**SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
 
 **FORM
        10-KSB**
 
 (Mark
        One)
 
 **x
        ANNUAL REPORT UNDER
        SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF**
 **1934**
 
 For
        the
        fiscal year ended May 31, 2006
 
 o
        TRANSITION REPORT UNDER
        SECTION 13 OR 15(d) OF THE SECURITIES
 **EXCHANGE
        ACT OF 1934**
 
 For
        the
        transition period from ______  to ______
 
 Commission
        file number 000-28385
 
 **Protalex,
        Inc.**
 (Name
        of
        small business issuer in its charter)
  Delaware
                (State
                  or other jurisdiction of
                Incorporation
                  or organization)
              
              91-2003490
                (I.R.S.
                  Employer Identification No.)145
                  Union Square Drive
              
              New
                  Hope, PA 18938(Address
                  of principal executive offices)
              
              (Zip
                  Code)
  (215)
                  862-9720
                (Issuer’s
                  telephone number)
 
 Securities
        registered under Section 12(b) of the Exchange Act:
 
 Title
                  of each class
              
              Name
                  of each exchange on which registeredNone
              
              None
 
 Securities
        registered under Section 12(g) of the Exchange Act:
 
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        Stock
 (Title
        of
        Class)
 
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        whether the issuer is not required to file reports pursuant to Section 13
        or
        15(d) of the Exchange Act o
  Check
        whether the issuer (1) filed all reports required to be filed by Section 13
        or 15(d) of the Exchange Act during the past 12 months (or for such shorter
        period that the registrant was required to file such reports), and (2) has
        been subject to such filing requirements for the past 90 days.
 
 Yes
xNo o
 
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        if
        there is no disclosure of delinquent files in response to Item 405 of
        Regulation S-B is not contained in this form, and no disclosure will be
        contained, to the best of registrant’s knowledge, in definitive proxy or
        information statements incorporated by reference in Part III of this Form
        10-KSB or any amendment to this Form 10-KSB. x
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). Yes o No  x
 
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        issuer’s revenues for its most recent fiscal year. $ 0
 
 State
        the
        aggregate market value of the voting and non-voting common equity held by
        non-affiliates computed by reference to the price at which the common equity
        was
        sold, or the average bid and asked price of such common equity, as of a
        specified date within the past 60 days. (See definition of affiliate in
        Rule 12b-2 of the Exchange Act.) $62,880,988 as of July 24,
        2006.
 
 Note:
        If
        determining whether a person is an affiliate will involve an unreasonable
        effort
        and expense, the issuer may calculate the aggregate market value of the common
        equity held by non-affiliates on the basis of reasonable assumptions, if
        the
        assumptions are stated.
 
 State
        the
        number of shares outstanding of each of the issuer’s classes of common equity,
        as of the latest practicable date 28,490,964 as of July 24, 2006.
 
 Transitional
        Small Business Disclosure Format (check one):
 
 Yes
o No  x
 Documents
        Incorporated by Reference
 
 Portions
        of the Definitive Proxy Statement for the 2006 Annual Meeting of Stockholders
        (which will be filed within 120 days after the close of the Company’s
        fiscal year ended May 31, 2006) are incorporated herein by reference. With
        the exception of those portions which are specifically incorporated by
        referenced in this Annual Report on Form 10-KSB, the Proxy Statement for
        the
        2006 Annual Meeting of Stockholders is not deemed to be filed as a part of
        this
        Report.
  
  **Table
        of Contents**
  **Page****ITEM
                  1 - DESCRIPTION OF BUSINESS**
              2**ITEM
                  2 - DESCRIPTION OF PROPERTY**
              15**ITEM
                  3 - LEGAL PROCEEDINGS**
              15**ITEM
                  4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS**
              15**ITEM
                  5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
                  MATTERS**
              15**ITEM
                  6 - MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
                  OPERATION**
              16**ITEM
                  7 - FINANCIAL STATEMENTS**
              19**BALANCE
                  SHEETS**
              20**STATEMENTS
                  OF OPERATIONS**
              21**STATEMENT
                  OF CHANGES IN STOCKHOLDERS’ EQUITY**
              22**STATEMENTS
                  OF CASH FLOWS**
              25**NOTES
                  TO FINANCIAL STATEMENTS**
              26**ITEM
                  8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND
                  FINANCIAL DISCLOSURE**
              33**ITEM
                  8A - CONTROLS AND PROCEDURES**
              33**ITEM
                  8B - OTHER INFORMATION**
              33**ITEM
                  9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
                  PERSONS;**
              33**ITEM
                  10 - EXECUTIVE COMPENSATION**
              34**ITEM
                  11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
                  AND
                  RELATED STOCKHOLDERS’ MATTERS**
              34**ITEM
                  12 - CERTAIN RELATIONSHIPS AND RELATED
                  TRANSACTIONS**
              34**ITEM
                  13 - INDEX TO EXHIBITS**
              35**ITEM
                  14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES**
              37**SIGNATURES**
              38**CERTIFICATION
                  OF CHIEF EXECUTIVE OFFICER****CERTIFICATION
                  OF CHIEF FINANCIAL OFFICER****CERTIFICATION
                  OF CHIEF EXECUTIVE OFFICER****CERTIFICATION
                  OF CHIEF FINANCIAL OFFICER**
  References
        in this report to “we,” “us”, “our” “the Company” and “Protalex” refer to
        Protalex, Inc., a Delaware corporation, unless the context requires
        otherwise.
  i
  **NOTICE
        ABOUT FORWARD-LOOKING STATEMENTS**
  This
        report and the documents incorporated by reference into this report contain
        “forward-looking statements” within the meaning of Section 27A of the Securities
        Act of 1933 and Section 21E of the Securities Exchange Act of 1934. To the
        extent that the information presented in this report discusses financial
        projections, information or expectations about Protalex’s business plans,
        results of operations, products or markets, or otherwise makes statements
        about
        future events, such statements are forward-looking. Words such as “may,” “will,”
“should,” “could,” “would,” “predicts,” “potential,” “continue,” “future,”
“intends,” “anticipates,” “believes,” “estimates,” “projects,” “forecasts,”
“expects,” “plans” and “proposes” and similar expressions, as well as statements
        in future tense, identify forward-looking statements. Forward looking statements
        include, without limitation:
  ·
              statements
                  about our product development and commercialization goals and
                  expectations;  ·
              potential
                  market opportunities;  ·
              our
                  plans for and anticipated results of our clinical development
                  activities;  ·
              the
                  potential advantage of our product
                  candidates;  ·
              statements
                  about our future capital requirements, the sufficiency of our capital
                  resources to meet those requirements and the expected composition
                  of our
                  capital resources; and  ·
              other
                  statements that are not historical
                  facts.
  Forward-looking
        statements are based on the judgment of management at the time the statements
        are made. Inaccurate assumptions and known and unknown risks and uncertainties
        can affect the accuracy of forward-looking statements. These include, among
        others, the cautionary statements in the “Risk Factors” and Protalex, Inc.
“Management’s Discussion and Analysis or Plan of Operation” sections of this
        report. These cautionary statements identify important factors that could
        cause
        actual results to differ materially from those described in the forward-looking
        statements. When considering forward-looking statements in this prospectus,
        you
        should keep in mind the cautionary statements in the “Risk Factors” and
        Protalex, Inc. “Management’s Discussion and Analysis or Plan of Operation”
sections, and other sections of this report.
  Investors
        should not unduly rely on these forward-looking statements, which speak only
        as
        of the date of this report. Protalex undertakes no obligation to publicly
        update
        any forward-looking statement to reflect new information, events or
        circumstances, whether anticipated or unanticipated, or to conform the statement
        to actual results or changes in Protalex’s expectations.
  -1-
  **ITEM
        1 - DESCRIPTION OF BUSINESS**
 
 **Overview**
  In
        September 1999, Protalex acquired a majority of the issued and outstanding
        shares of common stock of Enerdyne from Don Hanosh, pursuant to a Stock Purchase
        Agreement between Protalex, Enerdyne and Mr. Hanosh. In November 1999, Protalex
        merged with and into Enerdyne pursuant to a Merger Agreement and Plan of
        Reorganization, and Enerdyne changed its name to Protalex, Inc. After the
        merger, Protalex’s former stockholders held approximately 92% of the shares of
        our common stock, and Enerdyne’s former stockholders held approximately 8% of
        the shares of our common stock. On December 1, 2004, Protalex, Inc., a New
        Mexico corporation, consummated a merger with and into its newly-formed,
        wholly-owned subsidiary, Protalex Delaware, in order to reincorporate in
        the
        State of Delaware. Our authorized capital stock consists of 100,000,000 shares
        of $0.00001 par value common stock.
  We
        are a
        development stage company engaged in developing a class of biopharmaceutical
        drugs for treating autoimmune and inflammatory diseases. Our lead product,
        PRTX-100, has demonstrated effectiveness in pre-clinical studies in regulating
        the immune system with persisting effects. However, the effectiveness of
        PRTX-100 shown in pre-clinical studies using animal models may not be predictive
        of the results that we will see in our clinical trials. We currently have
        no
        product on the market. We are initially targeting the autoimmune diseases
        idiopathic thrombocytopenic purpura or ITP and Rheumatoid Arthritis, or
        RA.
  ITP
        is an
        uncommon autoimmune bleeding disorder characterized by too few platelets
        in the
        blood. Affected individuals may have bruising, small purple marks on the
        skin
        called petechiae, bleeding from the gums after having dental work, nosebleeds
        or
        other bleeding that is hard to stop, and in women, heavy menstrual bleeding.
        Although bleeding in the brain is rare, it can be life threatening if it
        occurs.
        The affected individuals make antibodies against their own platelets leading
        to
        the platelets' destruction, which in turn leads to the abnormal bleeding.
  RA
        is an
        autoimmune disease that causes the inflammation of the membrane lining multiple
        joints, resulting in pain, stiffness, warmth, redness and swelling. The inflamed
        joint lining, the synovium, can invade and damage bone and cartilage.
        Inflammatory cells release enzymes and cytokines that may damage bone and
        cartilage. The involved joint can lose its shape and alignment, resulting
        in
        pain and loss of movement. According to the National Institute of Health,
        scientists estimate that RA affects approximately 2.1 million Americans.
        According to the Merck Manual of Health & Aging, RA affects about 1% of the
        population worldwide.
  Our
        bioregulatory compounds are based on the principle of normalizing the activities
        of immune cells at a more basic level than traditional pharmaceutical agents,
        which act upon the end products of complex body functions. In autoimmune
        disease
        models, PRTX-100, which is a natural compound, has reversed the pathologic
        process resulting in a restoration and maintenance of normal healthy tissue.
        We
        intend to bring this biotechnology to bear on a range of serious autoimmune
        diseases that affect millions of sufferers worldwide, for indications such
        as
        pemphigus, Graves’ disease, antiphospholipid syndrome, systemic lupus
        erythematosus or lupus, psoriasis, inflammatory bowel diseases such as Crohn’s
        disease and ulcerative colitis, insulin-dependent diabetes mellitus, and
        multiple sclerosis. To date, however, we have not conducted any pre-clinical
        trials related to the treatment of these diseases and to do so would require
        substantial additional capital infusions.
  We
        are
        creating a class of human pharmaceuticals from organic molecules to regulate
        the
        immune system with persisting effects. We plan to bring to market our lead
        product, PRTX-100, a drug designed to combat the effects of ITP, RA and,
        potentially, other autoimmune diseases. We have completed pre-clinical studies
        on PRTX-100 and filed an Investigational New Drug, or IND, application with
        the
        United States Food and Drug Administration or FDA, on March 4, 2005. On March
        31, 2005, the FDA verbally disclosed to us that it had placed our IND on
        clinical hold, pending additional product characterization. On August 10,
        2005,
        we formally replied to the FDA. On September 9, 2005, the FDA notified us
        that
        it had lifted the clinical hold on our IND and that our proposed study could
        proceed. We commenced with the Phase I clinical trial on December 5, 2005
        and
        completed that Phase I clinical trial in March 2006. We anticipate that the
        Phase II in ITP will commence before the end of calendar year 2006.
  We
        are
        also broadening our intellectual property and developing our management team,
        facilities and operational infrastructure for commercialization of our products.
        Our business and laboratory operations are located in New Hope, Pennsylvania.
        We
        also outsource some of our activities to premier contract organizations and
        facilities. For example, we are in the process of completing the manufacturing
        of PRTX-100 under Current Good Manufacturing Practices, or cGMP, in quantities
        we believe are sufficient for the upcoming Phase II clinical trial in ITP.
        We
        also plan to contract with a third-party contract research organization to
        run
        our clinical trials in the United States and potentially in international
        locations.
  -2-
  Our
        in-house research includes demonstrating the efficacy of PRTX-100 in well
        established and characterized animal models of RA and other autoimmune diseases.
        For example, we have tested PRTX-100 in murine collagen induced arthritis,
        or
        CIA, model of human RA. This is the model that was used to test the efficacy
        of
        the FDA approved drug, etanercept, or Enbrel®. PRTX-100 has also demonstrated
        its efficacy in an animal model of systemic lupus erythematosus. Our scientists
        are also investigating the mechanism of action and developing a
        second-generation class of compounds. Our laboratory personnel are also
        developing analytical methods to screen derivative compounds for bioactivity,
        measure drug concentrations in the blood, and measure systemic effects to
        be
        used in evaluating the efficacy and safety data in human clinical trials.
  Pre-clinical
        safety studies for PRTX-100 have been conducted and no evidence of abnormal
        clinical reactions or toxicity had been observed. These studies and the
        pre-clinical efficacy studies were the foundation for the IND application.
        IND-related activities included manufacturing and formulation of PRTX-100
        for
        animal toxicity testing, arranging for packaging and testing, designing clinical
        trial protocols, and planning the clinical trials with physicians who will
        be
        investigators in the trials.
  In
        March
        2006, we completed our Phase I trial of our lead compound, PRTX-100 in humans.
        This Phase I trial was performed in healthy volunteers, and was designed
        primarily to assess the safety and tolerability of PRTX-100. The basic safety
        data demonstrated that PRTX-100 was safe and well tolerated. There were no
        deaths or serious adverse events. The pharmacokinetic profile was favorable
        and
        the pre-clinical pharmacokinetic data were confirmed by the data in this
        Phase I
        trial.
  We
        have
        concluded eight prior private placements of our common stock, raising a total
        of
        $42.2 million in the aggregate and carrying us through basic research,
        pre-clinical and early stage clinical trials. **** The
        most
        recent private placement in July 2006 raised approximately $15.2 million. Since
        we
        have completed our Phase I clinical trial and have started the planning process
        for the Phase II clinical trial, we anticipate that we will need to raise
        additional capital in fiscal year 2009 to fund the ongoing FDA approval
        process .
  As
        our
        lead product moves closer to the marketing stage, we intend to look for
        opportunities to enter into collaborative arrangements with larger strategic
        partners to market and sell our products in the United States and in foreign
        markets. We anticipate seeking out partners who would be responsible for
        funding
        or reimbursing all or a portion of the costs of pre-clinical and/or clinical
        trials required to obtain regulatory approval. In return for such payments,
        we
        could grant these partners rights to market certain of our products in
        particular geographical regions. We are also evaluating the alternative approach
        of pursuing our programs independently with the intention of becoming a fully
        integrated biopharmaceutical company.
  **About
        Bioregulation**
  The
        immune system exists to protect the body from foreign agents such as bacteria
        and viruses. In a normal functioning system, a complex set of interactions
        results in the destruction of these outside bodies. An important aspect of
        this
        process is the ability to recognize self, or normal tissue, from non-self,
        or
        foreign agents. Autoimmune diseases such as ITP, RA and others result when
        this
        self-recognition goes awry and the immune system mistakenly identifies normal
        tissue as foreign. In RA, the dysregulation of the immune system causes the
        joint lining to form invasive tissue that degrades cartilage and bone. With
        the
        current treatments available, prevention of long-term damage in RA requires
        ongoing indefinite drug therapy. The vast majority of FDA approved drugs
        for the
        treatment of RA carry significant side effects such as potential infections
        and
        development of cancer. They generally target specific products of the immune
        response that are formed well after the system has lost its ability to
        self-regulate. We believe our bioregulatory compound PRTX-100 has the potential
        to restore normal immune response by targeting the disease at its source.
  We
        have
        discovered a method of “restoring” the immune system through the use of a
        natural compound called PRTX-100, which has been shown to have minimal side
        effects at treatment dosages in animal studies. It also has been shown to
        work
        very early in the immune response to prevent the activation of lymphoid cells
        and the secretion of pathogenic cytokines. In the animal model specifically
        designed to evaluate the efficacy of anti-arthritic drugs, PRTX-100 has not
        only
        inhibited the development of inflammation, but also repaired and/or reversed
        the
        tissue damage caused by inflammatory response.
  -3-
  **Animal
        Studies**
  PRTX-100
        has proven effective in two clinical standard mouse autoimmune models:
  *Collagen-Induced
        Arthritis* —PRTX-100
        has
        demonstrated reproducible efficacy in a well-established animal model of
        RA.
        Mice received two injections of collagen in order to stimulate an inflammatory
        response. One group was treated with various doses of PRTX-100, a second
        group
        received Enbrel®, a leading commercially available treatment for RA, and the
        control group was injected with vehicle saline solution. The mice were observed
        for clinical symptoms, joint size and loss of function. The results showed
        that
        very low doses of PRTX-100 and standard doses of Enbrel® suppressed clinical
        symptoms including joint swelling over the first two to three weeks of
        treatment, and slowed disease progression as compared with the control group.
        Thereafter, the PRTX-100-treated mice continued to remain disease-free whereas
        the mice treated with Enbrel® showed a resumption of joint inflammation and
        tissue damage. This response to Enbrel® was expected because the mice developed
        immune response to it because it is a foreign protein. Overall, these results
        indicate that PRTX-100 is a potential treatment for RA in humans. The data
        from
        these studies has been used to serve as a rationale for conducting clinical
        trials in human patients.
  *BXSB
        Mice* —
These
        animals are genetically predisposed to autoimmune diseases. This model is
        used
        to evaluate drugs for autoimmune diseases such as lupus, Crohn’s disease and
        other autoimmune diseases. This genetic model more closely approximates the
        human condition in that it is complex, multi-factorial and usually treated
        by
        multiple drug regimens. In these studies, mice were treated with PRTX-100
        and
        sacrificed at regular intervals. Their organs were weighed and sectioned
        for
        histological analysis and their spleens were used for immunological assays.
        Spleen enlargement, or splenomegaly, was significantly reduced in treated
        animals compared with the controls at almost every time point, demonstrating
        the
        ability of PRTX-100 to delay the onset and severity of this disease. Treatment
        with PRTX-100 also reduced non-specific immunoglobulin production and specific
        autoantibody production and restored the number and function of immune cells
        known as T and B lymphocytes. These results represent improvement in a whole
        animal setting in this complex disease syndrome.
  Completed
        pre-clinical safety studies in animals have shown no drug-related toxicity.
        The
        studies were conducted in New Zealand white rabbits which are a very sensitive
        model to show any potential toxicity of immunomodulatory drugs such as PRTX-100.
        All of the animals in this study survived to scheduled euthanasia. No
        differences were observed in body weight gain or food consumption, nor in
        hematology, clinical chemistry, urinalysis, or organ weight data in animals
        treated with PRTX-100 compared with controls treated with vehicle, or the
        same
        dilutive material less PRTX-100. These study results were a crucial component
        of
        our IND application with the FDA.
  We
        have
        performed additional studies in non-human primates to determine the
        pharmacokinetics of PRTX-100. The results of those studies have indicated
        more
        favorable dosing schedules due to longer half lives than studies obtained
        from
        rodents. Since non-human primates are more closely related to humans, we
        decided
        to perform additional toxicology studies in monkeys to establish the toxicity
        and starting doses in humans.
  **Manufacturing**
  We
        have
        in the past contracted the manufacturing of our lead drug substance PRTX-100
        to
        Eurogentec S.A. in Belgium. The formulation, stability testing and packaging
        of
        the final product for clinical supplies are conducted at another reputable
        FDA-approved company in the United States. These companies have provided
        the
        product for both toxicological testing and clinical supplies. The drug is
        produced under cGMP. We believe that this entire process is scaleable to
        commercial production but will require additional manufacturing
        resources.
  **Markets**
  ITP
        is an
        uncommon autoimmune bleeding disorder characterized by too few platelets
        in the
        blood. Affected individuals may have bruising, small purple marks on the
        skin
        called petechiae, bleeding from the gums after having dental work, nosebleeds
        or
        other bleeding that is hard to stop, and in women, heavy menstrual bleeding.
        Although bleeding in the brain is rare, it can be life threatening if it
        occurs.
        The affected individuals make antibodies against their own platelets leading
        to
        the platelets' destruction, which in turn leads to the abnormal bleeding.
        According to the Platelet Disorders Support Association, approximately 200,000
        individuals are affected by ITP, with women affected approximately three
        times
        as often as men. It can affect all ages and ethnic groups, and about 50%
        of the
        new cases occur in children. Current treatment includes corticosteroids and
        removal of the spleen. Although most cases can be controlled with therapy,
        the
        treatments can have significant side effects and there is currently no broadly
        effective curative therapy.
  -4-
  RA
        will
        continue to be a long term focus. RA was chosen as a target disease because
        it
        represents a well-defined, rapidly growing market for which most available
        treatments are expensive. Many patients may either not respond to existing
        drugs
        or have dose-limiting toxicities. Therefore, there remains a significant
        unmet
        need in RA. If approved, we anticipate that PRTX-100 will provide these patients
        with a choice of therapy that is efficacious, cost-effective, and has a highly
        favorable benefit-risk ratio.
  RA
        is a
        serious autoimmune disorder that causes the body’s immune system to mistakenly
        produce antibodies that attack the lining of the joints, resulting in
        inflammation and pain. RA can lead to joint deformity or destruction, organ
        damage, disability and premature death. Navigant Consulting estimated that
        the
        RA market for 2006 would surpass $6.2 billion and estimates that it will
        increase to $14.8 billion by the end of 2009.
  Currently,
        no uniformly effective treatment for RA exists. Current treatments are costly,
        and in most cases must be continued for decades. In contrast, we believe
        that
        bioregulator therapy such as PRTX-100 would be potentially much more
        cost-effective and efficacious. We anticipate that our products will potentially
        be used to treat patients with moderate to severe cases of RA, and particularly
        those individuals for whom other treatments have failed However, the information
        gained in the laboratory on the mechanism of action of PRTX-100 suggests
        potential efficacy in a broad range of autoimmune diseases, which in total
        cause
        significant morbidity and mortality.
  Another
        objective is the development of second-generation compounds to add to our
        pharmaceutical product portfolio. The characterization of the new compounds
        is
        underway and the patent application process is ongoing.
  Additionally,
        our goal is to pursue FDA approval to treat other autoimmune diseases, where
        the
        drugs’ ability to decrease the inflammatory response will abrogate the
        underlying disease processes. The BXSB animal model is a generalized autoimmune
        model, so efficacy in pre-clinical trials shows promise in treating other
        autoimmune diseases. **** We
        intend
        to begin pre-clinical studies in autoimmune diseases other than RA during
        fiscal
        year 2007.
  **Competition**
  We
        believe, based on the pre-clinical trials and the result of the Phase I clinical
        trial, that our compound, PRTX-100, has a potential competitive advantage,
        as it
        may require lower doses and has the potential to be more convenient, safer
        and
        more efficacious than existing therapies. This potential advantage has not
        yet
        been, and may not ever be, validated in clinical trials. Current RA treatments
        are characterized by complex manufacturing methods and have resulted in an
        average annual retail cost of approximately $10,000 to $30,000 per patient,
        according to an article entitled “ Adalimumab:
        The First Entirely Human Monoclonal Antibody for Rheumatoid
        Arthritis ,”
by
        pharmacists Alicia Mack and Jessica Neely, as well as Thompson Micromedix
        respectively. A number of pharmaceutical agents are currently being used,
        with
        varying degrees of success, to control the signs and symptoms of RA and slow
        its
        progression. Available treatment options include:
  ·
            Analgesic/anti-inflammatory
                preparations, ranging from simple aspirin to the COX-2 inhibitors;  ·
            Immunosuppressive/antineoplastic
                drugs, including azathioprine and methotrexate;  ·
            TNF
                (Tumor Necrosis Factor) inhibitors, also known as anti-TNF therapy,
                currently represented by etanercept (Enbrel®), infliximab (Remicade®), and
                adalimumab (Humira®);  ·
            Soluble
                Interleukin-l (IL-I) Receptor Therapy, Anakinra (Kineret®).  ·
            Costimulatory
                molecule inhibitor (abatacept, Orencia® Anti CD20 therapy, and rituximab
                (Rituxan®)  ·
            “Immunoadsorption
                Therapy,” also known as Prosorba®, now in limited use in Europe and the
                United States, entailing weekly sessions during which a patient’s blood is
                separated and passed through a molecular filter. The use of such
                extreme
                treatment modalities emphasizes the unmet need for a new treatment
                for
                patients who cannot respond to existing therapies.   -5-
  Many
        large and small pharmaceutical companies are active in this market, with
        Amgen
        Corporation and Johnson & Johnson, Inc. dominating the market with their
        respective products, Enbrel® and Remicade®. According to MedAd News dated June
        2006, Enbrel®, a soluble receptor construct that is administered subcutaneously,
        generated estimated revenue of $3.7 billion, Remicade®, a chimeric monoclonal
        antibody administered by intravenous infusion, generated estimated revenue
        of
        $3.5 billion in 2005, and Abbot’s Humira®, generated estimated revenue of $1.4
        billion in 2005. Another recent entrant into the RA market is a less well-known
        product by Amgen Corporation, Anakinra (Kineret®).
  Post-marketing
        experience has indicated an enhanced risk for serious and opportunistic
        infections in patients treated with TNF inhibitors. Disseminated tuberculosis
        due to reactivation of latent disease was also seen commonly with in clinical
        trials of TNF inhibitors. There is also a possibly increased risk of lymphoma
        in
        patients treated with TNF inhibitors. TNF inhibitors are not recommended
        in
        patients with demyelinating disease or with congestive heart failure. Transient
        neutropenia or other blood dyscrasias have been reported with Enbrel® and the
        other TNF inhibitors. There was also an increased risk of serious infections
        with rituximab therapy in clinical trials, and abatacept has also been
        associated with an increased risk of serious infections. Findings such as
        these
        indicate that new and safer treatments for autoimmune diseases such as RA
        are
        needed. The Company anticipates that PRTX-l00 and its other products will
        provide such opportunity, but there can be no assurance that such results
        will
        occur.
  There
        are
        two companies that are developing thrombopietin agonists for treating ITP.
        GlaxoSmithKline’s drug #497115 and Amgen’s AMG 531 are both in Phase II clinical
        trials.
  If
        a
        patent is issued under our U.S. patent application, that patent may be a
        potential barrier to entry that could prevent competitors from implementing
        the
        same procedures as we have completed. However, we may be unable to protect
        these
        proprietary rights. See the risk factor titled “If we are unable to obtain,
        protect, and maintain our proprietary rights in intellectual property, we
        may
        not be able to compete effectively or operate profitably” on page 9 of this
        report.
  **Government
        Regulation**
  Our
        ongoing research and development activities, and our future manufacturing
        and
        marketing activities, are subject to extensive regulation by numerous
        governmental authorities, both in the United States and in other countries.
        In
        the United States, the FDA regulates the approval of our products under the
        authority of the Federal Food, Drug and Cosmetics Act.
  In
        order
        to obtain FDA approval of our drugs, extensive pre-clinical and clinical
        tests
        must be conducted and a rigorous clearance process must be completed. Final
        approval by the FDA for safety and efficacy may take several years and require
        the expenditure of substantial resources.
  Clinical
        studies are typically conducted in three sequential phases, although these
        phases may overlap. In Phase I trials, a drug is tested for safety in one
        or
        more doses in a small number of patients or healthy volunteers. In Phase
        II
        trials, efficacy and safety are tested in up to several hundred patients.
        Phase
        III trials involve additional safety, dosage and efficacy testing in an expanded
        patient population at multiple test sites.
  -6-
  The
        results of the pre-clinical and clinical trials are submitted to the FDA
        in the
        form of a Biological License Application, or BLA. The approval of a BLA may
        take
        substantial time and effort. In addition, upon approval of a BLA, the FDA
        may
        require post marketing testing and surveillance of the approved product,
        or
        place other conditions on their approvals.
  Sales
        of
        new drugs outside the United States are subject to foreign regulatory
        requirements that differ from country to country. Foreign regulatory approval
        of
        a product must generally be obtained before that product may be marketed
        in
        those countries.
  We
        and
        any third-party manufacturers or suppliers must continually adhere to federal
        regulations setting forth requirements, known as current good manufacturing
        practices, or cGMP, and their foreign equivalents, which are enforced by
        the FDA
        and other national regulatory bodies through their facilities inspection
        programs. If our facilities, or the facilities of our manufacturers or
        suppliers, cannot pass a preapproval plant inspection, the FDA will not approve
        the marketing of our product candidates. In complying with cGMP and foreign
        regulatory requirements, we and any of our potential third-party manufacturers
        or suppliers will be obligated to expend time, money and effort in production,
        record-keeping and quality control to ensure that our products meet applicable
        specifications and other requirements.
  **Patents,
        Trademarks, and Proprietary Technology**
  Our
        success will depend on our ability to maintain trade secrets and proprietary
        technology in the United States and in other countries, and to obtain and
        maintain patents for our bioregulatory technology. We filed an initial usage
        patent application with the U.S. Patent and Trademark Office or PTO, in April
        2002 and prosecution of this patent application is ongoing. We have also
        filed
        for foreign protection relating to this patent in Canada, Japan and the European
        Union. Additionally, patent applications relating to the manufacturing process
        of PRTX-100 and new compounds are currently in process.
  On
        July
        26, 2006, we received an Office Action Summary (rejection) of our initial
        usage
        patent application from the PTO. This does not mean that we will not succeed
        in
        obtaining meaningful claims relative to the use of Protein A in the treatment
        of
        autoimmune diseases. While the PTO office action is denoted as final, there
        are
        several options to pursue acceptance. We have the right to request an interview
        with the patent examiner and his respective supervisor, file a continuation
        application or file an appeal. We intend to pursue all options which we deem
        necessary in pursuit of an approval of our initial patent
        application.
  **Employees**
  We
        currently have ten full-time employees. None of our employees are represented
        by
        an organized labor union. We believe our relationship with our employees
        is very
        good, and we have never experienced an employee-related work stoppage. We
        will
        need to hire and retain highly-qualified experienced technical, management
        and
        sales personnel in order to execute our business plan, carry out product
        development and secure advantages over our competitors. No assurances can
        be
        given that we will be able to provide the overall compensation necessary
        to
        retain such skilled employees.
  **The
        risk factors listed in this section, as well as any other cautionary language
        appearing in this report, provide examples of risks, uncertainties and events
        that may cause our actual results to differ materially from the expectations
        described in the our forward-looking statements. The occurrence of the events
        described in these risk factors and elsewhere in this Form 10-KSB could have
        an
        adverse effect on our business, results of operations and financial condition.**
 
 **Risks
        Related to Our Business**
  **We
        have a history of significant losses, and we may never achieve or sustain
        profitability.**
  We
        are
        focused on product development and have not generated any revenues to date.
        We
        have incurred operating losses each year of our operations and we expect
        to
        continue to incur operating losses for the next several years. We may never
        become profitable. The process of developing our products requires significant
        clinical development and laboratory testing and clinical trials, as well
        as
        regulatory approvals. In addition, commercialization of our targeted products
        will require the establishment of sales, marketing and manufacturing
        capabilities, either through internal hiring or through contractual
        relationships with others. We expect our research and development and general
        and administrative expenses will increase over the next several years and,
        as a
        result, we expect our losses will increase. As of May 31, 2006, our cumulative
        net loss was $18,411,605. Our net loss was $6,104,402 for the fiscal year
        ended
        May 31, 2006. Our continued operational loss may lower the value of our common
        stock and may jeopardize our ability to continue our operations.
  -7-
  **If
        we fail to obtain regulatory approvals for PRTX-100 or any other drug we
        develop, we will not be able to generate revenues from the commercialization
        or
        sale of those drugs.**
  We
        must
        receive regulatory approval of each of our drugs before we can commercialize
        or
        sell that product. The pre-clinical laboratory testing, formulation development,
        manufacturing and clinical trials of any product we develop, as well as the
        distribution and marketing of these products, are regulated by numerous federal,
        state and local governmental authorities in the United States, principally
        the
        FDA, and by similar agencies in other countries. The development and regulatory
        approval process takes many years, requires the expenditure of substantial
        resources, is uncertain and subject to delays, and will thus delay our receipt
        of revenues, if any, from PRTX-100 or any other drug we develop. We cannot
        assure you that our clinical trials will demonstrate the safety and efficacy
        of
        PRTX-100 or any other drug we develop or will result in a marketable product.
  No
        product can receive FDA approval unless human clinical trials show both safety
        and efficacy for each target indication in accordance with FDA standards.
        A
        number of companies in the pharmaceutical and biotechnology industries have
        suffered significant setbacks in late stage clinical trials even after achieving
        promising results in early stage development. We therefore cannot assure
        you
        that the results from our clinical trials will be successful or that the
        results
        from our pre-clinical trials for PRTX-100 or any other drug we develop will
        be
        predictive of results obtained in future clinical trials. Further, data obtained
        from pre-clinical and clinical activities are subject to varying interpretations
        that could delay, limit or prevent regulatory agency approval. We cannot
        assure
        you that our clinical trials will establish the safety and efficacy of PRTX-100
        or any other drug we develop sufficiently for us to obtain regulatory
        approval.
  **If
        we are unable to enroll enough patients to complete our clinical trials,
        regulatory agencies may delay their review of, or reject our applications,
        which
        may result in increased costs and harm our ability to develop
        products.**
  Regulatory
        agencies may delay reviewing our applications for approval, or may reject
        them,
        based on our inability to enroll enough patients to complete our clinical
        trials. Patient enrollment depends on many factors, including the size of
        the
        patient population, the nature of the protocol, the proximity of patients
        to
        clinical sites and the eligibility criteria for the study. Delays in planned
        patient enrollment may result in increased costs and delays, which could
        have a
        harmful effect on our ability to develop products. We may also encounter
        delays
        or rejections based on changes in regulatory agency policies during the period
        in which we develop a drug or the period required for review of any application
        for regulatory agency approval of a particular compound. We also may encounter
        delays if we are unable to produce clinical trial material in sufficient
        quantities and of sufficient quality to meet the schedule for our planned
        clinical trials. In addition, we rely on a number of third-parties, such
        as
        clinical research organizations, to help support the clinical trials by
        performing independent clinical monitoring, data acquisition and data
        evaluations. Any failure on the part of these third-parties could delay the
        regulatory approval process.
  **Our
        products, if approved, may fail to achieve market acceptance.**
  There
        can
        be no assurance that any products we successfully develop, if approved for
        marketing, will achieve market acceptance or generate significant revenues.
        We
        intend for our products, including PRTX-100, to replace or alter existing
        therapies or procedures, and hospitals, physicians or patients may conclude
        that
        these products are less safe or effective or otherwise less attractive than
        existing therapies or procedures. If our products do not receive market
        acceptance for any reason, it would adversely affect our business, financial
        condition and results of operations.
  Further,
        our competitors may develop new technologies or products that are more effective
        or less costly, or that seem more cost-effective, than our products. We can
        give
        no assurance that hospitals, physicians, patients or the medical community
        in
        general will accept and use any products that we may develop.
  **If
        we cannot raise additional capital on acceptable terms, we will be unable
        to
        complete planned clinical trials, obtain regulatory approvals or commercialize
        our product candidates.**
  -8-
  We
        will
        require substantial future capital in order to continue to conduct the research
        and development, clinical and regulatory activities necessary to bring our
        products to market and to establish commercial manufacturing, marketing and
        sales capabilities. Our future capital requirements will depend on many factors,
        including:
  ·
            the
                progress of pre-clinical development and laboratory testing and clinical
                trials;  ·
            time
                and costs involved in obtaining regulatory approvals;  ·
            the
                number of products we pursue;  ·
            costs
                in filing and prosecuting patent applications and enforcing or defending
                patent claims; and  ·
            the
                establishment of selected strategic alliances and activities required
                for
                product commercialization.  In
        order
        to raise additional capital, we would seek funding through private or public
        sales of our securities. This funding may significantly dilute existing
        stockholders and, if we are able to obtain this funding from one or more
        strategic partners, they may limit our rights to our technology. No assurance
        can be given that we will be able to obtain additional financing on favorable
        terms, if at all. If we were to encounter any future problems with our
        previously filed and approved IND application or otherwise advance in the
        FDA
        approval process, our ability to sustain our operations would be significantly
        jeopardized.
  **If
        we are unable to obtain, protect, and maintain our proprietary rights in
        intellectual property, we may not be able to compete effectively or operate
        profitably.**
  Our
        commercial success depends, in large part, on our ability to obtain and maintain
        intellectual property protection for our technology covering our product
        candidates and avoiding infringement of the proprietary technology of others.
        Our ability to do so will depend on, among other things, complex legal and
        factual questions, and it should be noted that the standards regarding
        intellectual property rights in our industry are still evolving. However,
        we
        will be able to protect our proprietary rights from unauthorized use by
        third-parties only to the extent that our proprietary rights are covered
        by
        valid and enforceable patents or are effectively maintained as trade secrets.
  We
        have
        tried to protect our proprietary position by filing a U.S. patent application
        related to PRTX-100. Because the patent position of pharmaceutical companies
        involves complex legal and factual questions, the issuance, scope and
        enforceability of patents cannot be predicted with certainty. Patents, if
        issued, may be challenged, invalidated or circumvented. Thus, any patents
        that
        we own may not provide any protection against competitors. Our pending patent
        application or those we may file in the future or those we may license from
        third parties, may not result in patents being issued. If issued, they may
        not
        provide us with proprietary protection or competitive advantages against
        competitors with similar technology. Furthermore, others may independently
        develop similar technologies or duplicate any technology that we have developed,
        or designed around any patents we may have issued to us. Moreover, the laws
        of
        foreign countries do not protect intellectual property rights to the same
        extent
        as the laws of the United States.
  We
        also
        rely on trade secrets, know-how and technology, which are not protected by
        patents, to maintain our competitive position. We protect this information
        by
        entering into confidentiality agreements with parties that have access to
        it,
        such as our corporate partners, licensors, employees and consultants. Any
        of
        these parties may breach the agreements and disclose our confidential
        information, or our competitors might learn of the information in some other
        way. If any trade secret, know-how or other technology not protected by a
        patent
        was to be disclosed to or independently developed by a competitor, our business
        and financial condition could be adversely affected.
  **If
        other companies claim that we infringe their proprietary technology, we may
        incur liability for damages or be forced to stop our development and
        commercialization efforts.**
  Competitors
        and other third-parties may initiate patent litigation against us in the
        United
        States or in foreign countries based on existing patents or patents that
        may be
        granted in the future. These lawsuits can be expensive and would consume
        time
        and other resources even if unsuccessful or brought without merit. Our
        competitors may have sought or may seek patents that cover aspects of our
        technology.
  -9-
  We
        are
        aware that a third-party has a pending patent application for technologies
        generally related to ours, and more patents for similar technologies may
        be
        filed in the future. In the United States, patent applications may remain
        confidential after filing or publish 18 months after filing.
  Owners
        or
        licensees of patents may file one or more infringement actions against us.
        Any
        such infringement action could cause us to incur substantial costs defending
        the
        lawsuit and could distract our management from our business, even if the
        allegations of infringement or misappropriation are unwarranted. The defense
        of
        multiple claims could have a disproportionately greater impact. Furthermore,
        an
        adverse outcome from this type of claim could subject us to a judgment that
        requires us to pay substantial damages. A judgment could also include an
        injunction or other court order that could prevent us from making, using,
        selling, offering for sale or importing our products or prevent our customers
        from using our products. Alternatively, we could be required to license disputed
        rights from the third party. If a court determines, or if we independently
        discover, that any of our products or manufacturing processes violates
        third-party proprietary rights, we might not be able to reengineer the product
        or processes to avoid those rights, or obtain a license under those rights
        on
        commercially reasonable terms, if at all.
  **We
        may become involved in lawsuits to protect or enforce our patents that would
        be
        expensive and time consuming.**
  In
        order
        to protect or enforce our patent rights, we may initiate patent litigation
        against third-parties. In addition, we may become subject to interference
        or
        opposition proceedings conducted in patent and trademark offices to determine
        the priority of inventions. The defense of intellectual property rights,
        including patent rights through lawsuits, interference or opposition
        proceedings, and other legal and administrative proceedings, would be costly
        and
        divert our technical and management personnel from their normal
        responsibilities. An adverse determination of any litigation or defense
        proceedings could put our patent application at risk of not issuing.
  Furthermore,
        because of the substantial amount of discovery required in connection with
        intellectual property litigation, there is a risk that some of our confidential
        information could be compromised by disclosure during this type of litigation.
        For example, during the course of this kind of litigation, confidential
        information may be inadvertently disclosed in the form of documents or testimony
        in connection with discovery requests, depositions or trial testimony. This
        disclosure could negatively affect our business and financial results.
  **If
        third-party manufacturers of our products fail to devote sufficient time
        and
        resources to our concerns, or if their performance is substandard, our clinical
        trials and product introductions may be delayed and our costs may rise.**
  We
        have
        relied on, and intend to rely in the future, in part, on third-party contract
        manufacturers to supply, store and distribute PRTX-100 and other potential
        products. Any products we develop may be in competition with other product
        candidates and products for access to these facilities. Thus, we may not
        be
        successful in contracting with third-party manufacturers, or they may not
        be
        able to manufacture these candidates and products in a cost-effective or
        timely
        manner. Additionally, our reliance on third-party manufacturers exposes us
        to
        the following risks, any of which could delay or prevent the completion of
        (x)
        our clinical trials, (y) the approval of our products by the FDA or (z) the
        commercialization of our products, resulting in higher costs or depriving
        us of
        potential product revenues:
  ·
            Contract
                manufacturers are obliged to operate in accordance with FDA-mandated
                current good manufacturing practices, or cGMPs. Their failure to
                establish
                and follow cGMPs and to document their adherence to such practices
                may
                lead to significant delays in the availability of material for clinical
                study and may delay or prevent filing or approval of marketing
                applications for our products. Additionally, failure to achieve and
                maintain high manufacturing standards, including the incidence of
                manufacturing errors, could result in patient injury or death, product
                recalls or withdrawals, delays or failures in product testing or
                delivery,
                cost overruns or other problems that could seriously hurt our business.  ·
            It
                may be difficult or impossible for us to find replacement manufacturers
                quickly on acceptable terms, or at all. For example, we have initially
                relied on a single contract manufacturer, Eurogentec S.A., to produce
                PRTX-100. Changing this manufacturer, or changing the manufacturer
                for any
                other products we develop, may be difficult. The number of potential
                manufacturers is limited, and changing manufacturers may require
                confirmation of the analytical methods of the manufacturing processes
                and
                procedures in accordance with FDA-mandated cGMPs. Such confirmation
                of the
                analytical methods may be costly and
                time-consuming.  -10-
  ·
            Our
                contract manufacturers may not perform as agreed or may not remain
                in the
                contract manufacturing business for the time required to produce,
                store
                and distribute our products successfully.  Drug
        manufacturers are subject to ongoing periodic unannounced inspection by the
        FDA,
        the U.S. Drug Enforcement Agency, and corresponding state and foreign agencies
        to ensure strict compliance with cGMPs, other government regulations and
        corresponding foreign standards. While we are obligated to audit the performance
        of third-party contractors, we do not have control over our third-party
        manufacturers’ compliance with these regulations and standards. Failure by our
        third-party manufacturers or us to comply with applicable regulations could
        result in sanctions being imposed on us, including fines, injunctions, civil
        penalties, failure of the government to grant market approval of drugs, delays,
        suspension or withdrawal of approvals, seizures or recalls of product, operating
        restrictions and criminal prosecutions, any of which could significantly
        and
        adversely affect our business.
  Eurogentec
        S.A. has the capacity to produce a sufficient inventory of PRTX-100 to conduct
        our clinical trials. If these inventories are lost or damaged, or if Eurogentec
        S.A. cannot produce additional inventory to complete the remaining phases
        of
        clinical trials, the clinical development of our product candidate or its
        submission for regulatory approval could be delayed, and our ability to
        commercialize this product could be impaired or precluded.
  **We
        may not be able to manufacture our products in commercial quantities, which
        would prevent us from marketing our products.**
  To
        date,
        PRTX-100 has been manufactured in enough quantities to conduct our clinical
        trials. If this product were approved by the FDA for commercial sale, we
        would
        need to manufacture it in larger quantities. We have no manufacturing facilities
        at this time, and we have no experience in the commercial manufacturing of
        drugs
        and limited experience in designing drug manufacturing equipment. Thus, we
        would
        need to either develop the capability of manufacturing on a commercial scale
        or
        engage third-party manufacturers with this capability. Significant scale-up
        of
        manufacturing may require certain additional validation studies, which the
        FDA
        must review and approve. Moreover, contract manufacturers often encounter
        difficulties in achieving volume production, quality control and quality
        assurance, as well as shortages of qualified personnel. For these reasons,
        a
        third-party manufacturer might not be able to manufacture sufficient quantities
        of PRTX-100 to allow us to commercialize it. If we are unable to increase
        the
        manufacturing capacity for PRTX-100, or any other product we may develop,
        we may
        experience delays in or shortages in supply when launching them
        commercially.
  **We
        have no experience selling, marketing or distributing our products and no
        internal capability to do so.**
  If
        we
        receive regulatory approval to commence commercial sales of PRTX-100, we
        will
        face competition with respect to commercial sales, marketing and distribution.
        These are areas in which we have limited experience. To market our product
        directly, we must develop a direct marketing and sales force with technical
        expertise and supporting distribution capability. Alternatively, we may engage
        a
        pharmaceutical or other healthcare company with an existing distribution
        system
        and direct sales force to assist us. There can be no assurance that we will
        successfully establish sales and distribution capabilities either on our
        own or
        in collaboration with third-parties or gain market acceptance for our product.
        To the extent we enter co-promotion or other licensing arrangements, any
        revenues we receive will depend on the efforts of third-parties. Those efforts
        may not succeed.
  **Competition
        in the pharmaceutical industry is intense; if we fail to compete effectively,
        our financial results will suffer.**
  We
        engage
        in a business characterized by extensive research efforts, rapid developments
        and intense competition. We cannot assure you that our products will compete
        successfully or that research and development by others will not render our
        products obsolete or uneconomical. Our failure to compete effectively would
        negatively affect our business, financial condition and results of operations.
        We expect that successful competition will depend, among other things, on
        product efficacy, safety, reliability, availability, timing and scope of
        regulatory approval and price. Specifically, other factors we expect will
        impact
        our ability to compete include the relative speed with which we can develop
        products, complete the clinical, development and laboratory testing and
        regulatory approval processes and supply commercial quantities of the product
        to
        the market.
  -11-
  We
        expect
        competition to increase as technological advances are made and commercial
        applications broaden. In commercializing PRTX-100 and any additional products
        we
        develop using our technology, we will face substantial competition from large
        pharmaceutical, biotechnology and other companies, universities and research
        institutions.
  Most
        of
        our competitors have substantially greater capital resources, research and
        development staffs, facilities and experience in conducting clinical trials
        and
        obtaining regulatory approvals than us. As well, some of our competitors
        have
        advantages over us in manufacturing and marketing pharmaceutical products.
        We
        are thus at a competitive disadvantage to those competitors who have greater
        capital resources and we may not be able to compete effectively.
  **If
        we are unable to retain key personnel and hire additional qualified scientific,
        sales and marketing, and other personnel, we may not be able to achieve our
        goals.**
  We
        depend
        on the principal members of our scientific and management staff, including
        Steven H. Kane, our president and chief executive officer, Victor S. Sloan,
        M.D., our senior vice president and chief medical officer, and Marc L. Rose,
        CPA, our vice president of finance, chief financial officer, treasurer and
        corporate secretary. The loss of any of these individuals’ services might
        significantly delay or prevent the achievement of research, development or
        business objectives and could negatively affect our business, financial
        condition and results of operations. We do not maintain key person life
        insurance on any of these individuals.
  Mr.
        Kane,
        who joined us in December 2002, Dr. Sloan, who joined us in August 2005 and
        Mr.
        Rose, who joined us in November 2004, are key members of our management team
        and
        are critical in directing and managing our growth and future development.
        We are
        not aware of any present intention of any of these individuals to leave our
        Company.
  Our
        success depends, in large part, on our ability to attract and retain qualified
        scientific and management personnel such as these individuals. We face intense
        competition for such personnel and consultants. We cannot assure you that
        we
        will attract and retain qualified management and scientific personnel in
        the
        future.
  Further,
        we expect that our potential expansion into areas and activities requiring
        additional expertise, such as further clinical trials, governmental approvals,
        contract manufacturing and marketing, will place additional requirements
        on our
        management, operational and financial resources. We expect these demands
        will
        require an increase in management and scientific personnel and the development
        of additional expertise by existing management personnel. The failure to
        attract
        and retain such personnel or to develop such expertise could reduce prospects
        for our success.
  **Risks
        Relating to Our Industry**
  **Even
        if we obtain marketing approval, PRTX-100 will be subject to ongoing regulatory
        review.**
  If
        regulatory approval of PRTX-100 is granted, that approval may be subject
        to
        limitations on the indicated uses for which it may be marketed or contain
        requirements for costly post-marketing follow-up studies. As to products
        for
        which marketing approval is obtained, the manufacturer of the product and
        the
        manufacturing facilities will be subject to continual review and periodic
        inspections by the FDA and other regulatory authorities. In addition, the
        labeling, packaging, adverse event reporting, storage, advertising, promotion
        and record keeping related to the product will remain subject to extensive
        regulatory requirements. The subsequent discovery of previously unknown problems
        with the product, manufacturer or facility may result in restrictions on
        the
        product or the manufacturer, including withdrawal of the product from the
        market. We may be slow to adapt, or we may never adapt, to changes in existing
        requirements or adoption of new requirements or policies.
  If
        we
        fail to comply with applicable regulatory requirements, we may be subject
        to
        fines, suspension or withdrawal of regulatory approvals, product recalls,
        seizure of products, operating restrictions and criminal prosecution.
  **Market
        acceptance of PRTX-100 will be limited if users are unable to obtain adequate
        reimbursement from third-party payors.**
  Government
        health administration authorities, private health insurers and other
        organizations generally provide reimbursement for products like PRTX-100,
        and
        our commercial success will depend in part on these third-party payors agreeing
        to reimburse patients for the costs of our product. Even if we succeed in
        bringing our proposed products to market, we cannot assure you that third-party
        payors will consider it cost-effective or provide reimbursement in whole
        or in
        part for its use.
  -12-
  Significant
        uncertainty exists as to the reimbursement status of newly approved health
        care
        products. PRTX-100 is intended to replace or alter existing therapies or
        procedures. These third-party payors may conclude that our product is less
        safe,
        effective or cost-effective than existing therapies or procedures. Therefore,
        third-party payors may not approve our product for reimbursement.
  If
        third-party payors do not approve our product for reimbursement or fail to
        reimburse them adequately, sales will suffer as some physicians or their
        patients will opt for a competing product that is approved for reimbursement
        or
        is adequately reimbursed. Even if third-party payors make reimbursement
        available, these payors’ reimbursement policies may adversely affect our ability
        to sell our product on a profitable basis.
  Moreover,
        the trend toward managed healthcare in the United States, the growth of
        organizations such as health maintenance organizations and legislative proposals
        to reform healthcare and government insurance programs could significantly
        influence the purchase of healthcare services and products, resulting in
        lower
        prices and reduced demand for our product, which could adversely affect our
        business, financial condition and results of operations.
  In
        addition, legislation and regulations affecting the pricing of pharmaceuticals
        may change in ways adverse to us before or after the FDA or other regulatory
        agencies approve PRTX-100 for marketing. While we cannot predict the likelihood
        of any of these legislative or regulatory proposals, if any government or
        regulatory agencies adopt these proposals they could negatively affect our
        business, financial condition and results of operations.
  **We
        may be required to defend lawsuits or pay damages in connection with the
        alleged
        or actual harm caused by our products.**
  We
        face
        an inherent business risk of exposure to product liability claims in the
        event
        that the use of any of our products is alleged to have resulted in harm to
        others. This risk exists in clinical trials as well as in commercial
        distribution. In addition, the pharmaceutical and biotechnology industries
        in
        general have been subject to significant medical malpractice litigation.
        We may
        incur significant liability if product liability or malpractice lawsuits
        against
        us are successful. Furthermore, product liabilities claims, regardless of
        their
        merits, could be costly and divert our management’s attention from other
        business concerns, or adversely affect our reputation and the demand for
        our
        product. We currently maintain a $2,000,000 general liability insurance policy
        and a $3,000,000 clinical liability insurance policy. We intend to expand
        our
        liability insurance coverage to any products for which we obtain marketing
        approval, however, such insurance may be unavailable, prohibitively expensive
        or
        may not fully cover our potential liabilities. If we are unable to maintain
        sufficient insurance coverage on reasonable terms or to otherwise protect
        against potential product liability claims or field actions, we may be unable
        to
        continue to market our products and develop new markets.
  **Rapid
        technological change could make our products obsolete.**
  Pharmaceutical
        technologies have undergone rapid and significant change. We expect that
        pharmaceutical technologies will continue to develop rapidly. Our future
        will
        depend in large part on our ability to maintain a competitive position with
        respect to these technologies. Any compound, product or process we develop
        may
        become obsolete before we recover any expenses incurred in connection with
        their
        development. Rapid technological change could make our products obsolete,
        which
        could negatively affect our business, financial condition and results of
        operations.
  **Risks
        Related to Our Common Stock**
  **Our
        common stock has experienced in the past, and may experience in the future,
        significant price volatility, which substantially increases the risk of loss
        to
        persons owning our common stock.**
  The
        stock
        market, particularly in recent years, has experienced significant volatility
        particularly with respect to pharmaceutical and biotechnology stocks. The
        volatility of pharmaceutical and biotechnology stocks often does not relate
        to
        the operating performance of the companies represented by the stock. Factors
        that could cause this volatility in the market price of our common stock
        include:
  -13-
  ·
            announcements
                of the introduction of new products by us or our competitors;  ·
            market
                conditions in the pharmaceutical and biotechnology sectors;  ·
            rumors
                relating to us or our competitors;  ·
            litigation
                or public concern about the safety of our potential products;  ·
            our
                quarterly operating results;  ·
            deviations
                in our operating results from the estimates of securities analysts;
                and  ·
            FDA
                or international regulatory actions.  Because
        of the limited trading market for our common stock, and because of the
        significant price volatility, you may not be able to sell your shares of
        common
        stock when you desire to do so. In the fiscal year ended May 31, 2006, our
        stock
        price ranged from a high of $5.00 to a low of $2.00 per share. The inability
        to
        sell your shares in a rapidly declining market may substantially increase
        your
        risk of loss as a result of such illiquidity and because the price for our
        common stock may suffer greater declines due to its price volatility.
  **We
        may be the subject of securities class action litigation due to future stock
        price volatility.**
  In
        the
        past, when the market price of a stock has been volatile, holders of that
        stock
        have periodically instituted securities class action litigation against the
        company that issued the stock. If any of our stockholders brought a lawsuit
        against us, we could incur substantial costs defending the lawsuit. The lawsuit
        could also divert the time and attention of our management.
  **Future
        sales of common stock by our existing stockholders may cause our stock price
        to
        fall.**
  The
        market price of our common stock could decline as a result of sales by our
        existing stockholders of shares of common stock in the market or the perception
        that these sales could occur. These sales might also make it more difficult
        for
        us to sell equity securities at a time and price that we deem appropriate
        and
        thus inhibit our ability to raise additional capital when it is needed.
  **We
        have never paid dividends on our capital stock, and we do not anticipate
        paying
        any cash dividends in the foreseeable future.**
  We
        have
        paid no cash dividends on our capital stock to date and we currently intend
        to
        retain our future earnings, if any, to fund the development and growth of
        our
        business. In addition, the terms of any future debt or credit facility may
        preclude us from paying these dividends. As a result, capital appreciation,
        if
        any, of our common stock will be your sole source of gain for the foreseeable
        future.
  **Our
        common stock is subject to the penny stock rules.**
  Our
        common stock is subject to Rules 15g-1 through 15g-9 under the Securities
        Exchange Act of 1934, as amended, which impose certain sales practice
        requirements on broker-dealers which sell our common stock to persons other
        than
        established customers and “accredited investors” (generally, individuals with a
        net worth in excess of $1,000,000 or annual incomes exceeding $200,000 (or
        $300,000 together with their spouses)). For transactions covered by this
        rule, a
        broker-dealer must make a special suitability determination for the purchaser
        and have received the purchaser’s written consent to the transaction prior to
        the sale. This rule adversely affects the ability of broker-dealers to sell
        our
        common stock and purchasers of our common stock to sell their shares of such
        common stock. Additionally, our common stock is subject to the SEC regulations
        for “penny stock.” Penny stock includes any non-Nasdaq equity security that has
        a market price of less than $5.00 per share, subject to certain exceptions.
        The
        regulations require that prior to any non-exempt buy/sell transaction in
        a penny
        stock, a disclosure schedule set forth by the SEC relating to the penny stock
        market must be delivered to the purchaser of such penny stock. This disclosure
        must include the amount of commissions payable to both the broker-dealer
        and the
        registered representative and current price quotations for the common stock.
        The
        regulations also require that monthly statements be sent to holders of penny
        stock which disclose recent price information for the penny stock and
        information of the limited market for penny stocks. These requirements adversely
        affect the market liquidity of our common stock.
  -14-
  **ITEM
        2 - DESCRIPTION OF PROPERTY**
 
 We
        entered into a three year operating lease in New Hope, PA for 3,795 square
        feet
        of office and laboratory space. The lease commenced on January 9, 2004 and
        was
        originally to expire on February 28, 2007. On November 18, 2005, we modified
        the
        existing lease which added an additional 2,147 square feet and extended the
        lease term to January 31, 2008. The lease contains options to extend for
        an
        additional one to two years. In the fiscal third quarter of 2006, we invested
        $62,907 in leasehold improvements, which will be amortized through January
        2008.
 
 **ITEM
        3 - LEGAL PROCEEDINGS**
 
 We
        are
        not a party to any pending legal proceedings and we are not aware of threatened
        legal proceedings to which any person, officer, affiliate of the Company
        or any
        owner of more than 5% of the Company’s stock is an adverse party to or has a
        material interest adverse to the Company.
  **ITEM
        4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 There
        were no matters submitted to a vote of security holders in the fourth quarter
        of
        the fiscal year ended May 31, 2006.
  **ITEM
        5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**
  Our
        common stock is traded on the Over-The-Counter Bulletin Board under the symbol
        “PRTX”.
 
 The
        following table sets forth, for the fiscal periods indicated, the high and
        low
        closing prices for the common stock of Protalex for the last two fiscal years.
        Our fiscal year-end is May 31 st .
        The
        quotations are taken from Internet quotation sources. The quotations may
        reflect
        inter-dealer prices, without retail mark-up, markdown or commission and may
        not
        necessarily represent actual transactions. Average daily volume was 13,672
        shares traded and the annual average closing price was $2.85 for the year
        ended
        May 31, 2006.
 
 **High**
              
              **Low****Fiscal
                  Year 2005**First
                  Quarter
              
              
              2.95
              
              
              2.15Second
                  Quarter
              
              
              2.95
              
              
              2.25Third
                  Quarter
              
              
              2.95
              
              
              1.95Fourth
                  Quarter
              
              
              2.95
              
              
              1.95**Fiscal
                  Year 2006**First
                  Quarter
              
              
              2.95
              
              
              2.00Second
                  Quarter
              
              
              3.10
              
              
              2.20Third
                  Quarter
              
              
              4.00
              
              
              2.60Fourth
                  Quarter
              
              
              5.00
              
              
              2.66
  As
        of
        July 24, 2006, we had 28,490,964 shares of common stock outstanding, which
        were
        held by approximately 465 stockholders of record. The transfer agent for
        our
        common stock is American Stock Transfer & Trust Company, Operations Center
        6201 15th Avenue Brooklyn, NY 11219.
 
 Dividend
        Policy - No dividends have been declared or paid to date on any of our capital
        stock. We currently anticipate that we will retain all future earnings for
        use
        in the operation and expansion of our business and we do not anticipate paying
        any cash dividends in the foreseeable future.
 
 Recent
        Sales of Unregistered Securities
 
 On
        July
        7, 2006, the Company raised $15,177,534 through the sale of 6,071,013 shares
        of
        its common stock at $2.50 per share, with warrants to purchase an additional
        1,517,753 shares of its common stock, at an exercise price of $3.85 per share.
        The warrants expire on July 7, 2011. Net of transaction costs of approximately
        $840,000, the Company’s proceeds were $14,337,252.
  -15-
  **ITEM
        6 - MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**
 
 **Plan
        of Operation**
  Favorable
        pre-clinical safety and efficacy studies for our lead compound, PRTX-100,
        laid
        the foundation for the Investigational New Drug Application or IND, for treating
        RA. We submitted the IND application to the FDA on March 4, 2005 and on March
        31, 2005 the FDA verbally disclosed to us that it had placed our IND on clinical
        hold, pending additional product characterization. On August 10, 2005, we
        formally replied to the FDA and on September 9, 2005, the FDA notified us
        that
        it had lifted the clinical hold on our IND and that our proposed study could
        proceed. We commenced with the Phase I clinical trial on December 5, 2005
        and
        completed the Phase I clinical trial in March 2006. This Phase I trial was
        performed in healthy volunteers, and was designed primarily to assess the
        safety
        and tolerability of PRTX-100. The basic safety data demonstrated that PRTX-100
        was safe and well tolerated. There were no deaths or serious adverse events.
        The
        pharmacokinetic profile was favorable and the pre-clinical pharmacokinetic
        data
        were confirmed by the data in this Phase I trial.
  We
        anticipate commencing with our Phase II in ITP before the end of calendar
        year
        2006. We also expect that other clinical trial-related activities will occur
        during the next 12 months, including arranging for packaging and testing,
        designing clinical trial protocols and completing additional toxicology studies
        utilizing our manufactured drug. Additionally, we intend to conduct research
        and
        pre-clinical activities with PRTX-100 and other compounds in pemphigus, Graves’
disease and other autoimmune indications.
 
 In
        the
        area of intellectual property and derivative drug development, our patent
        application was filed in April 2002 and subsequently, we have had ongoing
        discussions with the PTO. Additionally, patent applications relating to the
        manufacturing process of PRTX-100 and new compounds are currently in process.
 
 Staffing
        plans for fiscal 2007 include hiring additional clinical and laboratory support
        personnel. Continued growth in staffing is anticipated in our business plan,
        and
        specialized staffing requirements in the areas of scientific and FDA regulatory
        affairs will call for competitive salaries to attract and retain qualified
        personnel .
  In
        the
        third fiscal quarter of 2006, we completed the expansion of our current facility
        in New Hope, PA. Additional expansion of laboratory space is anticipated
        with
        our further growth.
 
 Research
        and Development Expenses - Research and development expenses increased from
        $3,519,910 in 2005 to $3,840,400 in 2006. The increase of $330,490 or 9%
        was due
        to increased clinical personnel, along with activity related to an outside
        contract research organization for the Phase I clinical trial, on-going product
        manufacturing and product qualification related costs.
 
 Administrative
        Expenses - Administrative expenses increased from $1,457,694 in 2005 to
        $2,175,223 in 2006. The increase of $717,529 or 49% was due primarily to
        personnel salary and wage increases, and stock based compensation, which
        is used
        to attract and reward qualified employees, consultants and board members.
 
 Professional
        Fees - Professional fees decreased from $714,665 in 2005 to $435,289 in 2006.
        The decrease of $279,376 or 39% was due to decreased costs in the areas of
        legal, audit, tax, and employee recruitment. In fiscal 2005, significant
        legal
        and audit fees were incurred in connection with the filing of the Company’s
        Post-Effective Amendment to Registration Statement on Form SB-2 related to
        its
        September 2003 offering.
 
 **Liquidity
        and Capital Resources**
  Since
        1999, we have incurred significant losses, and we expect to experience operating
        losses and negative cash flow for the foreseeable future. Our primary source
        of
        cash to meet short-term and long-term liquidity needs is the sale of shares
        of
        our common stock. We issue shares in private placements at a discount to
        the
        current market price, as such the resale of privately-placed shares are
        restricted under the Securities Act, which reduces their liquidity and,
        accordingly, their value as compared to freely-tradable shares on the open
        market.
  -16-
  On
        September 19, 2003, we raised $12,657,599 through the sale of 7,445,654 shares
        of our common stock at $1.70 per share, with warrants to purchase an additional
        3,164,395 shares of our common stock, at an exercise price of $2.40 per share.
        The warrants expire on September 19, 2008. Net of transaction costs of
        $1,301,536, our proceeds were $11,356,063.
  On
        May
        25, 2005, we raised $5,057,885 through the sale of 2,593,788 shares of our
        common stock at $1.95 per share, with warrants to purchase an additional
        920,121
        shares of our common stock, at an exercise price of $2.25 per share. The
        warrants expire on May 25, 2010. As part of this transaction, the exercise price
        for the warrants from the September 2003 transaction were lowered from $2.40
        per
        share to $2.25 per share. Net of transaction costs of $206,692, our proceeds
        were $4,851,193.
  On
        December 30, 2005, we raised $5,839,059 through the sale of 2,595,132 shares
        of
        our common stock at $2.25 per share, with warrants to purchase an additional
        648,784 shares of our common stock, at an exercise price of $2.99 per share.
        The
        warrants expire on December 30, 2010. Net of transaction costs of approximately
        $328,000, our proceeds were $5,510,967.
  In
        the
        fourth fiscal quarter of 2006, existing investors exercised 351,598 warrants
        which resulted in $786,538 in cash proceeds.
  On
        July
        7, 2006, we raised $15,177,534 through the sale of 6,071,013 shares of our
        common stock at $2.50 per share, with warrants to purchase an additional
        1,517,753 shares of our common stock, at an exercise price of $3.85 per share.
        The warrants expire on July 7, 2011. Net of transaction costs of approximately
        $840,000, our proceeds were $14,337,252.
 
 As
        of May
        31, 2006, our net working capital was $9,174,737 and our total cash and cash
        equivalents were $9,992,545. We have no significant payments due on long-term
        obligations, and other demands or commitments to be incurred beyond the next
        12
        months. However, we anticipate entering into significant contracts to perform
        product manufacturing and clinical trials in fiscal year 2007 that will
        potentially extend into future fiscal years. We anticipate investing
        approximately $400,000 in laboratory equipment in the first half of fiscal
        year
        2007. With the completion of the July 7, 2006 financing transaction, we
        anticipate that we will need to raise additional capital in fiscal year 2009
        to
        fund the ongoing FDA approval process. If we are unable to obtain approval
        of
        our future IND applications or otherwise advance in the FDA approval process,
        our ability to sustain our operations would be significantly jeopardized.
 
  **Off
        Balance Sheet Arrangements**
  We
        have
        entered into the following off-balance sheet arrangements:
 
 ·
            *Employee
                Agreements-Officers*.
                To attract and retain qualified management personnel, we have entered
                into
                employment agreements with three executive officers: Steven H. Kane,
                president and chief executive officer, Victor S. Sloan, MD, senior
                vice
                president and chief medical officer, and Marc L. Rose, CPA, vice
                president
                of finance, chief financial officer, treasurer and corporate
                secretary.  ·
            *Directors
                Agreements*.
                To attract and retain qualified candidates to serve on the board
                of
                directors, we have entered into agreements with G. Kirk Raab, Chairman
                of
                the Board, Carleton A. Holstrom, Chairman of the Audit Committee,
                Eugene
                A. Bauer, MD and Peter G. Tombros, under which Messrs. Raab, Holstrom,
                Dr.
                Bauer and Mr. Tombros receive aggregate annual cash payments aggregating
                $150,000, $20,000, $20,000 and $20,000, respectively, as directors’
                fees.  ·
            *Operating
                Lease - Office Space*.
                We have entered into a three year operating lease in New Hope, PA
                for
                3,795 square feet of office and laboratory space. The lease commenced
                on
                January 9, 2004 and was originally to expire on February 28, 2007.
                On
                November 18, 2005, the company modified the existing lease which
                added an
                additional 2,147 square feet and extended the lease term to January
                31,
                2008.  ·
            *Operating
                Lease - Copier*.
                We have entered into a sixty-three month operating lease for a
                multi-function copier. The lease commenced on December 16, 2004 and
                will
                expire on March 16, 2010.  -17-
  **Payments
                  due by period****Contractual
                  Obligations**
              
              **Total**
              
              **Less
                  than 1 year**
              
              **1-3
                  years**
              
              **3-5
                  years**
              
              **More
                  than 5 years**Employment
                  Agreements-Officers
              
              $
              1,001,320
              
              $
              1,001,320
              
              $
              0
              
              $
              0
              
              $
              0Directors
                  Agreements
              
              
              210,000
              
              
              210,000
              
              
              0
              
              
              0
              
              
              0Operating
                  Lease - Office Space
              
              
              298,540
              
              
              116,229
              
              
              182,311
              
              
              0
              
              
              0Operating
                  Lease - Copier
              
              
              11,454
              
              
              1,743
              
              
              8,964
              
              
              747
              
              
              0Total
              
              $
              1,521,314
              
              $
              1,329,292
              
              $
              191,275
              
              $
              747
              
              $
              0
 
 **Critical
        Accounting Policies and Estimates**
  Our
        financial statements are prepared in conformity with accounting principles
        generally accepted in the United States of America. Note B to the financial
        statements describes the significant accounting policies and methods used
        in the
        preparation of our financial statements.
  We
        have
        identified the policies below as some of the more critical to our business
        and
        the understanding of our financial position and results of operations. These
        policies may involve a high degree of judgment and complexity in their
        application and represent the critical accounting policies used in the
        preparation of our financial statements. Although we believe our judgments
        and
        estimates are appropriate and correct, actual future results may differ from
        estimates. If different assumptions or conditions were to prevail, the results
        could be materially different from these reported results. The impact and
        any
        associated risks related to these policies on our business operations are
        discussed throughout this report where such policies affect our reported
        and
        expected financial results.
  **Use
        of Estimates**
  The
        preparation of our financial statements, in conformity with accounting
        principles generally accepted in the United States, requires management to
        make
        estimates and assumptions that affect the reported amounts of assets,
        liabilities and equity and disclosure of contingent assets and liabilities
        at
        the date of the financial statements and the reported amounts of expenses
        during
        the reporting period. These estimates have a material impact on our financial
        statements and are discussed in detail throughout this report.
  As
        part
        of the process of preparing our financial statements, we are required to
        estimate income taxes in each of the jurisdictions in which we operate. This
        process involves estimating actual current tax expense together with assessing
        temporary differences resulting from differing treatment of items for tax
        and
        accounting purposes. These differences result in deferred tax assets and
        liabilities, which are included within the balance sheet. We must then assess
        the likelihood that our deferred tax assets will be recovered from future
        taxable income and to the extent we believe that recovery is not likely,
        we must
        establish a valuation allowance. In the event that we determine that we would
        be
        able to realize deferred tax assets in the future in excess of the net recorded
        amount, an adjustment to the deferred tax asset valuation allowance would
        increase income in the period such determination was made.
  Significant
        management judgment is required in determining the valuation allowance recorded
        against net deferred tax assets, which primarily consist of net operating
        loss
        carry-forwards. We have recorded a full valuation allowance of $7,388,000
        as of
        May 31, 2006, due to uncertainties related to our ability to utilize such
        net
        operating loss carry-forwards before they expire. The valuation allowance
        is
        based on our estimates of taxable income by jurisdiction in which we operate
        and
        the period over which our deferred tax assets will be recoverable, if at
        all.
  -18-
 
 **ITEM
        7 - FINANCIAL STATEMENTS**
  Report
        of Independent Registered Public Accounting Firm
  The
        Board
        of Directors
 Protalex,
        Inc.
  We
        have
        audited the accompanying balance sheets of Protalex, Inc. (a Delaware
        Corporation in the development stage) as of May 31, 2006 and 2005, and the
        related statements of operations, changes in stockholders’ equity, and cash
        flows for the years then ended and for the cumulative period from inception
        through May 31, 2006, as it relates to the fiscal years ended May 31, 2006
        and
        2005. These financial statements are the responsibility of the Company’s
        management. Our responsibility is to express an opinion on these financial
        statements based on our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance about whether the
        financial statements are free of material misstatement. The Company is not
        required to have, nor were we engaged to perform, an audit of its internal
        control over financial reporting. Our audits included consideration of internal
        control over financial reporting as a basis for designing audit procedures
        that
        are appropriate in the circumstances, but not for the purpose of expressing
        an
        opinion on the effectiveness of the Company’s internal control over financial
        reporting. Accordingly, we express no such opinion. An audit also includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements, assessing the accounting principles used and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits provide a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial position of Protalex, Inc. as of May 31,
        2006
        and 2005, and the results of its operations and its cash flows for the years
        then ended, and for the cumulative period from inception through May 31,
        2006,
        as it relates to the fiscal years ended May 31, 2006 and 2005, in conformity
        with accounting principles generally accepted in the United States of
        America.
   /s/
        GRANT
        THORNTON LLP
 Philadelphia,
        Pennsylvania
 July
        21,
        2006 (except for Note K, as to
 which
        the
        date is July 26, 2006)
  -19-
  Protalex,
        Inc.
 (A
        Company in the Development Stage)
  **BALANCE
        SHEETS**
  May 31,
  2006
              
              2005**ASSETS**CURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              9,992,545
              
              $
              9,453,367Prepaid
                  expenses
              
              
              221,187
              
              
              9,281Total
                  current assets
              
              
              10,213,732
              
              
              9,462,648PROPERTY
                  & EQUIPMENT:Lab
                  equipment
              
              
              327,287
              
              
              313,613Office
                  and computer equipment
              
              
              157,787
              
              
              157,787Furniture
                  & fixtures
              
              
              40,701
              
              
              25,556Leasehold
                  improvements
              
              
              89,967
              
              
              27,060615,742
              
              
              524,016Less
                  accumulated depreciation and amortization
              
              
              (478,785
              )
              
              (400,387
              )136,957
              
              
              123,629OTHER
                  ASSETS:Deposits
              
              
              7,990
              
              
              7,590Intellectual
                  technology property, net ofaccumulated amortization of $6,693 in 2006 and$5,673 in 2005
              
              
              13,607
              
              
              14,627Total
                  other assets
              
              
              21,597
              
              
              22,217$
              10,372,286
              
              $
              9,608,494**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**CURRENT
                  LIABILITIES:Current
                  maturities of capital lease obligation
              
              $
              0
              
              $
              20,046Accounts
                  payable
              
              
              744,732
              
              
              866,628Payroll
                  and related liabilities
              
              
              67,415
              
              
              28,835Accrued
                  expenses
              
              
              226,848
              
              
              81,517Total
                  current liabilities
              
              
              1,038,995
              
              
              997,026Other
              
              
              3,696
              
              
              4,655Total
                  liabilities
              
              
              1,042,691
              
              
              1,001,681STOCKHOLDERS'
                  EQUITY:Common
                  stock, par value $0.00001, 100,000,000 and 40,000,000 shares authorized
                  as
                  of May 31, 2006 and May 31, 2005 respectively, 22,389,951 and 19,393,221
                  shares issued and outstanding as of May 31, 2006 and May 31, 2005,
                  respectively
              
              
              224
              
              
              194Additional
                  paid in capital
              
              
              27,740,976
              
              
              20,913,822Deficit
                  accumulated during the development stage
              
              
              (18,411,605
              )
              
              (12,307,203
              )Total
                  stockholders’ equity
              
              
              9,329,595
              
              
              8,606,813$
              10,372,286
              
              $
              9,608,494
  The
        accompanying notes are an integral part of these financial
        statements
  -20-
  Protalex,
        Inc.
 (A
        Company in the Development Stage)
  **STATEMENTS
        OF OPERATIONS**
 
 For
        the
        years ended May 31, 2006 and 2005, and From
 Inception
        (September 17, 1999) through May 31, 2006
 
 Year
                  Ended
                May
                  31, 2006
              
              Year
                  Ended
                May
                  31, 2005
              
              From
                  Inception
                Through
                May
                  31, 2006REVENUES
              
              $
              -
              
              $
              -
              
              $
              -OPERATING
                  EXPENSES:Research
                  and development
              
              
              (3,840,400
              )
              
              (3,519,910
              )
              
              (11,043,216
              )Administrative
              
              
              (2,175,223
              )
              
              (1,457,694
              )
              
              (5,989,663
              )Professional
                  fees
              
              
              (435,289
              )
              
              (714,665
              )
              
              (1,715,247
              )Depreciation
                  and amortization
              
              
              (4,296
              )
              
              (5,111
              )
              
              (150,402
              )Operating
                  Loss
              
              
              (6,455,208
              )
              
              (5,697,380
              )
              
              (18,898,528
              )Other
                  income (expense)Interest
                  income
              
              
              351,649
              
              
              132,181
              
              
              568,115Interest
                  expense
              
              
              (843
              )
              
              (2,530
              )
              
              (70,612
              )Loss
                  on disposal of equipment
              
              
              -
              
              
              -
              
              
              (10,580
              )Net
                  Loss
              
              $
              (6,104,402
              )
              $
              (5,567,729
              )
              $
              (18,411,605
              )Weighted
                    average number of commonshares
                    outstanding
              
              
              20,559,291
              
              
              16,832,643
              
              
              13,903,129Loss
                  per common share - basic and diluted
              
              $
              (.30
              )
              $
              (.33
              )
              $
              (1.32
              )
 
 The
        accompanying notes are an integral part of these financial statements.
  -21-
  Protalex,
        Inc.
 (A
        Company in the Development Stage)
  **STATEMENT
        OF CHANGES IN STOCKHOLDERS’ EQUITY**
 
 From
        Inception (September 17, 1999) through May 31, 2006
 
 **Common
                  Stock****Shares**
              
              **Amount**
              
              **Additional****Paid
                  in****Capital**
              
              **Common**
                **Stock-**
                **Contra**
              
              **Deficit**
                **Accumulated**
                **During
                  The**
                **Development**
                **Stage**
              
              **Total**September 17,
                  1999 — initial issuance of 10,000 shares for intellectual technology
                  license at $.03 per share
              
              
              10,000
              
              $
              300
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              300September 30,
                  1999 — cost of public shell acquisition over net assets acquired to be
                  accounted for as a Recapitalization
              
              
              —
              
              
              —
              
              
              —
              
              
              (250,000
              )
              
              —
              
              
              (250,000
              )October 27,
                  1999 — issuance of 84 shares to individual for $25,000
              
              
              84
              
              
              25,000
              
              
              —
              
              
              —
              
              
              —
              
              
              25,000November 15,
                  1999 — reverse merger transaction with Enerdyne Corporation, net
                  transaction amounts
              
              
              8,972,463
              
              
              118,547
              
              
              —
              
              
              (118,547
              )
              
              —
              
              
              —November 18,
                  1999 — February 7, 2000 — issuance of 459,444 shares to various
                  investors at $0.36 per share
              
              
              459,444
              
              
              165,400
              
              
              —
              
              
              —
              
              
              —
              
              
              165,400January 1,
                  2000 — issuance of 100,000 shares in exchange for legal services
              
              
              100,000
              
              
              15,000
              
              
              —
              
              
              —
              
              
              —
              
              
              15,000May
                  1 - 27, 2000 — issuance of 640,000 shares to various investors at $1.00
                  per share
              
              
              640,000
              
              
              640,000
              
              
              —
              
              
              —
              
              
              —
              
              
              640,000May 27,
                  2000 — issuance of 1,644 shares to individual in exchange for interest
                  Due
              
              
              1,644
              
              
              1,644
              
              
              —
              
              
              —
              
              
              —
              
              
              1,644Net
                  loss for the year ended May 31, 2000
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (250,689
              )
              
              (250,689
              )Balance,
                  May 31, 2000
              
              
              10,183,635
              
              
              965,891
              
              
              —
              
              
              (368,547
              )
              
              (250,689
              )
              
              346,655December 7,
                  2000 — issuance of 425,000 shares to various investors at $1.00 per share
              
              
              425,000
              
              
              425,000
              
              
              —
              
              
              —
              
              
              —
              
              
              425,000May 31,
                  2001 — Forgiveness of debt owed to shareholder
              
              
              —
              
              
              —
              
              
              40,000
              
              
              —
              
              
              —
              
              
              40,000Net
                  loss for the year ended May 31, 2001
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (553,866
              )
              
              (553,866
              )Balance,
                  May 31, 2001
              
              
              10,608,635
              
              
              1,390,891
              
              
              40,000
              
              
              (368,547
              )
              
              (804,555
              )
              
              257,789
  -22-
  **Common
                  Stock****Shares**
              
              **Amount**
              
              **Additional****Paid
                  in****Capital**
              
              **Common**
                **Stock-**
                **Contra**
              
              **Deficit**
                **Accumulated**
                **During
                  The**
                **Development**
                **Stage**
              
              **Total**August 13,
                  2001 — Contribution by Shareholders
              
              
              —
              
              
              —
              
              
              143,569
              
              
              —
              
              
              —
              
              
              143,569November 7,
                  2001 — issuance of 881,600 Shares at $1.25 per share
              
              
              881,600
              
              
              1,102,000
              
              
              —
              
              
              —
              
              
              —
              
              
              1,102,000November 26,
                  2001 — options issued to board member
              
              
              —
              
              
              —
              
              
              133,000
              
              
              —
              
              
              —
              
              
              133,000Net
                  loss for the year ended May 31, 2002
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,280,465
              )
              
              (1,280,465
              )Balance,
                  May 31, 2002
              
              
              11,490,235
              
              
              2,492,891
              
              
              316,569
              
              
              (368,547
              )
              
              (2,085,020
              )
              
              355,893July 5,
                  2002 — issuance of 842,000 shares at $1.50 per share
              
              
              842,000
              
              
              1,263,000
              
              
              —
              
              
              —
              
              
              —
              
              
              1,263,000July 1,
                  2002 - May 1, 2003 - purchase of common stock from shareholder at
                  $.70 per share
              
              
              (130,955
              )
              
              (91,667
              )
              
              —
              
              
              —
              
              
              —
              
              
              (91,667
              )January 15,
                  2003 - May 15, 2003 — common stock issued to Company president
              
              
              41,670
              
              
              82,841
              
              
              —
              
              
              —
              
              
              —
              
              
              82,841May 14,
                  2003 — common stock issued to employee
              
              
              5,000
              
              
              11,250
              
              
              —
              
              
              —
              
              
              —
              
              
              11,250June 1,
                  2002 - May 31, 2003 — options issued to board members and employees
              
              
              —
              
              
              —
              
              
              287,343
              
              
              —
              
              
              —
              
              
              287,343Net
                  loss for the year ended May 31, 2003
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (1,665,090
              )
              
              (1,665,090
              )Balance,
                  May 31, 2003
              
              
              12,247,950
              
              
              3,758,315
              
              
              603,912
              
              
              (368,547
              )
              
              (3,750,110
              )
              
              243,570June 15,
                  2003, common stock issued to Company president
              
              
              8,334
              
              
              16,418
              
              
              —
              
              
              —
              
              
              —
              
              
              16,418June 15,
                  2003, purchase of common stock from shareholder
              
              
              (12,093
              )
              
              (8,333
              )
              
              —
              
              
              —
              
              
              —
              
              
              (8,333
              )September 18,
                  2003 - issuance of 7,445,646 of common stock issued in private
                  placement
                  At $1.70 per share, net of transaction costs
              
              
              7,445,646
              
              
              11,356,063
              
              
              —
              
              
              —
              
              
              —
              
              
              11,356,063September 19,
                  2003 - repurchase and retired 2,994,803 shares for $300,000
              
              
              (2,994,803
              )
              
              (300,000
              )
              
              —
              
              
              —
              
              
              —
              
              
              (300,000
              )December 12,
                  2003 - issuance of 39,399 shares to terminated employees at $2.60
                  per
                  share
              
              
              39,399
              
              
              102,438
              
              
              —
              
              
              —
              
              
              —
              
              
              102,438March 1,
                  2004 - common stock issued to employee at $2.55 per share
              
              
              50,000
              
              
              127,500
              
              
              —
              
              
              —
              
              
              —
              
              
              127,500May 31,
                  2004 - reclassify common stock contra to common stock
              
              
              —
              
              
              (368,547
              )
              
              —
              
              
              368,547
              
              
              —
              
              
              —
  -23-
  **Common
                  Stock****Shares**
              
              **Amount**
              
              **Additional
                  Paid in Capital**
              
              **Common
                  Stock-Contra**
              
              **Deficit
                  Accumulated During The Development Stage**
              
              **Total**June
                  1 , 2003 - May 31, 2004 - options issued to board members, employees
                  and consultants
              
              
              —
              
              
              —
              
              
              448,096
              
              
              —
              
              
              —
              
              
              448,096Net
                  loss for the year ended May 31, 2004
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (2,989,364
              )
              
              (2,989,364
              )Balance,
                  May 31, 2004
              
              
              16,784,433
              
              $
              14,683,854
              
              $
              1,052,008
              
              
              —
              
              $
              (6,739,474
              )
              $
              8,996,388November
                  30, 2004 - adjust March 1, 2004 common stock issued to
                  employee
              
              
              
              
              
              (20,000
              )
              
              
              
              
              
              
              
              
              
              
              (20,000
              )January
                  13, 2005 - common stock issued to employee at $2.55 per
                  share
              
              
              15,000
              
              
              38,250
              
              
              
              
              
              
              
              
              
              
              
              38,250February
                  28, 2005 - Reclass Par Value for Reincorporation into DE as of
                  12/1/04
              
              
              
              
              
              (14,701,935
              )
              
              14,701,935
              
              
              
              
              
              
              
              
              0May
                  25, 2005 - issuance of 2,593,788 shares of common stock issued
                  in private
                  placement At $1.95 per share, net of transaction costs
              
              
              2,593,788
              
              
              25
              
              
              4,851,168
              
              
              
              
              
              
              
              
              4,851,193June
                  1 , 2004 - May 31, 2005 - options issued to board members, employees
                  and consultants
              
              
              
              
              
              
              
              
              308,711
              
              
              
              
              
              
              
              
              308,711Net
                  loss for the year ended May 31, 2005
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (5,567,729
              )
              
              (5,567,729
              )Balance,
                  May 31, 2005
              
              
              19,393,221
              
              $
              194
              
              $
              20,913,822
              
              
              —
              
              $
              (12,307,203
              )
              $
              8,606,813August
                  23, 2005 - common stock issued to employee
              
              
              40,000
              
              
              0
              
              
              100,000
              
              
              
              
              
              
              
              
              100,000October
                  19, 2005 - common stock issued to employee
              
              
              10,000
              
              
              0
              
              
              25,000
              
              
              
              
              
              
              
              
              25,000December
                  30, 2005 - issuance of 2,595,132 shares of common stock issued
                  in private
                  placement at $2.25 per share, net of transaction costs
              
              
              2,595,132
              
              
              26
              
              
              5,510,941
              
              
              
              
              
              
              
              
              5,510,967June
                  1, 2005 - May 31, 2006 - warrants exercised
              
              
              351,598
              
              
              4
              
              
              786,534
              
              
              
              
              
              
              
              
              786,538June
                  1 , 2005- May 31, 2006 - options issued to board members, employees
                  and consultants
              
              
              
              
              
              
              
              
              404,679
              
              
              
              
              
              
              
              
              404,679Net
                  loss for the year ended May 31, 2006
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (6,104,402
              )
              
              (6,104,402
              )Balance,
                  May 31, 2006
              
              
              22,389,951
              
              $
              224
              
              $
              27,740,976
              
              
              
              
              $
              (18,411,605
              )
              $
              9,329,595
  The
        accompanying notes are an integral part of these financial statements.
  -24-
  Protalex,
        Inc.
 (A
        Company in the Development Stage)
  **STATEMENTS
        OF CASH FLOWS**
  For
        the
        years ended May 31, 2006 and 2005, and From Inception
 (September 17,
        1999) through May 31, 2006
  **Year
                  Ended****May 31, 2006**
              
              **Year
                  Ended****May 31, 2005**
              
              **From
                  Inception Through******
                **May
                  31, 2006**CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  loss
              
              $
              (6,104,402
              )
              $
              (5,567,729
              )
              $
              (18,411,605
              )Adjustments
                  to reconcile net loss to net cash and cash equivalents used in
                  operating
                  activities:Loss
                  on disposal of equipment
              
              
              —
              
              
              —
              
              
              10,580Depreciation
                  and amortization
              
              
              79,418
              
              
              58,684
              
              
              507,999Non
                  cash compensation expense
              
              
              529,679
              
              
              326,960
              
              
              2,065,525Non
                  cash expenses
              
              
              —
              
              
              —
              
              
              16,644(Increase)/Decrease
                  in prepaid expenses and deposits
              
              
              (212,306
              )
              
              12,760
              
              
              (229,177
              )Increase
                  in accounts payable and accrued expenses
              
              
              23,435
              
              
              571,045
              
              
              971,580Increase
                  in payroll and related liabilities
              
              
              38,580
              
              
              4,275
              
              
              67,415Increase/(Decrease)
                  in other liabilities
              
              
              (959
              )
              
              3,111
              
              
              3,696Net
                  cash and cash equivalents used in operating activities
              
              
              (5,646,555
              )
              
              (4,590,894
              )
              
              (14,997,343
              )CASH
                  FLOWS FROM INVESTING ACTIVITIES:Acquisition
                  of intellectual technology license - fee portion
              
              
              —
              
              
              —
              
              
              (20,000
              )Acquisition
                  of property and equipment
              
              
              (91,726
              )
              
              (79,229
              )
              
              (502,262
              )Excess
                  of amounts paid for Public Shell over assets acquired to be accounted
                  for
                  as a recapitalization
              
              
              —
              
              
              —
              
              
              (250,000
              )Proceeds
                  from disposal of equipment
              
              
              —
              
              
              —
              
              
              6,000Net
                  cash and cash equivalents used in investing activities
              
              
              (91,726
              )
              
              (79,229
              )
              
              (766,262
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Proceeds
                  from stock issuance
              
              
              6,297,505
              
              
              4,851,194
              
              
              26,125,163Principal
                  payment on capital leases and installment purchase payable
              
              
              (20,046
              )
              
              (20,487
              )
              
              (295,411
              )Contribution
                  by shareholders
              
              
              —
              
              
              —
              
              
              183,569Principal
                  payment on note payable individual
              
              
              —
              
              
              —
              
              
              (225,717
              )Issuance
                  of note payable to individual
              
              
              —
              
              
              —
              
              
              368,546Acquisition
                  of common stock
              
              
              —
              
              
              —
              
              
              (400,000
              )Net
                  cash and cash equivalents provided by financing activities
              
              
              6,277,459
              
              
              4,830,707
              
              
              25,756,150NET
                  INCREASE IN CASH AND CASH EQUIVALENTS
              
              
              539,178
              
              
              160,584
              
              
              9,992,545Cash
                  and cash equivalents, beginning
              
              
              9,453,367
              
              
              9,292,783
              
              
              —Cash
                  and cash equivalents, ending
              
              $
              9,992,545
              
              $
              9,453,367
              
              $
              9,992,545Supplemental
                  disclosures of cash flow information:Interest
                  paid
              
              $
              614
              
              $
              2,128
              
              $
              66,770Taxes
                  paid
              
              $
              0
              
              $
              50
              
              $
              100
  The
        accompanying notes are an integral part of these financial statements.
  -25-
  Protalex,
        Inc.
 (A
        Company in the Development Stage)
  **NOTES
        TO FINANCIAL STATEMENTS**
  From
        Inception (September 17, 1999) through May 31, 2006
 
 **NOTE
        A - DESCRIPTION OF OPERATIONS AND DEVELOPMENT STAGE STATUS**
 
 The
        Company is a development stage enterprise incorporated on September 17,
        1999 in Albuquerque, New Mexico and reincorporated in the State of Delaware
        on
        December 1, 2004. The Company’s headquarters are located in New Hope,
        Pennsylvania. The Company was formed to take all necessary steps to fully
        develop and bring to commercial realization certain bioregulatory technology
        for
        the treatment of human diseases. The Company has no operating revenue.
  The
        accompanying financial statements have been prepared in conformity with
        accounting principles generally accepted in the United States of America,
        which
        contemplate continuation of the Company as a going concern. The Company is
        a
        development stage enterprise and does not anticipate generating operating
        revenue for the foreseeable future. The ability of the Company to continue
        as a
        going concern is dependent upon developing products that are regulatory approved
        and market accepted. There is no assurance that these plans will be realized
        in
        whole or in part. The financial statements do not include any adjustments
        that
        might result from the outcome of these uncertainties.
 
 On
        December 1, 2004, the Company reincorporated from New Mexico to Delaware.
        The
        impact to the Stockholders’ Equity as of May 31, 2005 as a result of the
        reincorporation was to adjust Common Stock to its legal par value and is
        reflected in the accompanying **** Statement
        of Changes in Stockholders’ Equity.
 
 On
        October 25, 2005, the Company’s shareholders approved the Amendment to the
        Company’s Amended Certificate of Incorporation to increase the number of
        authorized shares of the Company’s common stock from 40,000,000 shares to
        100,000,000 shares.
 
 **NOTE
        B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
 
 1.
        Estimates
 
 The
        preparation of financial statements in conformity with accounting principles
        generally accepted in the United States of America requires the Company to
        make
        estimates and assumptions affecting the reported amounts of assets, liabilities,
        and expense, and the disclosure of contingent assets and liabilities. Estimated
        amounts could differ from actual results.
 
 2.
        Loss
        per Common Share
 
 The
        Financial Accounting Standards Board (FASB) has issued Statement of
        Financial Accounting Standards No. 128 “Earnings Per Share” (SFAS
        No. 128) that provides for the calculation of “Basic” and “Diluted”
earnings per share. Basic earnings per share include no dilution and is computed
        by dividing loss to common shareholders by the weighted average number of
        common
        shares outstanding for the period. All potentially dilutive securities have
        been
        excluded from the computations since they would be antidilutive. However,
        these
        dilutive securities could potentially dilute earnings per share in the future.
        As of May 31, 2006, the Company had a total of 8,520,538 potentially
        dilutive securities.
 
 3.
        Stock
        Based Compensation
 
 The
        Company adopted the disclosure provisions of Statement of Financial Accounting
        Standards No. 148, “Accounting for Stock-Based Compensation - Transition and
        Disclosure.” The Company accounts for options granted to employees using the
        intrinsic value recognition and measurement principles of APB Opinion No.
        25,
“Accounting for Stock Issued to Employees” (APB 25) and related interpretations.
        In accordance with APB 25, the Company records compensation cost as the
        difference between the exercise price of the options and the fair market
        value
        of the Company stock on the measurement (grant) date. These costs are amortized
        to expense over the options’ vesting period (see Recent Accounting
        Pronouncements pertaining to SFAS No. 123-Revised). Options to non-employees
        are
        accounted for using the fair value method, which recognizes the value of
        the
        option as an expense over the related service period with a corresponding
        increase to additional paid-in capital.
  -26-
  The
        following table illustrates the effect on net loss and earnings per share
        if the
        Company applied the fair value recognition provision of SFAS No. 123 to
        stock-based employee compensation.
 
 **Year
                  Ended**
                **May
                  31, 2006**
              
              **Year
                  Ended**
                **May
                  31, 2005**
              
              **From
                  Inception**
                **Through**
                **May
                  31, 2006**Net
                  loss, as reported
              
              $
              (6,104,402
              )
              $
              (5,567,729
              )
              $
              (18,411,605
              )Add:
                  stock-based employee compensation expense included in reported
                  net loss
              
              
              529,679
              
              
              288,710
              
              
              1,412,701Deduct:
                  stock-based employee compensation Expense determined under fair-value
                  method for all awards
              
              
              (1,129,724
              )
              
              (1,384,715
              )
              
              (4,419,373
              )Pro
                  forma net loss
              
              $
              (6,704,447
              )
              $
              (6,663,734
              )
              $
              (21,418,277
              )Loss
                  per common share, as reported - basic and diluted
              
              $
              (.30
              )
              $
              (.33
              )
              $
              (1.32
              )Proforma
                  loss per common share - basic and diluted
              
              $
              (.33
              )
              $
              (.40
              )
              $
              (1.54
              )
 
 
 The
        fair
        value of the options are estimated on the date of the grant using the
        Black-Scholes option pricing model with the following assumptions:
 
 **Year
                  Ended**
                **May,
                  31, 2006**
              
              **Year
                  Ended******
                **May,
                  31, 2005**
              
              **From
                  Inception**
                **Through**
                **May
                  31, 2006**Dividends
                  per year
              
              
              0
              
              
              0
              
              
              0Volatility
                  percentage
              
              
              107
              %
              
              102%-107
              %
              
              90%-131
              %Risk
                  free interest rate
              
              
              3.85%-4.42
              %
              
              2.57%-3.52
              %
              
              2.07%-5.11
              %Expected
                  life (years)
              
              
              4
              
              
              4
              
              
              3-5
 
 4.
        Cash
        and Cash Equivalents
 
 For
        the
        purposes of reporting cash flows, the Company considers all cash accounts,
        which
        are not subject to withdrawal restrictions or penalties, and highly liquid
        investments with original maturities of 90 days or less to be cash and cash
        equivalents.
 
 5.
        Property, Equipment, Intellectual Technology Property, Depreciation and
        Amortization
 
 Property,
        Equipment and Leasehold Improvements are carried at cost. Depreciation and
        amortization has been provided by the Company in order to amortize the cost
        of
        property and equipment over their estimated useful lives, which are estimated
        to
        be over three to five years. The Company uses the straight-line method for
        all
        classes of assets for book purposes and accelerated methods for tax purposes.
        Depreciation and amortization expense was $78,398, $57,664, and $478,785
        for the
        years ended May 31, 2006, 2005 and from inception through May 31, 2006,
        respectively. Depreciation included in research and development expense totaled
        $74,102, $53,575 and $356,577 for the years ended May 31, 2006 and 2005 and
        from
        inception to May 31, 2006, respectively.
 -27-
  The
        Company’s intellectual technology property was originally licensed from a former
        related party. This intellectual technology property was then assigned to
        the
        Company upon the dissolution of the related party. The cost of the intellectual
        technology property is being amortized over a 20-year period. Amortization
        expense is **$** 1,020,
        $1,020 and $6,693 for the years ended May 31, 2006, 2005 and from inception
        through May 31, 2006, respectively. The Company reviews the intellectual
        property for impairment on at least an annual basis in accordance with SFAS
        No. 142 “Goodwill and Other Intangible Assets”. Amortization expense for
        the intellectual property will be $1,020 for each of the next five
        years.
  6.
        Income
        Taxes
 
 Income
        taxes are recognized using enacted tax rates, and are composed of taxes on
        financial accounting income that is adjusted for the requirement of current
        tax
        law and deferred taxes. Deferred taxes are accounted for using the liability
        method. Under this method, deferred tax assets and liabilities are recognized
        based on the difference between the financial statement carrying amounts
        of
        existing assets and liabilities and their respective tax bases. The Company
        does
        not expect to have current income taxes payable or deferred tax asset balances
        for the foreseeable future.
 
 7.
        Other
        Comprehensive Income
 
 From
        September 17, 1999 (inception) through May 31, 2006, the Company had no changes
        in equity which constitute components of other comprehensive
        income.
 
 8.
        Research and Development
 
 Research
        and development costs are expensed as incurred and also include depreciation
        as
        reported above.
 
 9.
        Fair
        Value of Financial Instruments
 
 The
        fair
        value of the Company’s financial instruments, principally cash, approximates
        their carrying value.
 
 10.
        Recent Accounting Pronouncements
 
 In
        December 2004, the FASB issued Statement No. 123 (revised) *Share-Based
        Payment* (“SFAS
        No. 123R”), which is a revision of Statement No. 123, *Accounting
        for Stock-Based Compensation* (“SFAS
        No. 123”). SFAS No. 123R supersedes APB No. 25, *Accounting
        for Stock Issued to Employees* ,
        and
        amends SFAS No. 95, *Statement
        of Cash Flows* .
        Generally, the approach in SFAS No. 123R is similar to the approach described
        in
        SFAS No. 123. However, SFAS No. 123R requires all share-based payments to
        employees, including grants of employee stock options, to be recognized in
        the
        income statement based on their fair values. Pro forma disclosure will no
        longer
        be an alternative.
 
 As
        permitted by SFAS No. 123, the Company currently accounts for share-based
        payments to employees using the intrinsic value method permitted by APB No.
        25
        and, as such, generally recognizes no compensation cost for employee stock
        options.
 
 We
        will
        adopt SFAS No. 123R using the modified prospective method beginning with
        the
        first fiscal quarter of 2007. The impact of adoption of SFAS No. 123R cannot
        be
        predicted at this time because it will depend on levels of share-based payments
        granted in the future. The adoption of SFAS No. 123R’s fair value method will
        have a significant impact on the Company’s results of operations, although it
        will have no impact on our overall financial position.
 
 Had
        the
        Company adopted SFAS No. 123R in prior periods, the impact of that standard
        would have approximated the impact of SFAS No. 123 as described in the
        disclosure of pro forma net income and earnings per share in the Notes to
        these
        financial statements. SFAS No. 123R also requires the benefits of tax deductions
        in excess of recognized compensation cost to be reported as a financing cash
        flow, rather than as an operating cash flow as required under current
        literature. This requirement will reduce net operating cash flows and increase
        net financing cash flows in periods after adoption. For the years ended May
        31,
        2006, and 2005, the Company did not pay any taxes, therefore, there was no
        effect on operating cash flows for such excess tax deductions.
  -28-
  **NOTE
        C - REVERSE MERGER**
 
 On
        November 15, 1999, Enerdyne Corporation or Enerdyne acquired all of the
        outstanding common stock of Protalex, Inc. in exchange for the issuance of
        additional shares of Enerdyne stock. The ratio of exchange was 822 shares
        of
        Enerdyne stock issued for each share of Protalex stock received. For accounting
        purposes, the acquisition has been treated as an acquisition of Enerdyne
        by
        Protalex and as a recapitalization of Protalex or Reverse Merger. The historical
        financial statement of operations presented herein include only those of
        the
        accounting acquirer and the retained earnings or deficit of only the
        accounting acquirer carries over consistent with the requirements of reverse
        merger accounting. Concurrently with the share exchange, Enerdyne changed
        its
        name to Protalex, Inc.
 
 The
        details of the reverse merger transaction are as follows:
 **Account
                  Description**
              
              **Protalex,
                  Inc.**
              
              **Enerdyne
                Corporation**
              
              **Transaction
                  Adjustments**
              
              **Balance
                  Sheet at November 16, 1999**Cash
              
              $
              23,531
              
              $
              —
              
              $
              —
              
              $
              23,531Note
                  receivable shareholder
              
              
              —
              
              
              118,547
              
              
              —
              
              
              118,547License
              
              
              20,300
              
              
              —
              
              
              —
              
              
              20,300Investment
                  in Enerdyne
              
              
              368,547
              
              
              —
              
              
              (368,547
              )
              
              —Other
                  current assets
              
              
              8,212
              
              
              —
              
              
              —
              
              
              8,212Other
                  current liabilities
              
              
              (17,555
              )
              
              —
              
              
              —
              
              
              (17,555
              )Accounts
                  payable Alex
              
              
              (40,000
              )
              
              —
              
              
              —
              
              
              (40,000
              )Note
                  payable
              
              
              (368,546
              )
              
              —
              
              
              —
              
              
              (368,546
              )Common
                  stock
              
              
              (25,300
              )
              
              (833,459
              )
              
              714,912
              
              
              (143,847
              )Additional
                  paid in capital
              
              
              —
              
              
              (1,105,014
              )
              
              1,105,014
              
              
              —Treasury
                  stock
              
              
              —
              
              
              430,424
              
              
              (430,424
              )
              
              —Accumulated
                  deficit
              
              
              30,811
              
              
              1,389,502
              
              
              (1,389,502
              )
              
              30,811Common
                  stock - contra
              
              
              —
              
              
              —
              
              
              368,547
              
              
              368,547$
              —
              
              $
              —
              
              $
              —
              
              $
              —
 
 **NOTE
        D - INCOME TAXES**
 
 The
        provision for income taxes for the years ended May 31, 2006 and 2005
        consist of the following. Total income tax benefit differs from the amounts
        computed by applying the statutory tax rate to loss before income taxes due
        to
        the increase in the Company’s valuation allowance.
 
 **Year
                  Ended**
                **May
                  31, 2006**
              
              **Year
                  Ended**
                **May
                  31, 2005**Statutory
                  federal and state rates of 40%
              
              $
              2,465,000
              
              $
              2,227,000Increase
                  in valuation allowance
              
              
              (2,465,000
              )
              
              (2,227,000)
              )Actual
                  tax benefit
              
              $
              —
              
              $
              —
 
 For
        the
        years ended May 31, 2006 and 2005, the components of income tax benefit
        (expense) consist of the following:
 
 **Year
                  Ended**
                **May
                  31, 2006**
              
              **Year
                  Ended**
                **May
                  31, 2005**Current:Federal
              
              $
              —
              
              $
              —State
              
              
              —
              
              
              —Deferred:Federal
              
              
              2,095,250
              
              
              1,858,000State
              
              
              369,750
              
              
              369,000Increase
                  in valuation allowance
              
              
              (2,465,000
              )
              
              (2,227,000
              )Income
                  tax benefit
              
              $
              —
              
              $
              —
  -29-
  The
        components of the net deferred tax asset as of May 31, 2006 and 2005 are as
        follows:
  **May
                  31, 2006**
              
              **May
                  31, 2005**Assets:Net
                  operating losses
              
              $
              5,780,000
              
              $
              3,818,000Vacation
                  accrual
              
              
              12,000
              
              
              12,000Stock
                  based compensation
              
              
              826,000
              
              
              613,000General
                  business credit
              
              
              771,000
              
              
              506,000Deferred
                  tax assets
              
              
              7,389,000
              
              
              4,949,000Liability:Equipment
              
              
              (1,000
              )
              
              (26,000
              )Gross
                  deferred tax asset
              
              
              7,388,000
              
              
              4,923,000Less
                  valuation allowance
              
              
              (7,388,000
              )
              
              (4,923,000
              )Deferred
                  tax asset, net of valuation allowance
              
              $
              —
              
              $
              —
  The
        gross
        deferred taxes have been fully offset by a valuation allowance since the
        Company
        cannot currently conclude that it is more likely than not that the benefits
        will
        be realized. The net operating loss carryforward for income tax purposes
        of
        approximately $15,400,000 as of May 31, 2006 expires beginning in 2014 through
        2021. Internal Revenue Code Section 382 places a limitation on the amount
        of
        taxable income that can be offset by carryforwards after a change in control.
        As
        a result of these provisions, utilization of the NOL and tax credit
        carryforwards may be limited. As of May 31, 2006, a portion of the gross
        deferred tax asset and related valuation allowance is attributable to stock
        based compensation. To the extent that such assets are realized in the future,
        the benefit is applied to equity.
 
 **NOTE
        E - RELATED PARTIES**
 
 During
        the years ended May 31, 2006 and May 31, 2005, the Company incurred $68,607
        and
        $12,098 respectively, of expenses related to air travel to a partnership
        principally owned by the Chief Executive Officer of the Company.
 
 During
        the years ended May 31, 2006 and May 31, 2005, the Company incurred $0 and
        $12,515 respectively, of expenses related to legal services to a firm which
        employs one of the Company’s board members.
 
 The
        Company has an agreement with its Chairman to pay $12,500 per month as a
        director fee. During the years ended May 31, 2006 and May 31, 2005, the Company
        incurred $150,000 in each year for this director’s fee.
 
 The
        Company has an agreement with Carleton A. Holstrom, Eugene A. Bauer, MD and
        Peter G. Tombros to pay each $1,667 per month payable on a quarterly basis
        in
        arrears as a director fee. During the years ended May 31, 2006 and May 31,
        2005,
        the Company incurred $51,677 and $16,667 respectively for these directors’ fees.
        As of May 31, 2006, $3,333, is included within Accrued Expenses and was
        subsequently paid on July 15, 2006.
 
 **NOTE
        F**-**CAPITAL
        LEASE OBLIGATIONS**
 
 We
        leased
        certain equipment under a capital lease. As of May 31, 2006 and 2005, the
        recorded amount of assets, net of related accumulated depreciation was $0
        and
        $20,383, respectively. This capital lease expired in April 2006.
  **NOTE
        G - STOCK OPTIONS**
 
 Prior
        to
        January 22, 2004, all options were issued as “stand alone” options. On January
        22, 2004, the board of directors of the Company approved the Protalex, Inc.
        2003
        Stock Option Plan., and on October 25, 2005, the shareholders approved an
        amendment to the Protalex, Inc. 2003 Stock Option Plan to increase the
        authorized number of shares under from 1,500,000 to 4,500,000 which provides
        for
        incentive and non-qualified stock options to purchase a total of 4,500,000
        shares of the Company’s Common Stock. Under the terms of the plan, incentive
        options may not be granted for less than the fair market value of the Common
        Stock at the date of the grant and non-qualified options shall not be granted
        for less than 85% of the fair market value of the Common Stock at the date
        of
        the grant. Beginning January 1, 2005, all stock options are granted at fair
        market value. Vesting generally occurs ratably over forty eight months and
        is
        exercisable over a period no longer than ten years after the grant date.
        As of
        May 31, 2006, options to purchase 3,834,625 shares of the Company’s Common Stock
        were granted, of which 1,623,370 were issued under the Company’s 2003 Stock
        Option Plan and the remaining 2,211,255 were issued as stand alone options.
        As
        of May 31, 2006, 2,871,548 are exercisable.
  -30-
  A
        summary
        of the common stock option activity for employees, directors, officers and
        consultants as of May 31, 2006 is as follows:
  **Options**
              
              **Grant**
                **Prices**
              
              **Exercisable**Balance,
                  September 17, 1999
              
              
              —
              
              $
              —
              
              
              —Granted,
                  April 28, 2000
              
              
              40,000
              
              
              0.36
              
              
              —Granted,
                  November 26, 2001
              
              
              100,000
              
              
              1.25
              
              
              100,000Expired,
                  April 28, 2002
              
              
              (40,000
              )
              
              0.36
              
              
              —Granted,
                  June 1, 2002
              
              
              125,000
              
              
              1.50
              
              
              —Granted,
                  July 18, 2002
              
              
              233,680
              
              
              1.50
              
              
              233,680Granted,
                  October 24, 2002
              
              
              100,000
              
              
              1.45
              
              
              100,000Granted,
                  December 16, 2002
              
              
              863,242
              
              
              1.50
              
              
              750,847Granted,
                  December 16, 2002
              
              
              50,000
              
              
              1.70
              
              
              40,000Granted,
                  March 15, 2003
              
              
              130,000
              
              
              1.50
              
              
              —Granted,
                  April 1, 2003
              
              
              40,000
              
              
              1.50
              
              
              30,832Granted,
                  July 1, 2003
              
              
              40,000
              
              
              1.50
              
              
              20,000Granted,
                  August 13, 2003
              
              
              100,000
              
              
              1.50
              
              
              100,000Granted,
                  September 19, 2003
              
              
              584,333
              
              
              1.50
              
              
              422,883Granted,
                  October 28, 2003
              
              
              60,000
              
              
              1.50
              
              
              60,000Granted,
                  January 22, 2004
              
              
              75,000
              
              
              2.13
              
              
              75,000Granted,
                  January 22, 2004
              
              
              100,000
              
              
              2.13
              
              
              52,497Granted,
                  January 22, 2004
              
              
              50,000
              
              
              2.75
              
              
              —Forfeited,
                  January 22, 2004
              
              
              (130,000
              )
              
              1.50
              
              
              —Granted,
                  March 1, 2004
              
              
              150,000
              
              
              2.17
              
              
              —Granted,
                  July 22, 2004
              
              
              15,000
              
              
              2.60
              
              
              6,874Granted,
                  October 26, 2004
              
              
              30,000
              
              
              2.70
              
              
              3,958Granted,
                  October 26, 2004
              
              
              100,000
              
              
              2.30
              
              
              100,000Granted,
                  January 13, 2005
              
              
              330,000
              
              
              2.55
              
              
              71,664Granted,
                  January 13, 2005
              
              
              125,000
              
              
              2.55
              
              
              125,000Forfeited,
                  January 26, 2005
              
              
              (10,000
              )
              
              1.70
              
              
              —Forfeited,
                  January 26, 2005
              
              
              (10,000
              )
              
              2.13
              
              
              —Granted,
                  February 15, 2005
              
              
              100,000
              
              
              2.80
              
              
              100,000Granted,
                  April 13, 2005
              
              
              50,000
              
              
              2.60
              
              
              13,541Forfeited,
                  June 1, 2005
              
              
              (125,000
              )
              
              1.50
              
              
              —Granted,
                  July 29, 2005
              
              
              51,429
              
              
              2.80
              
              
              17,914Granted,
                  August 23, 2005
              
              
              250,000
              
              
              2.50
              
              
              46,873Forfeited,
                  October 22, 2005
              
              
              (10,000
              )
              
              2.70
              
              
              —Forfeited,
                  October 22, 2005
              
              
              (1,000
              )
              
              2.55
              
              
              —Granted,
                  October 25, 2005
              
              
              200,714
              
              
              2.65
              
              
              153,749Granted,
                  November 8, 2005
              
              
              121,407
              
              
              2.75
              
              
              121,407Granted,
                  January 11, 2006
              
              
              133,000
              
              
              2.85
              
              
              9,829Forfeited,
                  January 25, 2006
              
              
              (50,000
              )
              
              2.75
              
              
              —Forfeited,
                  January 25, 2006
              
              
              (25,000
              )
              
              2.55
              
              
              —Forfeited,
                  January 25, 2006
              
              
              (25,000
              )
              
              2.65
              
              
              —Forfeited,
                  February 28, 2006
              
              
              (150,000
              )
              
              2.17
              
              
              —Forfeited,
                  February 28, 2006
              
              
              (50,000
              )
              
              2.55
              
              
              —Forfeited,
                  March 13, 2006
              
              
              (10,000
              )
              
              2.70
              
              
              —Forfeited,
                  March 13, 2006
              
              
              (1,500
              )
              
              2.55
              
              
              —Forfeited,
                  March 13, 2006
              
              
              (1,429
              )
              
              2.80
              
              
              —Granted,
                  March 16, 2006
              
              
              115,000
              
              
              2.90
              
              
              115,000Granted,
                  April 20, 2006
              
              
              27,000
              
              
              4.50
              
              
              —Forfeited,
                  April 30, 2006
              
              
              (16,251
              )
              
              2.80
              
              
              —3,834,625
              
              
              
              
              
              2,871,548
  -31-
 
 The
        following summarizes certain information regarding stock options at May 31,
        2006:
 
 **Total**
              
              **Exercisable****Exercise
                  Price Range**
              
              **Number**
              
              **Weighted
                  Average Exercise Price**
              
              **Weighted
                  Average Remaining Life (years**)****
              
              **Number**
              
              **Weighted
                  Average Exercise Price**
              
              **Weighted
                  Average Remaining Life**$0.90
                  - 1.35
              
              
              100,000
              
              $
              1.25
              
              
              5.5
              
              
              100,000
              
              $
              1.25
              
              
              5.5$1.36
                  - 1.80
              
              
              2,061,255
              
              $
              1.50
              
              
              6.8
              
              
              1,758,242
              
              $
              1.50
              
              
              6.8$1.81
                  - 2.25
              
              
              165,000
              
              $
              2.13
              
              
              7.6
              
              
              127,497
              
              $
              2.13
              
              
              7.6$2.26
                  - 2.70
              
              
              978,214
              
              $
              2.53
              
              
              8.9
              
              
              521,659
              
              $
              2.53
              
              
              8.9$2.71
                  - 3.15
              
              
              503,156
              
              $
              2.82
              
              
              9.3
              
              
              364,150
              
              $
              2.82
              
              
              9.3$3.16
                  - 4.50
              
              
              27,000
              
              $
              4.50
              
              
              9.9
              
              
              0
              
              $
              -
              
              
              9.93,834,625
              
              $
              1.98
              
              
              
              
              
              2,871,548
              
              $
              1.87
 
 **NOTE
        H** - **DESCRIPTION
        OF LEASING ARRANGEMENTS**
 
 The
        Company leases its office space under a non-cancelable operating lease. The
        lease term, revised on November 18, 2005 extends through January 31, 2008,
        with
        an option to extend for one or two years beyond the revised termination date.
        Rent expense for the years ended May 31, 2006 and 2005 was $119,256 and $98,498,
        respectively.
 
 In
        December 2004, the Company entered into a non-cancelable operating lease
        for a
        multi-function copier. The lease term is for sixty three months. Rent expense
        for the years ended May 31, 2006 and 2005 was $4,014 and $1,245,
        respectively.
 
 Future
        minimum lease payments are as follows:
 
 **Year
                  ending May 31,**2007
              
              $
              126,5062008
              
              
              115,7212009
              
              
              2,9882010
              
              
              2,490Total
              
              $
              247,705
  **NOTE
        I - SALE AND REPURCHASE OF COMMON STOCK**
 
 On
        September 18, 2003, the Company closed a private placement, raising a total
        of
        $11,356,063, net of transaction costs in exchange for 7,445,646 shares of
        common
        stock and 2,605,976 warrants exercisable at $2.40 per share, expiring on
        September 18, 2008. In addition, 558,423 warrants, exercisable at $2.40 per
        share, were issued to Merriman and Company, as part of their fee for acting
        as
        placement agent.
 
 On
        September 19, 2003, the Company repurchased and retired 2,994,803 shares
        of
        common stock from former Chief Scientific Officer Paul Mann and family members
        for $300,000.
 
 On
        May
        25, 2005, the Company closed a private placement, raising a total of $4,851,193,
        net of transaction costs in exchange for 2,593,788 shares of common stock
        at
        $1.95 per share and 920,121 warrants exercisable at $2.25 per share, expiring
        on
        May 25, 2010. Included in this warrant amount were 100,000 warrants for Pacific
        Growth Equities, LLC. As part of this transaction, the warrants issued on
        September 18, 2003, were repriced from $2.40 per share to $2.25 per share.
  -32-
  On
        December 30, 2005, the Company closed a private placement, raising a total
        of
        $5,510,967, net of transaction costs in exchange for 2,595,132 shares of
        its
        common stock at $2.25 per share, with warrants to purchase an additional
        648,784
        shares of its common stock, at an exercise price of $2.99 per share. The
        warrants expire on December 30, 2010.
  In
        the
        fourth fiscal quarter of 2006, existing investors exercised 351,598 warrants
        which resulted in $786,538 in cash proceeds to the Company.
  **NOTE
        J - EMPLOYEE BENEFITS**
 
 Effective
        July 1, 2005, we maintain a defined contribution 401(k) retirement plan,
        pursuant to which employees, with no service requirement, can elect to
        contribute up to 15% of their compensation on a tax deferred basis up to
        the
        maximum amount permitted by the Internal Revenue Code of 1986, as amended.
        We do
        not match the participants’ deferral.
 
 **NOTE
        K - SUBSEQUENT EVENTS**
 
 On
        July
        7, 2006, the Company closed a private placement, raising a total of $14,337,252,
        net of transaction costs in exchange for 6,071,013 shares of its common stock
        at
        $2.50 per share, with warrants to purchase an additional 1,517,753 shares
        of its
        common stock, at an exercise price of $3.85 per share. The warrants expire
        on
        July 7, 2011.
 
 On
        July
        26, 2006, we received an Office Action Summary (rejection) of our initial
        usage
        patent application from the United States Patent and Trademark Office or
        PTO.
        This does not mean that we will not succeed in obtaining meaningful claims
        relative to the use of Protein A in the treatment of autoimmune diseases.
        While
        the PTO office action is denoted as final, there are several options to pursue
        acceptance. We have the right to request an interview with the patent examiner
        and his respective supervisor, file a continuation application or file an
        appeal. We intend to pursue all options which we deem necessary in pursuit
        of an
        approval of our initial patent application.
  
 **ITEM
        8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE**
  None
  **ITEM
        8A - CONTROLS AND PROCEDURES**
 
 Within
        the 90 days prior to the date of this report, the Company carried out an
        evaluation, under the supervision and with the participation of its management,
        including its Chief Executive Officer and Chief Financial Officer, of the
        effectiveness of the design and operation of the Company’s disclosure controls
        and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation,
        the Chief Executive Officer and Chief Financial Officer concluded that the
        Company’s disclosure controls and procedures are effective in alerting them in a
        timely matter to material information required to be included in its periodic
        filings with the Securities and Exchange Commission. There have been no
        significant changes in the Company’s internal controls or in other factors that
        could significantly affect these controls subsequent to the date of the
        previously mentioned evaluation.
 
 **ITEM
        8B - OTHER INFORMATION**
 
 None.
  **ITEM
        9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;** **COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT**
 
 The
        information required as to this Item is incorporated herein by reference
        to the
        data under the caption “Information Concerning Nominees and Continuing
        Directors” and “Executive Officers” in the Proxy Statement to be used in
        connection with the solicitation of proxies to be voted at our Annual Meeting
        of
        Stockholders.
  -33-
  **ITEM
        10 - EXECUTIVE COMPENSATION**
 
 The
        information required as to this Item is incorporated herein by reference
        to the
        data under the captions “Executive Compensation and Other Information,” “Report
        on Executive Compensation and Employment Agreements” in the Proxy Statement to
        be used in connection with the solicitation of proxies to be voted at our
        Annual
        Meeting of Stockholders.
  **ITEM
        11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
        STOCKHOLDERS’ MATTERS**
 
 The
        information required as to this Item is incorporated herein by reference
        to the
        data under the caption “Security Ownership of Certain Beneficial Owners and
        Management” in the Proxy Statement to be used in connection with the
        solicitation of proxies to be voted at our Annual Meeting of Stockholders.
  **ITEM
        12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**
 
 The
        information required as to this Item is incorporated herein by reference
        from
        the data under the caption “Certain Relationships and Related Transactions” in
        the Proxy Statement to be used in connection with the solicitation of proxies
        to
        be voted at our Annual Meeting of Stockholders.
  -34-
  **ITEM
        13 - INDEX TO EXHIBITS**
 
 2.1
              
              Stock
                  Purchase Agreement among the Company, Don Hanosh and Enerdyne Corporation
                  December 6, 1999)
              
              Incorporated
                  by reference, to Exhibit 2.1 to the Company’s 10-SB filing on December 6,
                  1999.2.2
              
              Merger
                  Agreement and Plan of Re-organization between the Company and Enerdyne
                  Corporation
              
              Incorporated
                  by reference, to Exhibit 2.2 to the Company’s 10-SB filing on December 6,
                  1999.2.3
              
              Plan
                  of Merger and Agreement between Protalex, Inc., a New Mexico corporation
                  and Protalex, Inc. a Delaware Corporation
              
              Incorporated
                  by reference, to Exhibit 2.1 to the Company’s 8K filing on December 6,
                  2004.3.1
              
              Certificate
                  of Incorporation of the Company
              
              Incorporated
                  by reference, to Exhibit 3.1 to the Company’s 8-K filing on December 6,
                  2004.3.2
              
              Bylaws
                  of the Company
              
              Incorporated
                  by reference, to Exhibit 3.2 to the Company’s 8-K filing on December 6,
                  2004.3.3
              
              State
                  of Delaware, Certificate of Amendment of Certificate of Incorporation
              
              Incorporated
                  by reference, to Exhibit 3.3 to the Company 10-QSB filed on January
                  13,
                  2006.4.1
              
              Letter
                  Agreement with Pembroke Financial Ltd. Dated July 9, 2001
              
              Incorporated
                  by reference, to Exhibit 10.9 to the Company’s 10-KSB/A filed on September
                  24, 2003.4.2
              
              Securities
                  Purchase Agreement dated September 18, 2003 between the Company
                  and
                  certain of the Selling Stockholders
              
              Incorporated
                  by reference, to Exhibit 4.2 to the Company’s SB-2 filed on October 20,
                  2003.4.3
              
              Investor
                  Rights Agreement dated September 18, 2003 between the Company and
                  certain
                  of the Selling Stockholders
              
              Incorporated
                  by reference, to Exhibit 4.3 to the Company’s SB-2 filed on October 20,
                  2003.4.4
              
              Form
                  of Common Stock Purchase Warrant issued by the Company to the Selling
                  Stockholders
              
              Incorporated
                  by reference, to Exhibit 4.4 to Company’s SB-2 filed on October 20,
                  2003.4.5
              
              Warrant
                  and Common Stock Purchase Agreement dated May 25, 2005 among the
                  Company
                  and the several purchasers thereunder
              
              Incorporated
                  by reference to Exhibit 4.5 to the Company’s Form SB-2 filed on June 16,
                  2005.4.6
              
              Registration
                  Rights Agreement dated May 25, 2005 among the purchasers under
                  the Warrant
                  and Common Stock Purchase Agreement of even date therewith
              
              Incorporated
                  by reference to Exhibit 4.6 to the Company’s Form SB-2 filed on June 16,
                  2005.4.7
              
              Addendum
                  1 to Subscription Agreement and Questionnaire of vSpring SBIC,
                  LP dated
                  May 25, 2005
              
              Incorporated
                  by reference to Exhibit 4.7 to the Company’s Annual Report on Form 10-KSB
                  filed on August 26, 2005.4.8
              
              Warrant
                  and Common Stock Purchase Agreement dated December 22, 2005 among
                  the
                  Company and the several purchasers thereunder
              
              Incorporated
                  by reference, to Exhibit 4.5 to the Company’s SB-2 filed on January 27,
                  2006.
  -35-
 
 4.9
              
              Registration
                  Rights Agreement dated December 22, 2005 among the purchasers under
                  the
                  Warrant and Common Stock Purchase Agreement of even date therewith
              
              Incorporated
                  by reference, to Exhibit 4.6 to the Company’s SB-2 filed on January 27,
                  2006.4.10
              
              Form
                  of Warrant issued by the Company to the Selling Stockholders dated
                  December 22, 2005 of even date therewith
              
              Incorporated
                  by reference, to Exhibit 4.7 to the Company’s SB-2 filed on January 27,
                  2006.4.11
              
              Warrant
                  and Common Stock Purchase Agreement dated June 30, 2006 among the
                  Company
                  and the several purchasers thereunder
              
              Incorporated
                  by reference, to Exhibit 10.1 to the Company’s Current Report on Form 8K
                  filed on July 10, 2006.4.12
              
              Registration
                  Rights Agreement dated June 30, 2006 among the purchasers under
                  the
                  Warrant and Common Stock Purchase Agreement of even date therewith
              
              Incorporated
                  by reference, to Exhibit 10.2 to the Company’s Current Report on Form 8K
                  filed on July 10, 2006.4.13
              
              Form
                  of Warrant issued by the Company to the Selling Stockholders dated
                  June
                  30, 2006 of even date therewith
              
              Incorporated
                  by reference, to Exhibit 10.3 to the Company’s Current Report on Form 8K
                  filed on July 10, 2006.10.1
              
              Employment
                  offer letter executed by Steven H. Kane
              
              Incorporated
                  by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
                  10-QSB filed on January 13, 2006.10.2
              
              Board
                  appointment executed by G. Kirk Raab
              
              Incorporated
                  by reference, to Exhibit 10.4 to the Company’s Annual Report on Form
                  10-KSB/A filed on September 24, 2003.10.3
              
              Form
                  of Option Agreement
              
              Incorporated
                  by reference, to Exhibit 10.6 to the Company’s Annual Report on Form
                  10-KSB/A filed on September 24, 200310.4
              
              Frame
                  Contract between the Company and Eurogentec S.A.
              
              Incorporated
                  by reference, to Exhibit 10.5 to the Company’s 10-KSB/A filed on September
                  24, 200310.5
              
              Assignment
                  of Intellectual Property from Alex LLC to the Company
              
              Incorporated
                  by reference, to Exhibit 10.8 to the Company’s 10-KSB/A filed on September
                  24, 2003.10.6
              
              Assignment
                  of Intellectual Property from Dr. Paul Mann to the Company
              
              Incorporated
                  by reference, to Exhibit 10.8 to the Company’s Annual Report on Form
                  10-KSB/A filed on September 24, 2003.10.7
              
              Stock
                  Redemption Agreement dated August 15, 2003, by and between the
                  Company,
                  Paul L. Mann, Leslie A. McCament-Mann, Gail Stewe and Elizabeth
                  Sarah Anne
                  Wiley
              
              Incorporated
                  by reference, to Exhibit 10.10 to the Company’s Annual Report on Form
                  10-KSB/A filed on September 24, 2003.10.8
              
              Letter
                  dated August 21, 2003 from Paul L. Mann to the Company
              
              Incorporated
                  by reference, to Exhibit 10.11 to the Company’s Annual Report on Form
                  10-KSB/A filed on September 24, 2003.10.9
              
              Technology
                  License Agreement dated November 17, 1999, between the Company
                  and Alex,
                  LLC
              
              Incorporated
                  by reference, to Exhibit 10.4 to the Company’s Registration of Securities
                  on Form 10-SB filed on December 6,
                  1999.
  -36-
 
 10.10
              
              Letter
                  Agreement, dated March 16, 2005, effective October 26, 2004, between
                  the
                  Company and Carleton A. Holstrom
              
              Incorporated
                  by reference, to Exhibit 10.3 to the Company’s Quarterly Report on Form
                  10-QSB/A filed on April 14, 2005.10.11
              
              Description
                  of the verbal agreement between the Company and Eugene A. Bauer,
                  M.D.
              
              Incorporated
                  by reference to the Company’s Current Report on Form 8K filed on February
                  22, 2005.10.12
              
              Protalex,
                  Inc. 2003 Stock Option Plan Amended and Restated as of July 29,
                  2005
              
              Incorporated
                  by reference to Appendix B to the Company’s Proxy Statement filed with the
                  SEC on September 23, 2005.10.13
              
              Description
                  of the verbal agreement between the Company and Peter G. Tombros
              
              Incorporated
                  by reference to the Company’s Current Report on Form 8K filed on November
                  14, 2005.10.14
              
              Modified
                  lease agreement with Union Square LP, dated November 18, 2005
              
              Incorporate
                  by reference to Exhibit 99.1 to the Company’s Current Report Form 8-K
                  filed with the Securities and Exchange Commission on November 22,
                  2005.10.15
              
              Employment
                  offer letter executed by Marc L. Rose
              
              Incorporated
                  by reference, to Exhibit 10.2 to the Company’s Quarterly Report on Form
                  10-QSB filed on January 14, 2005.10.16
              
              Employment
                  off letter executed by Victor S. Sloan, M.D
              
              Incorporated
                  by reference, to Exhibit 10.1 to the Company’s Quarterly Report on Form
                  10-QSB filed on October 14, 2005.10.17
              
              Clinical
                  Study Agreement executed October 19, 2005 between the Company and
                  PAREXEL
                  International LLC
              
              Incorporated
                  by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form
                  10-QSB filed on January 13, 2006.10.18
              
              Service
                  Contract with AAIPharma Inc., dated February 8, 2006
              
              Incorporated
                  by reference to exhibit 10.1 to the Company’s Quarterly Report on Form
                  10-QSB filed on April 14, 2006.31.1
              
              Certification
                  of Chief Executive Officer pursuant to Section 302(a) of the
                  Sarbanes-Oxley Act
              
              Filed
                  herewith31.2
              
              Certification
                  of Chief Financial Officer pursuant to Section 302(a) of the
                  Sarbanes-Oxley Act
              
              Filed
                  herewith32.1
              
              Certification
                  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
                  Act
              
              Filed
                  herewith32.2
              
              Certification
                  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
                  Act
              
              Filed
                  herewith
 
 **ITEM
        14 - PRINCIPAL ACCOUNTANT FEES AND SERVICES**
 
 The
        information required as to this Item is incorporated herein by reference
        to the
        data under the captions “Audit Fees,” “Audit-Related Fees,” “Tax Fees” and “All
        Other Fees” in the Proxy Statement to be used in connection with the
        solicitation of proxies to be voted at our Annual Meeting of Stockholders.
 
 The
        Company has adopted a code of ethics and will provide a copy of such code
        without any charge to the person requesting the copy by written request to
        the
        Chief Financial Officer of the Company.
  -37-
  **SIGNATURES**
 
 In
        accordance with Section 13 or 15(d) of the Exchange Act, the registrant
        caused this report to be signed on its behalf by the undersigned, thereunto
        duly
        authorized.
  Date:
                  July 28, 2006**PROTALEX,
                  INC.**By:
              /s/
                Steven H. KaneSteven H. Kane
                Chief Executive
                  Officer
  /s/
                  G. Kirk Raab
              
              Chairman
                  of the Board and Director
              
              July
                  28, 2006G.
                  Kirk Raab/s/
                  Steven H. Kane
              
              President,
                  Chief Executive Officer and Director (Principal Executive
                  Officer)
              
              July
                  28, 2006Steven
                  H. Kane/s/
                  Marc L. Rose, CPA
              
              Vice
                  President of Finance, Chief Financial Officer,
              
              July
                  28, 2006Marc
                  L. Rose
              
              Treasurer
                and
                Corporate Secretary (Principal Financial and Accounting Officer)/s/
                  Dinesh Patel, Ph.D
              
              Director
              
              July
                  28, 2006Dinesh
                  Patel/s/
                  Peter G. Tombros
              
              Director
              
              July
                  28, 2006Peter
                  G. Tombros/s/
                  Frank M. Dougherty
              
              Director
              
              July
                  28, 2006Frank
                  M. Dougherty/s/
                  Thomas P. Stagnaro
              
              Director
              
              July
                  28, 2006Thomas
                  P. Stagnaro/s/
                  Carleton A. Holstrom
              
              Director
              
              July
                  28, 2006Carleton
                  A. Holstrom/s/
                  Eugene A. Bauer, MD
              
              Director
              
              July
                  28, 2006Eugene
                  A. Bauer
  -38-