      existing or potential therapies.





We
      spent
      $9,885,776 and $3,574,593 on research and development for the biodefense
      applications of Protectan CBLB502 in the fiscal years ended December 31, 2007
      and December 31, 2006, respectively. For the quarters ended September 30, 2008
      and 2007 we spent $1,846,094 and $2,423,658 respectively on research and
      development for biodefense applications of Protectan CBLB502. For the nine
      months ended September 30, 2008 and September 30, 2007, we spent $4,638,905
      and
      $6,927,442 respectively on research and development for biodefense applications
      of Protectan CBLB502, respectively. From our inception to September 30, 2008,
      we
      spent $18,975,288 on research and development for the biodefense applications
      of
      Protectan CBLB502.




26




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.





We
      intend
      to enter into contracts to sell Protectan CBLB502 to various U.S. government
      agencies as soon as the FDA approves the BLA. Future sales to U.S. government
      agencies will depend, in part, on our ability to meet federal contract
      requirements. Also, if the U.S. government makes significant future contract
      awards for the supply of its emergency stockpile to our competitors, our
      business will be harmed and it is unlikely that we will be able to ultimately
      commercialize our competitive product.





*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.




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




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 funded
      by
      a grant from the Department of Defense and 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.




27




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.





In
      order
      for us to receive final FDA approval for Protectan CBLB502 for medical
      applications, we will need to complete various tasks, including:





·
            Submitting
                an amendment to our CBLB502 IND application and receiving allowance
                from
                the FDA. We cannot estimate with any certainty when the FDA may allow
                the
                application. We expect to make this submission in early 2009 at an
                approximate cost of $100,000.





·
            Performing
                a Phase I/II human efficacy study on a small number of cancer patients.
                We
                expect to complete this study in the third quarter of 2010 at an
                approximate cost of $1,500,000.





·
            Performing
                an additional Phase II efficacy study on a larger number of cancer
                patients. At the present time, the costs and the scope of this study
                cannot be approximated with any level of
                certainty.





·
            Performing
                a Phase III human clinical study on a large number of cancer patients
                and
                filing a BLA with the FDA. At the present time, the costs and the
                scope of
                these steps cannot be approximated with any level of
                certainty.





We
      spent
      $815,399 and $144,369 on research and development for the medical applications
      of Protectan CBLB502 in the fiscal years ended December 31, 2007 and December
      31, 2006, respectively. For the quarters ended September 30, 2008 and 2007,
      we
      spent $161,030 and $153,040 respectively on R&D for the medical applications
      of Protectan CBLB502. For the nine months ended September 30, 2008 and September
      30, 2007, we spent $550,495 and $410,020 respectively on research and
      development for the medical applications of Protectan CBLB502. From our
      inception to September 30, 2008, we spent $1,571,197 on research and development
      for the medical applications of Protectan CBLB502.





Because
      of the uncertainties of clinical trials and the evolving regulatory requirements
      applicable to the medical applications of Protectan CBLB502, estimating the
      completion dates or cost to complete our research and development is highly
      speculative and subjective and so the estimates above are subject to change.





Nor
      can
      we be certain when any net cash flow from products validated under our research
      and development, if any, will commence. Even if we successfully develop and
      market the medical applications of Protectan CBLB502, we may not generate
      sufficient or sustainable revenue to achieve or sustain
      profitability.





***Protectan
      CBLB612***




Protectan
      CBLB612 is a proprietary synthetic analogue of mycoplasma lipopeptides 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.




28




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 than 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.





More
      recent studies demonstrated Protectan CBLB612’s ability to substantially reduce
      myelosuppression (the most common rate limiting adverse effect of chemotherapy)
      caused by a widely used chemotherapeutic drug, cyclophosphamide (Cytoxan,
      Neosar, CTX).




In
      these
      experiments, mice bearing syngeneic melanomas were treated once a week for
      two
      weeks with a 500 mg/kg, or near maximum tolerable dose, of cyclophosphamide,
      alone or in combination with Protectan CBLB612. Protectan CBLB612 was
      administered 24 hours after each cyclophosphamide administration. Complete
      blood
      counts and tumor growth were evaluated over a three-week period.




Peripheral
      white blood cell counts were in the range of normal in Protectan CBLB612 treated
      animals following two independent cyclophosphamide injections, while untreated
      animals suffered severe leukopenia. The deepest drop of white blood cells in
      the
      Protectan CBLB612 treated group on average was to 2.66x10 3 /uL
      compared to -0.432.66x10 3 /uL
      in
      the control group (p < 0.05).




Moreover,
      treatment with Protectan CBLB612 did not interfere with the anti-cancer efficacy
      of cyclophosphamide and tumor growth was equally reduced in the
      chemotherapy-treated groups regardless of co-administration with Protectan
      CBLB612.




Tumor
      growth was partially diminished in mice that received Protectan CBLB612 alone,
      compared to animals that were injected only with the vehicle control. This
      intrinsic anti-tumor effect of Protectan CBLB612 may be related to its immune
      stimulation properties.




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 second
      half of 2009 to begin human studies. The development of our Protectan CBLB612
      has been supported by a grant from the Defense Advanced Research Projects Agency
      of the Department of Defense.





In
      order
      for us to receive final FDA approval for Protectan CBLB612, we need to complete
      several interim steps, including:





·
            Conducting
                pivotal animal safety studies with GMP-manufactured
                CBLB612.





·
            Submitting
                an IND application and receiving approval from the
                FDA;





·
            Performing
                a Phase I dose-escalation human
                study;





·
            Performing
                a Phase II and Phase III human efficacy study using the dose of CBLB612
                selected from the previous studies previously shown to be safe in
                humans
                and efficacious in animals; and





·
            Filing
                a New Drug Application.





We
      spent
      $1,127,248 and $466,715 on research and development for Protectan CBLB612 in
      the
      fiscal years ended December 31, 2007 and December 31, 2006, respectively. For
      the quarters ended September 30, 2008 and 2007, we spent $288,450 and $157,563
      respectively on R&D for Protectan CBLB612. For the nine months ended
      September 30, 2008 and September 30, 2007, we spent $875,105 and $650,016
      respectively on the research and development for CBLB612, respectively. From
      our
      inception to September 30, 2008, we spent $3,031,020 on research and development
      for Protectan CBLB612. Further development and extensive testing will be
      required to determine its technical feasibility and commercial
      viability.




29




Because
      of the uncertainties at this early stage of development of Protectan CBLB612,
      estimating the completion dates or cost to complete our research and development
      would be highly speculative and subjective. The risks and uncertainties
      associated with developing our products, including significant and changing
      governmental regulation and the uncertainty of future clinical study results
      increase the difficulty associated with supplying timing and cost estimates.





Nor
      can
      we be certain when any net cash flow from products validated under our research
      and development, if any, will commence. Even if we successfully develop and
      market Protectan CBLB612, we may not generate sufficient or sustainable revenue
      to achieve or sustain profitability.




**Curaxins**




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





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 research
      and
      development 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.





We
      spent
      $4,708,773 and $2,426,014 on research and development for Curaxins overall
      in
      the fiscal years ended December 31, 2007 and December 31, 2006, respectively.
      For the quarters ended September 30, 2008 and 2007, we spent $886,852 and
      $1,087,215 respectively on R&D for Curaxins. For the nine months ended
      September 30, 2008 and September 30, 2007, we spent $2,726,527 and $2,918,940
      respectively on research and development for Curaxins. From our inception to
      September 30, 2008, we spent $11,134,247 on research and development for
      Curaxins.





30




**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).





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.




We
      intend
      to decide on the scope of future development efforts for CBLC102 once the
      results from this trial are analyzed. We anticipate that additional clinical
      efficacy studies will be required before we are able to apply for FDA approval.
      Because of the uncertainties of the scope of the remaining clinical studies,
      we
      cannot currently estimate when any development efforts may be completed or
      the
      cost of completion. Nor can we estimate when we may realize any cash flow from
      the development of Curaxin CBLC102.





We
      spent
      $2,712,521 and $1,372,998 on research and development for Curaxin CBLC102 in
      the
      fiscal years ended December 31, 2007 and December 31, 2006, respectively. For
      the quarters ended September 30, 2008 and 2007, we spent $466,088 and $626,806
      respectively on research and development for Curaxin CBLC102. For the nine
      months ended September 30, 2008 and September 30, 2007, we spent $1,431,077
      and
      $1,714,109 respectively on research and development for Curaxin CBLC102. From
      our inception to September 30, 2008, we spent $6,156,366 on research and
      development for Curaxin CBLC102.




**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.




31




We
      spent
      $1,996,252 and $1,053,016 on research and development for other Curaxins in
      the
      fiscal years ended December 31, 2007 and December 31, 2006, respectively. For
      the quarters ended September 30, 2008 and 2007, we spent $420,764 and $460,409
      respectively on R&D for other Curaxins. For the nine months ended September
      30, 2008 and September 30, 2007, we spent $1,295,449 and $1,204,831 respectively
      on research and development for other Curaxins. From our inception to September
      30, 2008, we spent $4,977,881 on research and development for other
      Curaxins.





These
      other Curaxin candidates are at a very early stage of their development and,
      as
      a result, it is premature to estimate when any development of any of them may
      be
      completed, the cost of development or when any cash flow could be realized
      from
      development.





**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 September 30,
      2008
      the securities issued in the transaction, in the aggregate, were convertible
      into or exercisable for approximately **** 5,933,975
      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 research and development 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 research
      and development program.




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, 1,277,637 shares of Series B
      Preferred were converted and $2,119,741 in dividends earned were paid as of
      September 30, 2008. At September 30, 2008 there were 3,301,373 remaining
      outstanding Series B Preferred shares for which $44,320 in dividends had been
      accrued.




32




**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, research and
      development 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 during the period that the costs
      were
      incurred.




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 as allowable research and development expenses
      are incurred during the period and according to the terms of the contract.
      Commercial development revenues are recognized when the service or development
      is delivered.




***Research
      and Development Expenses***





Research
      and development costs are expensed as incurred. These expenses consist primarily
      of our proprietary research and development efforts, including salaries and
      related expenses for personnel, costs of materials used in our research and
      development 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 research and development arrangements are
      expensed when the specific milestone has been achieved. As of September
      30 ,
      2008, $50,000
      has been paid to
      the CCF for
      milestone payments relating to the filing of an IND with the FDA for Curaxin
      CBLC102, $250,000 has been paid to
      the CCF as a
      result of commencing Phase II clinical trials for Curaxin CBLC102 and $50,000
      has been paid to
      the CCF 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 research and development expenses to
      increase as we continue to develop our drug candidates.





33





***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 20 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
      $263,284 relating to these costs incurred for the nine months ended September
      30, 2008, totaling $722,386.




***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 nine months ended September 30, 2008, the Company granted 958,380 additional
      stock options pursuant to stock award agreements. The Company recognized a
      total
      of $1,929,433 in expense related to options for the nine months ended September
      30, 2008. The Company also recaptured $1,459,425 of previously recognized
      expense due to the stock options awarded under the 2007 executive compensation
      program. 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 nine-months ended
      September 30, 2008 of $470,008.





During
      the nine months ended September 30, 2007, the Company granted 543,000 stock
      options pursuant to stock award agreements and expensed $2,745,287 related
      to
      stock options.





For
      the
      nine months ended September 30, 2008 the Company also recognized a total of
      $626,500 expense for shares issued under the Plan and a total of $54,185 in
      expense related to the amortization of restricted shares. For the nine months
      ended September 30, 2007, the Company recognized a total of $1,700,450 in
      expense for shares issued under the Plan to various consultants.




34




During
      the quarters ended September 30, 2008 and September 30, 2007, the Company
      granted 43,456 and 18,000 additional stock options pursuant to stock award
      agreements, respectively. We recognized a total of $355,800 and $395,129 in
      expense related to options for the quarters ended September 30, 2008 and
      September 30, 2007, respectively. The weighted average, estimated grant date
      fair values of stock options granted during the quarters ended September 30,
      2008 and 2007 was $2.76 and 4.95, 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.





In
      April 2008, the FASB issued FASB Staff Position No. FAS
      142-3, **“** Determination
      of the Useful Life of Intangible Assets” (“FSP FAS 142-3”).  FSP FAS 142-3
      amends the factors that should be considered in developing renewal or extension
      assumptions used to determine the useful life of a recognized intangible asset
      under FASB Statement No. 142, “Goodwill and Other Intangible Assets”. The
      FSP is intended to improve the consistency between the useful life of a
      recognized intangible asset under Statement 142 and the period of expected
      cash
      flows used to measure the fair value of the asset under SFAS 141(R) and
      other U.S. generally accepted accounting principles.  The new standard is
      effective for financial statements issued for fiscal years and interim periods
      beginning after December 15, 2008.  We are currently evaluating the
      impact, if any of FSP FAS 142-3 upon adoption on our financial
      statements.





In
      May 2008, the FASB issued SFAS No. 162, *Hierarchy
      of Generally Accepted Accounting Principles* (“SFAS
      No. 162”). SFAS No. 162 identifies the sources of accounting
      principles and the framework for selecting the principles used in the
      preparation of financial statements. SFAS No. 162 is effective 60 days
      following the SEC’s approval of the Public Company Accounting Oversight Board
      amendments to AU Section 411, The Meaning of Present Fairly in Conformity
      with Generally Accepted Accounting Principles. The implementation of this
      standard is not expected to have a material impact on our financial position
      and
      results of operations.





**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
      nine months ended September 30, 2008 and September 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.





35





**Quarter**
            
            **Quarter**
            
            **Nine Months**
            
            **Nine Months**
            
            **Year Ended**
            
            **Year Ended****Ended**
            
            **Ended**
            
            **Ended**
            
            **Ended**
            
            **December 31,**
            
            **December 31,****30-Sep-08**
            
            **30-Sep-07**
            
            **30-Sep-08**
            
            **30-Sep-07**
            
            **2007**
            
            **2006****(unaudited)**
            
            **(unaudited)**
            
            **(unaudited)**
            
            **(unaudited)**Revenues
            
            $
            1,851,419
            
            $
            660,544
            
            $
            3,202,119
            
            $
            1,617,996
            
            $
            2,018,558
            
            $
            1,708,214Operating
                expenses
            
            
            4,725,572
            
            
            5,548,149
            
            
            14,145,311
            
            
            18,631,619
            
            
            27,960,590
            
            
            9,126,315Other
                expense (income)
            
            
            6,277
            
            
            1,206,672
            
            
            (90,018
            )
            
            1,456,351
            
            
            2,058,236
            
            
            -Net
                interest expense (income)
            
            
            (49,450
            )
            
            (305,568
            )
            
            (244,593
            )
            
            (760,561
            )
            
            (1,003,766
            )
            
            (195,457
            )Net
                income (loss)
            
            $
            (2,830,980
            )
            $
            (5,787,709
            )
            $
            (10,608,581
            )
            $
            (17,709,413
            )
            $
            (26,996,502
            )
            $
            (7,222,644
            )





The
      following table summarizes research and development expenses for the quarter
      and
      nine months ended September 30, 2008 and September 30, 2007 and the years ended
      December 31, 2007 and 2006 and since inception:





**Quarter**
            
            **Quarter**
            
            **Nine Months**
            
            **Nine Months**
            
            **Year Ended**
            
            **Year Ended**
            
            **Total****Ended**
            
            **Ended**
            
            **Ended**
            
            **Ended**
            
            **December 31,**
            
            **December 31,**
            
            **Since****30-Sep-08**
            
            **30-Sep-07**
            
            **30-Sep-08**
            
            **30-Sep-07**
            
            **2007**
            
            **2006**
            
            **Inception****(unaudited)**
            
            **(unaudited)**
            
            **(unaudited)**
            
            **(unaudited)**Research
                and development
            
            $
            3,485,430
            
            $
            4,105,480
            
            $
            9,719,519
            
            $
            11,663,054
            
            $
            17,429,652
            
            $
            6,989,804
            
            $
            39,815,429General
            
            $
            303,004
            
            $
            284,004
            
            $
            928,488
            
            $
            756,636
            
            $
            892,456
            
            $
            378,113
            
            $
            5,103,677Protectan
                CBLB502 - medical applications
            
            $
            1,846,094
            
            $
            2,423,658
            
            $
            4,638,905
            
            $
            6,927,442
            
            $
            9,885,776
            
            $
            3,574,593
            
            $
            18,975,287Protectan
                CBLB502 - non-medical applications
            
            $
            161,030
            
            $
            153,040
            
            $
            550,495
            
            $
            410,020
            
            $
            815,399
            
            $
            144,369
            
            $
            1,571,197Protectan
                CBLB612
            
            $
            288,450
            
            $
            157,563
            
            $
            875,105
            
            $
            650,016
            
            $
            1,127,248
            
            $
            466,715
            
            $
            3,031,020Curaxin
                CBLC102
            
            $
            466,088
            
            $
            626,806
            
            $
            1,431,077
            
            $
            1,714,109
            
            $
            2,712,521
            
            $
            1,372,998
            
            $
            6,156,366Other
                Curaxins
            
            $
            420,764
            
            $
            460,409
            
            $
            1,295,449
            
            $
            1,204,831
            
            $
            1,996,252
            
            $
            1,053,016
            
            $
            4,977,882





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




***Revenue***




Revenue
      increased from $660,544 for the three months ended September 30, 2007 to
      $1,851,419 for the three months ended September 30, 2008 representing an
      increase of $1,190,875 or 180.3% resulting primarily from an increase in revenue
      from various federal grants and contracts including the Department of Defense
      contract and the Collaborative Research Agreement with the Roswell Park Cancer
      Institute.





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


**Revenue**
              
              **Revenue**
              
              **Revenue****2008**
              
              **2007**
              
              **2007****Period of**
              
              **(July 1 thru**
              
              **(July 1 thru****Agency**
              
              **Program**
              
              **Amount**
              
              **Performance**
              
              **Sept. 30)**
              
              **Sept. 30)****(unaudited)**
              
              **(unaudited)****DoD**
              
              
              DTRA Contract
              
              $
              1,263,836
              
              
              03/2007-02/2009
              
              $
              -
              
              $
              114,952
              
              $
              466,322**NIH**
              
              
              Phase II NIH SBIR
                  program
              
              $
              750,000
              
              
              07/2006-06/2008
              
              $
              -
              
              $
              $139,867
              
              $
              459,621**NASA**
              
              
              Phase
                  I NASA STTR program
              
              $
              100,000
              
              
              01/2006-01/2007
              
              $
              -
              
              $
              -
              
              $
              33,197**NY
                  State/RPCI**
              
              
              Sponsored
                  Research Agreement
              
              $
              3,000,000
              
              
              03/2007-02/2012
              
              $
              84,792
              
              $
              153,238
              
              $
              329,390**NIH**
              
              
              NCI
                  Contract
              
              $
              750,000
              
              
              09/2006-08/2008
              
              $
              71,363
              
              $
              132,487
              
              $
              440,028**DoD**
              
              
              DOD
                  Contract
              
              $
              8,900,000
              
              
              05/2008
                  - 09/2009
              
              $
              1,635,868
              
              $
              -
              
              $
              -**HHS**
              
              
              BARDA
                  Contract
              
              $
              13,300,000
              
              
              09/2008-09/2011
              
              $
              2,115
              
              $
              -
              
              $
              -**NIH**
              
              
              NIAID
                  Grant
              
              $
              774,183
              
              
              09/2008-02/2010
              
              $
              57,281
              
              $
              -
              
              $
              -Totals
              
              $
              1,851,419
              
              $
              540,544
              
              $
              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.




36




***Operating
      Expenses***




Operating
      expenses have historically consisted of costs relating to research and
      development and general and administrative expenses. Research and development
      expenses have consisted mainly of supporting our research and development 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 $5,548,149 for the three months ended September 30,
      2007
      to $4,725,572 for the three months ended September 30, 2008, a decrease of
      $822,577 or 14.8%. We recognized a total of $379,760 of non-cash, stock-based
      compensation for the three months ended September 30, 2008 compared to $554,279
      for the three months ended September 30, 2007. If these non-cash, stock-based
      compensation expenses were excluded, operating expenses would have decreased
      from $4,993,870 for the three months ended September 30, 2007 to $4,345,812
      for
      the three months ended September 30, 2008. This represents a decrease in
      operating expenses of $648,058 or 13.0%.





Research
      and development costs decreased from $4,105,480 for the three months ended
      September 30, 2007 to $3,485,430 for the three months ended September 30, 2008.
      This represents a decrease of $620,050 or 15.1%. We recognized a total of
      $201,848 of non-cash, stock based compensation under research and development
      costs for the three months ended September 30, 2008 compared to $96,554 for
      the
      three months ended September 30, 2007. Without the non-cash, stock-based
      compensation, the research and development expenses decreased from $4,008,926
      for the three months ended September 30, 2007 to $3,283,582 for the three months
      ended September 30, 2008; a decrease of $725,344 or 18.1%.





Selling,
      general and administrative costs decreased from $1,442,669 for the three months
      ended September 30, 2007 to $1,240,142 for the three months ended September
      30,
      2008. This represents a decrease of $202,527 or 14.0%. We recognized a total
      of
      $177,912 of non-cash, stock-based compensation under selling, general and
      administrative costs for the three months ended September 30, 2008 compared
      to
      $477,557 for the three months ended September 30, 2007. Without the non-cash,
      stock-based compensation, the selling, general and administrative expenses
      increased from $965,112 for the three months ended September 30, 2007 to
      $1,062,230 for the three months ended September 30 2008; an increase of $97,118
      or 10.1%.




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.





**Nine
      Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
      2007**




***Revenue***




Revenue
      increased from $1,617,996 for the nine months ended September 30, 2007 to
      $3,202,119 for the nine months ended September 30, 2008 representing an increase
      of $1,584,122 or 97.9% resulting primarily from an increase in revenue from
      various federal grants and contracts including the Department of Defense
      contract and the Collaborative Research Agreement with the Roswell Park Cancer
      Institute.





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




37


**Revenue**
              
              **Revenue**
              
              **Revenue****2008**
              
              **2007**
              
              **2007****Period of**
              
              **(thru**
              
              **(thru****Agency**
              
              **Program**
              
              **Amount**
              
              **Performance**
              
              **Sept. 30)**
              
              **Sept. 30)****(unaudited)**
              
              **(unaudited)****DoD**
              
              
              DTRA Contract
              
              $
              1,263,836
              
              
              03/2007-02/2009
              
              $
              323,826
              
              $
              466,322
              
              $
              466,322**NY
                  State/RPCI**
              
              
              Sponsored
                  Research Agreement
              
              $
              3,000,000
              
              
              03/2007-02/2012
              
              $
              239,503
              
              $
              153,238
              
              $
              329,390**NIH**
              
              
              Phase
                  II NIH SBIR program
              
              $
              750,000
              
              
              07/2006-06/2008
              
              $
              77,971
              
              $
              280,461
              
              $
              459,621**NIH**
              
              
              NCI
                  Contract
              
              $
              750,000
              
              
              09/2006-08/2008
              
              $
              228,579
              
              $
              394,780
              
              $
              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
              
              $
              1,862,769
              
              $
              -
              
              $
              0**HHS**
              
              
              BARDA
                  Contract
              
              $
              13,300,000
              
              
              09/2008-09/2011
              
              $
              2,115
              
              $
              -
              
              $
              -**NIH**
              
              
              NIAID
                  Grant
              
              $
              774,183
              
              
              09/2008-02/2010
              
              $
              57,281
              
              $
              -
              
              $
              -Totals
              
              $
              3,082,119
              
              $
              1,327,997
              
              $
              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 $18,631,619 for the nine months ended September 30,
      2007
      to $14,145,311 for the nine months ended September 30, 2008, a decrease of
      $4,486,308 or 24.1%. We recognized a total of $1,150,692 of non-cash,
      stock-based compensation for the nine months ended September 30, 2008 compared
      to $4,445,737 for the nine months ended September 30, 2007. If these non-cash,
      stock-based compensation expenses were excluded, operating expenses would have
      decreased from $14,185,882 for the nine months ended September 30, 2007 to
      $12,994,619 for the nine months ended September 30, 2008. This represents a
      decrease in operating expenses of $1,191,263 or 8.4%.





Research
      and development costs decreased from $11,663,054 for the nine months ended
      September 30, 2007 to $9,719,519 for the nine months ended September 30, 2008.
      This represents a decrease of $1,943,535 or 16.7%. We recognized a total of
      $416,750 of non-cash, stock based compensation under research and development
      costs for the nine months ended September 30, 2008 compared to $711,296 for
      the
      nine months ended September 30, 2007. Without the non-cash, stock-based
      compensation, the research and development expenses decreased from $10,951,758
      for the nine months ended September 30, 2007 to $9,302,769 for the nine months
      ended September 30, 2008; a decrease of $1,648,989 or 15.1%.





Selling,
      general and administrative costs decreased from $6,968,565 for the nine months
      ended September 30, 2007 to $4,425,792 for the nine months ended September
      30,
      2008. This represents a decrease of $2,542,773 or 36.5%. We recognized a total
      of $733,942 of non-cash, stock-based compensation under selling, general and
      administrative costs for the nine months ended September 30, 2008 compared
      to
      $3,754,273 for the nine months ended September 30, 2007. Without the non-cash,
      stock-based compensation, the selling, general and administrative expenses
      increased from $3,214,292 for the nine-months ended September 30, 2007 to
      $3,691,850 for the nine months ended September 30, 2008; an increase of $477,558
      or 14.9%. 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.




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.




38




***Operating
      Expenses***





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, 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 research and development
      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 research and development 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, stock based compensation for research and development
      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 research
      and development 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%.





**Liquidity
      and Capital Resources**




We
      have
      incurred annual operating losses since our inception, and, as of September
      30,
      2008, we had an accumulated deficit of $52,545,054. 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 research
      and development 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 $8,903,451 for the nine months ended
      September 30, 2008, compared to $10,796,750 used in operating activities for
      the
      nine months ended September 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 research and
      development activities and maintaining and improving the infrastructure
      necessary to support these research and development activities.




Net
      cash
      used in investing activities was $416,537 for the nine months ended September
      30, 2008 and net cash used in investing activities was $238,716 for the nine
      months ended September 30, 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 purchasing capital assets and investing in intellectual
      property.




39




Net
      cash
      used in financing activities totaled $1,226,032 for the nine months ended
      September 30, 2008, compared to net cash provided by financing activities of
      $28,252,029 for the nine months ended September 30, 2007. The decrease in cash
      provided by financing activities was attributed to the payment of dividends
      in
      the first nine 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 nine 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
      September 30, 2008, we have paid $50,000 for the milestone payment relating
      to
      the filing of the IND application for Curaxin CBLC102, $250,000 for commencing
      Phase II clinical trials for Curaxin CBLC102 and $50,000 for the filing of
      an
      IND application for Protectan CBLB502. The $50,000 milestone payment for Curaxin
      CBLC102 was made May 3, 2007, the $250,000 milestone was paid on August 21,
      2007
      and the $50,000 milestone for Protectan CBLB502 was made on August 27, 2008
      as
      per the terms of the agreement.





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 research and development 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.





To
      meet
      our longer term cash requirements, we may be required to issue equity or debt
      securities or enter into other financial arrangements, including relationships
      with corporate and other partners. 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
      recent decline in the market value of certain securities backed by residential
      mortgage loans has led to a large liquidity crisis affecting the broader U.S.
      housing market, the financial services industry and global financial markets.
      Investors holding many of these and related securities have experienced
      substantial decreases in asset valuations and uncertain secondary market
      liquidity. Furthermore, credit rating authorities have, in many cases, been
      slow
      to respond to the rapid changes in the underlying value of certain securities
      and pervasive market illiquidity, regarding these securities. As a result,
      this
“credit crisis” may have a potential impact on our ability to raise sufficient
      equity capital or substantially raise the cost of additional
      capital.




***Impact
      of Inflation***




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





40





***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
      September 30, 2008, we are obligated to make payments under the agreement of
      1,033,262 Euros and 281,548 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 September 30, 2008, the Company has commitments for 100,000
      Euros and 0 GBP




***Off-Balance
      Sheet Arrangements***




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





41





**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 September 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 September 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
      September 30, 2008 that has materially affected, or is reasonably likely to
      materially affect, our internal control over financial reporting.








42





**PART
      II** **-** **Other
      Information**





**Item
      1. Legal Proceedings**




As
      of September 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**





None.





**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





43





**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:
                November 14, 2008
            By:
            /s/
                MICHAEL FONSTEINMichael
                Fonstein
              Chief
                Executive Officer
              (Principal
                Executive Officer)Dated:
                November 14, 2008
            By:
            /s/
                JOHN A. MARHOFER, JR.John
                A. Marhofer, Jr.
              Chief
                Financial Officer
              (Principal
                Financial Officer)





44