**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**WASHINGTON, D.C. 20549

**FORM 10-K**

**x****        ****ANNUAL REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006**

**OR**

**o****           ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**FOR THE TRANSITION PERIODFROM               TO**

**COMMISSION FILE NO. 001-14888**

**INOVIO BIOMEDICALCORPORATION**(EXACT NAME OFREGISTRANT AS SPECIFIED IN ITS CHARTER)

| **DELAWARE**                              |   | **33-0969592**       |
|-------------------------------------------|--------|----------------------|
| (State or other  jurisdiction             |   | (I.R.S. Employer     |
| of incorporation  or organization)        |   | Identification  No.) |
| **11494 SORRENTO VALLEY ROAD**            |   | ** **           |
| **SAN  DIEGO, CALIFORNIA**                |   | **92121-1318**       |
| (Address of  principal executive offices) |   | (Zip Code)           |

 

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE:(858) 597-6006

SECURITIES REGISTEREDPURSUANT TO SECTION 12(B) OF THE ACT:

| **COMMON STOCK, $0.001 PAR VALUE** |   | **AMERICAN  STOCK EXCHANGE**                 |
|------------------------------------|--------|----------------------------------------------|
| (Title of Class)                   |   | (Name of Each  Exchange on Which Registered) |

 

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OFTHE ACT: NONE

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o No x

Indicate by check markwhether the Company (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes x No o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K. x

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct. (Check one):

Large accelerated filer    o            Acceleratedfiler    x            Non-acceleratedfiler    o

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

The aggregate market valueof the voting and non-voting common equity (which consists solely of shares ofCommon Stock) held by non-affiliates of the Registrant as of June 30, 2006was approximately $63,899,267 based on $2.07, the closing price on that date ofthe Registrant’s Common Stock on the American Stock Exchange.

The number of sharesoutstanding of the Registrant’s Common Stock, $0.001 par value, was 38,176,204as of March 8, 2007.

**DOCUMENTS INCORPORATED BYREFERENCE**

Wehave incorporated by reference into Part III of this Annual Reportportions of our proxy statement for the 2007 Annual Meeting of Stockholders,for which a definitive proxy statement will be filed with the Securities andExchange Commission within 120 days after the fiscal year to which thisAnnual Report relates.

 

----

**TABLEOF CONTENTS**
| PART I                                                                                                               |   | 2   |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|-----|--------|
| ITEM 1. BUSINESS                                                                                                          |   | 2   |   |
| ITEM 1A. RISK FACTORS                                                                                                     |   | 28  |   |
| ITEM 1B. UNRESOLVED STAFF COMMENTS                                                                                        |   | 46  |   |
| ITEM 2. PROPERTIES                                                                                                        |   | 46  |   |
| ITEM 3. LEGAL PROCEEDINGS                                                                                                 |   | 46  |   |
| ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                                                              |   | 46  |   |
| PART II                                                                                                              |   | 46  |   |
| ITEM 5. MARKET FOR COMPANY’S COMMON EQUITY, RELATED  STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES |   | 46  |   |
| ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA                                                                              |   | 49  |   |
| ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS                       |   | 50  |   |
| ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES  ABOUT MARKET RISK                                                      |   | 66  |   |
| ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                       |   | 66  |   |
| ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS  ON ACCOUNTING AND FINANCIAL DISCLOSURE                             |   | 66  |   |
| ITEM 9A. CONTROLS AND PROCEDURES                                                                                          |   | 66  |   |
| ITEM 9B. OTHER INFORMATION                                                                                                |   | 68  |   |
| PART III                                                                                                             |   | 68  |   |
| ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE  COMPANY                                                                 |   | 68  |   |
| ITEM 11. EXECUTIVE COMPENSATION                                                                                           |   | 69  |   |
| ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT                                   |   | 69  |   |
| ITEM 13. CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS                                                                  |   | 69  |   |
| ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                           |   | 69  |   |
| PART IV                                                                                                              |   | 70  |   |
| ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                       |   | 70  |   |
| SIGNATURES                                                                                                                |   | 76  |   |
| CONSOLIDATED  FINANCIAL STATEMENTS                                                                                        |   | F-1 |   |

 

THIS ANNUAL REPORT ON FORM 10-K CONTAINSFORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. SUCHSTATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS CONTAINING THE WORDS “BELIEVES,”“ANTICIPATES,” “EXPECTS,” “ESTIMATES” AND WORDS OF SIMILAR MEANING. OUR ACTUALRESULTS COULD DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENTS,WHICH REFLECT MANAGEMENT’S OPINIONS ONLY AS OF THE DATE OF THIS REPORT, AS ARESULT OF SUCH RISKS AND UNCERTAINTIES. WE UNDERTAKE NO OBLIGATION TO REVISE ORPUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKINGSTATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE,BUT ARE NOT LIMITED TO, THOSE FOUND IN THIS ANNUAL REPORT ON FORM 10-KIN PART I, ITEM 1A UNDER THE HEADING “RISK FACTORS;” IN PART II, ITEM7 UNDER THE HEADING “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS;” AND ADDITIONAL FACTORS DISCUSSEDELSEWHERE IN THIS ANNUAL REPORT AND IN OTHER DOCUMENTS WE FILE FROM TIME TOTIME WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING OUR QUARTERLYREPORTS ON FORM 10-Q. READERS ARE CAUTIONED NOT TO PLACE UNDUERELIANCE ON ANY FORWARD-LOOKING STATEMENTS.

1

----

**PART I**

**ITEM 1.**                BUSINESS

**OVERVIEW**

We are a biomedical company whose technology platformis based on the science of electroporation. We are a leader in developing humantherapeutic applications of electroporation, which uses brief, controlledelectrical pulses to increase cellular uptake of useful biopharmaceuticals,with what we believe to be the industry’s most extensive patent portfoliocovering *in vivo* electroporation. To ourknowledge, we were the first to commercialize laboratory electroporationequipment. We now develop medical applications of our electroporationtechnology, the MedPulser® ElectroporationSystem, which delivers drugs or genes to treat cancer, infectious diseases, andprotein deficiency diseases. We are focused on commercializing our SelectiveElectrochemical Tumor Ablation (SECTA) therapy and developing multiple DNAvaccines using our delivery platform for gene-based treatments. SECTA, ourlocal ablation therapy for solid tumors, is designed for local treatment ofsolid tumors, selectively killing cancerous cells and minimizing cosmetic andfunctional impacts to healthy tissue typically treated around the tumor. Wehave sought to enhance our technologies through various licensing andcollaboration agreements. With our partners, we are researching and developingproducts using our patented DNA delivery technologies for the prevention andtreatment of serious and life-threatening diseases.

We are currently buildingtwo major franchises based on our MedPulser® Electroporation System: Oncology and DNAvaccines.

*Oncology*

For oncology, our therapyuses electroporation to enhance the local uptake of the generic cytotoxic drugbleomycin sulfate to achieve tumor cell death. Our system, which uses a pulsegenerator together with disposable needle applicators, delivers electricalpulses to tumors injected with the drug. We believe the distinctive feature ofthe system is the preservation of healthy tissue at the margins of the tumor.We anticipate the system may therefore afford advantages over surgery inpreserving function and improving the quality of life for cancer patients whowould otherwise face significant morbidity associated with cancer surgery. OurSECTA therapy is in Phase III clinical trials in the United States and Europefor the treatment of recurrent head and neck (H&N) cancer; and in PhaseI/II for the treatment of recurrent breast cancer. In addition, we areconducting pre-marketing studies to support the commercialization of our SECTAsystem in Europe. Prior to commercial sales of our SECTA system in the EuropeanUnion (EU), we are required to obtain, and already have obtained, a CE Mark,which is recognized internationally as a symbol of quality and compliance.Completion of the European pre-marketing studies will provide pharmacoeconomicdata to be used to seek reimbursement, as well as provide additional efficacyand safety data and local experience with physicians who are thought leaders inEurope. This pre-marketing data is a vital component of a European commerciallaunch of the SECTA system and will represent an important milestone for us.

*DNA Delivery/DNAVaccines*

As part of our MedPulser® product line, our efforts in tumor ablationare complemented by the development of other cancer therapies usingelectroporation therapy for the intracellular delivery of DNA-based treatments.To our knowledge, we were the first company to initiate a clinical studyinvolving the use of electroporation technology to deliver therapeutic genes inhuman subjects, which we achieved in collaboration with investigators at theMoffitt Cancer Center in Tampa, Florida in December 2004. Thisinvestigation was approved by the U.S. Food and Drug Administration (FDA) andinvolves electroporating melanomas with DNA encoded to express particularcytokines in an attempt to stimulate immunity against the patient’s tumor. In2004, we extended our license with Vical, Inc. (Vical) (NASDAQ:VICL) toinclude 

2

----

a worldwide license forthe use of our electroporation technology together with Vical’s “naked” DNAtechnology for their development of an HIV DNA vaccine. In 2004, we executed amajor licensing deal with milestone and royalty payments with Merck &Co., Inc. (Merck) (NYSE:MRK) for the development of proprietary DNAvaccines for cancer and infectious diseases using electroporation. In January 2005,we acquired Inovio AS, a Norwegian company, expanding our patent portfolio inthe area of intramuscular electroporation. Through the Inovio AS acquisition wealso obtained a collaboration with the University of Southampton (Southampton),United Kingdom on a Phase I clinical study for the electroporation of a DNAvaccine for prostate carcinoma. Our DNA electroporation delivery technology isnow being evaluated in four independent Phase I/II clinical trials togetherwith Moffitt, Vical, Merck and Southampton, respectively. In January 2006,we also executed a collaborative commercialization agreement with Tripep AB(Tripep) (Stockholm:TPEP.ST) to co-develop a hepatitis C therapeutic vaccine,which is likely to result in another Phase I clinical trial this year. In November 2006,we executed another major non-exclusive license to our DNA delivery technologyfor intramuscular applications regarding certain therapeutic DNA vaccines withWyeth Pharmaceuticals, a division of Wyeth (Wyeth) (NYSE: WYE).

In addition to our electroporation technology, we haveacquired technology for controlling gene expression and for the delivery of DNAvaccines. Our GeneSwitch® technology is a genetically engineered form ofthe progesterone receptor that can regulate the gene expression of gene therapyvectors in a dose-dependent manner in order to trace amounts of a clinicallyapproved anti-progestin. Our GeneSwitch® technology iscurrently licensed for research purposes to Invitrogen, Wyeth, Organon, GSK, LARNAX,Senomyx, and to Bayer Schering Pharma AG for the development of selected genetherapy products. Our DNAvax® polymer and lipid formulation useful for DNAvaccination is currently licensed for use with DNA vaccine technology by IDMPharmexa-Epimmune and Innogenetics.

We believe that attemptsto pioneer new therapies based on DNA have been hampered by the complexity,side effects, or lack of therapeutic response associated with other deliverymechanisms. Viral vectors, which are genetically engineered viruses used ascarriers or vectors to deliver DNA to the cell, are complex and have posedconcerns relating to toxicity. In addition to safety issues, viral vectors aredifficult and expensive to manufacture. Lipid vectors share some of these samechallenges. Other approaches such as the gene or particle gun have shownutility for certain applications. Because electroporation enhances the level ofDNA delivery and gene expression observed with non-viral vectors and has provenefficient and safe in animal experiments, we have been developing MedPulser® DNA Delivery Systems for different targettissues and applications. By engineering different applicators and choosingappropriate electroporation parameters, we believe we can deliver sufficientvolumes of DNA to muscle, tumor tissue, skin or the vasculature to generatelevels of gene expression capable of producing clinically significanttherapeutic or prophylactic responses. We believe such results would facilitateour existing attempts to promote DNA technologies as preferred therapies forcancer, infectious diseases including bioterrorism targets, protein deficiencydiseases resulting from genetic defects, and vascular diseases.

**MedPulser**® Electroporation Instrument

Our MedPulser® electroporation system delivers controlledelectrical pulses to facilitate the uptake of useful biopharmaceuticals. Thepulse generator is designed for ease of use, such that minimal user input isneeded to apply the therapy. Based on the size and anatomical location of thetumor to be treated, a physician selects the most appropriate electrodeapplicator. The applicator is then connected to the pulse generator of theMedPulser® electroporationinstrument. The applicator sends information for that particular applicator’ssize and shape to the pulse generator, which automatically selects theappropriate treatment parameters. Several different electrode applicatorconfigurations are currently available. The pulse generator is designed toallow for a wide variety of new electrode applicator configurations in order toprovide accessibility to a broad scope of tumor types. In addition, the systemincorporates other features 

3

----

to minimize thepossibility of applicator reuse as well as prevent the use of competitiveapplicators with the MedPulser® electroporation instrument. The commercialversion of the MedPulser® electroporation instrument has been certifiedby Underwriter Laboratories (UL), an independent test laboratory as meetinginternational electrical safety requirements.

In the U.S. a product approval pathway negotiated withthe FDA requires marketapproval of the MedPulser® and SECTA therapythrough a pre-marketing approval application (PMA) granted by the Center forDevices and Radiological Health (CDRH). The FDA treats SECTA as a combinationproduct with the mechanism of action related to the activity of the genericdrug bleomycin sulfate. Consequently, the clinical trial design and review willbe handled as a PMA with collaboration between CDRH and the Center for DrugEvaluation and Research (CDER) in the review of the clinical study. Due to thecomplexities of completing Phase I, II, and III clinical trials we arecurrently unable to estimate the length of time or cost involved in obtainingthe required approvals from the FDA.

In Europe and Asia, we anticipate that the MedPulser® electroporation instrument will be regulatedas a device. In the EU, the MedPulser® Electroporation System falls under the MedicalDevice Directive 93/42/EEC (MDD), meaning that prior to marketing the MedPulser® Electroporation System we are required toobtain the CE Mark for this device. This process includes the certification ofour quality system to the requirements of the MDD. We have achieved CE Markcertification for the MedPulser® Electroporation System, which allows us todistribute it in the European community. In many EU countries, bleomycinsulfate is approved for intra-tumoral, intra-lesional, local,intramuscular or subcutaneous administration. As the administration of approveddrugs outside the label indication may be at the discretion of the physicianand hospital pharmacist, we cannot predict with absolute certainty whetheradditional regulatory approvals for the combined use of the drug with oursystem may be required in certain countries. The costs associated with anyfilings for such regulatory approvals cannot be reasonably determined at thistime.

To our knowledge, we are presently the only U.S.company that has publicly announced that it has the capability to manufactureelectroporation equipment in compliance with the U.S. and European QualitySystem Regulations. We also believe we are the only company participating inclinical trials using electroporation therapy for DNA delivery. Our competitorsinclude several companies that either have rights to intellectual propertyrelated to electroporation devices, to electroporation methods, or toapplications of electroporation.

We believe that ourcompelling asset base of intellectual property resulting in scientific andengineering accomplishments, combined with our clinical results to date,position us as a leader in both electroporation-based electrochemical ablationof solid tumors and in electroporation as a method of DNA delivery.

**BUSINESS STRATEGY**

Our objective is to be abiomedical company focused on developing and commercializing products thataddress significant unmet medical needs and, as a result, improve patients’quality of life. To achieve this objective, our business strategy includes thefollowing key elements.

***Therapeutic Drug and DNA Delivery***

We develop equipmentdesigned to enable the use of electroporation to achieve efficient andcost-effective delivery into patients of therapeutic drugs or DNA targeting avariety of illnesses. Although there are many diseases where improved drug orDNA delivery is important, we believe that our greatest opportunities lie inapplying electroporation to the areas of oncology and DNA-based therapies(including immunotherapy).

4

----

***Advancing our Product Pipeline***

We currently focus our resources on the independentdevelopment of our SECTA product line, and aim to generate clinical datasupporting commercialization from our current clinical program. Throughconducting the European pre-marketing studies, our strategy is to provide theinitial clinical and pharmacoeconomic (PE) data to support commercializationefforts by an appropriate global or regional partner, ideally with anestablished oncology device franchise. The initial product launch wouldtherefore be based on the company’s initial approved indications, to befollowed by the partner’s investment in additional applications.

We also focus ourresources on the development of infectious disease vaccines and cancerimmunotherapies. We intend to retain significant participation in the productdevelopment and commercialization of any of these DNA vaccines and therapeuticsin pre-clinical and human trials. We may choose to expand our programs andenlist the support of more partners to accelerate product development andcommercialization.

***Expand Market Opportunity***

The marketopportunity afforded by the initial H&N, skin, and breast indications,although substantial, does not represent the full potential of our SECTAtherapy. Therefore, our plan is to identify additional market opportunities anddevelopment paths, including improvements to the applicator design, writingprotocols and perhaps obtaining FDA approval for protocols addressing  additional indications in order tosubstantially reduce the start-up time for a partner to pursue newapplications. We have focused on activities that can create additional valuewithout a significant adverse impact to our financial resources and staff.Considerable effort has gone into analyzing the market potential and path tocommercialization, identifying opportunities including:

·       palliation;

·       laryngealcancer;

·       tumormargin treatment after surgical resection (adjuvant); and

·       tumorsize reduction prior to surgical resection (neo-adjuvant).

We are also actively pursuing refinements, theevaluation of potential enhancements to our core technologies and theexploration of additional DNA delivery technologies. We are developing futureproduct candidates based on these technologies through pre-clinical andclinical testing to determine their safety and efficacy. We also seek todevelop additional applications for our technologies by testing new approachesto disease control or prevention. These efforts could lead to furtherindependent product development or licensing opportunities. In addition, wecontinually evaluate compatible technologies or products that may be ofpotential interest for in-licensing or acquisition.

***Expand theApplication of Our Technologies and Enable Product Development ThroughStrategic Collaborations***

In advanced pre-clinicaltrials and early clinical trials, our technology has enabled high levels of DNAuptake and gene expression without significant acute side effects. Based on theresults obtained, we believe that our technology is well positioned and ascapable as competing technologies to meet the requirements for DNA vaccines andimmunotherapy. Our strategy is to develop DNA vaccine and immunotherapyapplications with major pharmaceutical, biotechnology and government agencypartners wherever reasonable and/or possible to license our DNA deliverytechnology for specific genes or specific medical indications. In mostpartnering situations, we provide proprietary instruments and expertise tooptimize the delivery of DNA for particular applications and the partnercompany provides its proprietary gene, allowing us access to complementarytechnologies or greater resources. We believe that entering into 

5

----

selectivecollaborations as part of our product development programs can enhance thesuccess of our product development and commercialization, diversify our productportfolio and enable us to better manage our operating costs. Our collaborationwith partners allows pre-clinical research, clinical trials and mutuallybeneficial opportunities to expand our product pipeline, which may lead to theintroduction of a new treatment and/or products in the marketplace at a rateand range which we may not be able to support on our own. Additionally, suchcollaborations enable us to leverage investment by our collaborators and reduceour net cash burn while retaining significant economic rights. Our goal is toenter into additional agreements to license our electroporation technology foruse in the delivery of specific genes in 2007 and 2008. See “BusinessObjectives” for further discussion of our corporate strategy and goals.

**Business Objectives**

We currently havethe following business objectives:

1.                Conclude patientenrollment of Phase III recurrent and second primary H&N cancer studies inthe U.S. and EU;

2.                Conclude theEuropean pre-marketing clinical study of new and recurrent primary squamouscell carcinoma H&N (SCCHN) cancers to support the commercialization of ourSECTA therapy using our MedPulser® electroporation system in the EU;

3.                Conclude theEuropean pre-marketing clinical study of primary and recurrent skin cancers tosupport commercialization of our SECTA therapy using our MedPulser® electroporation system;

4.                Conclude patientenrollment in the Phase I/II breast cancer study to treat locally recurrentcancer after a mastectomy or partial mastectomy in the U.S. and EU;

5.                Conclude astrategic global or regional license (e.g., European) with a partner fordevelopment and the marketing rights to the SECTA therapy for treating solidtumors;

6.                Enter into furtherindustry relationships for the use of our electroporation technology in thedelivery of specific therapeutic genes; and

7.                Initiateadditional Phase I human clinical studies involving the use of electroporationwith DNA, most likely in the areas of infectious disease and cancer.

6

----

**PRODUCTS ANDPRODUCT DEVELOPMENT**

Togetherwith our licensees and collaborators, we are currently developing a number ofDNA-based vaccines and therapeutics for the prevention or treatment of cancerand infectious diseases. Our current independent development focus is on ournovel SECTA technology. The table below summarizes progress in our independent,collaborative and out-licensed product development programs. 
|                                                                   | ** ** | ** **                             | ** ** | **Pre-Clinical  Studies**                       | ** ** | **Development Status** | ** ** | ** **       | ** ** |
|-------------------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------------------|------------|-----------------------------|------------|------------------|------------|
| **Product Area**                                             | ** ** | ** **                             | ** ** | **Product Target and  Indication(s)** | ** ** | **In Vitro**           | ** ** | **In Vivo** | ** ** | **Phase  I** | ** ** | **Phase  II** | ** ** | **Phase  III** | ** ** | **Phase  IV** | ** ** | **Development** | ** ** |
| Therapeutic Drug  Delivery                                   | ** ** | **Oncology**                           |       |                                            |       |                        |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                              |       | H&N                                | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   | ** ** | ** ** | **P** |   | ** ** | ** ** | **P** |   |   |   | IP |   |   |   | IP*** |   |   | Inovio |   |
|                                                              |       | Cutaneous BCC & SCC | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   | ** ** | ** ** | **P** |   | ** ** | ** ** | **P** |   |   |   |   |   |   |   | IP*** |   |   | Inovio |   |
|                                                              |       | Melanoma                               | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   | ** ** | ** ** | **P** |   | ** ** | ** ** | **P** |   |   |   |   |   |   |   |   |   |   | Inovio |   |
|                                                              |       | Kaposi’s Sarcoma                  | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   | ** ** | ** ** | **P******* |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Inovio |   |
|                                                              |       | Pancreas                               | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   |   |   | IP |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Inovio |   |
|                                                              |       | Liver                                  | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   | ** ** | ** ** | **P******* |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Inovio |   |
|                                                              |       | Breast                                 | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   |   |   | IP |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Inovio |   |
|                                                              |       | Prostate                               | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Inovio |   |
|                                                              |       | Hepatocellular Carcinoma          | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Inovio |   |
|                                                              |       | Lewis Lung Carcinoma                   | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Inovio |   |
|                                                              |       | Non-Small Cell Lung                    | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Inovio |   |
|                                                              |       | Fibrosarcoma                           | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Inovio |   |
|                                                              |       | Glioma                                 | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Inovio |   |
|                                                              |       | Ovarian                                | ** ** | ** **                                      | **P**      |                        |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Inovio |   |
| ** **                                                        | ** ** | **Dermatology**                        |       |                                            |       |                        |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Inovio |   |
|                                                              |       | Vitamin C                              | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Inovio |   |
|                                                              |       | Warts                                  | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Inovio |   |
| ** **                                                        | ** ** | **Vascular**                           | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Inovio |   |
| DNA Delivery  Immunotherapy                                  |       | Malignant Melanoma                     | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   |   |   | IP |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Moffitt/RMR |   |
|                                                              |       | Metatstatic Melanoma                   | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   |   |   | IP |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Vical |   |
| DNA Delivery  Tumor-associated  antigen therapeutic vaccines |       | HER-2 and CEA,  unspecified cancer     | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   |   |   | IP |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Merck |   |
|                                                              |       | Prostate Cancer                        | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   |   |   | IP |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Univ.  of  Southampton |   |
|                                                              |       | Unspecified Cancer                     | ** ** | ** **                                      | **P**      |                        |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Merck |   |
|                                                              |       | Unspecified Cancer                     |       |                                            |       |                        |       |             |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | IDM |   |
| DNA Delivery  Infectious disease vaccine                     | ** ** | **HIV Vaccine****                      | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   | ** ** | ** ** | **P** |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Pharmexa-  Epimmune |   |
|                                                              | ** ** | **HBV Vaccine****                      | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   | ** ** | ** ** | **P** |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Innogenetics |   |
|                                                              |       | HCV Vaccine                            | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Tripep/Inovio |   |
|                                                              |       | CMV Vaccine                            | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Vical |   |
|                                                              |       | Unspecified Targets                    | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Wyeth |   |
|                                                              |       | Biodefense Targets                     | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | US  Army |   |
|                                                              | ** ** | **HCV Vaccine****                      | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Innogenetics |   |
|                                                              | ** ** | **HPV Vaccine****                      | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | Innogenetics |   |
|                                                              | ** ** | **Cancer Vaccine****                   | ** ** | ** **                                      | **P**      |                        | ** ** | ** **       | **P**      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | IDM |   |
|                                                                   |            |                                        |            |                                                 |            |                             |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

**P****               **=Completed

IP              = In Progress

*                    Efficacystudies conducted in North America with approval of selected clinics’Investigational Review Boards (IRB) or in the EU by clinics’ Ethics Committees

7

----

**             Acquired throughValentis acquisition in October 2006

***      Phase IV trial in EUonly

**Electroporation andInovio’s MedPulser**® Instruments

Most drugs must enter through a cell membrane into acell in order to perform their useful function. However, gaining entry into acell through the outer cell membrane can be a significant challenge. In the1970s it was discovered that the brief application of high-intensity, pulsedelectric fields can create temporary and reversible permeability, or pores, inthe cell membrane. This pulse-induced permeabilization of the cellular membraneis generally referred to as electroporation. One observable effect of cellmembrane electroporation is the less restricted exchange of molecules betweenthe cell exterior and interior—the benefit being that it allows and enhancesthe uptake of, for example, a biopharmaceutical agent previously injected intolocal tissue. The extent of membrane permeabilization depends upon variouselectrical, physical, chemical, and biological parameters.

The transient, reversiblenature of this electrical permeabilization of membranes is the underlying basisof Inovio’s MedPulser® electroporation instruments. The MedPulser® generates electric fields in target tissues toinduce electroporation, which increases cellular uptake of molecules such aschemotherapeutic drugs and even large molecules such as DNA. Most cell typesand tissue can be successfully electroporated as long as applicators with theappropriate configuration of needle electrodes can be used to expose cells andtissues to the electric field.

**SelectiveElectrochemical Tumor Ablation (SECTA) Therapy**System

Successful electrochemical ablation of tumors requiresthe presence of a sufficient extracellular concentration of thechemotherapeutic drug (i.e. bleomycin sulfate) as well as the generation of anelectric field of appropriate strength in the targeted tumor mass to increasecell membrane permeability and thereby intracellular concentration of the drug.Consistent delivery of an electric field of minimum strength to the tumorcells, without unnecessarily risking damage to the surrounding healthy tissuesby delivery of fields exceeding a critical maximum value, is one key to theeffectiveness of our MedPulser® electroporation instrument.

The principle operation of our MedPulser® electroporation instrument is the creation,within the confines of a series of conductive needle-electrodes arranged in asix-needle hexagonal array, of a pulsed electric field of sufficient strengthto induce a transient increase in the permeability of membranes of the cellsenclosed within the field. Our MedPulser® electroporationinstrument supplies a series of precisely timed, short duration pulses of avery specific voltage to pairs of the applicator needle-electrodes andautomatically sequences these pulses among the pairs of opposed needlescomprising the needle array. This “sequencing” of pulses assures complete anduniform coverage of the electric field within the needle array and complete anduniform electroporation of the cell membranes.

Our SECTA therapy consists of our MedPulser® electroporation system, which enhances localcellular uptake of useful biopharmaceuticals, in conjunction with a designatedchemotherapeutic agent called bleomycin sulfate. SECTA has been specificallydesigned to destroy malignant tissue without harming normal healthy tissue.

The Medpulser® electroporation system has two components: (1) apulse generator that creates the electric field; and (2) a sterile,disposable electrode applicator for single patient use. The applicatorspresently used contain needle electrode arrays that are inserted into the tumortissue. The applicators vary in needle length, needle gauge, electrode needlespacing, tip angle and handle configuration to allow the physician to access awide range of tumors. New configurations of electrode applicators have beencontemplated for future development to address future customer requirements.

8

----

The SECTA therapy isintended to provide physicians with an easy-to-use alternative to surgery toprovide local tumor control. Surgery is a clinical tool frequently used toremove solid tumors, but can result in disfigurement and loss of function. Webelieve our SECTA therapy is highly selective and effective in killingcancerous cells and can minimize or avoid detrimental outcomes that can arisefrom surgery. In doing so, it may improve the patient’s quality of life andreduce treatment and hospitalization costs.

**Phase III Studies**

We are enrolling patients in two Phase IIIpivotal studies to evaluate the use of our SECTA system as a treatment forrecurrent and second primary squamous cell carcinoma of the H&N (SCCHN).The trials have sites in North America, the EU and the rest of the world, andare divided by tumors that are anterior and posterior to the tonsillar pillar. Bothprotocols compare our SECTA therapy to surgery in patients with resectablerecurrent or second primary SCCHN. The primary endpoint of the study is todemonstrate that patients treated with electroporation therapy have superiorpreservation of function (e.g. eating in public, diet, and talking) comparedwith those who undergo surgery. Secondary endpoints include local tumor controland survival (with the goal of showing non-inferior results compared tosurgical treatment) as well as safety and pharmacoeconomic advantage.

In late 1997, the FDA granted us clearance to initiatemulti-center Phase II clinical trials in the United States utilizingour technology in combination with bleomycin sulfate (now referred to as the SECTAtherapy) to treat recurrent squamous cell carcinoma of the H&N in latestage patients who had failed conventional therapies such as surgery orchemotherapy. We also obtained similar clearance from the Canadian HealthProtection Branch to initiate the Phase II trials in Canada. TwoPhase II protocols were initiated in January 1998. The first Phase IIstudy was a single crossover controlled study evaluating the effectiveness ofSECTA with bleomycin sulfate to treat tumors that failed an initial bleomycinsulfate-alone treatment. The second Phase II protocol was a singlearm study that evaluated the effect of SECTA with bleomycin sulfate as the onlytreatment.

Twenty-five patients (37 tumors) were enrolled in thecrossover-controlled study and initially received bleomycin sulfatetreatment alone without electroporation. None of the tumors treated in thismanner showed a complete response1 andonly one tumor demonstrated a partial clinical response2. Seventeen of these patients subsequentlyhad lesions treated with bleomycin sulfate and EPT. Of the 20 lesions treated,55% achieved an objective clinical response3. This provided convincing evidence of the enhancingability of our SECTA therapy to ablate tumors with the combination of bleomycinsulfate and electroporation.

In the open-label Phase II (single arm) study,all patients received full bleomycin sulfate and EPT as their initialtreatment. Among the 25 patients (31 tumors) treated, 58% achieved anobjective clinical response. This second Phase II trial also confirmed theresults of the first Phase II trial in which patients first received bleomycinsulfate alone and then were crossed over to receive SECTA.

In a similar open-label single arm study conducted inFrance, 56% of lesions achieved an objective clinical response consistent withthe North American results.

More recently, market seeding trials in the EUevaluated bleomycin sulfate and EPT for localized primary or recurrent oralcavity squamous cell carcinoma. Sixteen of the 20 patient tumors (80%) hadno evidence of cancer cells by histopathology assessment four weeks aftertreatment, further validating the potential of EPT as a primary local treatmentfor H&N cancer.

9

----

Theresults of these H&N cancer studies are provided in the table below.
|                                         | ** ** | ** **           | ** ** | ** **                              | ** ** | ** **          | ** ** | **Objective Tumor  Response(3)** | ** ** |
|-----------------------------------------|------------|----------------------|------------|-----------------------------------------|------------|---------------------|------------|---------------------------------------|------------|
| **Study**                               | ** ** | ** **           | ** ** | **H&N Cancer  Type/Treatment** | ** ** | **# Patients** | ** ** | **# Tumors**                     | ** ** | **Responding  Tumors** | ** ** | **Non-Responding  Tumors** | ** ** |
| Phase I/II                         |       | Advanced             |       |                                    | 10         |                |       |                                  | 10         |   |   |   | 8(80% | ) |   |   | 2(20% | ) |   |
| North America                           |       | Bleo-EPT             |       |                                    |       |                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Phase II—Study(1)             |       | Advanced             |       |                                    | 25         |                |       |                                  | 37         |   |   |   | 1(3% | ) |   |   | 36(97% | ) |   |
| North America                           |       | Bleo-alone           |       |                                    |       |                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Phase II—Study(1)(cross-over) |       | Advanced             |       |                                    | 17         |                |       |                                  | 20         |   |   |   | 11(55% | ) |   |   | 9(45% | ) |   |
| North America                           |       | Bleo-EPT             |       |                                    |       |                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Phase II—Study(2)             |       | Advanced             |       |                                    | 25         |                |       |                                  | 31         |   |   |   | 18(58% | ) |   |   | 13(42% | ) |   |
| North America                           |       | Bleo-EPT             |       |                                    |       |                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Phase II—Study(3)             |       | Advanced             |       |                                    | 12         |                |       |                                  | 18         |   |   |   | 10(56% | ) |   |   | 8(44% | ) |   |
| EU                                      |       | Bleo-EPT             |       |                                    |       |                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Market Seeding                          |       | Primary  and         |       |                                    | 20         |                |       |                                  | 20         |   |   |   | 16(80% | ) |   |   | 4(20% | ) |   |
| EU                                      |       | Early Recurrent |       |                                    |       |                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
|                                    |       | Bleo-EPT             |       |                                    |       |                |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
|                                         |            |                      |            |                                         |            |                     |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          Complete response meansthat no sign of the tumor is present.

(2)          Partial response is >50% reduction in tumor volume.

(3)          Objectivetumor response includes complete and partial responses to treatment.

**Phase I/II Studies**

We are currently enrolling patients in our Phase I/IIstudy to treat locally recurrent breast cancer after a mastectomy or partialmastectomy using our SECTA therapy. The ultimate goal beyond the primaryobjective of demonstrating safety in this Phase I/II study is to establishSECTA as a viable alternative to surgery for recurrence and can be consideredan alternative to mastectomy (i.e. to preserve breasts). Recurrent breastcancer is often responsive to therapy and patients with local-regional diseaseincluding chest wall recurrences may become long-term survivors with theappropriate therapies. However, chest wall recurrences are problematic for thesurgical oncologist to remove or for the medical oncologist to effectivelytreat with systemic chemotherapy. For this reason, there is a significant unmetclinical need for a new approach.

The primary endpoint of the Phase I/II breast cancerstudy is to determine the safety profile of the MedPulser® electroporation therapy in conjunction withintralesionally-injected bleomycin sulfate for the treatment of cutaneous andsubcutaneous metastatic or locally recurrent breast cancer. The secondaryendpoints are to verify response by histology and to initially assess tumorresponse rates. It is our goal to complete enrollment of up to 12 patients inthe first quarter of 2007.

10

----

**Pre-MarketingStudies**

We are enrollingpatients in two pre-marketing European clinical studies, one for patients withprimary or recurrent SCCHN and one for patients with primary or recurrentcutaneous or subcutaneous tumors. Both studies are consistent with the intendeduse of the SECTA system and are designed to support commercialization in theEU. Prior clinical trials supported the safety and performance of the SECTAsystem for the treatment of these tumors, which resulted in securing theCE Mark. The European clinical studies are designed to:

·                    documentthe clinical and pharmacoeconomic benefits of the SECTA system in support ofsales, with coding and reimbursement within the EU;

·                    establishcenters of excellence to facilitate early adoption and sales;

·                    createa reference and customer base among key opinion leaders for a targetedpan-European commercial launch; and

·                    generateadditional clinical data to support or supplement applications and approvals inNorth America.

Each study is enrolling approximately 80-100patients at about 60 hospitals located in the U.K., Germany, Italy, France,Austria, and other western European countries. The studies will evaluate SECTA’spharmacoeconomic impact on the cost of operative and post-operative care. Itwill also examine patients’ quality of life, and local tumor control within theSCCHN study group. This data will help to define the overall benefits of theSECTA system for the treatment of SCCHN relative to the standard of care, whichis often surgery and frequently compromises a patient’s ability to speak orswallow and may be grossly disfiguring. The European studies are restricted tothe treatment of recurrent SCCHN and therefore differ from the current U.S.Phase III clinical trials, which are controlled two-armed trials for thepurpose of collecting clinical data to support the filing of marketapplications in the U.S.

Inlate 1997 and early 1998, we received regulatory approval to initiate clinicaltrials for H&N cancer, metastatic cancer of the liver, pancreatic cancer,metastatic melanoma and kaposi’s sarcoma and to initiate an expanded metastaticmelanoma study. These trials involved treating multiple lesions with bleomycinsulfate and electroporation together and control lesions treated with bleomycinsulfate alone on each patient. The overall results of these cutaneous cancerstudies are provided in the table below.

| ** **                  | ** ** | ** ** | ** ** | **bleomycin  sulfate-Electroporation  Tumor Response** | ** ** | **bleomycin  sulfate-alone Tumor  Response** | ** ** |
|-----------------------------|------------|------------|------------|-------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **Study**                   | ** ** | ** ** | ** ** | **# Patients**                                         | ** ** | **# Lesions**                                | ** ** | **Objective  Response** | ** ** | **# Lesions** | ** ** | **Objective  Response(1)** | ** ** |
| Melanoma                    |       |       | 44         |                                                        |       |                                              | 178        |   |   | 141(79% | ) |   | 61 |   |   |   | 13(21% | ) |   |
| Basal Cell  Carcinoma (BCC) |       |       | 25         |                                                        |       |                                              | 64         |   |   | 64(100% | ) |   | 8 |   |   |   | 1(13% | ) |   |
| Kaposi’s Sarcoma (KS)  |       |       | 5          |                                                        |       |                                              | 13         |   |   | 13(100% | ) |   | 11 |   |   |   | 6(55% | ) |   |
|                             |            |            |            |                                                             |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          Objective tumor responseincludes complete and partial responses to treatment.

The overall average tumor response rate followingelectroporation with bleomycin sulfate in cutaneous and subcutaneous cancer was86% (ranging from 79% for metastatic melanoma to 100% for basal cell carcinomaand kaposi’s sarcoma compared with an overall tumor response rate of 25% forbleomycin sulfate-alone treated lesions (ranging from 13% for basal cellcarcinoma, 21% for metastatic melanoma to 55% for kaposi’s sarcoma cancer).

These trials wereinitiated to demonstrate the SECTA system’s safety and performance in treatinga variety of solid tumors in support of CE Marking of the system. We achievedthe CE Mark certification in March 1999. To date, the SECTA system is CEmarked as an electroporation device indicated for the 

11

----

treatmentwith bleomycin sulfate of H&N cancer and cutaneous and subcutaneouscancers. This allows us to market our SECTA system within the countries of theEuropean Economic Area (EEA), which includes all countries of the EuropeanUnion.

**SECTACommercialization and R&D**

Our research and development efforts in the field ofoncology focus on preparing for a strategic alliance with a major partner inoncology that will market, sell and distribute the SECTA system in the majorterritories (i.e. North America, Europe and Asia). We expect that the companywould receive upfront and milestone payments and royalties on the sales of thedevices by the commercial partner. It is possible that we might manufacture andsupply devices to the partner. If we do so, then we would expect to deriveadditional income from the sale of the devices to the partner at an agreed upon“transfer price” at which the Company would recover the cost of goods formanufacturing the product and related overheads as well as receive a negotiatedprofit. Preparations for a strategic alliance include the organization andsummarization of engineering, pre-clinical and clinical data and records toenable prospective partners to carry out appropriate due diligence.

In addition to our work inH&N cancer, we plan to use our SECTA system to deliver bleomycin sulfatefor the treatment of other cancers. We are currently assessing our competitiveadvantage for the treatment of other cancers and the size of markets that wecould potentially serve. Extension of our SECTA system to additionalindications is expected to involve pre-clinical and engineering work regardingthe treatment of additional cancer types and the design and manufacture of newtypes of electrode applicators, such as a specialized applicator for laryngealcancer. We intend to develop second-generation electroporation devicesfor cancer treatment including devices that minimize muscle contractions and adevice for treating deep-seated tumors, such as prostate tumors. We intend tocontinue to strengthen our intellectual property position in the oncology areaby pursuing patent protection of any new material inventions. We believe theseinvestments should add value to our opportunity and enhance the valuation ofany partnership that we may enter relating to our SECTA program.

**DNA Vaccines andImmunotherapies**

DNA vaccines are intended to prevent a disease(prophylactic vaccines) or to treat an existing disease (therapeutic vaccines).A DNA vaccine consists of DNA plasmid molecules encoding a selected antigen orfragment of an antigen that are introduced into cells of humans or animals withthe purpose of evoking an immune response to the encoded antigen. Informationencoded in the vaccine DNA plasmid molecules directs the cells to produceproteins that may then trigger the immune system to mount one or both of tworesponses: the production of antibodies, also known as humoral immune response,and/or the activation of T-cells and “killer cells,” collectively termed cellmediated immune response. These responses can neutralize or eliminateinfectious agents (viruses, bacteria, and other microorganisms) or abnormalcells (e.g., malignant tumor cells). DNA vaccines have several advantages overtraditional vaccines in that they are completely non-pathogenic (meaning theycannot cause the disease), may be effective against diseases which cannot becontrolled by traditional vaccines, and are relatively fast, easy andinexpensive to design and produce. DNA vaccines are stable under normal environmentalconditions for extended periods of time and do not require continuousrefrigeration. A potentially major advantage of DNA vaccines is theirshort development cycle. For example, DNA vaccines against newly identifiedviral agents may be developed within weeks or months, as opposed to the yearsoften required to develop a traditional vaccine candidate.

We have acquired considerable expertise in thedelivery and efficacy evaluation of DNA vaccines, both against infectiousagents and complex diseases, such as cancer. In most cases  we have chosen skeletal muscle as the targettissue for vaccine delivery as this muscle is known to facilitate robust andlong-lasting 

12

----

immune responses. However,skin is also an attractive target for DNA vaccination and we have developed andpatented technology for DNA delivery into skin cells as well.

We are building a DNAfranchise around the use of our proprietary electroporation technology togetherwith gene-based treatments. The flagship of our development efforts involve licenseagreements with Wyeth, Merck and Vical in which these companies are supportingthe development and registration of the therapies using our devices. Thisstrategy of utilizing development partners distinguishes the DNA franchise fromthat of the oncology franchise in which we are currently sponsoring thedevelopment efforts. To date, most of our DNA vaccine development programs havebeen primarily initiated by corporate partners who sustain the majority of thedevelopment expenses and have the ability to conduct the commercializationactivities.

**MedPulser**® DNA Delivery Systems

DNA vaccines have tremendous potential as therapeuticagents for treating various diseases. One of the key obstacles to thesuccessful development and commercialization of DNA vaccines have been thelimitations associated with current delivery systems. Alternative approachesbased on the use of viruses and lipids are complex and expensive, have showninconsistent effectiveness, and have in the past created concerns regarding safety.Electroporation provides a straightforward, cost effective method fordelivering DNA into cells with high efficiency and minimal complications (ascompared to viral vectors) and, importantly, inducing levels of gene expressionconsidered suitable for clinical development.

The MedPulser® DNADelivery System (DDS) has been developed to optimize the delivery of DNA intomuscle cells. The modified system is similar to the MedPulser® Electroporation System and SECTA therapydescribed before. The primary differences are in the parameters of the electricpulses delivered by the generator and the needle-electrode configuration of theapplicator. The pulse is designed specifically for DNA delivery with a lowerstrength electrical field of longer duration than for tumor electroporation.The applicator has a four needle-electrode array consisting of one set ofopposite pairs. They are available in a range of configurations to meet therequirements of a variety of applications. In addition to the MedPulser® DNA Delivery System we are also testing arelated DNA electroporation system. We acquired a novel DNA delivery devicetermed the Elgen system as part of our acquisition of Inovio AS in 2005. TheElgen system is designed for muscle delivery and consists of a computer-controlled,motorized two needle delivery device that injects DNA and deliverselectroporation pulses through the same set of needles. This experimentalsystem is currently under evaluation in our clinical trial for a prostatecancer vaccine at the University of Southampton in the U.K.

For DNA delivery to tumorcells we use a device that is similar to that used for SECTA in that it usesthe same type of six needle applicators and a similar electrical field strength.The system is termed the MedPulser® DNAElectroporation System.  Extensivepreclinical testing has found that the electroporation parameters developed forSECTA are also useful in delivering plasmid-based therapeutics to tumors. Thisobservation allowed us to quickly expand our opportunities into the directdelivery of DNA encoding cytokines into accessible tumors using the MedPulser® DNA Electroporation System.

**Cancer Therapies**

Although cancer has been a major focus ofpharmaceutical companies for decades, cancer is still the second leading causeof death in the United States. Traditionally, three approaches have beenavailable for treatment of cancer: surgery, radiation therapy, andchemotherapy. The limitations of current cancer treatments are demonstrated bythe mortality associated with this disease. In addition, these treatments causesignificant side effects and morbidity.

For many decades, it has been suggested that theimmune system should also be able to recognize cancer cells as abnormal anddestroy these cells. However, cancer cells have developed mechanisms that 

13

----

allow them to escape thesurveillance of the immune system. A treatment that can augment the immuneresponse against tumor cells by making the cancer more “visible” to the immunesystem would likely represent a significant improvement in cancer therapy.Immune system-enhancing proteins such as IL-2 and IL-12 have shownencouraging results. However, these agents often require frequent doses thatregularly result in severe side effects. Using DNA-based immunotherapies thatenable the body to “naturally” express or produce IL-2 or IL-12proteins or using DNA vaccines, it may be possible to stimulate the immunesystem to specifically attack cancer cells. It is possible that such methodsmay be used to develop an effective and relatively nontoxic approach for thetreatment of cancer.

With our partners we have researched deliveryenhancements that may complement certain DNA delivery technologies and may helpus develop cancer therapies. The current clinical-stage approaches consist of injectingcertain plasmids directly into lesions, which plasmids, upon uptake into cells,direct the production of the encoded immunostimulatory proteins. We have takenthis approach one step further, following injection with electroporation.Electroporation enables the entry and significant uptake of plasmid DNA intothe tumor cells, ultimately leading to cytokine production. The intent of thisprocedure is to induce an immune response that will eliminate the cancer.

The ease of manufacturing, convenience, and ability torepeat administration may offer advantages over the current modalities oftherapy. In addition, cancer therapies using non-viral DNA delivery may offeran added margin of safety compared with viral-based delivery, as no viralDNA/RNA or viral particles are contained in the formulation.

Preclinical studies in animals have demonstrated thesafety and potential efficacy of this approach. Subsequently, in human studies,a very low incidence of treatment-related adverse events have been observed. IL-2and IL-12 electroporation enhanced non-viral cancer immunotherapies underdevelopment are discussed below.

In December 2004, we initiated a Phase Iclinical trial sponsored by the H. Lee Moffitt Cancer Center using ourMedPulser® DNA Electroporation System to deliver IL-12to tumors with the aim of treating malignant melanoma. The trial is measuringthe safety of our MedPulser® DNA Electroporation System to deliver pDNAinto tumor cells to mount an immune response. In this Phase I open-labelstudy, pDNA encoding IL-12 is delivered directly to tumors in patientswith malignant melanoma through electroporation using our MedPulser® DNA Electroporation System.

In July 2005, we announced along with our partnerVical Inc., the initiation of a human Phase 1 clinical study of aninvestigational method of delivering interleukin-2 (IL-2), a potentimmune system stimulant, for patients with recurrent metastatic melanoma.Intravenous delivery of IL-2 protein is already approved as a treatmentfor metastatic melanoma, but frequently causes severe systemic toxicities. Thenovel treatment approach being studied in this trial involves direct injectioninto a tumor lesion of plasmid DNA (pDNA) encoding IL-2, followed byelectroporation in which the local application of electrical pulses aredesigned to enhance the uptake of the pDNA into tumor cells. The pDNA isdesigned to cause cells within the tumor to produce high levels of IL-2protein locally and thereby stimulate the immune system to attack the tumorwithout the systemic toxicities associated with injected IL-2.

In November 2006, we granted VGX Pharmaceuticals(VGX) a world-wide non-exclusive license to our DNA delivery technology forintratumoral delivery of a proprietary gene to control the growth of melanomaand other cancers. This study is currently in the pre-clinical stage.

DNA vaccines against cancer use a portion of thegenetic code of a cancer antigen to cause a host to produce proteins of theantigen that may induce an immune response. The technical limitations ofconventional vaccine approaches have constrained the development of effectivevaccines for many diseases. In addition, the safety risks associated withcertain conventional vaccine approaches may offset their potential benefits. Inthe broader vaccine marketplace, it is important to note a changing dynamic. 

14

----

Traditionally, vaccineshave been predominantly focused on the pediatric market, intended to protectchildren from diseases that could cause them serious harm. Today, there is agrowing interest in vaccines against diseases that may affect adolescents andadults, which include both sexually transmitted diseases and infections thatstrike opportunistically, such as during pregnancy or in immuno-compromisedindividuals, including the geriatric population. We believe our technologies,because of their potential safety and development time advantages, could beideally suited for the development of this new generation of vaccines. Preclinicalstudies in animals have demonstrated the safety and potential efficacy of thisapproach. The following programs are underway with the University ofSouthampton and Merck.

In April 2005, TheUniversity of Southampton initiated a U.K. Medicines and Healthcareproducts Regulatory Agency (MHRA) approved Phase I/II clinical trial undertakenin collaboration with us. The study uses our electroporation technology todeliver a therapeutic plasmid-based DNA vaccine to skeletal muscle with the aimof treating recurrent prostate cancer. The trial, sponsored and led by the Universityof Southampton, is investigating whether the DNA vaccine, developed at theUniversity of Southampton, can stimulate patients to develop immune responsesagainst prostate cancer and whether use of our electroporation system enhancesthis response. In this Phase I/II open-label study, plasmid DNA encoding aprostate tumor antigen is delivered directly to skeletal muscle in patientswith recurrent prostate cancer. This technology uses electroporation to enablethe entry and uptake of plasmid DNA into muscle cells, which has been shown inpreclinical studies to induce antigen production and generation of an immuneresponse against the tumor antigen.

In November 2005, Merck initiated a Phase Iclinical trial of a DNA cancer vaccine based on our DNA gene deliverytechnology that uses pDNA encoding human epidermal growth factor receptor 2, orHER-2, and carcinoembryonic antigen, or CEA. As a result of Merckreaching this milestone, we received a payment of $2.0 million. The Phase 1trial will evaluate the safety, tolerability and immunogenicity of the vaccine.Further development may lead to additional milestone and royalty payments.

Numerous cancer antigenshave been identified over the past few decades and better identification toolsare under development by others. We will continue to evaluate opportunities toacquire or partner cancer antigens that may be useful in large market cancerssuch as breast, lung and prostate.

**DNA Vaccines forInfectious Diseases**

The selection of targets for our infectious disease programsis driven by three key criteria: the complexity of the product developmentprogram, competition, and commercial opportunities.

Like cancer, chronic infectious disease pathogens haveevolved certain mechanisms that escape typical immune surveillance. Thesemechanisms often render antibody and antibody-inducing therapies unable tocontrol infections. A need for technology that induces strong cell-mediatedimmune responses - like DNA vaccination - is needed to develop next generationvaccines for a variety of deadly and debilitating infections.

The premise of gene-based immunization is that for aparticular targeted pathogen, selected DNA sequences can be introduced intomuscle where they will produce one or more antigens and thereby elicit bothcellular and humoral immune responses against that pathogen. Our proprietarygene delivery system for gene-based immunization uses intramuscularelectroporation to enhance the cellular delivery and expression of these DNAagents to produce the desired antigens. Compared to conventional vaccines, DNAvaccines delivered using electroporation may provide important advantages inaccelerating the onset and enhancing the level of immunity generated, which iscritical in attempting to address threats posed by pandemics or bioterrorism.Pertinent genes can be quickly identified and isolated from potentialinfectious organisms, sequenced, and synthesized for vaccination of the generalpopulation or military in order to induce a protective immune response.

15

----

We believe advantagesof DNA vaccines for infectious diseases delivered via electroporation include:

·       robustT-cell responses not achievable with other technologies;

·       theability to make therapeutic as well as prophylactic vaccines;

·       stabilityand manufacturing advantages; and

·       intramusculardelivery with a low cost disposable device component.

In January 2006, we signedan agreement with Sweden-based Tripep to co-develop a therapeutic vaccine forhepatitis C virus (HCV) using electroporation. The vaccine will be based onTripep’s proprietary HCV antigen construct and delivered to infectedindividuals using our MedPulser® DNA Delivery System. Initiation of a Phase Iclinical trial in healthy volunteers is expected to begin in 2007 and will beperformed in Sweden. The terms of the development agreement call for each partyto fund a portion of the Phase I and subsequent Phase II trials and thereaftershare profit according to their contribution. Inovio will initially get a 33%ownership in the overall product with the option to increase this to 50% afterthe completion of the Phase I trial.

In November 2006, weentered into a collaboration and license agreement with Wyeth to develop DNAvaccines against multiple infectious disease targets. For further discussion aboutthis agreement, see “DNA Vaccine and Immunotherpy Delivery” below.

**DNA Vaccines forBiodefense**

With the adoptionof the Project Bioshield Act in 2004 by the U.S. government, there is anopportunity to secure development funding and for proof-of-principle DNAvaccine studies for biowarfare pathogens, and we have been successful atsecuring funding from the U.S. government. We believe DNA vaccines deliveredwith electroporation for bio-defense have the following advantages:

·       establishmentof a platform technology that can be readily adapted to new threats;

·       abilityto rapidly manufacture and scale-up vaccine candidates for newly identifiedpathogens;

·       rapidinduction of protective immune responses following vaccination; and

·       longshelf life of products for stockpiling.

As resources obtained from government funding can beleveraged to enhance the development of technology in the area of cancer andchronic infectious disease, we will continue to pursue opportunities in thearea of biodefense. As an example of potential applications in the area ofbiodefense, one of our partners (RMR, LLC) is currently employing its skinelectroporation technology in the pre-clinical development of an anthraxvaccine under a Department of Defense Small Business Innovation ResearchProgram grant. We currently have commercial rights to this skin electroporationsystem. The technology may also be useful with respect to targets such as theLassa fever virus currently being studied by the U.S. Army in collaborationwith us.

In October 2006, weannounced that we were awarded an appropriation of approximately $1.1 millionby the United States Department of Defense for the development of a genedelivery electroporation technology for vaccination against infectiousdiseases, including potential bioterrorism agents. The United States Congressappropriated the funding in the Defense Appropriations Bill for 2007. Theappropriation is a continuation of prior funding from the United States Army tous focused on the development of a more effective gene delivery system forgene-based vaccines. Inovio is working closely on this project with Dr. ConnieSchmaljohn, a world-renowned virologist and chief of the Department ofMolecular Virology at the United States Army Medical Research Institute ofInfectious Diseases (USAMRIID) at Ft. Detrick, Maryland.

16

----

**Gene Therapy**

Over the past tenyears, classic gene therapy or treatment of inherited disorders has provendifficult. Electroporation of genes encoding therapeutic proteins has, however,demonstrated the potential to resolve these difficulties. *In vivo*production of proteins such as Factor IX for hemophilia or EPO for anemiarepresents large market opportunities. Pre-clinical studies for our partnershave demonstrated multiple desirable characteristics of our approach,including:

·       longterm expression of the desired gene for convenient dosing;

·       lackof immune responses to the plasmid vector;

·       abilityto achieve therapeutic levels of desired protein at a steady state; and

·       morenatural production of the therapeutic protein than current recombinantproteins.

The major technical hurdlefor classic gene therapy is the induction of an unwanted immune response to thetransgene product. As this problem may take significant resources to overcome,we have decided not to focus on this market in the near term.

**AnimalHealth/Veterinary**

While we are primarilyfocused on the use of our technology in the development of novel humantherapeutics, we retain certain rights to veterinary applications and may seekto exploit these rights in the future.

**AdditionalApplications of our DNA Delivery Technology**

In addition to using our electroporation technologyfor drug and vaccine delivery, it can be used for research to validate new drugtargets and to deliver molecules. Such use of our technology may facilitatetransition into clinical development.

We continue to pursuebasic research and limited opportunities in the areas of stem cells, *ex-vivo* applications and RNAi.

**PARTNERSHIPS ANDCOLLABORATIONS**

**Therapeutic DrugDelivery**

On September 20,2000, the University of South Florida (USF) Research, Inc. granted us anexclusive worldwide license to its rights for certain patents and patentapplications generally related to needle electrodes, for which we had jointlydeveloped with USF. The terms of the exclusive license include a royalty to bepaid to USF based on net sales of products under the license. As of December 31,2006, no royalties had accrued as no sales were generated from this product. Inconnection with the acquisition of this exclusive license, we issued 37,500shares of our common stock and warrants to purchase 150,000 shares of ourcommon stock at $9.00 per share (some of which will vest subject to theoccurrence of specified milestones to USF and its designees, Drs. RichardHeller, Mark Jaroszeski, and Richard Gilbert).

**DNA Vaccine andImmunotherapy Delivery**

In November 2006, we entered into a collaborationand license agreement with Wyeth for a worldwide non-exclusive license to ourtechnology for certain infectious disease targets, for which we received anupfront payment of $4.5 million. We will also receive research support, annualmaintenance fees, royalties on any net product sales, and, contingent upon theachievement of clinical and regulatory milestones, payments of up to $60.0million over the term of the agreement.

17

----

In November 2006, we also granted VGX aworld-wide non-exclusive license to our DNA delivery technology forintratumoral delivery of a proprietary gene to control the growth of melanomaand other cancers. Under the terms of the agreement, we will receive a licensefee and payments based on successful completion of clinical and regulatorymilestones. We will exclusively supply VGX with electroporation devices for thetherapy included in the license agreement and we will receive royalties on thesale of products covered by the license.

In October 2006, we announced that we wereawarded an appropriation of approximately $1.1 million by the United StatesDepartment of Defense for the development of a gene delivery electroporationtechnology for vaccination against infectious diseases, including potentialbioterrorism agents.

In October 2006, we announced that we acquiredfrom Valentis, Inc. certain DNA delivery and expression assets, includingValentis’ DNAvax® polymer delivery system and GeneSwitch® gene regulation technology, and rights underexisting license agreements with IDM Pharma Inc., Innogenetics and Pharmexa AS.Innogenetics and Pharmexa have completed separate Phase I clinical trials ofDNA vaccines using the DNAvax® polymerdelivery system.

In July 2006, we announced that we extended ourlicense with RMR by exercising an existing option to license certain patentedtechnology relating to the delivery of gene-based therapeutics into skin. Thisextends a long-standing relationship with the University of South Floridascientists and RMR founders Drs. Heller, Jaroszeski, and Gilbert. Thisrelationship dates back to the co-development of our MedPulser® Electroporation Instrument fortreatment of all types of solid tumors including H&N cancers. RMR is thecollective effort of three scientists in collaboration with the University ofSouth Florida and the H. Lee Moffitt Cancer Center and Research Institute. The licensealso included other patents involving the delivery of genes or drugs via *ex vivo*, intratumoral, and intramuscular electroporation.Recent pre-clinical studies suggest that, for certain indications, needle-lessskin electroporation of DNA plasmids encoding selected antigens may also beeffective at inducing desired immune responses. The patented technologylicensed from RMR covers various skin electroporation electrode designs andmethods, including a needle-less design using a flexible material. RMR hasagreed to collaborate in an effort to develop research prototypes intocommercial grade electrodes for skin delivery as well as other novel forms ofelectroporation-assisted DNA delivery. We have agreed to provide RMR with otherdevelopment expertise pertinent to projects such as RMR’s SBIR-fundedpre-clinical study using RMR’s proprietary, dermal electrodes to deliver a DNAvaccine against anthrax. In connection with the acquisition of this exclusivelicense, we issued 86,956 shares of our common stock at a price of $2.30 pershare, worth $200,000 on the date of issuance.

We have also licensed from RMR patents that claim theintratumoral delivery method used in the ongoing clinical trial at the MoffittCancer Center & Research Institute, which is delivering the geneencoding IL-12 directly to melanoma lesions. RMR, Inovio, the Universityof South Florida and Moffitt Cancer Center have been collaborating in thedevelopment of this novel therapy for melanoma for the past two years.

In May 2006, we announced the acquisition, undera license with Sphergen SARL, of rights to several patent families relating tothe use of electroporation technology. The rights Inovio licensed included twopatents with broad claims regarding electroporation of nucleic acids in muscleand tumor tissue. This intellectual property acquisition enhanced the breadthof our patent portfolio directed to the use of electroporation technology todeliver therapeutic biopharmaceuticals. The license also includes grants ofrights to know how, future improvements, and provisions for exclusivity inapplications to human medicine.

In January 2006, Inovio signed a collaborativeagreement with Tripep to co-develop a therapeutic HCV DNA vaccine usingelectroporation. Under the terms of this agreement, Inovio has pledged certainelectroporation equipment toward the Phase I study of the proprietary Tripepvaccine in exchange for a minimum of 33% of the licensing revenues orcommercial income that might be derived from the vaccine. 

18

----

Under the terms of theagreement, Tripep will only commercialize the electroporation-based vaccinewith Inovio equipment. The initial Phase I clinical study is designed todetermine the safety of the DNA vaccine in normal healthy volunteers and isexpected to begin in 2007. If Inovio decides not to continue to support theco-development, the Company will retain a profit share of sub-licensing fees orcommercial revenues going forward.

In May 2005, we announced that Merck exercised anoption for a non-exclusive license for an additional antigen to be used withInovio’s MedPulser® DNA Delivery System. This option exercise wasprovided for under the 2004 license and research collaboration agreementbetween Merck and Genetronics Biomedical Corporation, now Inovio BiomedicalCorporation, and brought the total number of antigens licensed by Merck tothree. We received an option fee for the additional target antigen. Under theterms of our licensing agreement with Merck, Inovio is eligible for milestoneand royalty payments if certain development goals and commercialization of thedevice are achieved by Merck.

In April 2005, we announced the initiation of aU.K. Medicines and Healthcare products Regulatory Agency (MHRA) approved PhaseI/II clinical trial undertaken in collaboration with the University ofSouthampton. Our electroporation technology is being used to deliver atherapeutic plasmid-based DNA vaccine to skeletal muscle with the aim oftreating recurrent prostate cancer. The trial, sponsored and led by theUniversity of Southampton, will investigate whether the DNA vaccine, developedat the University of Southampton, can stimulate patients to develop immuneresponses against prostate cancer and whether use of Inovio’s electroporationsystem enhances this response. In this Phase I/II open-label study, plasmid DNAencoding a prostate tumor antigen is delivered directly to skeletal muscles inpatients with recurrent prostate cancer either by simple injection or using ourproprietary electroporation technology.

In January 2005, we acquired privately-heldInovio AS, a Norwegian company. Inovio AS’s use of electroporation for genetherapy and DNA vaccines complemented our existing electroporation therapyprogram. The acquisition expanded our intellectual property in electroporationand included the Phase I/II DNA vaccine clinical trial in the U.K.mentioned above.

In October 2004, we announced  an agreement with Vical wherein Vicallicensed our DNA delivery technology for use with HIV and melanoma (using IL-2)targets. This agreement was based on an option agreement established with Vicalin October of 2003 for a worldwide license for the use of ourproprietary *in vivo* electroporation deliverytechnology in combination with Vical’s vaccine and therapeutic DNA technology.

In May 2004, we announced a significant licensingdeal with Merck for the development of Merck’s DNA cancer and infectiousdisease vaccines. The terms of the agreement include milestone and royaltypayments for successful completion of the clinical development of the vaccinesby Merck. Merck will also reimburse us for the co-development of a proprietaryelectroporation system for the delivery of the Merck DNA vaccines. Thisdevelopment and commercialization agreement was an extension of an initialevaluation agreement established in 2003. Under the terms of the agreement,Merck received the right to use our proprietary technology for two specificantigens with an option to extend the agreement to include a limited number ofadditional target antigens. In addition, Merck obtained a non-exclusive licenseto the intellectual property related to the initial two specific antigens. Thecompanies agreed to co-develop certain components of the electroporation systemdesigned for administering DNA vaccines. Merck is responsible for alldevelopment costs and clinical programs. In May 2005, we announced thatMerck exercised an option for a non-exclusive license for an additional antigento be used with our DNA delivery technology, which is being developed for usewith certain of Merck’s DNA vaccine research programs.

The research carried out under the above agreementsmay result in new long-term license agreements with the other parties and mayprovide us with additional data that we believe will assist us in assessing theefficacy of using our MedPulser® DNAElectroporation System for delivery of DNA vaccines and gene therapy. The datashould also further assist us in our licensing and commercialization efforts.

19

----

In addition to the abovecollaboration and licensing arrangements, we may develop our own genetherapeutic product through early stage clinical trials and partner the productfor late stage clinical development and marketing. We may have to negotiate license(s) forgenes or other components of the product if they are not in the public domain.

**MARKET**

Our product developmentstrategy is focused on pursuing significant product opportunities where thecompany’s technology is truly enabling.

**Therapeutic DrugDelivery**

The primary front line treatment of many solid tumorsis surgical resection. Surgeons will often remove or resect an area outside ofthe obvious tumor mass to ensure that they have excised all of the canceroustissue. This can result in the loss of function and appearance of thesurrounding tissues and organs, reducing the patient’s quality of life. Recentadvances in non-surgical forms of tumor ablation, such as cryoablation,microwave and high frequency radio ablation therapy, fail to meet the clinicalneed to preserve normal healthy tissue. Given the number of patients with solidtumors and the demand for improved outcomes and reduced morbidity and cost, webelieve that there will be significant demand for our SECTA system by surgicaloncologists and patients once the technology is commercially available.

We aim to market our SECTA system to deliverchemotherapeutic agents, such as bleomycin sulfate, for the treatment ofcancer. We believe that electroporation therapy can address many diseases, butwe have chosen to initially focus our commercialization efforts on oncology’ssignificant unmet medical needs. Scientists are still learning about cancer andcurrent therapies are less than 100% effective; consequently, there issignificant room for improvement in cancer treatment. Our SECTA system providesan excellent fit with the current approach in cancer care and the objectives ofsociety, managed care and health care providers. We are initially targetingthose indications for which current treatment modalities result in a lowquality of life and external deformity or those which have very high mortalityrates. Specialized applicator concepts are being designed which will allowSECTA to treat other solid tumor cancers with a minimally invasive procedure.In parallel with the objectives of managed care companies and health careproviders, the MedPulser® equipment and the disposable applicators arebeing priced competitively given the relative advantages of our SECTA systemover other treatment modalities. Additionally, we are conductingpharmacoeconomic studies to provide support for the relative cost/benefitrelationship of the treatment.

Based on theperformance of our electroporation technology and the existing unmet clinicalneed, we have identified an initial number of disease targets and settingswhere we feel that our SECTA system can become an integral part of the tumorablation paradigm, including:

·       asan alternative to disfiguring surgery for primary and recurrent H&N cancer;

·       fortreatment of cutaneous tumors such as metastatic melanoma, basal cell carcinomaor squamous cell carcinoma, primary and secondary where surgery would bedisfiguring;

·       toaddress recurrent breast cancer to prevent mastectomy and to treat chest walllesions;

·       adjuvantto surgical resection of large tumors such as large H&N cancers that have ahigh potential for recurrence and exceed the limits of SECTA and requiresurgery as the only therapy option;

·       neo-adjuvantuse for tumor size reduction prior to resection (for example, primary breasttumor size reduction for conservation surgery rather than mastectomy); and

·       palliationfor tumors such as widespread malignant melanoma to reduce morbidity.

20

----

These are significantmarkets for commercialization with the existing product line. Future technologydevelopments (e.g., endoscopy) could open additional markets for development ofthe technology (e.g., in prostate or pancreatic carcinoma). We anticipate thata commercial partner would leverage our existing device technology in the futuredevelopment of product enhancements.

**DNA Vaccine &Immunotherapy**

We have prioritized our efforts after assessingdifferent market opportunities based on an evaluation of technology risk,market size and partner interest in DNA vaccines. Oncology applicationsrepresent the best market opportunities for infectious diseases, gene therapyfor protein deficiency diseases and biodefense DNA vaccines.

Our preference has been to partner with institutionsor companies that can provide the gene of interest and the clinical developmentcapabilities. The types of partnerships can range from pure out-licensing tojoint ventures. We have focused our efforts on developing and customizing theproprietary electroporation device most suited for each indication and providingthe regulatory and support services necessary to make each product developmentactivity successful.

We believe that there is a significant unmet clinicalneed to develop more efficacious vaccines that stimulate cellular immunity orcan be applied in therapeutic settings such as cancer, hepatitis C or HIVinfection. For these applications, our scientists believe that DNA vaccines mayoffer an improvement over classical vaccination. Our scientists believe thatelectroporation of DNA is critical in maximizing the efficiency of DNAvaccination in meeting the unmet clinical need for therapeutic vaccines. Wetherefore plan to work with our corporate partners to develop electroporationfor the delivery of DNA vaccines to capture what some analysts consider to be amulti-billion dollar market opportunity. DNA vaccines also represent atechnology platform that is of interest to government agencies concerned withmilitary preparedness and bioterrorism threat neutralization. We are workingwith the U.S. government to develop the technology for selected infectiousdisease targets.

The gene therapy marketincludes treatment of single gene defects as well as complex polygenic diseasessuch as cancer and vascular diseases. Examples of markets for single genedefects include hemophilia, sickle cell anemia, and EPO deficiency. For sicklecell anemia, often considered one of the most prevalent genetic diseases, thereis presently no effective and sustainable treatment available. EPO deficiencyaffects cancer patients undergoing chemotherapy and patients with chronickidney failure, among others.

**COMPETITION**

The primary front linetreatment of solid tumors involves surgical resection and/or radiation todebulk and control tumor growth prior to initiating systemic therapy withchemotherapeutic agents. Because of the concern of microscopic disease in thetissue surrounding a tumor and that it is often difficult or impossible forsurgeons to determine the border, or margins, between healthy and diseasedtissue, surgeons will often remove, or resect an area outside of the obvioustumor mass to ensure that they have excised all of the cancerous tissue. Thiscan result in the loss of function and appearance of the surrounding tissuesand organs, reducing the patient’s quality of life. Examples include the lossof speech from resection of tumors on the tongue or larynx or loss of erectilefunction from resection of the prostate. Recent advances in non-surgical formsof tumor ablation, such as cryoablation, microwave and high frequency radioablation therapy, fail to meet the clinical need to preserve normal healthytissue. Given the desire for improved outcomes in the surgical resection of alarge number of solid tumors such as those of the H&N, skin, pancreas,breast and prostate, we believe that there will be significant demand for ourtechnology from patients and surgical oncologists.

21

----

**Current TreatmentPractices**

***Surgery***

In 90% of cases, theprimary treatment for localized and operable tumors or lesions is eithersurgical resection alone or in combination with other modalities such asradiation therapy. Given the ability to cut an appropriate margin around thetumor in order to avoid recurrence from microscopic disease populating theperiphery of the tumor mass, surgery is highly effective for early stagecancers. However, accessibility of a tumor often prevents the use of surgery orlimits the margin that can be removed, especially at sites such as the tonguewhere the loss of tissue results in the loss of critical functions such as speech.The drawback to resecting tissue is potential disfigurement or debilitatingeffects on organ function. Surgery also requires additional cost in the form ofhospitalization and post-operative care.

***Radiation Therapy***

Radiation therapy’shigh-energy rays generated by an external machine or by radioactive materialsplaced directly into or near the tumor are used to damage and stop growth ofmalignant cells, which are more sensitive to the effects of radiation.Radiation is often used in combination with surgery and chemotherapy. In caseswhere a tumor is inoperable or unresponsive to chemotherapy, radiation is oftenused palliatively to limit the complications of disease progression. Radiationtherapy has a number of significant side effects, in that it damages healthycells surrounding the target area and takes several weeks to administer. It mayalso be costly due to the number of procedures and cost of administration.

***Chemotherapy***

Post-surgery, or incases where surgery is contraindicated, chemotherapy is often used to treatsystemic disease and may frequently be combined with radiation therapy.Typically it is used under the following circumstances:

·                    whencancer is disseminated requiring treatment of systemic or metastatsic disease;

·                    wherethe prognosis for local regional disease is poor due to the likelihood ofdisease progression;

·                    wheresurgery is contraindicated e.g. certain liver or pancreatic carcinoma; and

·                    forpalliation, to achieve tumor shrinkage to ameliorate tumor symptoms orcomplications.

The cytotoxicity of many existing anti-cancer drugs iswell proven, but there are other undesirable proven side effects includingalopecia (loss of hair), nausea, vomiting, myelosuppression and in some casesdrug resistance.

Surgery and radiationcannot be used where treatment poses a risk to nearby nerves, blood vessels, orvital organs. All of these practices have limited efficacy in treating cancersof certain organs, such as the pancreas.

**AlternativeTreatments**

***Radio Frequency Ablation***

This modality uses radiofrequency energy to heat tissue to a high enough temperature to ablate it, orcause cell death. An ablation probe is placed directly into the target tissue.An array of several small, curved electrodes is deployed from the end of theprobe. Once sufficient temperatures are reached, the heat kills the targettissue within a few minutes. This treatment has been proven efficacious intreating some solid tumors but suffers from not being tumor specific indestroying healthy as well as malignant tissue.

22

----

***Photodynamic Therapy***

Photodynamic therapy (PDT)uses intravenous administration of a light-activated drug thataccumulates in malignant cells. A non-thermal laser is used to activate thedrug, producing free radical oxygen molecules that destroy the cancer. PDT haslow risk of damage to adjacent normal tissue, the ability to re-treat, and canbe used concurrently with other treatment modalities. A major side effect ofPDT is patient photosensitivity that can last up to eight weeks. Other sideeffects include nausea and vomiting. This method is limited by the shallowdepth of penetration of the laser light which makes it more applicable tosurface lesions on the skin or esophagus.

***Cryoablation***

Cryoablation is atechnique being used to treat liver, kidney, prostate, and breast cancer. Thismethod uses liquid nitrogen filled probes inserted into the tumor mass withimage guided surgery to freeze cancer cells. Necrosis (cell death) occurs andthe dead cells are naturally sloughed off into the body. Cryoablation has beenmost commonly adopted for use in treating prostate carcinoma where surgery canoften lead to impotence. The technology is claimed to limit nerve damage in theprostate allowing for the retention of bladder and sexual function. Therefore,it may afford advantages over surgery and brachytherapy, as described below.

***Brachytherapy***

Brachytherapy involves thelocal implantation of radioactive seeds into or near a tumor mass. It has beenmost widely used in prostate and breast carcinoma *in situ*.The seeds decay over time resulting in the local destruction of malignantcells. The problem with brachytherapy, in addition to the concomitantdestruction of nascent healthy tissue, is the investment and training requiredto administer the therapy. Recent reports also suggest that the therapy may notproduce durable responses (i.e., long term cures). Consequently, brachytherapydoes not appear to be growing in acceptance in the marketplace.

***Biological Therapy or Immunotherapy***

This treatment encompasses many approaches focused oninvoking an immune response against a cancer, including vaccine-basedtreatments and treatments using monoclonal antibodies. Introgen Therapeutics, Inc.(NASDAQ:INGN) is involved in a Phase III study involving the use of anadenoviral vector to deliver a p53 gene to H&N cancers. While a similartherapy is available commercially in China, it is not approved in the US.Recent reports suggest that the therapy, which attempts to restore normal celldeath activity to tumors through the introduction of the p53 gene, may only beeffective if combined with other modalities such as radiation.

The use of monoclonal antibodies as therapeutic agentshas had a dramatic impact on the treatment of certain tumors. When theantibodies target growth factor receptors required for tumor cell growth, theycan often block the stimulation needed for cell growth and/or causeantibody-mediated cell killing of the tumor cell. Thus products like Herceptin®, Erbitux®, Rituxin® andAvastin® have proven beneficial especially when used incombination with a chemotherapeutic drug regime. The impact to local ablationtherapies will most likely stem from improved tumor control that will reducethe incidence of recurrence, and not in the front line therapy for primarycancers for which surgery is the current therapeutic mainstay.

The use of vaccination has long held interest asanother potential modality that could prove beneficial in treating and limitingsystemic disease. The problem has been that tumors may not display antigensunique to the tumor cell that the immune system can use to specifically targetfor selective destruction of malignant tissue and tumors over-express cellularproducts that the immune system ignores due to a process called tolerization whereinthe immune system is educated not to recognize self antigens early indevelopment. As a result, it has proven difficult to use conventionalvaccination strategies to break or 

23

----

overcome tolerance andgenerate immunity against tumor cells. However, the use of DNA vaccines withelectroporation may overcome this barrier, as described below.

The maincompetitive technologies in the area of DNA delivery are the following:

·       ViralDNA delivery;

·       DNAdelivery via ballistics;

·       LipidDNA delivery; and

·       Theinjection of “naked” DNA.

Both for DNA vaccines and gene therapy, effective DNAdelivery technologies are crucial. Many of the leading scientists in thesefields have pointed out that the major obstacle to success has been the lack ofsafe, efficient, and economical methods of delivering DNA.

Of the more than 700 gene therapy and DNA vaccineclinical trials started in the U.S. to date, none have progressed to regulatoryapproval. We believe that the DNA delivery problem must be solved if thepromise of gene therapy and DNA vaccines are to be fulfilled.

The simplest DNA delivery mode is the injection of “naked”plasmid DNA into target tissue, usually skeletal muscle. This method is safeand economical but inefficient in terms of cell transfection, the process oftransferring DNA into a cell across the outer cell membrane. However, whennaked DNA injection is followed by electroporation of the target tissue,transfection is significantly greater with resultant gene expression generallyenhanced 10 to 1000-fold. This increase makes many gene therapy and DNAvaccination projects feasible without unduly compromising safety or cost.

In December 2004, the first patient was treatedwith electroporation therapy and DNA and we have initiated, together with ourpartners, additional Phase I clinical trials using our electroporationtherapy and DNA technology. To date we have not observed any serious adverseevents that can be attributed to the use of electroporation in these clinicalDNA studies.

We believe that thegreatest obstacle to making DNA vaccines and immunotherapy a reality, namelythe safe, efficient, and economical delivery of the DNA plasmid construct intothe target cells, may be surmounted by our electroporation technology. Theinstrumentation we use for high-efficiency *invivo* gene transfer is derived from the instrumentation we developedfor intratumoral and transdermal drug delivery, an extension of the MedPulser® product line. We believe electroporation maybecome the method of choice for DNA delivery into cells in many applications.

**MEDICAL DEVICEMANUFACTURING**

We are a medical device manufacturer and, as such,operate in a regulated industry. We must comply with a variety ofmanufacturing, product development and quality regulations in order to be ableto distribute our products commercially around the world. In Europe, we mustcomply with the MDD. We have a Quality System certified by our internationalNotified Body to be in compliance with the international Quality SystemStandard, ISO13485, and meeting the Annex II Quality System requirements of theMDD. We completed an Annex II Conformity Assessment procedure and achieved ourCE Mark of the MedPulser® Electroporation System in March 1999.This CE Mark clears the MedPulser® Electroporation System for sale in theEuropean Economic Area which includes the European Union.

In the U.S., we are required to maintain facilities,equipment, processes and procedures that are in compliance with quality systemsregulations. Our systems have been constructed to be in compliance with theseregulations and our ongoing operations are conducted within these systems.Commercially distributed devices within the U.S. must be developed under formaldesign controls and be submitted to 

24

----

the FDA for clearance orapproval. As we prepare for U.S. marketing, all development activity isperformed according to formal procedures to ensure compliance with all designcontrol regulations.

We employ modern manufacturing methods and controls tooptimize performance and control costs. Internal capabilities and corecompetencies are strategically determined to optimize our manufacturingefficiency. We utilize contract manufacturers for key operations, such as cleanroom assembly and sterilization, which are not economically conducted in-house.We also outsource significant sub-assemblies, such as populated printed circuitboards, where capital requirements or manufacturing volumes do not justifyvertical integration. As we transition from late-stage development activitiesinto higher volume manufacturing activities, internal capabilities will bemodified and added, as appropriate, to meet our changing priorities.

Currently, the durableelectronic generator in the MedPulser® Electroporation System is assembled fromoutsourced populated printed circuit boards, and then tested, packaged andinventoried at our manufacturing facility. The disposable applicators used withthe MedPulser® Electroporation System are assembled andsterilized in a clean room at outside contract manufacturers. Futuremanufacturing of applicators for clinical trials and commercial distribution isplanned to be done in a clean room in our manufacturing facility.

**REVENUE ANDINTEREST AND OTHER  INCOME**

Thefollowing table provides the revenue obtained from licensing and research and developmentagreements and interest and other income generated by us for the past threefiscal years. The following table sets forth our selected consolidatedfinancial data for the periods indicated, derived from consolidated financialstatements prepared in accordance with U.S. generally accepted accountingprinciples. See further disclosures in Item 7. Management’s Discussion andAnalysis and in the Consolidated Statements of Operations. 

| ** **                                                         | ** ** | **Year Ended**         | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                         | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
| License fee and  milestone payments                                |       |                        | $          | 1,337,105 |   |   |   | $ | 2,563,283 |   |   |   | $ | 214,351 |   |   |
| Revenue under  collaborative research and development arrangements |       |                        | 962,207    |   |   |   | 1,492,145 |   |   |   | 945,591 |   |   |
| Grants and  miscellaneous revenue                                  |       |                        | 1,168,866  |   |   |   | 1,411,825 |   |   |   | 7,157 |   |   |
| Interest and other  income                                         |       |                        | 867,070    |   |   |   | 210,118 |   |   |   | 247,555 |   |   |

 

We, like many biomedicalcompanies, devote a substantial portion of our annual budget to research anddevelopment. Research and development expenses totaled $8.5 million,$11.5 million, and $6.5 million for the years ended December 31,2006, 2005 and 2004, respectively. These amounts far exceed revenue fromresearch arrangements and contribute substantially to our losses.

**INTELLECTUALPROPERTY**

Our success and ability to compete depends upon ourintellectual property. We maintain a broad-based patent portfolio (bothoriginal and in-licensed technologies) that as of December 31, 2006,includes over 62 issued U.S. patents and 181 issued foreign counterpartpatents, all of which collectively include claims to methods and/or devices forclinical use in the electroporation medical arts. Specifically, patentedsubject matter, as well as subject matter pending in the U.S. and foreignpatent offices, includes method and device claims for delivering medicallyimportant substances to the interior of cells in various body tissues such as apatient’s muscle, skin, and other organs (by electroporation.)

25

----

The company’s core technology is centered on fivebroad, medically relevant “indication” categories including oncology, genetherapy/delivery (including vaccination with expressible vectors), vascularadministration (e.g. by catheter), transdermal administration (includingdelivery of substances for cancer, gene therapy, and cosmetic applications),and *ex vivo* administration (e.g. byelectroporation of cells outside the body and introducing the created cells tothe patient).

Presently, the company’s primary focus is on oncologyand gene therapy/delivery, with particular emphasis in H&N cancer, skincancer, liver cancer, and breast cancer. For example, with respect to oncology,U.S. patent number 6,569,149 provides broad claim coverage directed to a methodfor the application of electric fields to a tissue of a patient having a “cellproliferation disorder” for the purpose of introducing molecules into cells ofthe tissue to treat the cell proliferation disorder. Such method comprisesproviding an array of multiple opposed pairs of electrodes connected to agenerator, wherein at least two pairs of electrodes are activatedsimultaneously after being placed in such tissue along with the substance beingelectroporated, and then applying an electric pulse. Likewise, in-licensedpatent 6,528,315 claims methods of electroporation of DNA to tumor cells in abroad manner.

Integral with oncology, gene therapy/delivery alsoenjoys a broad scope of patent protection such as found in U.S. patent numbers5,273,525 and in-licensed patents 6,110,161, 6,261,281, 6,610,044, 6,958,060and 6,939,862, which include claims to methods and apparatus for implantingmacromolecules (e.g. DNA and pharmaceutical compounds) into selected tissues ofa patient and to methods of implanting macromolecules into living cells of apatient by electroporation. Likewise, U.S. patent number 6,763,264, with claimsto methods of delivering expression vectors and molecules, and U.S. patentnumber 6,697,669, with claims to methods of *in vivo*electroporation of skin and muscle, provide broad-based coverage to thecompany. Additionally, other of the company’s patents protect the company’sproprietary methodology of electroporation wherein the electroporation processis carried out using “opposed-paired” electric field pulsing. Such patentsinclude, and are not limited to, U.S. patent numbers 6,241,701, 6,120,493,6,233,482, and 5,702,359C1. It is important to understand that patents withclaims directed to apparatuses and methods for the electroporation of tissuesare generally applicable to oncological applications.

The company also has a number of issued U.S. andforeign patents claiming a widely used gene regulation technology calledGeneSwitch® that permits control of gene expression fromDNA sequences via a small molecule that can be administered orally. Forexample, U.S. patents 5,364,791 and 6,599,698 claim various aspects of thisunique regulation system that may be used in gene therapy products. In additionto electroporation technology for gene delivery, the company also acquired agroup of patents claiming the delivery of DNA using polymers (e.g., 6,040,295and 6,514,947) and lipids (e.g., 6,387,395 and 6,235,310) that are useful inthe development of certain DNA vaccines.

With respect to vascular, transdermal, and *ex vivo* applications of electroporation technology, thecompany’s patent portfolio is also active. For example, U.S. patent 5,704,908includes claims directed to an electroporation balloon catheter. Additionally,U.S. patent 6,342,247 is directed to methods of increasing vasodilation, animportant indication in maintaining blood flow in certain patients with vesselocclusion problems. U.S. patents 6,697,669, 6,654,636, 5,810,762, and 5,439,440provide claims to transdermal application of electric fields to surfacetissues, while U.S. patents 6,027,488, 6,746,441, 6,800,484, and 6,150,148 includeclaims to electroporation of cells in vitro. Such electroporated cells could beused either in laboratory settings or for introduction into patient bloodstream or other tissues.

Of further importance tothe company, the currently issued patents provide a potential monopoly base forthe claimed subject matter for the various indications to at least the year2017 and numerous claims will be in force to between 2018 and 2020.

26

----

**CORPORATE HISTORYAND HEADQUARTERS**

We were incorporated on August 8, 1979, under thelaws of British Columbia, Canada, as Genetronics Biomedical Ltd. On June 15,2001, we completed a change in our jurisdiction of incorporation from BritishColumbia, Canada, to the state of Delaware. On March 31, 2005, we changedour corporate name from “Genetronics Biomedical Corporation” to “InovioBiomedical Corporation.”

Our principal executiveoffices are located at 11494 Sorrento Valley Road, San Diego, California 92121-1318,and our telephone number is (858) 597-6006. Effective April 4, 2005,our American Stock Exchange ticker symbol changed from “GEB” to “INO.”

**AVAILABLEINFORMATION**

Our Internet websiteaddress is *www.inovio.com*. Wemake our annual report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, Forms 3, 4, and 5 filed on behalf ofdirectors and executive officers, and any amendments to those reports filed orfurnished pursuant to Section 13(a) or 15(d) of the Securitiesand Exchange Act of 1934, available free of charge on our website as soon asreasonably practicable after we electronically file such material with, orfurnish it to, the Securities and Exchange Commission (the “SEC”). You canlearn more about us by reviewing such filings on our website or at the SEC’swebsite at *www.sec.gov*.

**EMPLOYEES**

As of March 8, 2007, we employed 33 people on afull-time basis and 6 people under consulting and project employmentagreements. Of the combined total, 24 were in product research, which includesresearch and development, quality assurance, clinical, engineering, and manufacturing,and 15 were in general and administrative, which includes corporatedevelopment, information technology, legal, investor relations, finance, andcorporate administration. None of our employees are subject to collectivebargaining agreements. We consider our employee relations to be good.

27

----

**ITEM 1A.**        RISKFACTORS

*You should carefully consider the following factorsregarding information included in this Annual Report. The risks anduncertainties described below are not the only ones we face. Additional risksand uncertainties not presently known to us or that we currently deemimmaterial also may impair our business operations. If any of the followingrisks actually occur, our business, financial condition and operating resultscould be materially adversely affected.*

**IF WE ARE UNABLE TO DEVELOP COMMERCIALLY SUCCESSFULPRODUCTS, INCLUDING OUR MEDPULSER**® ELECTROPORATION SYSTEM IN VARIOUS MARKETS FORMULTIPLE INDICATIONS, PARTICULARLY FOR THE TREATMENT OF H&N CANCER, OURBUSINESS WILL BE HARMED AND WE MAY BE FORCED TO CURTAIL OR CEASEOPERATIONS.

Our ability to achieve and sustain operatingprofitability depends on our ability to successfully commercialize ourMedPulser® Electroporation System in various markets foruse in treating solid tumors, particularly for the treatment of H&N cancer,and other indications, which depends in large part on our ability to commence,execute and complete clinical programs and obtain regulatory approvals for ourMedPulser® Electroporation System. In particular, ourability to achieve and sustain profitability will depend in large part on ourability to commercialize our MedPulser® Electroporation System for the treatment ofH&N cancer in Europe and the United States. While we have achieved CE Mark,which applies to Europe for our MedPulser® ElectroporationSystem for use in treating solid tumors; the products related to the CE Markhave not yet been commercialized. We have not yet received any regulatoryapprovals to sell any of our products in the United States and further clinicaltrials are still necessary before we can seek regulatory approval to sell ourproducts in the United States for treating solid tumors. We cannot assure youwe will receive approval for our MedPulser® Electroporation System for the treatment of H&Ncancer or other types of cancer or indications in the United States or in othercountries or, if approved, that we will achieve significant level of sales.

We have started additional clinical studies fordifferent indications, such as breast, and are also in the pre-clinical stagesof research and development with new product candidates using ourelectroporation technology. These new indications and product candidates willrequire significant costs to advance through the development stages. Even ifsuch product candidates are advanced through clinical trials, the results ofsuch trials may not gain FDA approval. Even if approved, our products may notbe commercially successful.

We cannot assure you thatwe will successfully develop any products. If we fail to develop orsuccessfully commercialize any products, we may be forced to curtail or ceaseour operations. Additionally, much of the commercialization efforts for ourproducts must be carried forward by a licensing partner. We may not be able toobtain such a partner.

**WE WILL HAVE A NEEDFOR SIGNIFICANT FUNDS IN THE FUTURE AND THERE IS NO GUARANTEE THAT WE WILL BEABLE TO OBTAIN THE FUNDS WE NEED.**

Developing a new medical device and conductingclinical trials is expensive. Our product development efforts may not lead tocommercial products, either because our product candidates fail to be foundsafe or effective in clinical trials or because we lack the necessary financialor other resources or relationships to pursue our programs throughcommercialization. Our capital and future revenue may not be sufficient tosupport the expenses of our operations, the development of a commercialinfrastructure and the conduct of our clinical trials and pre-clinicalresearch.

28

----

Our plans forcontinuing clinical trials, conducting research, furthering development and,eventually, marketing our human-use equipment will involve substantial costs.The extent of our costs will depend on many factors, including some of thefollowing:

·                    Theprogress and breadth of pre-clinical testing and the size or complexity of ourclinical trials and drug delivery programs, all of which directly influencecost;

·                    Higherthen expected costs involved in complying with the regulatory process to getour human-use products approved, including the number, size, and timing ofnecessary clinical trials and costs associated with the current assembly andreview of existing clinical and pre-clinical information;

·                    Higherthen expected costs involved in patenting our technologies and defending themand pursuing our intellectual property strategy;

·                    Changesin our existing research and development relationships and our ability to enterinto new agreements;

·                    Changesin or terminations of our existing collaboration and licensing arrangements;

·                    Fasterthan expected rate of progress and changes in scope and cost of our researchand development and clinical trial activities;

·                    Anincrease or decrease in the amount and timing of milestone payments we receivefrom collaborators;

·                    Higherthan expected costs of preparing an application for FDA approval of ourMedPulser® ElectroporationSystem;

·                    Higherthan expected costs of developing the processes and systems to support FDAapproval of our MedPulser® Electroporation System;

·                    Anincrease in our timetable and costs for the development of marketing operationsand other activities related to the commercialization of our MedPulser® Electroporation System and our other productcandidates;

·                    Achange in the degree of success in our Phase III clinical trial of MedPulser® Electroporation System and in our otherclinical trials;

·                    Higherthen expected costs to further develop and scale up our manufacturingcapability of our human-use equipment; and

·                    Competitionfor our products and our ability, and that of our partners, to commercializeour products.

We plan to fund operations by several means. We willattempt to enter into contracts with partners that will fund either generaloperating expenses or specific programs or projects. Some funding also may bereceived through government grants. However, we may not be able to enter intoany such contracts or may not receive such grants or, if we do, our partnersand the grants may not provide enough funding to meet our needs.

In the past, we have raised funds through the publicand private sale of our stock, and we are likely to do this in the future toraise needed funds. Sale of our stock to new private or public investorsusually results in existing stockholders becoming “diluted.” The greater thenumber of shares sold, the greater the dilution. A high degree of dilution canmake it difficult for the price of our stock to rise, among other things.Dilution also lessens a stockholder’s voting power.

29

----

We cannot assure you thatwe will be able to raise capital needed to fund operations, or that we will beable to raise capital under terms that are favorable to us.

**SALES OFSUBSTANTIAL AMOUNTS OF OUR SHARES, OR EVEN THE AVAILABILITY OF OUR SHARES FORSALE, IN THE OPEN MARKET COULD CAUSE THE MARKET PRICE OF OUR SHARES TO DECLINE.**

Under our registration statement that the Securitiesand Exchange Commission, or the SEC, declared effective on May 25, 2006,we have registered with the SEC an aggregate of $75,000,000 of our equitysecurities that we may issue from time to time, in one or more offerings atprices and on terms that we will determine at the time of each offering. Underthat so-called “shelf” registration statement, we have registered multiplekinds of our equity securities, including our common stock, preferred stock,warrants and a combination of these securities, or units. ThroughDecember 31, 2006, we have “taken-down” from our shelf registrationstatement, and issued and sold, an aggregate of 4,210,284 shares of our commonstock and warrants to purchase up to 1,425,919 shares of our common stock and,if those warrants are fully exercised at their exercise price of $2.87, we willhave issued an additional 1,425,919 shares of our common stock under that shelfregistration statement. In other words, the shares of common stock we have soldin offerings under our shelf registration statement represented approximately12% of our outstanding shares at December 31, 2006 (16% if the warrants wehave sold under our shelf registration statement are fully exercised).

In addition, in October 2006, Inovio Asia Pte.Ltd., our recently-formed subsidiary incorporated in the Republic of Singapore,issued and sold 2,201,644 of its ordinary shares to foreign investors at $2.43per share. Under the terms of the agreement under which these ordinary shareswere issued, they were exchanged for 2,201,644 shares of our common stock andfive-year warrants to purchase up to 770,573 shares of our common stock at anexercise price of $2.87 per share on January 14, 2007. Further, pursuantto participation rights applicable to these equity financings, inOctober 2006 we also issued and exchanged 479,722 shares of our commonstock and five-year warrants to purchase 167,902 shares of our common stock atan exercise price of $2.87 per share to certain institutional holders of ouroutstanding Series C Preferred Stock in exchange for their shares ofSeries C Preferred Stock.

The shares of common stock we issued in the exchangefor the ordinary shares of our subsidiary and for our Preferred Stock in theforegoing transactions represent approximately 8% of our outstanding shares atDecember 31, 2006 (10% if the warrants we also issued in thosetransactions are fully exercised). The registration statement of which thisprospectus is a part, registers for resale under the Securities Act of 1933, asamended, or the Securities Act, the shares of common stock and the shares ofcommon stock underlying the warrants that were included in the exchange for theordinary shares of IAPL and the shares of common stock underlying the warrantsthat were issued in the exchange with certain holders of our Preferred Stock.Upon the effectiveness of this registration statement, these shares will becomefreely tradable in the open market.

Thus, the number of shares of common stock we havesold under our shelf registration statement and exchanged as ofJanuary 14, 2007 represent approximately 19% of our outstanding shares atDecember  31, 2006 (26% if the warrants we are selling in this offeringand issued in the exchange transactions are fully exercised).

Sales of substantial amountsof our stock at any one time or from time to time by the investors to whom wehave issued them, or even the availability of these shares for sale, couldcause the market price of our common stock to decline.

30

----

**THE MARKET FOR OURSTOCK IS VOLATILE, WHICH COULD ADVERSELY AFFECT AN INVESTMENT IN OUR STOCK.**

Our share price and volume are highly volatile. Thisis not unusual for biomedical companies of our size, age, and with a discretemarket niche. It also is common for the trading volume and price of biotechnologystocks to be unrelated to a company’s operations, i.e. to go up or down onpositive news and to go up or down on no news. Our stock has exhibited thistype of behavior in the past, and may well exhibit it in the future. Thehistorically low trading volume of our stock, in relation to many otherbiomedical companies of our size, makes it more likely that a severefluctuation in volume, either up or down, will affect the stock price.

Some factors thatwe would expect to depress the price of our stock include:

·                    Adverseclinical trial results;

·                    Ourinability to obtain additional capital when needed;

·                    Announcementthat the FDA denied our request to approve our human-use product forcommercialization in the United States, or similar denial by other regulatorybodies which make independent decisions outside the United States (to date, theEU is the only foreign jurisdiction in which we have sought approval forcommercialization);

·                    Announcementof legal actions brought by or filed against us for patent or other matters,and especially any negative rulings or outcomes in such actions;

·                    Cancellationof important corporate partnerships or agreements;

·                    Publicconcern as to the safety or efficacy of our human-use products including publicperceptions regarding gene therapy in general;

·                    Stockholders’decisions, for whatever reasons, to sell large amounts of our stock;

·                    Adverseresearch and development results;

**·****                  **Decliningworking capital to fund operations, or other signs of apparent financialuncertainty; and

·                    Significantadvances made by competitors that are perceived to limit our market position.

Additionally, our clinicaltrials are open-ended and, therefore, there is a risk that informationregarding the success of our clinical trials may be obtained by the publicprior to a formal announcement by us. These factors, as well as the otherfactors described in this Report, could significantly affect the price of ourstock.

**WE HAVE A HISTORYOF LOSSES, WE EXPECT TO CONTINUE TO INCUR LOSSES AND WE MAY NOT ACHIEVE ORMAINTAIN PROFITABILITY**

As of December 31, 2006, we had an accumulateddeficit of $128.8 million. We have operated at a loss since 1994, and we expectthis to continue for some time. The amount of the accumulated deficit willcontinue to increase, as it will be expensive to continue clinical, researchand development efforts. If these activities are successful and if we receiveapproval from the FDA to market equipment, then even more funding will berequired to market and sell the equipment. The outcome of these matters cannotbe predicted at this time. We are evaluating potential partnerships as anadditional way to fund operations, but there is no assurance we will be able tosecure partnerships that will provide the required funding, if at all. We willcontinue to rely on outside sources of financing to meet our capital needsbeyond next year.

31

----

Further, there can be noassurance, assuming we successfully raise additional funds, that we willachieve positive cash flow. If we are not able to secure additional funding, wewill be required to further scale back our research and development programs,preclinical studies and clinical trials, general, and administrative activitiesand may not be able to continue in business. Including the cash proceedsreceived from financings, various licensing payments, the exercise of employeestock options and investor warrants, we believe we have sufficient funds tofund operations through the beginning of the third quarter of 2008.

**OUR ABILITY TOUTILIZE OUR NET OPERATING LOSSES AND CERTAIN OTHER TAX ATTRIBUTES MAY BELIMITED.**

As of December 31,2006, we had net operating losses (NOLs) of approximately $77.0 million forfederal income tax purposes and approximately $46.9 million for state incometax purposes. We also had federal research tax credit carryforwards ofapproximately $1.3 million as of December 31, 2006, which begin to expirein 2007 unless previously utilized. Under Section 382 of the InternalRevenue Code, if a corporation undergoes an “ownership change,” thecorporation’s ability to use its pre-change NOLs, research tax creditcarryforwards and other pre-change tax attributes to offset its post-changeincome may be limited. An ownership change is generally defined as a greaterthan 50% change in its equity ownership by value over a three-year period. Webelieve that there are built-in gains inherent in the value of our assets that,when recognized, may increase this annual limitation during the five-yearperiod form the date of an ownership change. We are currently assessing theextent of these built-in gains. The annual limitation on our net operating losscarryforwards that can be used to offset post-ownership change taxable incomecould adversely affect our liquidity and cash flow.

**IF WE DO NOT HAVEENOUGH CAPITAL TO FUND OPERATIONS, THEN WE WILL HAVE TO CUT COSTS.**

If we are not ableto raise needed money under acceptable terms, then we will have to takemeasures to cut costs, such as:

·                    Delay,scale back or discontinue one or more of our oncology or gene delivery programsor other aspects of operations, including laying off some personnel or stoppingor delaying clinical trials;

·                    Sellor license some of our technologies that we would not otherwise give up if wewere in a better financial position;

·                    Sellor license some of our technologies under terms that are less favorable thanthey otherwise might have been if we were in a better financial position; and

·                    Considermerging with another company or positioning ourselves to be acquired by anothercompany.

If it became necessary totake one or more of the above-listed actions, then we may have a lowervaluation, which may be reflected in our stock price. Further, the effects onour operations, financial performance and our stock price may be exacerbated ifwe do not or cannot take one or more of the above-listed actions in a timelymanner when needed.

**A SMALL NUMBER OFLICENSING PARTNERS ACCOUNT FOR A SUBSTANTIAL PORTION OF OUR REVENUES AND OURRESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD SUFFER IF WE LOSE THESELICENSING PARTNERS OR FAIL TO ADD ADDITIONAL LICENSING PARTNERS IN THE FUTURE.**

We derive a significantportion of our revenue from a limited number of licensing partners in eachperiod. Accordingly, if we fail to sign additional future contracts with majorlicensing partners, if a licensing contract is delayed or deferred, or if anexisting licensing contract expires or is cancelled and we 

32

----

fail toreplace the contract with new business, our revenue could be adverselyaffected. Until commercialization of our MedPulser® Electroporation System, we expect that alimited number of licensing partners will continue to account for a substantialportion of our revenue in each quarter in the foreseeable future. During theyear ended December 31, 2006, one licensing partner, Merck, accounted forapproximately 44% or $1.5 million of our consolidated revenue.

**PRE-CLINICAL ANDCLINICAL TRIALS OF HUMAN-USE EQUIPMENT ARE UNPREDICTABLE. IF WE EXPERIENCEUNSUCCESSFUL TRIAL RESULTS, OUR BUSINESS WILL SUFFER.**

Before any of our human-use equipment can be sold, theFDA or applicable foreign regulatory authorities must determine that theequipment meets specified criteria for use in the indications for whichapproval is requested, including obtaining appropriate regulatory approvals.Satisfaction of regulatory requirements typically takes many years, andinvolves compliance with requirements covering research and development,testing, manufacturing, quality control, labeling and promotion of drugs forhuman use. To obtain regulatory approvals, we must, among other requirements,complete clinical trials demonstrating our product candidates are safe andeffective for a particular cancer type or other disease. Regulatory approval ofa new medical device, drug or combination therapy is never guaranteed. The FDAwill make its determination based on the results from our pre-clinical testingand clinical trials and has substantial discretion in the approval process.Despite the time and experience exerted, failure can occur at any stage, and wecould encounter problems causing us to abandon clinical trials.

We have completed Phase II clinical trials and areconducting two Phase III clinical trials of our lead product candidate, theMedPulser® Electroporation System, for the treatment ofrecurrent and second primary H&N cancers. In addition, we are conductingtwo Phase IV (or Pre-Marketing) clinical trials of our MedPulser® Electroporation System for the treatment ofnew and recurrent H&N cancers and new and recurrent primary skin cancers,and have started a Phase I clinical trial of our MedPulser® Electroporation System for the treatment ofbreast cancers. Current or future clinical trials may demonstrate the MedPulser® Electroporation System is neither safe noreffective.

Any delays or difficulties we encounter in ourpre-clinical research and clinical trials, in particular the Phase III clinicaltrials of our MedPulser® Electroporation System for the treatment ofrecurrent H&N cancer, may delay or preclude regulatory approval. Ourproduct development costs will increase if we experience delays in testing orregulatory approvals or if we need to perform more or larger clinical trialsthan planned. Any delay or preclusion could also delay or preclude thecommercialization of our MedPulser® Electroporation System or any other productcandidates.

Clinical trials are unpredictable, especiallyhuman-use trials. Results achieved in early stage clinical trials may not berepeated in later stage trials, or in trials with more patients. When earlypositive results were not repeated in later stage trials, other pharmaceuticaland biotechnology companies have suffered significant setbacks and we wouldlikely suffer similar consequences under such circumstances. Not only has theinability to replicate consistent outcomes resulted in such companies pushingtheir commercialization timelines back, but some companies, particularlysmaller biotechnology companies with limited cash reserves, have gone out ofbusiness after releasing news of unsuccessful clinical trial results.

We cannot be certain the results we observed in ourpre-clinical testing will be confirmed in clinical trials or the results of anyof our clinical trials will support FDA approval. If we experience unexpected,inconsistent or disappointing results in connection with a clinical orpre-clinical trial our business will suffer.

The patients admitted to our oncology clinical trialsconducted in the United States and Europe are experiencing late stage cancerand are in a diminished physical state prior to entering our studies and thusthese patients can experience serious adverse events, which is abbreviated inour industry as SAEs, whether due to our technology or other procedures. Todate, the most clinically significant SAE’s that were 

33

----

assessed as at leastpossibly related to our drug and technology are:  bleeding in tumor bed, pain, dysphagia, edemaat treatment site, fistula, myocardial infarction and sudden death (cause ofdeath unknown). Because our studies are controlled and ongoing, we cannotassure you that these or other serious adverse events will not delay or preventapproval of our product by the FDA.

In addition, any ofour clinical trials for our treatment may be delayed or halted at any time forvarious reasons, including:

·                    Theelectroporation-mediated delivery of drugs or other agents may be found to beineffective or to cause harmful side effects, including death;

·                    Ourclinical trials may take longer than anticipated, for any of a number ofreasons including a scarcity of subjects that meet the physiological orpathological criteria for entry into the study, a scarcity of subjects that arewilling to participate through the end of the trial, or data and documentreview;

·                    Thereported clinical data may change over time as a result of the continuingevaluation of patients or the current assembly and review of existing clinicaland pre-clinical information;

·                    Datafrom various sites participating in the clinical trials may be incomplete orunreliable, which could result in the need to repeat the trial or abandon theproject; and

·                    Pre-clinicaland clinical data can be interpreted in many different ways, and the FDA andother regulatory authorities may interpret our data differently than we do,which could halt or delay our clinical trials or prevent regulatory approval.

If any of the above events arise during our clinicaltrials or data review, then we would expect this to have a serious negativeeffect on our company and our stockholders.

Despite the FDA’s designation of our MedPulser® Electroporation System as a Fast Trackproduct, suchFDA designation is independent of the FDA’s Priority Review and AcceleratedApproval designations and we may encounter delays in the regulatoryapproval process due to additional information requirements from the FDA,unintentional omissions in our PMA for our MedPulser® Electroporation System, or other delaysin the FDA’s review process. We may encounter delays or rejections in theregulatory approval process because of additional government regulation fromfuture legislation or administrative action or changes in FDA policy during theperiod of product development, clinical trials and FDA regulatory review.

A majority of our operating expenses relate to ourclinical trials. A delay in our trials, for whatever reason, will probablyrequire us to spend additional funds to keep the product(s) moving throughthe regulatory process. If we do not have or cannot raise the needed funds in atimely manner, then the testing of our human-use products could be shelved. Inthe event a clinical trial is not successful, we will have to determine whetherto put more money into the program to address its deficiencies or whether toabandon the clinical development programs for the products in the tested indications.Loss of the human-use product line would be a significant setback for ourcompany.

Because there are so manyvariables inherent in clinical trials, we cannot predict whether any of ourfuture regulatory applications to conduct clinical trials will be approved bythe FDA or other regulatory authorities, whether our clinical trials willcommence or proceed as planned, and whether the trials will ultimately bedeemed to be successful. To date, our experience has been that submission andapproval of clinical protocols has taken longer than desired or expected.

34

----

**OUR BUSINESS ISHIGHLY DEPENDENT ON RECEIVING APPROVALS FROM VARIOUS UNITED STATES ANDINTERNATIONAL GOVERNMENT AGENCIES AND WILL BE DRAMATICALLY AFFECTED IF APPROVALTO MANUFACTURE AND SELL OUR HUMAN-USE EQUIPMENT IS NOT GRANTED OR IS NOTGRANTED IN A TIMELY MANNER.**

The production and marketing of our human-useequipment and the ongoing research, development, pre-clinical testing, andclinical trial activities are subject to extensive regulation. Numerousgovernmental agencies in the U.S. and internationally, including the FDA, mustreview our applications and decide whether to grant approval. All of ourhuman-use equipment must go through an approval process, in some instances foreach indication for which we want to label it for use (such as use fordermatology, use for transfer of a certain gene to a certain tissue, or use foradministering a certain drug to a certain tumor type in a patient havingcertain characteristics). These regulatory processes are extensive and involvesubstantial costs and time.

We have limited experience in, and limited resourcesavailable for, regulatory activities. Failure to comply with applicableregulations can, among other things, result in non-approval, suspensions ofregulatory approvals, fines, product seizures and recalls, operatingrestrictions, injunctions and criminal prosecution.

Any of thefollowing events can occur and, if any did occur, any one could have a materialadverse effect on our business, financial conditions and results of operations:

·                    Clinicaltrials may not yield sufficiently conclusive results for regulatory agencies toapprove the use of our products;

·                    Therecan be delays, sometimes long, in obtaining approval for our human-use devices,and indeed, we have experienced such delays in obtaining FDA approval of ourclinical protocols;

·                    Therules and regulations governing human-use equipment such as ours canchange during the review process, which can result in the need to spend timeand money for further testing or review;

·                    Ifapproval for commercialization is granted, it is possible the authorized usewill be more limited than we believe is necessary for commercial success, orthat approval may be conditioned on completion of further clinical trials orother activities; and

·                    Once granted,approval can be withdrawn, or limited, if previously unknown problems arisewith our human-use product or data arising from its use.

**WE COULD BESUBSTANTIALLY DAMAGED IF PHYSICIANS AND HOSPITALS PERFORMING OUR CLINICALTRIALS DO NOT ADHERE TO PROTOCOLS OR PROMISES MADE IN CLINICAL TRIALAGREEMENTS.**

We work and have worked with a number of hospitals toperform clinical trials, primarily in oncology. We depend on these hospitals torecruit patients for the trials, to perform the trials according to ourprotocols, and to report the results in a thorough, accurate and consistentfashion. Although we have agreements with these hospitals, which govern whateach party is to do with respect to the protocol, patient safety, and avoidanceof conflict of interest, there are risks that the terms of the contracts willnot be followed, such as the following:

*Riskof Deviations from Protocol.*   The hospitals orthe physicians working at the hospitals may not perform the trials correctly.Deviations from protocol may make the clinical data not useful and the trialcould be essentially worthless.

35

----

*Riskof Improper Conflict of Interest.*   Physiciansworking on protocols may have an improper economic interest in our company, orother conflict of interest. When a physician has a personal stake in thesuccess of the trial, such as can be inferred if the physician owns stock, orrights to purchase stock, of the trial sponsor, it can create suspicion thatthe trial results were improperly influenced by the physician’s interest ineconomic gain. Not only can this put the clinical trial results at risk, but itcan also do serious damage to a company’s reputation.

*RisksInvolving Patient Safety and Consent.*   Physiciansand hospitals may fail to secure formal written consent as instructed or reportadverse effects that arise during the trial in the proper manner, which couldput patients at unnecessary risk. Physicians and hospital staff may fail toobserve proper safety measures such as the mishandling of used medical needles,which may result in the transmission of infectious and deadly diseases, such asHIV and AIDS. This increases our liability, affects the data, and can damageour reputation.

If any of these eventswere to occur, then it could have a material adverse effect on our ability toreceive regulatory authorization to sell our human-use equipment, not tomention on our reputation. Negative events that arise in the performance ofclinical trials sponsored by biotechnology companies of our size and withlimited cash reserves similar to ours have resulted in companies going out ofbusiness. While these risks are ever present, to date, our contractedphysicians and clinics have been successful in collecting significant dataregarding the clinical protocols under which they have operated, and we areunaware of any conflicts of interest or improprieties regarding our protocols.

**EVEN IF OURPRODUCTS ARE APPROVED BY REGULATORY AUTHORITIES, IF WE FAIL TO COMPLY WITHON-GOING REGULATORY REQUIREMENTS, OR IF WE EXPERIENCE UNANTICIPATED PROBLEMSWITH OUR PRODUCTS, THESE PRODUCTS COULD BE SUBJECT TO RESTRICTIONS ORWITHDRAWAL FROM THE MARKET.**

Any product for which weobtain marketing approval, along with the manufacturing processes,post-approval clinical data and promotional activities for such product, willbe subject to continual review and periodic inspections by the FDA and otherregulatory bodies. Even if regulatory approval of a product is granted, theapproval may be subject to limitations on the indicated uses for which theproduct may be marketed or certain requirements for costly post-marketingtesting and surveillance to monitor the safety or efficacy of the product.Later discovery of previously unknown problems with our products, includingunanticipated adverse events of unanticipated severity or frequency,manufacturer or manufacturing processes or failure to comply with regulatoryrequirements, may result in restrictions on such products or manufacturingprocesses, withdrawal of the products from the market, voluntary or mandatoryrecall, fines, suspension of regulatory approvals, product seizures ordetention, injunctions or the imposition of civil or criminal penalties.

**FAILURE TO COMPLYWITH FOREIGN REGULATORY REQUIREMENTS GOVERNING HUMAN CLINICAL TRIALS ANDMARKETING APPROVAL FOR OUR HUMAN-USE EQUIPMENT COULD PREVENT US FROM SELLINGOUR PRODUCTS IN FOREIGN MARKETS, WHICH MAY ADVERSELY AFFECT OUR OPERATINGRESULTS AND FINANCIAL CONDITIONS.**

For marketing ourMedPulser® Electroporation System outside the UnitedStates, the requirements governing the conduct of clinical trials, productlicensing, pricing and reimbursement vary greatly from country to country andmay require additional testing. The time required to obtain approvals outsidethe United States may differ from that required to obtain FDA approval. We maynot obtain foreign regulatory approval on a timely basis, if at all, or be ableto obtain regulatory approvals in one ore more of the jurisdictions in which wewould wish to commercialize our products. Approval by the FDA does not ensureapproval by regulatory authorities in other countries, and approval by oneforeign regulatory authority does not ensure approval by regulatory authoritiesin other countries or by the FDA. Failure to 

36

----

complywith these regulatory requirements or to obtain required approvals could impairour ability to develop these markets and could have a material adverse effecton our results of operations and financial condition.

**IF WE CANNOTMAINTAIN OUR EXISTING CORPORATE AND ACADEMIC ARRANGEMENTS AND ENTER INTO NEWARRANGEMENTS, WE MAY BE UNABLE TO DEVELOP PRODUCTS EFFECTIVELY, OR AT ALL.**

Our strategy for the research, development andcommercialization of our product candidates may result in our entering intocontractual arrangements with corporate collaborators, academic institutionsand others. We have entered into sponsored research, license and/orcollaborative arrangements with several entities, including Merck, Wyeth, Vical,Valentis, the U.S. Navy, Chiron and the University of South Florida, as well asnumerous other institutions that conduct clinical trials work or performpre-clinical research for us. Our success depends upon our collaborativepartners performing their responsibilities under these arrangements andcomplying with the regulations and requirements governing clinical trials. Wecannot control the amount and timing of resources our collaborative partnersdevote to our research and testing programs or product candidates, or theircompliance with regulatory requirements which can vary because of factorsunrelated to such programs or product candidates. These relationships may insome cases be terminated at the discretion of our collaborative partners withonly limited notice to us.

Merck can terminate its May 2004 license andcollaboration agreement with us at any time in its sole discretion, withoutcause, by giving ninety days advance notice to us. If this agreement isterminated by Merck at any time during the first two years of the collaborationterm, then Merck shall continue, for a six-month period beginning on the dateof such termination, to make payments previously approved by the project’sjoint collaboration committee in relation to scientists and outside contractorsengaged by us in connection with the agreement.

We may not be able tomaintain our existing arrangements, enter into new arrangements or negotiatecurrent or new arrangements on acceptable terms, if at all. Some of ourcollaborative partners may also be researching competing technologiesindependently from us to treat the diseases targeted by our collaborativeprograms.

**OUR ABILITY TO ACHIEVE SIGNIFICANT REVENUES FROM SALES ORLEASES OF HUMAN-USE PRODUCTS WILL DEPEND ON ESTABLISHING EFFECTIVE SALES,MARKETING AND DISTRIBUTION CAPABILITIES OR RELATIONSHIPS AND WE CURRENTLY LACKSUBSTANTIAL EXPERIENCE IN THESE AREAS.**

To market our products, we will need to develop sales,marketing and distribution capabilities. In order to develop or otherwise obtainthese capabilities, we may have to enter into marketing, distribution or othersimilar arrangements with third parties in order to sell, market and distributeour products successfully. To the extent we enter into any such arrangementswith third parties, our product revenue is likely to be lower than if wedirectly marketed and sold our products, and any revenue we receive will dependupon the efforts of such third parties. We may be unable to develop sufficientsales, marketing and distribution capabilities to commercialize our productssuccessfully.

If we want to market and sell our human-use productsdirectly, we must develop a marketing and sales force. This wouldinvolve substantial costs, training, and time. We have limited experience in sales, marketing anddistribution of clinical and human-use products and we currently have no sales,marketing or distribution capability. We may be unable to develop sufficientsales, marketing and distribution capabilities to commercialize our productssuccessfully. Regardless of whether we elect to use third parties 

37

----

or seek to develop our ownmarketing capability, we may not be able to successfully commercialize anyproduct.

**WE RELY ONCOLLABORATIVE AND LICENSING RELATIONSHIPS TO FUND A PORTION OF OUR RESEARCH ANDDEVELOPMENT EXPENSES AND CARRY OUT PORTIONS OF OUR RESEARCH; IF WE ARE UNABLETO MAINTAIN OR EXPAND EXISTING RELATIONSHIPS, OR INITIATE NEW RELATIONSHIPS, WEWILL HAVE TO DEFER OR CURTAIL RESEARCH AND DEVELOPMENT ACTIVITIES IN ONE ORMORE AREAS.**

Our partners and collaborators fund a portion of ourresearch and development expenses and assist us in the research and developmentof our human-use equipment. These collaborations and partnerships can help paythe salaries and other overhead expenses related to research. In the past, weencountered operational difficulties after the termination of an agreement by aformer partner. Because this partnership was terminated, we did not receivesignificant milestone payments which we had expected and were forced to delaysome clinical trials as well as some product development.

Our clinical trials to date have used our equipmentwith the anti-cancer drug bleomycin sulfate. We do not currently intend topackage bleomycin sulfate together with the equipment for sale, but if itshould be necessary or desirable to do this, we would need a reliable source ofthe drug. At this time we do not have a fixed source of bleomycin sulfate forinclusion with equipment or alone. If it becomes necessary or desirable toinclude bleomycin sulfate in our package, we would have to form a relationshipwith another provider of this generic drug before any product could belaunched.

We also rely on scientific collaborators at companiesand universities to further our research and test our equipment. In most cases,we lend our equipment to a collaborator, teach him or her how to use it, andtogether design experiments to test the equipment in one of the collaborator’sfields of expertise. We aim to secure agreements that restrict collaborators’rights to use the equipment outside of the agreed upon research, and outlinethe rights each of us will have in any results or inventions arising from thework.

Nevertheless, thereis always risk that:

·                    Ourequipment will be used in ways we did not authorize, which can lead toliability and unwanted competition;

·                    Wemay determine that our technology has been improperly assigned to us or acollaborator may claim rights to certain of our technology, which may requireus to pay license fees or milestone payments and, if commercial sales of theunderlying product is achieved, royalties;

·                    Wemay lose rights to inventions made by our collaborators in the field of ourbusiness, which can lead to expensive legal fights and unwanted competition;

·                    Ourcollaborators may not keep our confidential information to themselves, whichcan lead to loss of our right to seek patent protection and loss of tradesecrets, and expensive legal fights; and

·                    Ourcollaborative associations can damage a our reputation if they go awry andthus, by association or otherwise, the scientific or medical community maydevelop a negative view of us.

We cannot guarantee thatany of the results from these collaborations will be successful, that we willbe able to continue to collaborate with individuals and institutions that willfurther our work, or that we will be able to do so under terms that are notoverly restrictive. If we are not able to maintain or develop new collaborativerelationships, then it is likely the research pace will slow down and it willtake longer to identify and commercialize new products, or new indications forour existing products.

38

----

**WE RELY HEAVILY ONOUR PATENTS AND PROPRIETARY RIGHTS TO ATTRACT PARTNERSHIPS AND MAINTAIN MARKETPOSITION.**

Another factor that will influence our success is thestrength of our patent portfolio. Patents give the patent holder the right toprevent others from using its patented technology. If someone infringes uponthe patented material of a patent holder, then the patent holder has the rightto initiate legal proceedings against that person to protect the patentedmaterial. These proceedings, however, can be lengthy and costly. We perform anongoing review of our patent portfolio to evaluate whether our key technologiesappear to be adequately protected. If we determine that any of our patentsrequire either additional disclosures or revisions to existing information, wemay ask that such patents be reexamined or reissued, as applicable, by theUnited States Patent and Trademark Office.

The patenting process, enforcement of issued patents,and defense against claims of infringement are inherently risky. Because werely heavily on patent protection, we face the following significant risks:

*Riskof Inadequate Patent Protection for Product.*   TheUnited States Patent and Trademark Office or foreign patent offices may notgrant patents of meaningful scope based on the applications we have alreadyfiled and those we intend to file. If we do not have patents that adequatelyprotect our human-use equipment and indications for its use, then we will notbe able to maintain a competitive advantage in the market for such products.

*RiskThat Important Patents Will Be Judged Invalid.*   Someof the issued patents we now own or license may be determined to be invalid. Ifwe have to defend the validity of any of our patents, the costs of such defensecould be substantial, and there is no guarantee of a successful outcome. In theevent an important patent related to our drug delivery technology is found tobe invalid, we may lose competitive position and may not be able to receiveroyalties for products covered in part or whole by that patent under licenseagreements.

*Riskof Being Charged With Infringement.*   Although weare not currently aware of any parties intending to pursue infringement claimsagainst us, there is the risk that we will use a patented technology allegedlyor actually owned by another person and/or be charged with infringement.Defending, or indemnifying a third party, against a charge of infringement caninvolve lengthy and costly legal actions, and there can be no guarantee of asuccessful outcome. Biotechnology companies comparable to us in size andfinancial position have gone out of business after fighting and losinginfringement battles. If we or our partners are prevented from using or sellingour human-use equipment, then our business would be materially adverselyaffected.

*Freedomto Operate Risks.*   We are aware that patentsrelated to electrically-assisted drug delivery have been granted to, and patentapplications filed by, our potential competitors. We or our partners have takenlicenses to some of these patents, and will consider taking additional licensesin the future. Nevertheless, the competitive nature of our field of businessand the fact that others have sought patent protection for technologies similarto ours make these patent-related risks significant.

In addition to patents, wealso rely on trade secrets and proprietary know-how. We try to protect thisinformation with appropriate confidentiality and inventions agreements with ouremployees, scientific advisors, consultants, and collaborators. We cannot besure that these agreements will not be breached, that we will be able toprotect ourselves if they are breached, or that our trade secrets will nototherwise become known or be independently discovered by competitors. If any ofthese events occurs, then we run the risk of losing control of valuable companyinformation, which could negatively affect our competitive position.

39

----

**IF WE ARE NOTSUCCESSFUL DEVELOPING OUR CURRENT PRODUCTS, OUR BUSINESS MODEL MAY CHANGEAS OUR PRIORITIES AND OPPORTUNITIES CHANGE. OUR BUSINESS MAY NEVER DEVELOPTO BE PROFITABLE OR SUSTAINABLE.**

There are many productsand programs that to us seem promising and that we could pursue. However, withlimited resources, we may decide to change priorities and shift programs awayfrom those that we had been pursuing for the purpose of exploiting our coretechnology of electroporation. The choices we may make will be dependent uponnumerous factors, which we cannot predict. We cannot be sure that our businessmodel, as it currently exists or as it may evolve, will enable us to becomeprofitable or to sustain operations.

**SERIOUS ANDUNEXPECTED SIDE EFFECTS ATTRIBUTABLE TO GENE THERAPY MAY RESULT INGOVERNMENTAL AUTHORITIES IMPOSING ADDITIONAL REGULATORY REQUIREMENTS OR ANEGATIVE PUBLIC PERCEPTION OF OUR PRODUCTS.**

The MedPulser® DNADelivery System and any of our other Gene Therapy or DNA Vaccine productcandidates under development could be broadly described as gene therapies. Anumber of clinical trials are being conducted by other pharmaceutical companiesinvolving gene therapy, including compounds similar to, or competitive with,our product candidates. The announcement of adverse results from these clinicaltrials, such as serious unwanted and unexpected side effects attributable totreatment, or any response by the FDA to such clinical trials, may impede thetiming of our clinical trials, delay or prevent us from obtaining regulatoryapproval or negatively influence public perception of our product candidates,which could harm our business and results of operations and depress the valueof our stock.

The U.S. Senate has held hearings concerning theadequacy of regulatory oversight of gene therapy clinical trials, as well asthe adequacy of research subject education and protection in clinical researchin general, and to determine whether additional legislation is required toprotect volunteers and patients who participate in such clinical trials. TheRecombinant DNA Advisory Committee, or RAC, which acts as an advisory body tothe National Institutes of Health, has expanded its public role in evaluatingimportant public and ethical issues in gene therapy clinical trials.Implementation of any additional review and reporting procedures or otheradditional regulatory measures could increase the costs of or prolong ourproduct development efforts or clinical trials.

As of December 31, 2006, to our knowledge, therehave not been any serious adverse events in any gene therapy clinical trials inwhich our technology was used. These current gene therapy clinical trials arebeing sponsored by several of our partners. In the future, if one or a seriesof serious adverse events were to occur during a gene therapy clinical trial inwhich our technology was used by a partner, the partner would be responsiblefor reporting all such events to the FDA and other regulatory agencies asrequired by law. Such serious adverse events, whether treatment-related or not,could result in negative public perception of our treatments and requireadditional regulatory review or other measures, which could increase the costof or prolong our gene therapy clinical trials or require us to halt theclinical trials altogether.

The FDA has not approvedany gene therapy product or gene-induced product for sale in the United States.The commercial success of our products will depend in part on public acceptanceof the use of gene therapy products or gene-induced products, which are a newtype of disease treatment for the prevention or treatment of human diseases.Public attitudes may be influenced by claims that gene therapy products orgene-induced products are unsafe, and these treatment methodologies may notgain the acceptance of the public or the medical community. Negative publicreaction to gene therapy products or gene-induced products could also result ingreater government regulation and stricter clinical trial oversight.

40

----

**WE CANNOT PREDICTTHE SAFETY PROFILE OF THE USE OF OUR MEDPULSER**® ELECTROPORATION SYSTEM WHEN USED INCOMBINATION WITH OTHER THERAPIES.

Our trials involve the useof our MedPulser® Electroporation System in combination withbleomycin sulfate, an anti-cancer drug. While the data we have evaluated todate suggest the MedPulser® Electroporation System does not increase theadverse effects of other therapies, we cannot predict if this outcome will continueto be true or whether possible adverse side effects not directly attributableto the other drugs will compromise the safety profile of our MedPulser® Electroporation System when used in certaincombination therapies or if used off-label with other drugs by physicians.

**WE RUN THE RISKTHAT OUR TECHNOLOGY WILL BECOME OBSOLETE OR LOSE ITS COMPETITIVE ADVANTAGE.**

The drug delivery business is very competitive, fastmoving and intense, and expected to be increasingly so in the future. Othercompanies and research institutions are developing drug delivery systems that,if not similar in type to our systems, are designed to address the same patientor subject population. Therefore, we cannot promise you that our products willbe the best, the safest, the first to market, or the most economical to make oruse. If competitors’ products are better than ours, for whatever reason, thenwe could make less money from sales and our products risk becoming obsolete.

There are manyreasons why a competitor might be more successful than us, including:

*FinancialResources.*   Some competitors have greaterfinancial resources and can afford more technical and development setbacks thanwe can.

*GreaterExperience.*   Some competitors have been in thebiomedical business longer than we have. They have greater experience than usin critical areas like clinical testing, obtaining regulatory approval, andsales and marketing. This experience or their name recognition may give them acompetitive advantage over us.

*SuperiorPatent Position.*   Some competitors may have abetter patent position protecting their technology than we have or will have toprotect our technology. If we cannot use our patents to prevent others fromcopying our technology or developing similar technology, or if we cannot obtaina critical license to another’s patent that we need to make and use ourequipment, then we would expect our competitive position to weaken.

*Fasterto Market.*   Some companies with competitivetechnologies may move through stages of development, approval, and marketingfaster than us. If a competitor receives FDA approval before us, then it willbe authorized to sell its products before we can sell ours. Because the firstcompany “to market” often has a significant advantage over late-comers, asecond place position could result in less than anticipated sales.

*Reimbursement Allowed.*   Inthe U.S., third party payers, such as Medicare, may reimburse physicians and hospitalsfor competitors’ products but not for our human-use products. This wouldsignificantly affect our ability to sell our human-use products in the U.S. andwould have a serious effect on revenue and our business as a whole. Outside ofthe U.S., reimbursement and funding policies vary widely.

**ANY ACQUISITION WEMIGHT MAKE MAY BE COSTLY AND DIFFICULT TO INTEGRATE, MAY DIVERTMANAGEMENT RESOURCES OR DILUTE STOCKHOLDER VALUE.**

We have consideredand have made strategic acquisitions in the past, including our acquisition ofInovio AS in January 2005, and, in the future, may acquire or makeinvestments in complementary companies, products or technologies. As part ofour business strategy, we may acquire assets or businesses principally relatingto or complementary to our current operations, and we have in the pastevaluated and 

41

----

discussedsuch opportunities with interested parties. Any acquisitions we undertake willbe accompanied by the risks commonly encountered in business acquisitions.These risks include, among other things:

·                    Potentialexposure to unknown liabilities of acquired companies;

·                    Thedifficulty and expense of assimilating the operations and personnel of acquiredbusinesses;

·                    Diversionof management time and attention and other resources;

·                    Lossof key employees and customers as a result of changes in management;

·                    Incurrenceof amortization expenses related to intangible assets or large one-timecharges, such as the charge in excess of $3.3 million we incurred to ourresults of operations during 2005 related to our write-off of in-processresearch and development that we acquired in our acquisition of Inovio AS in January 2005;

·                    Increasedlegal, accounting and other administrative costs associated with negotiation,documentation and reporting on any such acquisition; and

·                    Possibledilution to our stockholders.

In addition, geographyand/or language barriers may make the integration of businesses more difficult.We may not be successful in overcoming these risks or any other problemsencountered in connection with any acquisitions.

**CHANGES IN FOREIGNEXCHANGE RATES MAY AFFECT OUR FUTURE OPERATING RESULTS.**

In January 2005, weacquired Inovio AS, a Norwegian company. During the year ended December 31,2006, Inovio AS contributed approximately $1.1million to our revenue, which amounted to approximately 33% of our totalrevenue. Inovio AS conducts its operations primarily in foreign currencies,including the Euro, Norwegian Kroner and Swedish Krona. In September 2006,we established Inovio Asia Pte. Ltd., a company incorporated in the Republic ofSingapore, which conducts its operations primarily in Singapore dollars. Fluctuationin the values of these foreign currencies relative to the U.S. dollar willaffect our financial results which are reported in US dollars and will causeU.S. dollar translation of such currencies to vary from one period to another.We cannot predict the scope of any fluctuations in the values of these foreigncurrencies relative to the U.S. dollar nor the effect of exchange ratefluctuations upon our future operating results.

**ECONOMIC,POLITICAL, MILITARY OR OTHER EVENTS IN THE UNITED STATES OR IN OTHER COUNTRIESCOULD INTERFERE WITH OUR SUCCESS OR OPERATIONS AND HARM OUR BUSINESS**

The September 11,2001 terrorist attacks disrupted commerce throughout the United States andother parts of the world. The continued threat of similar attacks throughoutthe world and the military action taken by the United States and other nationsin Iraq or other countries may cause significant disruption to commercethroughout the world. To the extent that such disruptions further slow theglobal economy, our business and results of operations could be materiallyadversely affected. We are unable to predict whether the threat of new attacksor the responses thereto will result in any long-term commercial disruptions orif such activities or responses will have a long-term material adverse effecton our business, results of operations or financial condition.

42

----

**OUR DEPENDENCE UPONNON-MARKETED PRODUCTS, LACK OF EXPERIENCE IN MANUFACTURING AND MARKETINGHUMAN-USE PRODUCTS, AND OUR CONTINUING DEFICIT MAY RESULT IN EVEN FURTHERFLUCTUATIONS IN OUR TRADING VOLUME AND SHARE PRICE.**

Successful approval,marketing, and sales of our human-use equipment are critical to the financialfuture of our company. Our human-use products are not yet approved for sale inthe United States and some other jurisdictions and we may never obtain thoseapprovals. Even if we do obtain approvals to sell our human-use products in theUnited States, those sales may not be as large or timely as we expect. Theseuncertainties may cause our operating results to fluctuate dramatically in thenext several years. We believe that quarter-to-quarter or annual comparisons ofour operating results are not a good indicator of our future performance.Nevertheless, these fluctuations may cause us to perform below the expectationsof the public market analysts and investors. If this happens, the price of ourcommon shares would likely fall.

**THERE IS A RISK OFPRODUCT LIABILITY WITH HUMAN-USE EQUIPMENT**

The testing, marketing and sale of human-use productsexpose us to significant and unpredictable risks of equipment product liabilityclaims. These claims may arise from patients, clinical trial volunteers, consumers,physicians, hospitals, companies, institutions, researchers or others using,selling, or buying our equipment. Product liability risks are inherent in ourbusiness and will exist even after the products are approved for sale. If andwhen our human-use equipment is commercialized, we run the risk that use (ormisuse) of the equipment will result in personal injury. The chance of such anoccurrence will increase after a product type is on the market.

We have obtained liability insurance in connectionwith ongoing business and products, and we may purchase additional policies ifsuch policies are determined by management to be necessary. However, ourexisting insurance and the insurance we purchase may not provide adequatecoverage in the event a claim is made and we may be required to pay claimsdirectly. If we did have to make payment against a claim, then it would impactour financial ability to perform the research, development, and salesactivities we have planned.

If and when our human-useequipment is commercialized, there is always the risk of product defects.Product defects can lead to loss of future sales, decrease in marketacceptance, damage to our brand or reputation, product returns and warrantycosts, and even product withdrawal from the market. These events can occurwhether the defect resides in a component we purchased from a third party orwhether it was due to our design and/or manufacture. We expect that our salesagreements will contain provisions designed to limit our exposure to productliability claims. However, we do not know whether these limitations areenforceable in the countries in which the sale is made. Any product liabilityor other claim brought against us, if successful and of sufficient magnitude,could negatively impact our financial performance, even if we have insurance.

**WE CANNOT BECERTAIN THAT WE WILL BE ABLE TO MANUFACTURE OUR HUMAN-USE EQUIPMENT INSUFFICIENT VOLUMES AT COMMERCIALLY REASONABLE RATES.**

Our manufacturing facilities for human-use productswill be subject to quality systems regulations, international quality standardsand other regulatory requirements, including pre-approval inspection for thehuman-use equipment and periodic post-approval inspections for all human-useproducts. While we have undergone and passed a quality systems audit from aninternational body, we have never undergone a quality systems inspection by theFDA. We may not be able to pass an FDA inspection when it occurs. If ourfacilities are found not to be up to the FDA standards in sufficient time,prior to a launch of our product in the United States, then it will result in adelay or termination of our ability to produce the human-use equipment in ourfacility. Any delay in production will have a negative effect on our business. 

43

----

While there are no targetdates set forth for launch of our products in the United States, we plan onlaunching these products once we successfully perform a Phase III clinicalstudy, obtain the requisite regulatory approval, and engage a partner who has thefinancial resources and marketing capacity to bring our products to market.

Our products must be manufactured in sufficientcommercial quantities, in compliance with regulatory requirements, and at anacceptable cost to be attractive to purchasers. We rely on third parties tomanufacture and assemble most aspects of our equipment, and thus cannotdirectly control the quality, timing or quantities of equipment manufactured orassembled at any given time.

Disruption of themanufacture of our products, for whatever reason, could delay or interrupt ourability to manufacture or deliver our products to customers on a timely basis.This would be expected to affect revenue and may affect our long-termreputation, as well. In the event we provide product of inferior quality, werun the risk of product liability claims and warranty obligations, which willnegatively affect our financial performance.

**IF WE LOSE KEYPERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL, HIGHLY SKILLEDPERSONNEL REQUIRED TO DEVELOP OUR PRODUCTS OR OBTAIN NEW COLLABORATIONS, OURBUSINESS MAY SUFFER.**

We depend, to asignificant extent, on the efforts of our key employees, including seniormanagement and senior scientific, clinical, regulatory and other personnel. Thedevelopment of new therapeutic products requires expertise from a number ofdifferent disciplines, some of which is not widely available. We depend uponour scientific staff to discover new product candidates and to develop andconduct pre-clinical studies of those new potential products. Our clinical andregulatory staff is responsible for the design and execution of clinical trialsin accordance with FDA requirements and for the advancement of our productcandidates toward FDA approval. Our operations staff is responsible fordesigning, developing and manufacturing in the product in accordance with theapplicable Quality System Regulations. The quality and reputation of ourscientific, clinical, regulatory and manufacturing staff, especially the seniorstaff, and their success in performing their responsibilities, are significantfactors in attracting potential funding sources and collaborators. In addition,our Chief Executive Officer and Chief Financial Officer and other executiveofficers are involved in a broad range of critical activities, includingproviding strategic and operational guidance. The loss of these individuals, orour inability to retain or recruit other key management and scientific,clinical, regulatory, operations and other personnel, may delay or prevent usfrom achieving our business objectives. We face intense competition forpersonnel from other companies, universities, public and private researchinstitutions, government entities and other organizations.

**WE MAY NOTMEET ENVIRONMENTAL GUIDELINES AND AS A RESULT COULD BE SUBJECT TO CIVIL ANDCRIMINAL PENALTIES.**

Like all companies in ourline of work, we are subject to a variety of governmental regulations relatingto the use, storage, discharge and disposal of hazardous substances. Our safetyprocedures for handling, storage and disposal of such materials are designed tocomply with applicable laws and regulations. While we believe we are currentlyin compliance with all material applicable environmental regulations, if we arefound to not comply with environmental regulations, or if we are involved withcontamination or injury from these materials, then we may be subject to civiland criminal penalties. This would have a negative impact on our reputation andfinances, and could result in a slowdown or even complete cessation of ourbusiness.

44

----

**OUR FACILITIES ARELOCATED NEAR KNOWN EARTHQUAKE FAULT ZONES, AND THE OCCURRENCE OF AN EARTHQUAKEOR OTHER CATASTROPHIC DISASTER COULD CAUSE DAMAGE TO OUR FACILITIES ANDEQUIPMENT.**

Our facilities are locatednear known earthquake fault zones and are vulnerable to damage fromearthquakes. We are also vulnerable to damage from other types of disasters,including fire, floods, power loss, communications failures and similar events.If any disaster were to occur, our ability to operate our business at ourfacilities would be seriously impaired. In addition, given the nature of ourresearch activities, any such disaster could cause significant delays in ourprograms and make it difficult for us to recover. The insurance we maintain maynot be adequate to cover our losses resulting from disasters or other businessinterruptions. Accordingly, an earthquake or other disaster could materiallyand adversely harm our ability to conduct business.

**LEGISLATIONREQUIRING COMPANIES TO EVALUATE INTERNAL CONTROLS UNDER SECTION 404 OF THESARBANES-OXLEY ACT OF 2002 HAS INCREASED OUR EXPENSES AND COULD RESULT INEVENTS THAT ADVERSELY AFFECT OUR STOCK.**

As directed by Section 404 of the Sarbanes-OxleyAct of 2002 (Section 404), the Securities and Exchange Commission adopted rules requiringpublic companies to include a report of management on our internal controlsover financial reporting in our annual reports on Form 10-K thatcontains an assessment by management of the effectiveness of our internalcontrols over financial reporting. In addition, our independent registeredpublic accounting firm must attest to and report on management’s assessment ofthe effectiveness of our internal controls over financial reporting. Thisrequirement first applied to our 2004 Annual Report on Form 10-K.

How companies are implementing these new requirementsincluding internal control reforms, if any, to comply with Section 404’srequirements, and how independent auditors are applying these new requirementsand testing companies’ internal controls, is an evolving process and remainssubject to uncertainty. The requirements of Section 404 are ongoing andapply to future years. We expect that our internal controls will continue toevolve as our business activities change. During the course of management’s andour independent registered public accounting firm’s review of our internalcontrols over financial reporting as of December 31, 2006, we did notidentify any significant control deficiencies that arose to the level ofmaterial weaknesses, as defined by the Public Company Accounting OversightBoard (PCAOB). Although we will continue to diligently and vigorously reviewour internal controls over financial reporting in order to ensure compliancewith the Section 404 requirements, any control system, regardless of howwell designed, operated and evaluated, can provide only reasonable, notabsolute, assurance that its objectives will be met.

If, during any year, our independent registered publicaccounting firm is not satisfied with our internal controls over financialreporting or the level at which these controls are documented, designed,operated, tested or assessed, or if the independent registered publicaccounting firm interprets the requirements, rules or regulationsdifferently than we do, then our independent registered public accounting firmmay decline to attest to management’s assessment or may issue a report that isqualified. This could result in an adverse reaction in the financialmarketplace due to a loss of investor confidence in the reliability of ourfinancial statements, which ultimately could negatively impact the market priceof our stock.

45

----

**ITEM 1B.**       UNRESOLVEDSTAFF COMMENTS

None.

**ITEM 2.**                PROPERTIES

We own no real property and have no plans to acquireany real property in the future. On January 28, 2005, we moved into newheadquarters of 22,867 square feet at 11494 Sorrento Valley Road in San Diego,California. This facility provides adequate space for our current research,manufacturing, and administrative operations. This lease runs through February 28,2010. The annual rent for this leased property is $433,901 in the first twoyears and $452,767 in year three and four of the original lease term. Theannual rent for the fifth and final year of the original lease term is$480,207. At the end of the original lease term, we have the option of renewingthis lease for an additional five-year lease term at an annual rate equal tothe fair market rental value of the property, as defined in the leaseagreement.

In connection with this lease, we issued a warrant topurchase 50,000 shares of our common stock at $5.00 per share to the landlordof this leased facility in December 2004. This warrant is immediatelyexercisable and expires five years from the date of issuance. This warrant wasvalued on the date of issuance using the Black-Scholes pricing model. Thefair value of this warrant, $120,913, will be recognized ratably over thefive-year term of the lease as rent expense.

In January 2007, we entered into a facility leasein Oslo, Norway to support our research and development activities conductedthrough our subsidiary Inovio AS. The term of the lease is for three years andmay be terminated with three months notice. Monthly rent is approximately$1,350 per month.

We believe our currentfacilities will be adequate to meet our operating needs for the foreseeablefuture. Should we need additional space, we believe we will be able to secureadditional space at commercially reasonable rates.

**ITEM 3.**                LEGALPROCEEDINGS

Neither we nor any of oursubsidiaries are involved in any material legal proceedings.

**ITEM 4.**                SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submittedto a vote of security holders during the fourth quarter of fiscal 2006.

**PART II**

**ITEM 5.**                MARKETFOR COMPANY’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER REPURCHASESOF EQUITY SECURITIES

*Market Information*

Our common stock is traded on the American StockExchange (AMEX) under the symbol “INO.” Trading began on the AMEX on December 8,1998.

On September 13, 2004, we effected a one-for-fourreverse split of our common stock. At the time of the reverse stock split, eachfour shares of our issued and outstanding common stock were combined into oneshare of our common stock. The reverse stock split did not change the number ofauthorized shares of our common stock. All common share and per share amountsthroughout this Report have been adjusted to give effect to this reverseone-for-four stock split.

46

----

Thetable below sets forth the quarterly high and low closing sales prices of ourcommon shares in the two most recent fiscal years. 

| ** **                                           | ** ** | **American  Stock  Exchange  US$** | ** ** |
|------------------------------------------------------|------------|------------------------------------|------------|
| **Year ended December 31, 2006** | ** ** | ** **                         | ** ** | **High** | ** ** | **Low** | ** ** |
| First quarter                                        |       | 3.15                               |       | 2.28 |   |
| Second quarter                                       |       | 2.67                               |       | 2.00 |   |
| Third quarter                                        |       | 2.58                               |       | 2.01 |   |
| Fourth quarter                                       |       | 3.59                               |       | 2.62 |   |
| **Year ended December 31, 2005**                | ** ** | ** **                         | ** ** | ** ** | ** ** |
| First quarter                                        |       | 5.01                               |       | 3.42 |   |
| Second quarter                                       |       | 3.70                               |       | 2.45 |   |
| Third quarter                                        |       | 3.24                               |       | 2.60 |   |
| Fourth quarter                                       |       | 2.86                               |       | 1.99 |   |
|                                                      |            |                                    |            |  |  |  |  |

 

As of March 8, 2007,we had approximately 481 common stockholders of record. This figure does notinclude beneficial owners who hold shares in nominee name. The closing priceper share of our common stock on March 8, 2007 was $3.10, as reported onthe AMEX.

*Recent Sales ofUnregistered Securities*

In December 2006 weissued 45,000 unregistered common shares to an employee of the company pursuantto an exemption from registration under the Securities Act of 1933, as amended.

*Dividends*

The payment of any dividends on our common stock iswithin the discretion of our board of directors. However, we may not paydividends on our common stock without the consent of holders of a majority ofeach Series of our outstanding Preferred Stock. We have not paid cashdividends on our common stock and the board of directors does not expect todeclare cash dividends on the common stock in the foreseeable future.

The holders of our Series A and B Preferred Stockwere entitled to receive an annual dividend at the rate of 6%, payablequarterly, through September 30, 2006. These dividends were payable incash unless the closing price of our common shares for the 20 trading daysimmediately preceding the dividend payment date was equal to or greater thanthe conversion price of such shares, in which event we may have elected to paythe dividends to the holders in common stock. During the three years in theperiod ended December 31, 2006, we paid dividends to the holders of our Series Aand B Preferred Stock through the issuance of 2,871 shares of our common stockvalued at $7,693 and in cash of $15,140 during 2006; through the issuance of55,518 shares of our common stock valued at $179,956 and in cash of $60,235during 2005; and through the issuance of 73,072 shares of our common stockvalued at $322,397 in 2004. As of December 31, 2006 there were no sharesof Series A or B Preferred Stock outstanding. As of December 31,2005, 52 shares of Series A Preferred Stock and 100 shares of Series BPreferred Stock remained outstanding.

The holders of our Series CPreferred Stock are entitled to receive an annual dividend at the rate of 6%,payable quarterly, through June 30, 2007. These dividends are payable incash unless the closing price of our common shares for the 20 trading daysimmediately preceding the dividend payment date is equal to or greater than theconversion price of such shares, in which event we may elect to pay thedividends to the holders in common stock. Currently, the conversion price ofsuch shares is $6.80 per share. During the year 

47

----

ended December 31,2006, we paid dividends to the holders of our Series C Preferred Stock incash of $117,204 and accrued dividends of $14,571 which were converted intocommon shares and warrants as part of our October 2006 private placement. Duringthe year ended December 31, 2005 we paid cash of $553,694 and during theyear ended December 31, 2004 we issued 30,124 shares of our common stockvalued at $133,693, and paid $276,315 in cash. As of December 31, 2006 and2005, there were 102 and 337 shares of Series C Preferred Stockoutstanding, respectively.

*Repurchases*

We did not repurchase anyof our equity securities during the fourth quarter of fiscal 2006.

*Equity CompensationPlans*

Our equity compensationplan information is provided as set forth in Part III, Item 11 herein.

*Performance Graph*

The following graphillustrates a comparison of the total cumulative stockholder return on ourcommon stock since March 31, 2001. The graph assumes an initial investmentof $100 on March 31, 2001. The comparisons in the graph are required bythe Securities and Exchange Commission and are not intended to forecast or beindicative of possible future performance of our common stock.

**COMPARISON OF 69 MONTH CUMULATIVE TOTAL RETURN***

AmongInovio Biomedical Corporation, The AMEX Composite IndexAnd The S & P SuperCap Biotechnology Index

****

*$100 invested on 3/31/01 in stock or Index-including reinvestment of dividends.Fiscal year ending December 31.

48

----

**ITEM 6.**                SELECTEDCONSOLIDATED FINANCIAL DATA

The following table setsforth our selected consolidated financial data for the periods indicated,derived from consolidated financial statements prepared in accordance with U.S.generally accepted accounting principles. The selected Statement of Operationsdata for each of the three years in the period ended December 31, 2006 andthe Balance Sheet data as of December 31, 2006 and 2005 are derived fromour audited consolidated financial statements included later in this Form 10-K.The selected Statement of Operations data for years ended December 31,2003 and 2002 and the Balance Sheet data as of December 31, 2004, 2003,and 2002 were derived from our audited consolidated financial statements, whichare not included in this Form 10-K. The data set forth below shouldbe read in conjunction with our Consolidated Financial Statements and the Notesthereto included elsewhere in this Report and “Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations” setforth below. 

| ** **                                                         | ** ** | **Year Ended  December 31,  2006** | ** ** | **Year Ended  December 31,  2005*** | ** ** | **Year Ended  December 31,  2004** | ** ** | **Year Ended  December 31,  2003** | ** ** | **Year Ended  December 31,  2002** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| Operations  Data:                                                  |       |                                         |       |                                          |       |                                         |       |                                         |       |                                         |       |   |   |
| License fee and milestone  payments                                |       | $                                            | 1,337,105  |                                          | $          | 2,563,283                                    |       | $                                            | 214,351    |                                         | $          | 5,882 |   |   | $ | 5,883 |   |   |
| Revenue under collaborative  research and development arrangements |       | 962,207                                      |       | 1,492,145                                     |       | 945,591                                      |       | 74,647                                       |       |                                         | 183,638    |   |   |
| Grants and miscellaneous  revenue                                  |       | 1,168,866                                    |       | 1,411,825                                     |       | 7,157                                        |       | —                                       |       |                                         |       |   |   |
| Loss from continuing  operations                                   |       | (12,479,124                                  | )          | (15,296,852                                   | )          | (11,263,140                                  | )          | (6,588,245                                   | )          |                                         | (5,908,044 | ) |   |
| Gain on disposal of assets                                         |       | —                                       |       | —                                        |       | 290,209                                      |       | 2,034,078                                    |       |                                         | —     |   |   |
| Loss from discontinued  operations                                 |       | —                                       |       | —                                        |       | —                                       |       | (110,740                                     | )          |                                         | (56,783    | ) |   |
| Net loss                                                           |       | (12,479,124                                  | )          | (15,296,852                                   | )          | (10,972,931                                  | )          | (4,664,907                                   | )          |                                         | (5,964,827 | ) |   |
| Imputed and declared  dividends                                    |       | (2,005,664                                   | )          | (11,065,770                                   | )          | (732,405                                     | )          | (18,210,530                                  | )          |                                         | —     |   |   |
| Loss attributable to common  stockholders                          |       | (14,484,788                                  | )          | (26,362,622                                   | )          | (11,705,336                                  | )          | (22,875,437                                  | )          |                                         | (5,964,827 | ) |   |
| *Amounts  per common share—basic and diluted:*                | * *   | * *                                     | * *   | * *                                      | * *   | * *                                     | * *   | * *                                     | * *   |                                         |       |   |   |
| Loss from continuing  operations                                   |       | (0.40                                        | )          | (0.81                                         | )          | (0.64                                        | )          | (0.49                                        | )          |                                         | (0.58      | ) |   |
| Gain (loss) from  discontinued operations                          |       | —                                       |       | —                                        |       | 0.02                                         |       | 0.14                                         |       |                                         | (0.01      | ) |   |
| Net loss                                                           |       | (0.40                                        | )          | (0.81                                         | )          | (0.62                                        | )          | (0.35                                        | )          |                                         | (0.59      | ) |   |
| Imputed and declared  dividends                                    |       | (0.06                                        | )          | (0.58                                         | )          | (0.04                                        | )          | (1.37                                        | )          |                                         | —     |   |   |
| Net loss attributable to  common stockholders                      |       | (0.46                                        | )          | (1.39                                         | )          | (0.66                                        | )          | (1.72                                        | )          |                                         | (0.59      | ) |   |
| Balance  Sheet Data:                                               |       |                                         |       |                                          |       |                                         |       |                                         |       |                                         |       |   |   |
| Cash and cash equivalents                                          |       | 8,321,606                                    |       | 17,166,567                                    |       | 17,889,797                                   |       | 13,460,446                                   |       |                                         | 875,444    |   |   |
| Short-term investments                                             |       | 14,700,000                                   |       | —                                        |       | —                                       |       | —                                       |       |                                         | —     |   |   |
| Total assets                                                       |       | 35,949,615                                   |       | 28,978,954                                    |       | 20,951,502                                   |       | 16,228,990                                   |       |                                         | 5,419,225  |   |   |
| Long-term liabilities                                              |       | 5,638,615                                    |       | 1,791,801                                     |       | —                                       |       | —                                       |       |                                         | 35,851     |   |   |
| Total stockholders equity                                          |       | 21,692,556                                   |       | 23,470,748                                    |       | 15,549,510                                   |       | 15,047,635                                   |       |                                         | 3,725,370  |   |   |
|                                                                    |            |                                              |            |                                               |            |                                              |            |                                              |            |                                              |            |  |  |  |  |  |  |  |

----

*                     On January 25,2005, we consummated the acquisition of Inovio AS, a Norwegian company. Forinformation concerning this acquisition, see Note 15 of Notes to ourConsolidated Financial Statements appearing later in this Report. For adiscussion of the affect of this acquisition on our operating results during2005, see Item 7. Management’s Discussionand Analysis of Financial Condition and Results of Operations—Results of Operations—Comparison of Years Ended December 31,2006 and 2005 and Comparison of Years Ended December 31, 2005 and 2004.

49

----

**ITEM 7.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

**Forward-LookingStatements**

The following discussion should be read in conjunctionwith the audited consolidated financial statements and the notes theretocontained elsewhere in this annual report. The following discussion andanalysis explains trends in our financial condition and results of operationsfor the years ended December 31, 2006, 2005 and 2004.

This Form 10-K contains forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995, including statements with regards to our revenue, spending, cash flow,products, actions, plans, strategies and objectives. Forward-lookingstatements include, without limitation, any statement that may predict,forecast, indicate or simply state future results, performance or achievements,and may contain the words “believe,” “anticipate,” “expect,” “estimate,” “intend,”“plan,” “project,” “will be,” “will continue,” “will result,” “could,” “may,” “might,”or any variations of such words with similar meanings, including the negativesof such words. Any such statements are subject to risks and uncertainties thatcould cause our actual results to differ materially from those which aremanagement’s current expectations or forecasts. Such information is subject tothe risk that such expectations or forecasts, or the assumptions underlyingsuch expectations or forecasts, become inaccurate.

The risks anduncertainties are detailed from time to time in our reports filed with the SEC,including Forms 8-K, 10-Q, and 10-K, and include, amongothers, items included under Item 1A Risk Factors of this Report. The risks included there are notexhaustive. Other sections of this report may include additional factors thatcould adversely impact our business and financial performance. Moreover, weoperate in a very competitive and rapidly changing environment. New riskfactors emerge from time to time and we cannot predict all such risk factors,nor can we assess the impact of all such risk factors on our business or theextent to which any factor, or combination of factors, may cause actual resultsto differ materially from those contained in any forward looking statements.Given these risks and uncertainties, investors should not place undue relianceon forward-looking statements as a prediction of actual results.Investors should also be aware that while we do, from time to time, communicatewith securities analysts, we do not disclose any material non-publicinformation or other confidential commercial information to them. Accordingly,individuals should not assume that we agree with any statement or report issuedby any analyst, regardless of the content of the report. Thus, to the extentthat reports issued by securities analysts contain any projections, forecastsor opinions, such reports are not our responsibility.

**Overview**

We are a biomedical company whose technology platformis based on the science of electroporation. We are a leader in developing humantherapeutic applications of electroporation, which uses brief, controlledelectrical pulses to increase cellular uptake of useful biopharmaceuticals,with what we believe to be the industry’s most extensive patent portfoliocovering *in vivo* electroporation.We are focused on commercializing our Selective Electrochemical Tumor Ablation(SECTA) therapy and developing multiple DNA vaccines using our deliveryplatform for gene-based treatments. SECTA, our local ablation therapy for solidtumors is designed to selectively kill cancerous cells and minimize cosmetic orfunctional impacts to healthy tissue typically treated around the tumor. Inaddition, we have enhanced our technologies through various licensing andcollaboration agreements. With our partners, we are researching and developingproducts using our patented DNA delivery technologies for the prevention andtreatment of serious and life-threatening diseases.

We are currently building two major franchises basedon our MedPulser® Electroporation System: Oncology and DNAvaccines.

50

----

For oncology, our therapy uses electroporation toenhance the local uptake of the generic cytotoxic drug bleomycin sulfate toachieve tumor cell death. Our system, which uses a pulse generator togetherwith disposable needle applicators, delivers electrical pulses to tumorsinjected with the drug. We believe the distinctive feature of the system is thepreservation of healthy tissue at the margins of the tumor. We anticipate thesystem may therefore afford advantages over surgery in preserving function andimproving the quality of life for cancer patients who would otherwise facesignificant morbidity associated with cancer surgery. Our SECTA therapy is inPhase III clinical trials in the United States and Europe for the treatment ofrecurrent H&N cancer; and in Phase I/II for the treatment of recurrentbreast cancer. In addition, we are conducting pre-marketing studies to supportthe commercialization of our SECTA system in Europe. Prior to commercial salesof our SECTA system in the European Union (EU), we are required to obtain, andalready have obtained a CE Mark, which is recognized internationally as asymbol of quality and compliance. Completion of the European pre-marketingstudies will provide pharmacoeconomic data to be used to seek reimbursement, aswell as provide additional efficacy and safety data and local experience withphysicians who are thought leaders in Europe. This pre-marketing data is avital component of a European commercial launch of the SECTA system and will representan important milestone for us.

As part of our MedPulser® product line, our efforts in tumor ablationare complemented with the development of other cancer therapies usingelectroporation therapy for the intracellular delivery of DNA-based treatments.To our knowledge, we are the first company to initiate a clinical studyinvolving the use of electroporation technology to deliver therapeutic genes inhuman subjects, which was achieved in collaboration with investigators at theMoffitt Cancer Center in Tampa, Florida in December 2004. Thisinvestigation was approved by the FDA and involves electroporating melanomaswith DNA encoded to express particular cytokines in an attempt to stimulateimmunity against the patient’s tumor. In 2004, we extended our license withVical to include a worldwide license for the use of our electroporationtogether with Vical’s “naked” DNA technology for their development of an HIVDNA vaccine. In 2004, we executed a major licensing deal with milestone androyalty payments with Merck for the development of proprietary DNAvaccines for cancer and infectious diseases using electroporation.

In January 2005, we acquired Inovio AS, aNorwegian company, to expand our patent portfolio in the area of intramuscularelectroporation. The Inovio AS acquisition included a collaboration with theUniversity of Southampton on a Phase I clinical study for the electroporationof a DNA vaccine for prostate carcinoma. Our DNA electroporation deliverytechnology is now being evaluated in four independent Phase I/II clinicaltrials together with Moffitt, Vical, Merck and Southampton, respectively. In January 2006,we executed a collaborative commercialization agreement with Tripep AB (Tripep)(Stockholm:TPEP.ST) to co-develop a hepatitis C therapeutic vaccine, which islikely to result in another Phase I clinical trial this year. In November 2006,we executed another major non-exclusive license to our DNA delivery technologyfor intramuscular applications regarding certain therapeutic DNA vaccines toWyeth Pharmaceuticals, a division of Wyeth. We have been enrolling patients ina Phase I study to treat locally recurrent breast cancer after a mastectomy orpartial mastectomy using our SECTA therapy. In addition, in 2005, we initiateda Phase I pancreatic cancer study. Although we still believe that a potentialpancreatic disease indication for SECTA would be attractive commercially due tothe unmet clinical need for improved local control, the pancreatic trial wasterminated to maintain a focused and more manageable clinical program. As aresult we terminated the pancreatic study during the second quarter of 2006.

In October 2006, we acquired various licenses,patents and the rights to existing customer agreements from Valentis inexchange for future cash payments of $540,000 and the settlement of a royaltyobligation of $320,000. As part of this arrangement, Valentis discharged us ofall other outstanding obligations in connection with a previous licensingarrangement, and we received approximately $159,000 of funds previously held inescrow.

51

----

In October 2006, we also announced anappropriation of approximately $1,100,000 by the United States Department ofDefense for the development of our gene delivery electroporation technology forapplication to vaccinations against infectious diseases, including potentialbioterrorism agents.

In November 2006, we granted VGX a world-widenon-exclusive license to our DNA delivery technology for intratumoral deliveryof a proprietary gene to control the growth of melanoma and other cancers. Underthe terms of the agreement, we received an upfront license fee and may receivepayments based on successful completion of clinical and regulatory milestones. Wewill exclusively supply VGX with electroporation devices for the therapyincluded in the license agreement and we will receive royalties on the sale ofproducts covered by the license.

In November 2006, we also entered into acollaboration and license agreement with Wyeth Pharmaceuticals whereby wereceived an upfront fee of $4,500,000, as well as research support, annualmaintenance fees and royalties on net product sales, in exchange for aworldwide non-exclusive license to our technology for certain infectiousdisease targets. In addition, contingent upon the achievement of clinical andregulatory milestones, we will receive development payments of up to$60,000,000 over the term of the collaboration and license agreement.

We will continue to seek new strategic licensingpartners for the use of electroporation for the delivery of drugs in thetreatment of cancer and delivery of genes into cells. We will not receive anyadditional milestone or licensing payments for development or sale of ourproducts until a new strategic alliance is in place or we achieve the milestonesspecified in our existing agreements, or product sales commence under ourexisting agreements. There can be no assurance that we will be able to contractwith such a partner or that we can achieve the milestones set out in ouragreements.

Until the commercialization of human-use clinicalproducts currently in the clinic, we expect revenues and other income tocontinue to be attributable to collaborative research arrangements, licensingfees, grants and interest income. To suppot our working capital needs, in October 2006we completed a registered offering to foreign investors, whereby we sold4,074,067 shares of our common stock and issued warrants to purchase 1,425,919shares of our common stock, which resulted in gross aggregate cash proceeds of$9,900,003. All warrants included in the registered offering have a term offive years and are exercisable at $2.87 per share.

In September 2006, we also incorporated InovioAsia Pte. Ltd. (IAPL), a new wholly-owned subsidiary of Inovio, in the Republicof Singapore and thereafter granted IAPL an exclusive royalty-free license touse certain of our intellectual property in exchange for 6,584,365 ordinaryshares of IAPL. In March 2007, we terminated our license agreement whileretaining our ordinary shares.

In October 2006, IAPL completed a privateplacement in which it issued and sold 2,201,644 of its ordinary shares for cashin the amount $5,349,995. On January 14, 2007, these ordinary shares wereexchanged for 2,201,644 shares of our common stock and five-year warrants topurchase up to 770,573 shares of our common stock at an exercise price of $2.87per share. Concurrent with the October 2006 financings, certain holders ofour Series C Preferred Stock converted 115.12 preferred shares and $14,571of accrued dividends into 479,722 shares of our common stock together withwarrants to purchase 167,902 shares of our common stock, pursuant to the termsand conditions of their Preferred Stock.

Due to the amount ofexpenses incurred in the development of the oncology and gene delivery systems,we have been unprofitable since 1994. As of December 31, 2006, we had anaccumulated deficit of $128,754,730. We expect to continue to incur substantialoperating losses in the future due to our commitment to our research anddevelopment programs, the funding of preclinical studies, clinical trials andregulatory activities and the costs of general and administrative activities.

52

----

**Critical AccountingPolicies**

The SEC defines critical accounting policies as thosethat are, in management’s view, important to the portrayal of our financialcondition and results of operations and demanding of management’s judgment. Ourdiscussion and analysis of our financial condition and results of operations isbased on our audited consolidated financial statements, which have beenprepared in accordance with U.S. generally accepted accounting principles(GAAP). The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses. We base our estimates on experience and onvarious assumptions that we believe are reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results may differ from those estimates and assumptions.

Our critical accounting policies include:

*RevenueRecognition.**  *Wehave adopted a strategy of co-developing or licensing our gene deliverytechnology for specific genes or specific medical indications. Accordingly, wehave entered into collaborative research and development agreements and havereceived funding for pre-clinical research and clinical trials. Payments underthese agreements, which are non-refundable, are recorded as revenue as therelated research expenditures are incurred pursuant to the terms of theagreements and provided collectibility is reasonably assured.

License fees comprise initial fees and milestonepayments derived from collaborative licensing arrangements. Non-refundablemilestone payments continue to be recognized upon the achievement of specifiedmilestones when we have earned the milestone payment, provided the milestonepayment is substantive in nature and the achievement of the milestone was notreasonably assured at the inception of the agreement. We defer payments formilestone events which are reasonably assured and recognize them ratably overthe minimum remaining period of our performance obligations. Payments formilestones which are not reasonably assured are treated as the culmination of aseparate earnings process and are recognized as revenue when the milestones areachieved.

We receive non-refundable grants under availablegovernment programs. Government grants towards current expenditures arerecorded as revenue when there is reasonable assurance that we have compliedwith all conditions necessary to receive the grants, collectibility isreasonably assured, and as the expenditures are incurred.

*Patentand License Costs.**  *Patentsare recorded at cost and amortized using the straight-line method over theexpected useful lives of the patents or 17 years, whichever is less. Costis comprised of the consideration paid for patents and related legal costs. Ifmanagement determines that development of products to which patent costs relateis not reasonably certain or that costs exceed recoverable value, such costsare charged to operations.

License costs are recorded based on the fair value ofconsideration paid and amortized using the straight-line method over theshorter of the expected useful life of the underlying patents or the term ofthe related license agreement.

*Long-livedAssets.**  *Weassess the recoverability of long-lived assets by determining whether thecarrying value of such assets can be recovered through undiscounted futureoperating cash flows. If impairment is indicated, we reduce the carrying valueof the asset to fair value. While our current and historical operating and cashflow losses are potential indicators of impairment, we believe the future cashflows to be received from the long-lived assets will exceed the assets’carrying value, and accordingly, we have not recognized any impairment lossesthrough December 31, 2006.

53

----

*Researchand Development Expenses.**  *Since our inception, virtually all of our activitieshave consisted of research and development efforts related to developing ourelectroporation technologies. We expense all such expenditures in the periodincurred. Our expenses related to clinical trials are based on servicesreceived and efforts expended pursuant to contracts with multiple researchinstitutions and clinical research organizations that conduct and manageclinical trials on our behalf. The financial terms of these agreements aresubject to negotiation and vary from contract to contract and may result inuneven payment flows. Generally, these agreements set forth the scope of workto be performed at a fixed fee or unit price. Payments under the contractsdepend on factors such as the successful enrollment of patients or thecompletion of clinical trial milestones. Expenses related to clinical trialsgenerally are accrued based on contracted amounts applied to the level ofpatient enrollment and activity according to the protocol. If timelines orcontracts are modified based upon changes in the clinical trial protocol orscope of work to be performed, we modify our estimates accordingly on aprospective basis.

*Valuationof Goodwill and Intangible Assets.**  *Our business acquisitions typicallyresult in goodwill and other intangible assets, and the recorded values ofthose assets may become impaired in the future. As of December 31, 2006,our goodwill and intangible assets, net of accumulated amortization, totaled$7,909,344. The determination of the value of such intangible assets requiresmanagement to make estimates and assumptions that affect our consolidatedfinancial statements. We assess potential impairments to intangible assets whenthere is evidence that events or changes in circumstances indicate that thecarrying amount of an asset may not be recovered. Our judgments regarding theexistence of impairment indicators and future cash flows related to intangibleassets are based on operational performance of our acquired businesses, marketconditions and other factors. Although there are inherent uncertainties in thisassessment process, the estimates and assumptions we use are consistent withour internal planning. If these estimates or their related assumptions changein the future, we may be required to record an impairment charge on all or aportion of our goodwill and intangible assets. Furthermore, we cannot predictthe occurrence of future impairment-triggering events nor the impact suchevents might have on our reported asset values. Future events could cause us toconclude that impairment indicators exist and that goodwill or other intangibleassets associated with our acquired businesses are impaired. Any resultingimpairment loss could have an adverse impact on our results of operations.

*Share-BasedCompensation.**  *EffectiveJanuary 1, 2006, the Company adopted SFAS No. 123(R) using themodified prospective application method and began accounting for itsstock-based compensation using a fair-value based recognition method. Under theprovisions of SFAS No. 123(R), stock-based compensation cost is estimatedat the grant date based on the fair-value of the award and is recognized asexpense ratably over the requisite service period of the award. Determining theappropriate fair-value model and calculating the fair value of stock-basedawards at the grant date requires considerable judgment, including estimatingstock price volatility, expected option life and forfeiture rates. We developour estimates based on historical data. If factors change and we employdifferent assumptions in future periods, the compensation expense that werecord under SFAS No. 123(R) may differ significantly from what wehave recorded in the current period. A small change in the estimates used mayhave a relatively large change in the estimated valuation.

We use the Black-Scholesoption valuation model to value employee stock awards. We recognizecompensation expense using the straight-line amortization method.

**Recent AccountingPronouncements**

In July 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation ofFASB Statement No. 109,” (FIN 48). FIN 48 prescribes a comprehensive modelfor how a company should recognize, measure, present, and disclose in itsfinancial statements uncertain tax positions that it has taken or expects totake on a tax return. FIN 48 became effective for us 

54

----

on January 1, 2007.Management is currently evaluating the impact of this interpretation and doesnot expect the adoption of FIN 48 to have a material impact on our consolidatedfinancial statements.

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements,” (SFAS 157).SFAS 157 defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles, and expands disclosuresabout fair value measurements. The provisions of this standard apply to otheraccounting pronouncements that require or permit fair value measurements. SFAS 157becomes effective for us on January 1, 2008. Upon adoption, the provisionsof SFAS 157 are to be applied prospectively with limited exceptions. Theadoption of SFAS 157 is not expected to have a material impact on ourconsolidated financial statements.

**Results ofOperations**

*Comparison of YearsEnded December 31, 2006 and 2005*

Theaudited consolidated financial data for the years ended December 31, 2006and December 31, 2005 is presented in the following table and the resultsof these two periods are used in the discussion thereafter.

| ** **                                                         | ** ** | **Year Ended  December 31, 2006** | ** **  | **Year Ended  December 31, 2005** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------|-------------|--------------------------------------------------|------------|
| **Revenue:**                                                       |       |                                             |        |                                             |       |   |   |   |   |
| License fee and  milestone payments                                |       |                                             | $           | 1,337,105                                        |       |   |   | $ | 2,563,283 |   |   |
| Revenue under  collaborative research and development arrangements |       |                                             | 962,207     |                                             |       |   | 1,492,145 |   |   |
| Grants and  miscellaneous revenue                                  |       |                                             | 1,168,866   |                                             |       |   | 1,411,825 |   |   |
| **Total  revenue**                                                 |       |                                             | 3,468,178   |                                             |       |   | 5,467,253 |   |   |
| **Operating  expenses:**                                           |       |                                             |        |                                             |       |   |   |   |   |
| Research and  development                                          |       |                                             | 8,509,785   |                                             |       |   | 11,454,773 |   |   |
| General and  administrative                                        |       |                                             | 8,079,587   |                                             |       |   | 5,981,200 |   |   |
| Amortization of  intangible assets                                 |       |                                             | 225,000     |                                             |       |   | 206,250 |   |   |
| Charge for  acquired in-process research and development           |       |                                             | —      |                                             |       |   | 3,332,000 |   |   |
| **Total  operating expenses**                                      |       |                                             | 16,814,372  |                                             |       |   | 20,974,223 |   |   |
| **Loss  from operations**                                          |       |                                             | (13,346,194 | )                                                |       |   | (15,506,970 | ) |   |
| Interest and other income                                          |       |                                             | 867,070     |                                             |       |   | 210,118 |   |   |
| **Net Loss**                                                       |       |                                             | (12,479,124 | )                                                |       |   | (15,296,852 | ) |   |
| Imputed and declared dividends on preferred stock                  |       |                                             | (2,005,664  | )                                                |       |   | (11,065,770 | ) |   |
| **Net  loss attributable to common stockholders**                  |       |                                             | $           | (14,484,788                                      | )          |   |   | $ | (26,362,622 | ) |   |
| **Amount  per common share—basic and diluted**                |       |                                             |        |                                             |       |   |   |   |   |
| Net loss                                                           |       |                                             | $           | (0.40                                            | )          |   |   | $ | (0.81 | ) |   |
| Imputed and  declared dividends on preferred stock                 |       |                                             | (0.06       | )                                                |       |   | (0.58 | ) |   |
| **Net loss per share attributable  to common stockholders**        |       |                                             | $           | (0.46                                            | )          |   |   | $ | (1.39 | ) |   |

 

*Revenue*

During the year ended December 31, 2006, werecorded total revenue of $3,468,178, as compared to $5,467,253 for the yearended December 31, 2005. Revenue consists of license fees, milestonepayments and amounts received from collaborative research and developmentarrangements and grants.

55

----

During the years ended December 31,2006 and 2005, we recognized revenue of $1,135,455 and $1,323,896 attributableto the operations of Inovio AS, a Norwegian company that we acquired in January 2005,which amounted to approximately 33% and 24% of our total revenue. Inovio AS’revenue primarily consists of amounts received from grants and licensingrevenue, which are received primarily in foreign currencies, including the Euro,Norwegian Kroner and Swedish Krona.

During the years ended December 31,2006 and 2005, we recorded revenue under license fees and milestone payments of$1,337,105 and $2,563,283, respectively. The decrease in license fees for theyear ended December 31, 2006, as compared to the 2005 fiscal year, wasmainly due to the recognition of a $2,000,000 milestone payment during thethree months ended June 30, 2005, resulting from the achievement of aclinical milestone by Merck for a plasmid-based vaccine using our MedPulser®  DNA Delivery System. Under the Merckagreement, we may receive additional future milestone payments linked to thesuccessful development of a product if achieved.  This decrease was offset by license feepayments of $1,000,000 and $500,000 received from Merck in May 2004 and June 2005,respectively, under which the parties seek to develop and commercialize ourMedPulser®  DNA Delivery System for use with certain ofMerck’s DNA vaccine programs, combined with revenue recognized from newlicensing and milestone agreements entered into during 2006. The licensepayments we have received from Merck in prior years are being amortized overthe remaining minimum term of the agreement. Royalties are receivable on salesof a product utilizing our device. As of December 31, 2006, no royaltieshave been received.

During the year ended December 31,2006, we recorded revenue under collaborative research and developmentarrangements of $962,207, as compared to $1,492,145 for the year ended December 31,2005. The decrease in revenue during the year ended December 31, 2006, ascompared to the 2005 fiscal year, was primarily due to less collaborativeresearch and development revenue recognized from the Merck agreement. Billingsfrom research and development work performed pursuant to the Merck agreementare recorded as revenue as the related research expenditures are incurred.

Grant and miscellaneousrevenue was $1,168,866 for the year ended December 31, 2006, compared to$1,411,825 for the year ended December 31, 2005. The decrease in grant andmiscellaneous revenue was mainly due to less revenue recognized by Inovio ASfrom our European Union and U.S. Army grants due to the timing of workperformed.

*Research and Development Expenses*

Research and developmentexpenses, which include clinical trial costs, for the year ended December 31,2006, were $8,509,785, as compared to $11,454,773 for the year ended December 31,2005. The decrease in research and development expenses for the year ended December 31,2006, as compared to fiscal 2005, was primarily due to a decrease in clinical trial expenses. Historically, clinical expenseshave included costs related to the use of an outside Clinical ResearchOrganization (CRO). Throughout the year ended December 31, 2006, weincreased the use of internal resources and other smaller outside CROs to morecost effectively fulfill those activities formerly undertaken by this CRO. Theremainder of the decrease was mainly due to lower cost of manufacturingproducts to support these clinical trials and research collaborations,decreased external research expenses, legal fees and other expenses associatedwith our clinical trials and lower outside regulatory consulting costsassociated with our clinical trials. These were offset by an increase inshare-based compensation expense of $279,067 for the year ended December 31,2006, related to options issued to employees.  During the years ended December 31, 2006and 2005, research and development expenses also included $1,369,162 and$1,110,292, in research and development costs attributable to Inovio AS.

Our research and development activities reflect ourefforts to advance our products through the various stages of productdevelopment. The expenditures that will be necessary to execute our developmentplans are subject to numerous uncertainties, which may affect our research anddevelopment 

56

----

expenditures and capitalresources. For instance, the duration and the cost of clinical trials may varysignificantly depending on a variety of factors including the number ofpatients in the trial, the number of clinical sites in the trial, and the lengthof time required enrolling suitable patient subjects. Even if earlier resultsare positive, we may obtain different results in later stages of development,which could impact our development expenditures for a particular product.Although we spend a considerable amount of time planning our developmentactivities, we may be required to alter our plan based on new circumstances orevents. Any deviation from our plan may require us to incur additionalexpenditures or accelerate or delay the timing of our development spending.

Depending upon theprogress of our clinical and pre-clinical programs and our availability ofcapital, we expect our research and development expenses to increase during theyear ending December 31, 2007 compared to the year ended December 31,2006.

*General andAdministrative Expenses*

General and administrative expenses, which includebusiness development expenses, for the year ended December 31, 2006, were$8,079,587, as compared to $5,981,200 for the year ended December 31,2005. The increase in general and administrative expenses for the year ended December 31,2006, as compared to fiscal 2005, was mainly due to share-based compensation expense of $920,874, related to options issuedto employees. The remainder of the increase was due to legal fees associatedwith intellectual property and business development, an increase in accountingand audit fees, an increase in recruiting and relocation expenses associatedwith expanding our in-house expertise, an increase in royalty obligationsrelated to licensing agreements entered into during 2006 and an increase in ourconsultant share-based compensation expense. General and administrative costsattributable to Inovio AS were insignificant for the year ended December 31,2006, and $88,187 for the year ended December 31, 2005.

*Share-BasedCompensation.*   Prior to January 1, 2006, weaccounted for our stock plans using the intrinsic value method under APB No. 25.Effective January 1, 2006, we adopted SFAS No. 123(R), and elected toadopt the modified prospective application method. SFAS No. 123(R) requiresus to use a fair-value based method to account for stock-based compensation.Accordingly, stock-based compensation cost is measured at the grant date, basedon the fair value of the award reduced by estimated forfeitures, and isrecognized as expense over the employee’s requisite service period. Totalcompensation cost for our stock plans for the year ended December 31, 2006was $1,199,941. At December 31, 2006, there was $946,844 of totalunrecognized compensation cost, related to unvested stock options, which weexpect to recognize over a weighted-average period of one year.

*Amortizationof Intangible Assets.*   Amortization of intangibleassets was $225,000 and $206,250 for the years ended December 31, 2006 and2005, respectively, related to an intangible asset associated with contractsand intellectual property acquired as part of our purchase of Inovio AS in January 2005.

*Charge for AcquiredIn-Process Research and Development.*   Operatingresults for the year ended December 31, 2005 included a $3,332,000 non-cashcharge related to the write-off of acquired in-process research and development(IPR&D) resulting from the Inovio AS acquisition in January. The amountexpended for IPR&D represents the estimated fair value of purchasedin-process technology for projects that, as of the acquisition date, had notreached technological feasibility and had no alternative future use. There wereno charges resulting from any acquisitions during the same period in 2006.

*Interest and OtherIncome*

Interest and other incomefor the year ended December 31, 2006, was $867,070, as compared to$210,118 for the year ended December 31, 2005. The increase in interestand other income for the year ended December 31, 2006, as compared to the2005 fiscal year, was primarily due to a larger cash and short-term investmentsbalance and higher average interest rate.

57

----

*Imputed andDeclared Dividends on Preferred Stock*

The holders of our Series A and B Preferred Stockwere entitled to receive an annual dividend at the rate of 6%, payable quarterly,through September 30, 2006. These dividends were payable in cash unlessthe closing price of our common shares for the 20 trading days immediatelypreceding the dividend payment date was equal to or greater than the conversionprice of such shares, in which event we may have elected to pay the dividendsto the holders in common stock. As part of this dividend to holders of Series Aand B Preferred Stock, we issued a total of 2,871 common shares valued at$7,693, and paid $15,140 in cash during 2006. We issued a total of 55,518common shares valued at $179,956 and paid $60,235 in cash during 2005. Therewere no shares of Series A or B Preferred Stock outstanding on December 31,2006. As of December 31, 2005, 52 shares of Series A Preferred Stockand 100 shares of Series B Preferred Stock remained outstanding.

The holders of our Series C Preferred Stock areentitled to receive an annual dividend at the rate of 6%, payable quarterly,through June 30, 2007. These dividends are payable in cash unless theclosing price of our common shares for the 20 trading days immediatelypreceding the dividend payment date is equal to or greater than the conversionprice of such shares, in which event we may elect to pay the dividends to theholders in common stock. In 2006 we paid dividends to the holders of our Series CPreferred Stock in cash of $117,204 and accrued dividends of $14,571 which wereconverted into common shares and warrants as part of our October 2006private placement. We paid dividends in cash of $553,694 during 2005.

During 2006, we recorded an imputed dividend charge of$1,851,056 during the three months ended December 31, 2006, related to theinvestors who converted $1,151,200 of their Series C Preferred Stockinvestment into 473,744 shares of our common stock as part of our October 2006private placement. This imputed dividend charge was calculated using guidancecontained in Emerging Issues Task Force (EITF) Issue No. 00-27, *Application of Issue No. 98-5 to Certain ConvertibleInstruments*. As part of this private placement, these investorsreceived 304,450 additional shares of our common stock, as compared to thenumber of shares of our common stock into which their existing Series CPreferred Stock could have been converted under the original terms of the Series CPreferred Stock. Under EITF Issue No. 00-27, this incremental numberof shares of our common stock was multiplied by the price of our common stockon the commitment date of the original Series C Preferred Stock issuance,or $6.08 per share, to calculate the $1,851,056 imputed dividend chargeassociated with this beneficial conversion.

During 2005, we recorded an imputed dividend charge of$1,942,773 related to the investors who converted $3,200,000 of their previous Series CPreferred Stock investment into 790,123 shares of our common stock as part ofour January 2005 private placement. As part of this private placement,these investors received 319,535 additional shares of our common stock byparticipating, as compared to the number of shares of our common stock intowhich their existing Series C Preferred Stock could have been convertedunder the original terms of the Series C Preferred Stock. This incrementalnumber of shares of our common stock was multiplied by the price of our commonstock on the commitment date of the original Series C Preferred Stockissuance, or $6.08 per share, to calculate the $1,942,773 imputed dividendcharge associated with this beneficial conversion.

During 2005, we also recorded an imputed dividendcharge of $8,329,112 related to the investors who converted their Series Band C Preferred Stock and common stock investments into shares of commonstock as part of our December 2005 private placement. As part of thisprivate placement, these investors received 1,670,406 additional shares of ourcommon stock by participating, as compared to the number of shares of ourcommon stock into which their existing common or preferred stock could havebeen converted under the original terms of their agreements. This incremental number of shares of our commonstock was multiplied by the price of our common stock on the commitment date ofthe original issuance, to calculate the $8,329,112 imputed dividend chargeassociated with this beneficial conversion.

58

----

*Income Taxes*

Since inception, we haveincurred operating losses and accordingly have not recorded a provision forincome taxes for any of the periods presented. As of December 31, 2006, wehad net operating loss carry forwards for federal and state income tax purposesof approximately $77.0 million and $46.9 million, respectively. Wealso had federal and state research and development tax credits ofapproximately $1.3 million and $0.7 million, respectively. If notutilized, the net operating losses and credits will continue to expire in 2007through 2025. Utilization of net operating losses and credits are subject to asubstantial annual limitation due to ownership change limitations provided bythe Internal Revenue Code of 1986, as amended. The annual limitation couldresult in the expiration of our net operating losses and credit carryforwardsbefore they otherwise could be used.

*Comparison of YearsEnded December 31, 2005 and 2004*

Theaudited consolidated financial data for the years ended December 31, 2005and December 31, 2004 is presented in the following table and the resultsof these two periods are used in the discussion thereafter.

| ** **                                                         | ** ** | **Year Ended  December 31, 2005** | ** **  | **Year Ended  December 31, 2004** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------|-------------|--------------------------------------------------|------------|
| **Revenue:**                                                       |       |                                             |        |                                             |       |   |   |   |   |
| License fee and  milestone payments                                |       |                                             | $           | 2,563,283                                        |       |   |   | $ | 214,351 |   |   |
| Revenue under  collaborative research and development arrangements |       |                                             | 1,492,145   |                                             |       |   | 945,591 |   |   |
| Grants and  miscellaneous revenue                                  |       |                                             | 1,411,825   |                                             |       |   | 7,157 |   |   |
| **Total  revenue**                                                 |       |                                             | 5,467,253   |                                             |       |   | 1,167,099 |   |   |
| **Operating  expenses:**                                           |       |                                             |        |                                             |       |   |   |   |   |
| Research and  development                                          |       |                                             | 11,454,773  |                                             |       |   | 6,548,599 |   |   |
| General and  administrative                                        |       |                                             | 5,981,200   |                                             |       |   | 6,129,195 |   |   |
| Amortization of  intangible assets                                 |       |                                             | 206,250     |                                             |       |   | — |   |   |
| Charge for  acquired in-process research and development           |       |                                             | 3,332,000   |                                             |       |   | — |   |   |
| **Total  operating expenses**                                      |       |                                             | 20,974,223  |                                             |       |   | 12,677,794 |   |   |
| **Loss  from operations**                                          |       |                                             | (15,506,970 | )                                                |       |   | (11,510,695 | ) |   |
| Interest and other income                                          |       |                                             | 210,118     |                                             |       |   | 247,555 |   |   |
| **Loss  from continuing operations**                               |       |                                             | (15,296,852 | )                                                |       |   | (11,263,140 | ) |   |
| Discontinued  operations:                                          |       |                                             |        |                                             |       |   |   |   |   |
| Gain on disposal and other, net                                    |       |                                             | —      |                                             |       |   | 290,209 |   |   |
| Loss from discontinued operations                                  |       |                                             | —      |                                             |       |   | — |   |   |
| **Net  loss**                                                      |       |                                             | (15,296,852 | )                                                |       |   | (10,972,931 | ) |   |
| Imputed and  declared dividends on preferred stock                 |       |                                             | (11,065,770 | )                                                |       |   | (732,405 | ) |   |
| **Net  loss attributable to common stockholders**                  |       |                                             | $           | (26,362,622                                      | )          |   |   | $ | (11,705,336 | ) |   |
| **Amount  per common share—basic and diluted**                |       |                                             |        |                                             |       |   |   |   |   |
| Loss from continuing operations                                    |       |                                             | $           | (0.81                                            | )          |   |   | $ | (0.64 | ) |   |
| Gain from  discontinued operations, net                            |       |                                             | —      |                                             |       |   | 0.02 |   |   |
| **Net  loss**                                                      |       |                                             | (0.81       | )                                                |       |   | (0.62 | ) |   |
| Imputed and  declared dividends on preferred stock                 |       |                                             | (0.58       | )                                                |       |   | (0.04 | ) |   |
| **Net loss attributable to common  stockholders**                  |       |                                             | $           | (1.39                                            | )          |   |   | $ | (0.66 | ) |   |

 

59

----

*Revenue*

During the year ended December 31, 2005, werecorded total revenue of $5,467,253, as compared to $1,167,099 for the yearended December 31, 2004. Revenue consists of license fees, milestonepayments and amounts received from collaborative research and developmentarrangements and grants. During the year ended December 31, 2005, werecognized revenue of $1,323,896 attributable to the operations of Inovio AS, aNorwegian company that we acquired in January 2005, which amounted toapproximately 24% of our revenue. Inovio AS’ revenue primarily consists ofamounts received from grants, which are received primarily in foreigncurrencies, including the Euro, Norwegian Kroner and Swedish Krona.

During the year ended December 31, 2005 and 2004,we recorded revenue under license fees and milestone payments of $2,563,283 and$214,351, respectively. The increase in license fees for the year ended December 31,2005, as compared to fiscal 2004, was mainly due to the recognition of a$2,000,000 milestone payment during the three months ended June 30, 2005,resulting from the achievement of a clinical milestone by Merck & Co., Inc.(Merck) for a plasmid-based vaccine using our MedPulser® DNA Delivery System. This $2,000,000 milestonepayment was received in July 2005. Under our May 2004 license andcollaboration agreement with Merck, we may receive additional future milestonepayments linked to the successful development of a product if achieved.

An additional $500,000 license fee payment wasreceived from Merck in June 2005 related to the Merck agreement, underwhich we and Merck seek to develop and commercialize our MedPulser® DNA Delivery System for usewith certain of Merck’s DNA vaccine programs. The license payments receivedfrom Merck in 2004 and 2005 will be amortized over the remaining minimum termof the agreement. Royalties are payable on sales of a product utilizing the devicedeveloped under the Merck Agreement.

Revenue from license fees during the years ended December 31,2005 and 2004 included the amortization of license fees we received from anon-exclusive license and supply agreement we entered into with Valentis, Incin November 2001.

During the year ended December 31, 2005, werecorded revenue under collaborative research and development arrangements of$1,492,145, as compared to $945,591 for the year ended December 31, 2004.The increase in revenue from collaborative research and developmentarrangements during the year ended December 31, 2005, as compared tofiscal 2004, was primarily due to revenue recognized from the Merck agreement.Billings from research and development work performed pursuant to the Merck agreementare recorded as revenue as the related research expenditures are incurredpursuant to the terms of the agreement.

Grant and miscellaneousrevenue was $1,411,825 for the year ended December 31, 2005, compared to$7,157 for the year ended December 31, 2004. The increase in grant andmiscellaneous revenue was mainly due to revenue recognized from our EuropeanUnion and U.S. Army grants received from the acquisition of Inovio AS.

*Research andDevelopment Expenses*

Research and development expenses, which includeclinical trial costs, for the year ended December 31, 2005, were$11,454,773, as compared to $6,548,599 for the year ended December 31,2004. The increase in research and development expenses for the year ended December 31,2005, as compared to fiscal 2004, was primarily due to an increase in clinicaltrial expenses. These clinical trial expenses included the use of ClinicalResearch Organizations hired in association with our clinical trials. Theremainder of the increase was mainly due to personnel expenses to supportinternal efforts related to product development and clinical trials, increasedexternal research expenses and other consulting expenses associated with ourclinical trials, and the cost of manufacturing products to support these clinical

60

----

trials. During the yearended December 31, 2005, research and development expenses also included$1,110,292, in research and development costs attributable to Inovio AS.

Our research anddevelopment activities reflect our efforts to advance our products through thevarious stages of product development. The expenditures that will be necessaryto execute our development plans are subject to numerous uncertainties, whichmay affect our research and development expenditures and capital resources. Forinstance, the duration and the cost of clinical trials may vary significantlydepending on a variety of factors including the number of patients in thetrial, the number of clinical sites in the trial, and the length of timerequired enrolling suitable patient subjects. Even if earlier results arepositive, we may obtain different results in later stages of development, whichcould impact our development expenditures for a particular product. Although wespend a considerable amount of time planning our development activities, we maybe required to alter our plan based on new circumstances or events. Anydeviation from our plan may require us to incur additional expenditures oraccelerate or delay the timing of our development spending.

*General andAdministrative Expenses*

General and administrative expenses, which includebusiness development expenses, for the year ended December 31, 2005, were$5,981,200, as compared to $6,129,195 for the year ended December 31,2004. The decrease in general and administrative expenses for the year ended December 31,2005, as compared to fiscal 2004, was mainly due to accounting-related expensesincurred during the year ended December 31, 2004, primarily related to theinitial implementation of internal controls over financial reportingrequirements under Section 404 of the Sarbanes-Oxley Act of 2002. Duringthe year ended December 31, 2005, general and administrative expenses alsoincluded $88,187, in general and administrative costs attributable to InovioAS.

*Amortizationof Intangible Assets.*   Amortization of intangibleassets was $206,250 for the year ended December 31, 2005, related to anintangible asset associated with contracts and intellectual property acquiredas part of our purchase of Inovio AS in January 2005.

*Charge for AcquiredIn-Process Research and Development.*   Operatingresults for the year ended December 31, 2005 included a $3,332,000non-cash charge related to the write-off of acquired in-process research anddevelopment (IPR&D) resulting from the Inovio AS acquisition in January 2005.The amount expended for IPR&D represents the estimated fair value ofpurchased in-process technology for projects that, as of the acquisition date,had not reached technological feasibility and had no alternative future use.There were no charges resulting from any acquisitions during the same period in2004.

*Interest and OtherIncome*

Interest and other incomefor the year ended December 31, 2005, was $210,118, as compared tointerest and other income of $247,555 for the year ended December 31,2004. The decrease in interest and other income for the year ended December 31,2005, as compared to fiscal 2004, was primarily due to lower average cash andinvestments balance during the year.

*DiscontinuedOperations*

In April 2004, wereceived the final payment of $200,862 in connection with the sale of the BTXDivision and recorded expenses related to this transaction of $5,000. Inaddition, we received a one-time settlement payment of $61,000 associated withthe termination of a purchase agreement to acquire the BTX Division by apotential buyer. Our 2004 results reflect a gain of $33,347 we realized fromthe write-off in the third quarter of 2004 of an accrued warranty liabilityrelated to the sale of the BTX division.

61

----

*Imputed andDeclared Dividends on Preferred Stock*

The holders of our Series A and B Preferred Stockwere entitled to receive an annual dividend at the rate of 6%, payablequarterly, through September 30, 2006. These dividends were payable incash unless the closing price of our common shares for the 20 trading daysimmediately preceding the dividend payment date is equal to or greater than theconversion price of such shares, in which event we may have elected to pay thedividends to the holders in common stock. We paid dividends to the holders ofour Series A and B Preferred Stock through the issuance of a total of55,518 of our shares of common stock valued at $179,956 and in cash of $60,235during 2005 and through the issuance of 73,072 shares of our common stockvalued at $322,397 in 2004.

The holders of our Series C Preferred Stock areentitled to receive an annual dividend at the rate of 6%, payable quarterly,through June 30, 2007. These dividends are payable in cash unless theclosing price of our common shares for the 20 trading days immediatelypreceding the dividend payment date is equal to or greater than the conversionprice of such shares, in which event we may elect to pay the dividends to theholders in common stock. We paid dividends to the holders of our Series CPreferred Stock in cash of $553,694 during 2005 and through the issuance of atotal of 30,124 shares of our common stock valued at $133,693, and in cash of$276,315 during 2004.

During 2005, we recorded an imputed dividend charge of$1,942,773 during the three months ended March 31, 2005, related to theinvestors who converted $3,200,000 of their previous Series C PreferredStock investment into 790,123 shares of our common stock as part of our January 2005private placement. This imputed dividend charge was calculated using guidancecontained in Emerging Issues Task Force (EITF) Issue No. 00-27, *Application of Issue No. 98-5 to Certain ConvertibleInstruments*. As part of this private placement, these investorsreceived 319,535 additional shares of our common stock by participating in thisprivate placement, as compared to the number of shares of our common stock intowhich their existing Series C Preferred Stock could have been convertedunder the original terms of the Series C Preferred Stock. Under EITF IssueNo. 00-27, this incremental number of shares of our common stock wasmultiplied by the price of our common stock on the commitment date of theoriginal Series C Preferred Stock issuance, or $6.08 per share, tocalculate the $1,942,773 imputed dividend charge associated with thisbeneficial conversion.

During 2005, we alsorecorded an imputed dividend charge of $8,329,112 during the three months endedDecember 31, 2005, related to the investors who converted their Series Band C Preferred Stock and common stock investments into shares of commonstock as part of our December 2005 private placement. This imputeddividend charge was calculated using guidance contained in Emerging Issues TaskForce (EITF) Issue No. 00-27, *Application of Issue No. 98-5to Certain Convertible Instruments*. As part of this privateplacement, these investors received 1,670,406 additional shares of our commonstock by participating in this private placement, as compared to the number ofshares of our common stock into which their existing common or preferred stockcould have been converted under the original terms  of their agreements. Under EITF Issue No. 00-27,this incremental number of shares of our common stock was multiplied by theprice of our common stock on the commitment date of the original issuance, tocalculate the $8,329,112 imputed dividend charge associated with thisbeneficial conversion.

*Income Taxes*

Since inception, we haveincurred operating losses and accordingly have not recorded a provision forincome taxes for any of the periods presented. As of December 31, 2005, wehad net operating loss carry forwards for federal and state income tax purposesof approximately $71.0 million and $46.6 million, respectively. Wealso had federal and state research and development tax credits each ofapproximately $1.79 million. If not utilized, the net operating losses andcredits will continue to expire in 2006 through 2024. Utilization of netoperating losses and credits are subject to a substantial annual limitation dueto 

62

----

ownershipchange limitations provided by the Internal Revenue Code of 1986, as amended.The annual limitation could result in the expiration of our net operatinglosses and credit carryforwards before they otherwise could be used.

**Liquidity andCapital Resources**

During the last sevenyears, our primary uses of cash have been to finance research and developmentactivities including clinical trial activities in the Oncology, DNA vaccinesand Immunotherapy areas of our business. Since inception, we have satisfied ourcash requirements principally from proceeds from the sale of equity securities.

***Recent Sales of Equity Securities***

In October 2006, we completed a registered equityfinancing with foreign investors, wherein we issued and sold 4,074,067 sharesof our common stock for $2.43 per share and warrants to purchase 1,425,919shares of our common stock, resulting in aggregate cash proceeds of $9,900,003prior to offering expenses of $1,161,070. In connection with this offering,certain holders of our outstanding Series C Preferred Stock exchanged115.12 shares of our outstanding Series C Preferred Stock and accrueddividends thereon amounting to $14,571 for 479,722 shares of our common stockand warrants to purchase 167,902 shares of our common stock. All warrantsissued in this transaction have a term of 5 years and are exercisable at $2.87per share.

In October 2006, Inovio Asia Pte. Ltd. (IAPL),our wholly-owned subsidiary organized in Singapore, completed a privateplacement issuing and selling 2,201,644 of its ordinary shares at $2.43 pershare for cash in the amount of $5,349,995. These ordinary shares wereexchanged in January 2007 for 2,201,644 shares of our common stock andfive-year warrants to purchase up to 770,573 shares of common stock at anexercise price of $2.87 per share.

On December 30, 2005, we completed a privateplacement of an aggregate of $15,795,080 in gross cash proceeds through thesale of our common stock to institutional and accredited investors thatincluded Merck & Co. Inc. and Vical Inc., two of our strategicpartners. At the closing, we issued to the investors an aggregate of 9,892,735shares of common stock and warrants to purchase an aggregate of 3,462,451shares of common stock, and received in exchange (1) gross cash proceedsof $15,795,080; (2) an aggregate of 734 shares of outstanding Series A,B and C Cumulative Convertible Preferred Stock; and (3) 1,142,593 sharesof our outstanding common stock. In addition, we issued to the investorsfive-year warrants to purchase 35% of the number of shares of common stock theyacquired in the offering at an exercise price of approximately $2.93 per share.

In January 2005, we completed a private placementto accredited investors whereby we sold 1,540,123 shares of our common stock ata purchase price of $4.05 per share and issued warrants to purchase 508,240shares of our common stock at an exercise price of $5.50 per share, whichresulted in aggregate cash proceeds of $3,037,500. A portion of this privateplacement involved investors who converted $3,200,000 of their previousinvestment in our Series C Preferred Stock into 790,123 shares of thecommon stock issued as part of this private placement with no associated cashproceeds to us.

On January 25, 2005, we consummated theacquisition of Inovio AS. We acquired the entire share capital of Inovio AS foran aggregate purchase price of $10,904,494, which consisted of $3,000,000 incash and $7,904,494 in the issuance of shares of our Series D ConvertiblePreferred Stock.

On May 20, 2004, weclosed a private preferred share placement and raised an aggregate of$10,901,333 through the sale of our Series C Preferred Stock toinstitutional and accredited investors.

63

----

***Working Capital and Liquidity***

As of December 31, 2006, we had working capitalof $21,203,490, as compared to $14,604,502 as of December 31, 2005. Theincrease in working capital during 2006 was primarily a result of the equityfinancing with foreign investors in October 2006, as well as the receiptof licensing payments and the exercise of stock options. These receipts wereoffset, in part, by expenditures related to our research and development andclinical trial activities, as well as various general and administrativeexpenses related to legal, corporate development, investor relations andfinance activities.

Further, there can be no assurance, assuming wesuccessfully raise additional funds, that we will achieve positive cash flow.If we are not able to secure additional funding, we will be required to furtherscale back our research and development programs, preclinical studies andclinical trials, general, and administrative activities and may not be able tocontinue in business.

As of December 31, 2006, we had an accumulateddeficit of $128,754,730. We have operated at a loss since 1994, and we expectthis to continue for some time. The amount of the accumulated deficit willcontinue to increase, as it will be expensive to continue clinical, researchand development efforts. If these activities are successful and if we receiveapproval from the FDA to market equipment, then even more funding will berequired to market and sell the equipment. The outcome of the above matterscannot be predicted at this time. We are evaluating potential partnershipsas an additional way to fund operations. We will continue to rely onoutside sources of financing to meet our capital needs beyond next year. Weexpect to fund our operations through the third quarter of 2008 based on ourcurrent operating plan.

Our long-termcapital requirements will depend on numerous factors including:

·                    Theprogress and magnitude of the research and development programs, includingpreclinical and clinical trials;

·                    Thetime involved in obtaining regulatory approvals;

·                    Thecost involved in filing and maintaining patent claims;

·                    Competitorand market conditions;

·                    Theability to establish and maintain collaborative arrangements;

·                    Theability to obtain grants to finance research and development projects; and

·                    Thecost of manufacturing scale-up and the cost of commercialization activities andarrangements.

The ability togenerate substantial funding to continue research and development activities,preclinical and clinical studies and clinical trials and manufacturing,scale-up, and selling, general, and administrative activities is subject to anumber of risks and uncertainties and will depend on numerous factorsincluding:

·                    Theability to raise funds in the future through public or private financings,collaborative arrangements, grant awards or from other sources;

·                    Ourpotential to obtain equity investments, collaborative arrangements, licenseagreements or development or other funding programs in exchange formanufacturing, marketing, distribution or other rights to products developed byus; and

·                    Theability to maintain existing collaborative arrangements.

We cannot guarantee thatadditional funding will be available when needed or on favorable terms. If itis not, we will be required to scale back our research and developmentprograms, preclinical studies and 

64

----

clinicaltrials, and selling, general, and administrative activities, or otherwisereduce or cease operations and our business and financial results and conditionwould be materially adversely affected.

*Off-Balance SheetArrangements*

We do not have anyoff-balance sheet arrangements that have or are reasonably likely to have acurrent or future effect on our financial condition, changes in financialcondition, revenue, expenses, results of operations, liquidity, capitalexpenditures or capital resources.

*ContractualObligations*

As of December 31, 2006, we did not have anymaterial long-term debt or other known contractual obligations, except for theoperating lease for our new facility, which expires in February 2010, andoperating leases for copiers, which expire in 2008 and 2009.

We arecontractually obligated to make the following operating lease payments as of December 31,2006:

| ** **                   | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
|------------------------------|------------|-----------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| Operating lease  obligations |       | $         | 1,561,179  |                            | $          | 489,224            |       | $                  | 991,478    |                             | $          | 80,477 |   |   | $ | 0 |   |   |
|                              |            |           |            |                                 |            |                    |            |                    |            |                                  |            |  |  |  |  |  |  |  |

 

65

----

**ITEM 7A.**        QUALITATIVEAND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

*Interest Rate Risk*

Our exposure to marketrisk for changes in interest rates relates primarily to the increase ordecrease in the amount of interest income that we can earn on our cash and cashequivalents and short-term investments. We are subject to interest rate risk onour short-term investments, which, as of December 31, 2006, had an averageinterest rate of approximately 5.04%. Under our current policies, we do not useinterest rate derivative instruments to manage exposure to interest ratechanges. We ensure the safety and preservation of our invested principal fundsby limiting default risk, market risk and reinvestment risk. We mitigatedefault risk by investing in AAA investment grade securities. A hypothetical100 basis point adverse move in interest rates along the entire interest rateyield curve would not materially affect the fair value of our interestsensitive financial instruments. Declines in interest rates over time will, however,reduce our interest income.

*Foreign CurrencyRisk*

We have operated primarily in the United States andmost transactions in the fiscal year ended December 31, 2006, have beenmade in U.S. dollars. Accordingly, we have not had any material exposure toforeign currency rate fluctuations, nor do we have any foreign currency hedginginstruments in place.

We are currently conducting clinical trials in Europein conjunction with several CROs. While invoices from these CROs relating towork done on our European clinical trials are generally denominated in U.S.dollars, our financial results could be affected by factors such as inflationin foreign currencies, in relation to the U.S. dollar, in markets where theCROs are assisting us in conducting these clinical trials.

In September 2006 we incorporated Inovio AsiaPte. Ltd. (IAPL), a company in the Republic of Singapore, and in January 2005we acquired Inovio AS, a Norwegian company. The transactions related to thesesubsidiaries are denominated primarily in foreign currencies, including Euros,British Pounds, Canadian Dollars, Norwegian Kroner, Swedish Krona, andSingapore Dollars. As a result, our financial results could be affected byfactors such as changes in foreign currency exchange rates or weak economicconditions in foreign markets where Inovio conducts business.

We do not use derivativefinancial instruments for speculative purposes. We do not engage in exchangerate hedging or hold or issue foreign exchange contracts for trading purposes.We do not expect the impact of fluctuations in the relative fair value of othercurrencies to be material in 2007.

**ITEM 8.**                FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

The information requiredby this Item 8 is incorporated by reference to our Consolidated FinancialStatements and the Report of Independent Registered Public Accounting Firmbeginning at page F-1 of this report.

**ITEM 9.**                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**ITEM 9A.**        CONTROLSAND PROCEDURES

**Evaluation ofDisclosure Controls and Procedures**

As of December 31,2006, an evaluation was carried out by the company, with the participation ofour Chief Executive Officer and Chief Financial Officer, of the effectivenessof our disclosure controls and procedures (as defined in Rule 13a-15(e) underthe Securities Exchange Act of 1934). Based upon that 

66

----

evaluation,our Chief Executive Officer and Chief Financial Officer concluded that thesedisclosure controls and procedures were effective as of the end of the periodcovered by this report.

**Internal Controlsover Financial Reporting**

*(a)**          Management’sAnnual Report on Internal Control over Financial Reporting*

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting, as defined in Rules 13a—15(f) and15d—15(f) under the Securities Exchange Act of 1934. Our internal controlover financial reporting is a process designed under the supervision of ourChief Executive Officer and Chief Financial Officer to provide reasonableassurance regarding the reliability of financial reporting and the preparationof our financial statements for external purposes in accordance with U.S.generally accepted accounting principles.

As of December 31, 2006, management, with theparticipation of the Chief Executive Officer and Chief Financial Officer,assessed the effectiveness of our internal control over financial reportingbased on the criteria for effective internal control over financial reportingestablished in “Internal Control—Integrated Framework,” issued by the Committeeof Sponsoring Organizations (COSO) of the Treadway Commission. Based on theassessment, management determined that we maintained effective internal controlover financial reporting as of December 31, 2006.

Ernst & YoungLLP, the independent registered public accounting firm that audited ourconsolidated financial statements included in this Annual Report on Form 10-K,has issued an attestation report on management’s assessment of theeffectiveness of our internal control over financial reporting as of December 31,2006. The report is included in this Item under the heading “Report ofIndependent Registered Public Accounting Firm.”

*(b)**          Reportof Independent Registered Public Accounting Firm*

The Board of Directors and StockholdersInovio Biomedical Corporation

We have audited management’s assessment, included inthe accompanying Management’s Annual Report on Internal Control over FinancialReporting, that Inovio Biomedical Corporation maintained effective internalcontrol over financial reporting as of December 31, 2006, based oncriteria established in Internal Control—Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (the COSOcriteria). Inovio Biomedical Corporation’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting.Our responsibility is to express an opinion on management’s assessment and anopinion on the effectiveness of the company’s internal control over financialreporting based on our audit.

We conducted our audit in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting wasmaintained in all material respects. Our audit included obtaining an understandingof internal control over financial reporting, evaluating management’sassessment, testing and evaluating the design and operating effectiveness ofinternal control, and performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonablebasis for our opinion.

A company’s internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. A company’sinternal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance 

67

----

of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactionsare recorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that receipts andexpenditures of the company are being made only in accordance withauthorizations of management and directors of the company; and (3) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of the company’s assets that could have amaterial effect on the financial statements.

Because of its inherent limitations, internal controlover financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that InovioBiomedical Corporation maintained effective internal control over financialreporting as of December 31, 2006, is fairly stated, in all materialrespects, based on the COSO criteria. Also, in our opinion, Inovio BiomedicalCorporation maintained, in all material respects, effective internal controlover financial reporting as of December 31, 2006, based on the COSOcriteria.

Wealso have audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheets of InovioBiomedical Corporation as of December 31, 2006 and 2005, and the relatedconsolidated statements of operations, stockholders’ equity and cash flows foreach of the three years in the period ended December 31, 2006 of InovioBiomedical Corporation and our report dated March 15, 2007 expressed anunqualified opinion thereon.
|                                             | /s/ Ernst & Young LLP |
|---------------------------------------------|--------------------------------|
| San Diego,  California  March 15, 2007 |                           |

 

*(c)**           Changesin Internal Control over Financial Reporting*

There have not been anychanges in our internal control over financial reporting (as defined in Rules 13a—15(f) and15d—15(f) under the Securities Exchange Act of 1934) that occurred duringthe fourth quarter of our fiscal year ended December 31, 2006, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

**ITEM 9B.**       OTHERINFORMATION

None.

**PART III**

**ITEM 10.**         DIRECTORSAND EXECUTIVE OFFICERS OF THE COMPANY

The information required by this Item 10 is herebyincorporated by reference from our definitive proxy statement, to be filedpursuant to Regulation 14A within 120 days after the end of our 2006fiscal year.

We have adopted a Code of Ethics for Senior Officers(the “Code of Ethics”), a copy of which was previously filed with our AnnualReport on Form 10-K for the year ended December 31, 2004 as Exhibit 14.1and which we have incorporated as Exhibit 14.1 to this Report. The Code ofEthics is available free of charge and may be requested by mail from our InvestorRelations Department, Inovio Biomedical Corporation, 11494 Sorrento Valley Rd.San Diego, CA 92121-1318 or by telephone at 877-446-6846 (877-4-INOVIO).

68

----

We intend to satisfy thedisclosure requirements under the Securities Exchange Act of 1934, as amended,regarding any amendment to, or a waiver from, our Code of Ethics by postingsuch information on our web site at www.inovio.com.

**ITEM 11.**         EXECUTIVECOMPENSATION

The information requiredby this Item 11 is hereby incorporated by reference from our definitive proxystatement, to be filed pursuant to Regulation 14A within 120 daysafter the end of our 2006 fiscal year.

**ITEM 12.**         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information requiredby this Item 12 is hereby incorporated by reference from our definitive proxystatement, to be filed pursuant to Regulation 14A within 120 daysafter the end of our 2006 fiscal year.

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

The information requiredby this Item 13 is hereby incorporated by reference from our definitive proxystatement, to be filed pursuant to Regulation 14A within 120 daysafter the end of our 2006 fiscal year.

**ITEM 14.**         PRINCIPALACCOUNTANT FEES AND SERVICES

The information required by this Item 14 is herebyincorporated by reference from our definitive proxy statement, to be filedpursuant to Regulation 14A within 120 days after the end of our 2006fiscal year.

69

----

**PART IV**

**ITEM 15.**         EXHIBITSAND FINANCIAL STATEMENT SCHEDULES

1.                 FinancialStatements

Consolidated financial statements required to be filedhereunder are indexed on Page F-1 hereof.

2.                 FinancialStatement Schedules

Schedules not listedherein have been omitted because the information required to be set forththerein is not applicable or is included in the Financial Statements or notesthereto.

3.                 Exhibits

The following exhibits arefiled as part of this annual report on Form 10-K:
| Exhibit  Number | ** ** | **Description of Document**                                                                                                                                                                                                                                                              | ** ** |
|-----------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| 2.1             |       | Plan of Reorganization  (incorporated by reference to Exhibit 2.1 of the registrant’s  Registration Statement on Form S-4, as amended  (File No. 333-56978), filed on April 5, 2001).                                                                                |       |
| 3.1             | (a)        | Certificate of  Incorporation (incorporated by reference to Exhibit 3.1 of the  registrant’s Registration Statement on Form S-3  (File No. 333-108752) filed on September 12, 2003).                                                                                 |       |
|            | (b)        | Certificate of  Amendment to Amended and Restated Certificate of Incorporation as filed with  the Delaware Secretary of State on September 10, 2004 (incorporated by  reference to Exhibit 3.1 of the registrant’s Current Report on  Form 8-K filed September 16, 2004). |       |
|            | (c)        | Certificate of  Amendment of the Amended and Restated Certificate of Incorporation as filed  with the Delaware Secretary of State on March 31, 2005 (incorporated by  reference to Exhibit 3.1 of the registrant’s Current Report on  Form 8-K filed on April 4, 2005).   |       |
| 3.2             | (a)        | Amended and  Restated Bylaws (incorporated by reference to Exhibit 3.2 of the  registrant’s Form 10-Q filed on November 13, 2002).                                                                                                                                             |       |
|            | (b)        | Amended and  Restated Bylaws, as amended through August 12, 2005 (incorporated by  reference to Exhibit 3.2 of the Current Report on Form 8-K  filed on August 17, 2005).                                                                                                      |       |
| 3.3             |       | Certificate of  Designations, Rights and Preferences of Series A Cumulative Convertible  Preferred Stock (incorporated by reference to Exhibit 3.3 of the  registrant’s Registration Statement on Form S-3  (File No. 333-108752) filed on September 12, 2003). |       |
| 3.4             |       | Certificate of  Designations, Rights and Preferences of Series B Cumulative Convertible  Preferred Stock (incorporated by reference to Exhibit 3.4 of the  registrant’s Registration Statement on Form S-3  (File No. 333-108752) filed on September 12, 2003). |       |
| 3.5             |       | Certificate of  Designations, Rights and Preferences of Series C Convertible Preferred  Stock of Registrant (incorporated by reference to Exhibit 3.3 of the  registrant’s Registration Statement on Form S-3 filed on  June 21, 2004).                                   |       |
| 3.6             |       | Certificate of  Decrease of Shares of Series C Cumulative Convertible Preferred Stock of  Registrant (incorporated by reference to Exhibit 3.4 of the registrant’s  Registration Statement on Form S-3 filed on June 21, 2004).                                           |       |

70

----

 
| 3.7  |   | Certificate of  Designations, Rights and Preferences of Series D Convertible Preferred  Stock of Registrant (incorporated by reference to Exhibit 3.1 of the  registrant’s Current Report on Form 8-K filed on January 31,  2005).                                                                                                                                      |   |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 4.1  |   | Amended and  Restated Stockholders Rights Agreement dated June 20, 1997 by and  between the Registrant and Computershare Trust Company of Canada, as amended  on March 25, 2003 (incorporated by reference to Exhibit A to the  registrant’s Definitive Proxy Statement filed on April 28, 2003).                                                                       |   |
| 4.2  | † | Warrant to  Purchase Common Stock, dated September 15, 2000 by and between the  Registrant and the University of South Florida Research Foundation  (incorporated by reference to Exhibit 10.6 of the registrant’s  Form 10-Q filed on November 9, 2000).                                                                                                               |   |
| 4.3  | † | Warrant to  Purchase Common Stock, dated September 15, 2000 by and between the  Registrant and Dr. Richard Gilbert (incorporated by reference to  Exhibit 10.7 of the registrant’s Form 10-Q filed on  November 9, 2000).                                                                                                                                          |   |
| 4.4  | † | Warrant to  Purchase Common Stock, dated September 15, 2000 by and between the  Registrant and Dr. Richard Heller (incorporated by reference to  Exhibit 10.8 of the registrant’s Form 10-Q filed on  November 9, 2000).                                                                                                                                           |   |
| 4.5  | † | Warrant to  Purchase Common Stock, dated September 15, 2000 by and between the  Registrant and Dr. Mark Jaroszeski (incorporated by reference to  Exhibit 10.9 of the registrant’s Form 10-Q filed on  November 9, 2000).                                                                                                                                          |   |
| 4.6  |   | Investors Rights  Agreement, dated July 14, 2003, between the Registrant and the  Purchasers listed on Schedule 1 thereto (incorporated by reference to  Exhibit 4.2 of the registrant’s Registration Statement on Form S-3  (File No. 333-108752) filed on September 12, 2003).                                                                         |   |
| 4.7  |   | Form of  Series A Common Stock Purchase Warrant, dated July 14, 2003,  between the registrant and the purchasers listed on Schedule 1 of  Purchase Agreement (Exhibit 10.3 herein) (incorporated by reference to  Exhibit 4.3 of the registrant’s Registration Statement on Form S-3  (File No. 333-108752) filed on September 12, 2003). |   |
| 4.8  |   | Form of  Series B Common Stock Purchase Warrant, dated July 14, 2003,  between the registrant and the purchasers listed on Schedule 1 of  Purchase Agreement (Exhibit 10.3 herein) (incorporated by reference to  Exhibit 4.4 of the registrant’s Registration Statement on Form S-3  (File No. 333-108752) filed on September 12, 2003). |   |
| 4.9  |   | Placement Agent  Series A Common Stock Purchase Warrant, dated July 14, 2003,  between the registrant and SCO Securities LLC (incorporated by reference to  Exhibit 4.5 of the registrant’s Registration Statement on Form S-3  (File No. 333-108752) filed on September 12, 2003).                                                                      |   |
| 4.10 |   | Placement Agent  Series B Common Stock Purchase Warrant, dated July 14, 2003,  between the registrant and SCO Securities LLC (incorporated by reference  to Exhibit 4.6 of the registrant’s Registration Statement on Form S-3  (File No. 333-108752) filed on September 12, 2003).                                                                 |   |
| 4.11 |   | Specimen common  stock certificate (incorporated by reference to Exhibit 4.8 of the  registrant’s Registration Statement on Form S-3  (File No. 333-108752) filed on September 12, 2003).                                                                                                                                                                          |   |

71

----

 
| 4.12 |   | Preferred Stock  and Warrant Purchase Agreement dated as of May 10, 2004 by and between  the registrant and the purchasers indicated on the schedule thereto  (incorporated by reference to Exhibit 4.1 of the registrant’s Registration  Statement on Form S-3 filed on June 21, 2004).                                                                                                                          |   |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 4.13 |   | Investor Rights  Agreement dated as of May 10, 2004 by and between the registrant and the  purchasers indicated on the schedule thereto (incorporated by reference to  Exhibit4.2 of the registrant’s Registration Statement on Form S-3  filed on June 21, 2004).                                                                                                                                                     |   |
| 4.14 |   | Form of  Series C Common Stock Purchase Warrant dated as of May 10, 2004 by  and between the registrant and the purchasers indicated on the schedule  thereto (incorporated by reference to Exhibit 4.3 of the registrant’s  Registration Statement on Form S-3 filed on June 21, 2004).                                                                                                                |   |
| 4.15 |   | Form of  Placement Agent Common Stock Purchase Warrant dated as of May 20, 2004  by and between the registrant and each of SCO Capital Partners LLC, Jeffery  B. Davis, Preston Tsao, Daniel DiPietro and Mark Alvino  (incorporated by reference to Exhibit 4.4 of the registrant’s  Registration Statement on Form S-3 filed on June 21, 2004).                                                  |   |
| 4.16 |   | Warrant to  Purchase Common Stock, dated December 6, 2004 by and between the registrant  and Collins Development Company, Arlin Miller Multiples, Roger R.  and Sally J. Post, Tatiana Lansche and Kent M. Scudder. Scudder  (incorporated by reference to Exhibit 4.16 of the registrant’s Annual  Report of Form 10-K for the year ended December 31, 2004,  filed on March 15, 2005). |   |
| 4.17 |   | Registration  Rights Agreement dated as of January 10, 2005 by and among the  Registrant and certain investors indicated on the schedule thereto  (incorporated by reference to Exhibit 4.2 of the registrant’s Current  Report on Form 8-K filed on January 13, 2005).                                                                                                                                           |   |
| 4.18 |   | Form of  Warrants issued by the registrant on January 10, 2005, including a  schedule of warrant holders (incorporated by reference to Exhibit 4.1 of  the registrant’s Current Report on Form 8-K filed on  January 13, 2005).                                                                                                                                                                              |   |
| 4.19 |   | Registration  Rights Agreement dated as of January 25, 2005 by and among the  registrant and the shareholders of Inovio AS (incorporated by reference to  Exhibit 4.1 of the registrant’s Current Report on Form 8-K  filed on January 31, 2005).                                                                                                                                                                 |   |
| 4.20 |   | Form of  Warrants (incorporated by reference to Exhibit 99.2 to registrant’s  Form 8-K filed on January 6, 2006).                                                                                                                                                                                                                                                                                                 |   |
| 4.21 |   | Registration  Rights Agreement dated December 30, 2005, by and among the registrant  and the investors named on the signature pages thereto (incorporated by  reference to Exhibit 99.3 to registrant’s Form 8-K filed with  the Securities and Exchange Commission on January 6, 2006).                                                                                                                     |   |
| 4.22 |   | Form of  Common Stock Purchase Warrant dated as of September 15, 2006 by and  between the registrant and each of the purchasers listed on Schedule 1 to the  Securities Purchase Agreement (Exhibit 10.23 herein) (incorporated by  reference to Exhibit 4.3 of the registrant’s Current Report on  Form 8-K filed on September 20, 2006).                                                              |   |
| 4.23 |   | Registration  Rights Agreement dated as of September 15, 2006 by and among registrant  and certain investors indicated on a schedule thereto (incorporated by  reference to Exhibit 10.5 of the registrant’s Quarterly Report on  Form 10-Q filed on November 9, 2006).                                                                                                                                           |   |

72

----

 
| 4.24   |   | Form of  Common Stock Purchase Warrant to be used by and between the registrant and  each of the purchasers listed on Schedule 1 to the Securities Purchase and  Exchange Agreement (Exhibit 10.25 herein).                                                                                                                                   |   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.1   | *      | Amended 2000  Stock Option Plan, as amended by the Board of Directors through March 6,  2006 with approvals by stockholders through May 5, 2006 (incorporated by  reference to Exhibit 4.1 of the registrant’s Registration Statement on  Form S-8 filed on July 28, 2006).                                               |   |
| 10.2   |   | Forms of  Incentive and Nonstatutory Stock Option Agreements used in connection with  the 2000 Stock Option Plan (incorporated by reference to Exhibit 10.7 of  the registrant’s Registration Statement on Form S-4/A  (File No. 333-58168) filed on April 5, 2001).                                                      |   |
| 10.3   | *      | Preferred Stock and  Warrant Purchase Agreement, dated July 14, 2003, between the registrant  and the purchasers listed on Schedule 1 thereto (incorporated by  reference to Exhibit 4.1 of the registrant’s Registration Statement on  Form S-3 (File No. 333-108752) filed on September 12,  2003).           |   |
| 10.4   | *      | Employment  Agreement dated October 10, 2001 by and between the registrant and Avtar  Dhillon (incorporated by reference to Exhibit 99.1 of the registrant’s  Registration Statement on Form S-3/A, as amended  (File No. 333-76738), filed on February 25, 2002).                                                   |   |
| 10.5   | *      | Employment  Agreement dated November 15, 2001 by and between the registrant and  James L. Heppell (incorporated by reference to Exhibit 10.24 of the  registrant’s Form 10-K for the year ending December 31, 2001  filed on April 1, 2002).                                                                         |   |
| 10.6   | † | License Agreement  dated September 20, 2000 by and between the registrant and the  University of South Florida Research Foundation, Inc. (incorporated by  reference to Exhibit 10.5 of the registrant’s Form 10-Q filed  on November 9, 2000).                                                                           |   |
| 10.7   |   | Asset Purchase  Agreement by and among the Registrant, Genetronics, Inc., a subsidiary  of the Registrant, and Harvard Bioscience, Inc. dated December 24,  2002 (incorporated by reference to Exhibit A to the registrant’s  Definitive Proxy Statement filed on January 7, 2003).                                       |   |
| 10.8   | (a)    | Financial  Consultant Agreement, dated October 3, 2002, between the registrant and  Catalyst Capital, LLC (incorporated by reference to Exhibit 4.7 of  the registrant’s Registration Statement on Form S-3  (File No. 333-108752) filed on September 12, 2003).                                                |   |
|   | (b)    | Amendment to  Financial Consultant Agreement, dated July 14, 2003, between the  registrant and Catalyst Capital, LLC (incorporated by reference to  Exhibit 4.7(a) of the registrant’s Registration Statement on  Form S-3 (File No. 333-108752) filed on  September 12, 2003).                                 |   |
| 10.9   |   | Securities  Purchase Agreement dated as of January 10, 2005 by and among the  registrant and certain investors indicated on the schedule thereto  (incorporated by reference to Exhibit 10.1 to the Current Report on  Form 8-K filed on January 13, 2005).                                                                         |   |
| 10.10  |   | Form of  Promissory Notes issued by the registrant on January 10, 2005, including  a schedule of note holders (incorporated by reference to Exhibit 10.2 to  the Current Report on Form 8-K filed on January 13, 2005).                                                                                                        |   |
| 10.11  | † | Non-Exclusive  License and Research Collaboration Agreement dated as of May 21, 2004 by  and among the registrant and Merck & Co., Inc. and  Genetronics, Inc., a subsidiary of the registrant (incorporated by  reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q  filed on August 13, 2004). |   |

73

----

 
| 10.12 |   | Escrow Agreement  dated as of January 10, 2005 by and among the registrant, certain  investors indicated on the schedule thereto and Computershare Trust Company  of Canada (incorporated by reference to Exhibit 10.3 to the Current  Report on Form 8-K filed on January 13, 2005). |   |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.13 |   | Stock Purchase  Agreement dated January 25, 2005 by and among the registrant,  Inovio AS and the Shareholders of Inovio AS (incorporated by reference  to Exhibit 10.1 to the Current Report on Form 8-K filed on  January 31, 2005).                                            |   |
| 10.14 |   | Lease Agreement  by and between the registrant and Nexus Sorrento Glen LLC dated  August 26, 1999 (incorporated by reference to Exhibit 10.15 of the  registrant’s Registration Statement on Form S-1, as amended  (File No. 333-88427), filed on October 5, 1999).    |   |
| 10.15 |   | Lease Agreement  by and between the registrant and Sorrento Centre Tenancy in Common dated  November 29, 2004 (incorporated by reference to Exhibit 10.16 of  the registrant’s Annual Report of Form 10-K for the year ended  December 31, 2004, filed on March 15, 2005).  |   |
| 10.16 |   | Lease Amendment  #3 by and between the registrant and Nexus Sorrento Glen LLC dated  January 21, 2005 (incorporated by reference to Exhibit 10.17 of the  registrant’s Annual Report of Form 10-K for the year ended  December 31, 2004, filed on March 15, 2005).          |   |
| 10.17 |   | Letter agreement  dated September 30, 2005 between the registrant and Verdas extending due  date of Promissory Note (incorporated by reference to Exhibit 99.1 of  the registrant’s Report of Form 8-K, filed on October 6,  2005).                                              |   |
| 10.18 |   | Letter agreement  dated September 30, 2005 between the registrant and Baystar extending  due date of Promissory Note (incorporated by reference to Exhibit 99.2  of the registrant’s Report of Form 8-K, filed on October 6,  2005).                                             |   |
| 10.19 |   | Letter agreement  dated November 30, 2005 between registrant and Verdas extending due date  of the Promssory Note (incorporated by reference to Exhibit 99.1 of the  registrant’s Report of Form 8-K, filed on December 6, 2005).                                                |   |
| 10.20 |   | Letter agreement  dated November 30, 2005 between registrant and Baystar extending due  date of the Promissory Note (incorporated by reference to Exhibit 99.2  of the registrant’s Report of Form 8-K, filed on December 6,  2005).                                             |   |
| 10.21 |   | Securities  Purchase Agreement dated as of December 16, 2005, among registrant and  each purchaser identified on the signature pages thereto (incorporated by reference to Exhibit 99.1  of the registrant’s Report of Form 8-K, filed on January 6,  2006).                |   |
| 10.22 |   | License Agreement  dated September 15, 2006 between registrant and Inovio Asia Pte. Ltd.  (incorporated by referenced to Exhibit 10.1 to registrant’s Quarterly  Report on Form 10-Q filed on November 9, 2006).                                                                 |   |
| 10.23 |   | Securities Purchase  Agreement dated September 15, 2006 between registrant and purchasers  named therein (incorporated by reference to Exhibit 4.1 of the  registrant’s Current Report on Form 8-K filed on  September 20, 2006).                                                |   |
| 10.24 |   | Amendment to  Securities Purchase Agreement, amending the Securities Purchase Agreement  filed as Exhibit 10.27 (incorporated by reference to Exhibit 4.3 of  the registrant’s Current Report on Form 8-K filed on  October 16, 2006).                                           |   |

74

----

 
| 10.25 |   | Securities  Purchase and Exchange Agreement between registrant and Inovio Asia Pte. Ltd.  and the purchasers named therein, dated September 15, 2006 (incorporated  by referenced to Exhibit 10.2 to registrant’s Quarterly Report on  Form 10-Q filed on November 9, 2006).      |   |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.26 |   | Preferred  Exchange Agreement dated September 15, 2006 between registrant and  certain holders of Series C Preferred Stock (incorporated by referenced  to Exhibit 4.4 of the registrant’s Registration Statement on Form S-3,  filed January 19, 2007).                          |   |
| 14.1  |   | Inovio Biomedical  Corporation Code of Ethics for Senior Officers (incorporated by reference to  exhibit number 14.1 of the registrant’s Annual Report of Form 10-K  for the year ended December 31, 2004, filed with the Securities and  Exchange Commission on March 15, 2005). |   |
| 21.1  |   | Subsidiaries of  the registrant.                                                                                                                                                                                                                                                                           |   |
| 23.1  |   | Consent of  Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                                 |   |
| 24.1  |   | Power of Attorney  (included on signature page).                                                                                                                                                                                                                                                           |   |
| 31.1  |   | Certification of  the Chief Executive Officer pursuant Securities Exchange Act Rule 13a-14(a).                                                                                                                                                                                                        |   |
| 31.2  |   | Certification of  the Chief Financial Officer pursuant Securities Exchange Act Rule 13a-14(a).                                                                                                                                                                                                        |   |
| 32.1  |   | Certification pursuant  to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                                                     |   |

----

†                    Wehave applied with the Secretary of the Securities and Exchange Commission forconfidential treatment of certain information pursuant to Rule 24b-2of the Securities Exchange Act of 1934. We have filed separately with ourapplication a copy of the exhibit including all confidential portions, whichmay be made available for public inspection pending the Securities and ExchangeCommission’s review of the application in accordance with Rule 24b-2.

*                    Designatesmanagement contract, compensatory plan or arrangement.

75

----

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized on March 16, 2007.
|        | **Genetronics Biomedical Corporation** |
|--------|----------------------------------------|
|   | By:                                    | /s/ AVTAR DHILLON |
|   |                                   | Avtar Dhillon |
|   |                                   | *President and Chief Executive Officer* |

 

**POWER OF ATTORNEY**

KNOW ALL PERSONS BY THESE PRESENTS, that each personwhose signature appears below constitutes and appoints Avtar Dhillon and PeterKies, and each of them severally, his or her true and lawful attorney-in-factwith power of substitution and resubstitution to sign in his or her name, placeand stead, in any and all capacities, to do any and all things and execute anyand all instruments that such attorney may deem necessary or advisable underthe Securities Exchange Act of 1934 and any rules, regulations and requirementsof the U.S. Securities and Exchange Commission in connection with the AnnualReport on Form 10-K and any and all amendments hereto, as fully forall intents and purposes as he or she might or could do in person, and herebyratifies and confirms all said attorneys-in-fact and agents, each acting alone,and his or her substitute or substitutes, may lawfully do or cause to be doneby virtue hereof.

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the dates indicated.
|                      | **Signature** | ** **                               | ** ** | ** **           | **Title** | ** ** | ** ** | ** ** | **Date** | ** ** |
|----------------------|---------------|------------------------------------------|------------|----------------------|-----------|------------|------------|------------|----------|------------|
| /s/ AVTAR  DHILLON   |          | President, Chief Executive Officer       |       | March 16, 2007  |
| Avtar  Dhillon       |          | (Principal  Executive Officer), Director |       |                 |
|                 |          |                                     |       |                 |
| /s/ PETER KIES       |          | Chief  Financial Officer                 |       | March 16,  2007 |
| Peter  Kies          |          | (Principal  Accounting Officer and       |       |                 |
|                 |          | Principal  Financial Officer)            |       |                 |
|                 |          |                                     |       |                 |
| /s/ FELIX THEEUWES   |          | Director                                 |       | March 16,  2007 |
| Felix  Theeuwes      |          |                                     |       |                 |
|                 |          |                                     |       |                 |
| /s/ JAMES L. HEPPELL |          | Director                                 |       | March 16,  2007 |
| James  L. Heppell    |          |                                     |       |                 |
|                 |          |                                     |       |                 |
| /s/ RIAZ BANDALI     |          | Director                                 |       | March 16,  2007 |
| Riaz  Bandali        |          |                                     |       |                 |
|                 |          |                                     |       |                 |
| /s/ TAZDIN ESMAIL    |          | Director                                 |       | March 16,  2007 |
| Tazdin  Esmail       |          |                                     |       |                 |
|                 |          |                                     |       |                 |
| /s/ SIMON X. BENITO  |          | Director                                 |       | March 16,  2007 |
| Simon X. Benito      |          |                                     |       |                 |

 

76

----

**INOVIO BIOMEDICALCORPORATION**

**Indexto Financial Statements**
|                                                                                                  | ** ** | **Page** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of Independent Registered Public Accounting  Firm                                         |       | F-2      |       |
| Consolidated  Balance Sheets as of December 31, 2006 and December 31, 2005             |       | F-3      |       |
| Consolidated Statements of Operations for the years  ended December 31, 2006, 2005 and 2004 |       | F-4      |       |
| Consolidated Statements of Stockholders’ Equity                                             |       | F-5      |       |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2006, 2005 and 2004 |       | F-6      |       |
| Notes to Consolidated Financial Statements                                                       |       | F-7      |       |

 

F-1

----

**Report of IndependentRegistered Public Accounting Firm**

The Board of Directors and ShareholdersInovio Biomedical Corporation

We have audited the accompanying consolidated balancesheets of Inovio Biomedical Corporation as of December 31, 2006 and 2005,and the related consolidated statements of operations, stockholders’ equity andcash flows for each of the three years in the period ended December 31,2006. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, 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 toabove present fairly, in all material respects, the consolidated financialposition of Inovio Biomedical Corporation at December 31, 2006 and 2005,and the consolidated results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2006, in conformity withU.S. generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements,effective January 1, 2006 the Company changed its method of accounting forshare-based payments in accordance with Statement of Financial AccountingStandards (SFAS) No. 123 (revised 2004), “Share-Based Payment.”

We also have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the effectiveness of Inovio Biomedical Corporation’s internalcontrol over financial reporting as of December 31, 2006, based oncriteria established in Internal Control—Integrated Framework issued by the Committeeof Sponsoring Organizations of the Treadway Commission and our report dated March 15,2007 expressed an unqualified opinion thereon.

/s/ Ernst & YoungLLP

San Diego, California

March 15, 2007

F-2

----

**Inovio Biomedical CorporationCONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                                                                                | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| **Current assets:**                                                                                                                                                       | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Cash and cash  equivalents                                                                                                                                                |       | $                           | 8,321,606  |                        | $          | 17,166,567 |   |
| Short-term  investments                                                                                                                                                   |       | 14,700,000                  |       | —                      |       |
| Accounts  receivable                                                                                                                                                      |       | 326,071                     |       | 284,171                     |       |
| Prepaid expenses  and other                                                                                                                                               |       | 1,124,262                   |       | 870,169                     |       |
| **Total  current assets**                                                                                                                                                 |       | 24,471,939                  |       | 18,320,907                  |       |
| Fixed assets, net                                                                                                                                                         |       | 390,789                     |       | 375,613                     |       |
| Patents and other  assets, net                                                                                                                                            |       | 3,177,543                   |       | 2,148,090                   |       |
| Goodwill                                                                                                                                                                  |       | 4,290,594                   |       | 4,290,594                   |       |
| Intangible assets,  net                                                                                                                                                   |       | 3,618,750                   |       | 3,843,750                   |       |
| **Total  assets**                                                                                                                                                         |       | $                           | 35,949,615 |                        | $          | 28,978,954 |   |
| **LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS’  EQUITY**                                                                                                         | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| **Current  liabilities:**                                                                                                                                                 | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Accounts payable  and accrued expenses                                                                                                                                    |       | $                           | 2,009,972  |                        | $          | 1,864,935 |   |
| Accrued clinical  trial expenses                                                                                                                                          |       | 675,330                     |       | 1,064,497                   |       |
| Deferred revenue                                                                                                                                                          |       | 583,147                     |       | 786,973                     |       |
| **Total  current liabilities**                                                                                                                                            |       | 3,268,449                   |       | 3,716,405                   |       |
| Deferred revenue                                                                                                                                                          |       | 4,396,875                   |       | 419,470                     |       |
| Deferred rent                                                                                                                                                             |       | 228,490                     |       | 285,875                     |       |
| Deferred tax  liabilities                                                                                                                                                 |       | 1,013,250                   |       | 1,076,250                   |       |
| Long-term  liabilities                                                                                                                                                    |       | —                      |       | 10,206                      |       |
| **Total  liabilities**                                                                                                                                                    |       | 8,907,064                   |       | 5,508,206                   |       |
| **Minority Interest**                                                                                                                                                     |       | 5,349,995                   |       | —                      |       |
| **Stockholders’  equity:**                                                                                                                                           | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Preferred  stock—par value $0.001; Authorized shares: 10,000,000, issued and  outstanding: 1,028,069 and 1,562,424 at December 31, 2006 and 2005,  respectively |       | 1,028                       |       | 1,562                       |       |
| Common stock—par  value $0.001; Authorized shares: 300,000,000, issued and outstanding:  35,639,521 and 29,468,756 at December 31, 2006 and 2005, respectively  |       | 35,639                      |       | 29,469                      |       |
| Additional paid-in  capital                                                                                                                                               |       | 150,459,604                 |       | 137,739,954                 |       |
| Receivables from  stockholders                                                                                                                                            |       | (86,030                     | )          | —                      |       |
| Accumulated  deficit                                                                                                                                                      |       | (128,754,730                | )          | (114,269,942                | )          |
| Accumulated other  comprehensive income (loss)                                                                                                                            |       | 37,045                      |       | (30,295                     | )          |
| **Total  stockholders’ equity**                                                                                                                                      |       | 21,692,556                  |       | 23,470,748                  |       |
| **Total liabilities, minority  interest and stockholders’ equity**                                                                                                   |       | $                           | 35,949,615 |                        | $          | 28,978,954 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-3

----

**Inovio Biomedical CorporationCONSOLIDATED STATEMENTS OF OPERATIONS**

| ** **                                                           | ** ** | **Year ended  December 31,  2006** | ** **  | **Year ended  December 31,  2005** | ** ** | **Year ended  December 31,  2004** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------|-------------|----------------------------------------------|------------|----------------------------------------------|------------|
| **Revenue:**                                                         | ** ** | ** **                                   | ** **  | ** **                                   | ** ** | ** **                                   | ** ** |
| License fee and  milestone payments                                  |       | $                                            | 1,337,105   |                                         | $          | 2,563,283                                    |       | $ | 214,351 |   |
| Revenue under  collaborative research and development arrangements   |       | 962,207                                      |        | 1,492,145                                    |       | 945,591                                      |       |
| Grants and  miscellaneous revenue                                    |       | 1,168,866                                    |        | 1,411,825                                    |       | 7,157                                        |       |
| **Total  revenue**                                                   |       | 3,468,178                                    |        | 5,467,253                                    |       | 1,167,099                                    |       |
| **Operating  expenses:**                                             | ** ** | ** **                                   | ** **  | ** **                                   | ** ** | ** **                                   | ** ** |
| Research and  development                                            |       | 8,509,785                                    |        | 11,454,773                                   |       | 6,548,599                                    |       |
| General and  administrative                                          |       | 8,079,587                                    |        | 5,981,200                                    |       | 6,129,195                                    |       |
| Amortization of  intangible assets                                   |       | 225,000                                      |        | 206,250                                      |       | —                                       |       |
| Charge for  acquired in-process research and development             |       | —                                       |        | 3,332,000                                    |       | —                                       |       |
| **Total  operating expenses**                                        |       | 16,814,372                                   |        | 20,974,223                                   |       | 12,677,794                                   |       |
| **Loss  from operations**                                            |       | (13,346,194                                  | )           | (15,506,970                                  | )          | (11,510,695                                  | )          |
| Interest and other income                                            |       | 867,070                                      |        | 210,118                                      |       | 247,555                                      |       |
| **Loss  from continuing operations**                                 |       | (12,479,124                                  | )           | (15,296,852                                  | )          | (11,263,140                                  | )          |
| **Discontinued operations:**                                         | ** ** | ** **                                   | ** **  | ** **                                   | ** ** | ** **                                   | ** ** |
| Gain on disposal  of assets                                          |       | —                                       |        | —                                       |       | 290,209                                      |       |
| **Net  loss**                                                        |       | (12,479,124                                  | )           | (15,296,852                                  | )          | (10,972,931                                  | )          |
| Imputed and  declared dividends on preferred stock                   |       | (2,005,664                                   | )           | (11,065,770                                  | )          | (732,405                                     | )          |
| **Net  loss attributable to common stockholders**                    |       | $                                            | (14,484,788 | )                                            | $          | (26,362,622                                  | )          | $ | (11,705,336 | ) |
| **Amounts  per common share—basic and diluted:**                | ** ** | ** **                                   | ** **  | ** **                                   | ** ** | ** **                                   | ** ** |
| Loss from  continuing operations                                     |       | $                                            | (0.40       | )                                            | $          | (0.81                                        | )          | $ | (0.64 | ) |
| Gain from  discontinued operations, net                              |       | —                                       |        | —                                       |       | 0.02                                         |       |
| **Net  loss**                                                        |       | (0.40                                        | )           | (0.81                                        | )          | (0.62                                        | )          |
| Imputed and  declared dividends on preferred stock                   |       | (0.06                                        | )           | (0.58                                        | )          | (0.04                                        | )          |
| **Net  loss attributable to common stockholders**                    |       | $                                            | (0.46       | )                                            | $          | (1.39                                        | )          | $ | (0.66 | ) |
| **Weighted  average number of common shares—basic and diluted** |       | 31,511,683                                   |        | 19,009,189                                   |       | 17,623,559                                   |       |

 

Net loss for the year ended December 31, 2006included stock-based compensation expense that the Company recorded as a resultof the adoption of Statement of Financial Accounting Standards (SFAS) No. 123(R),“Share-Based Payment,” on January 1, 2006. Total compensation cost underSFAS No. 123(R) for our stock plans for the year ended December 31,2006 was $1,199,941, of which $279,067 was included in research and developmentexpenses and $920,874 was included in general and administrative expenses. The Companydid not record stock-based compensation expense for the years ended December 31,2005 and 2004. As previously disclosed in the notes to the consolidatedfinancial statements for the years ended December 31, 2005 and 2004, netloss including pro forma stock-based compensation expense was $(27,738,325) and$(13,244,003), respectively. See Note 2 to the consolidated financialstatements for additional information.

The accompanying notes are an integral part of these consolidated financial statements.

F-4

----

**Inovio Biomedical CorporationCONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY**

| ** **                                                                               | ** ** | **Preferred stock** | ** ** | **Common stock** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | **Accumulated**  | ** ** | ** **      | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|------------|------------|------------|------------|----------------|------------|------------------|------------|-----------------|------------|
| ** **                                                                               | ** ** | **Number**               | ** ** | ** **            | ** ** | **Number** | ** ** | ** ** | ** ** | **Additional** | ** ** | **Receivables**  | ** ** | ** **      | ** ** | **other** | ** ** | **Total** | ** ** |
| ** **                                                                               | ** ** | **of**                   | ** ** | ** **            | ** ** | **of**     | ** ** | ** ** | ** ** | **paid-in**    | ** ** | **from**         | ** ** | **Accumulated** | ** ** | **comprehensive** | ** ** | **stockholders’** | ** ** |
| ** **                                                                               | ** ** | **shares**               | ** ** | **Amount**            | ** ** | **shares** | ** ** | **Amount** | ** ** | **capital**    | ** ** | **stockholders** | ** ** | **deficit**     | ** ** | **(loss) income** | ** ** | **equity** | ** ** |
| Balance at  December 31, 2003                                                       | 847        |                     |       | $                     | 1          |       |       | 15,920,432 |       |           | $          | 15,920           |       |            | $          | 91,233,698 |   |   | $ | — |   |   | $ | (76,201,984 | ) |   | $ | — |   |   |   | $ | 15,047,635 |   |   |
| Exercise of stock  options for cash                                                      |       | —                   |       |                  | —     |       |       | 140,821    |       |           | 141        |             |       | 270,233         |       |   | — |   |   | — |   |   | — |   |   |   | 270,374 |   |   |
| Exercise of  warrants for cash                                                           |       | —                   |       |                  | —     |       |       | 474,713    |       |           | 475        |             |       | 1,335,982       |       |   | — |   |   | — |   |   | — |   |   |   | 1,336,457 |   |   |
| Cashless exercise  of warrants                                                           |       | —                   |       |                  | —     |       |       | 39,883     |       |           | 40         |             |       | (40             | )          |   | — |   |   | — |   |   | — |   |   |   | — |   |   |
| Issuance of Series C  preferred stock for cash, net of issuance costs of $1,170,363 |       | 1,090                    |       |                  | 2          |       |       | —     |       |           | —     |             |       | 9,730,968       |       |   | — |   |   | — |   |   | — |   |   |   | 9,730,970 |   |   |
| Conversions of  preferred stock to common stock                                          |       | (496                     | )          |                  | (1         | )          |       | 1,741,382  |       |           | 1,741      |             |       | (1,740          | )          |   | — |   |   | — |   |   | — |   |   |   | — |   |   |
| Share-based  compensation                                                                |       | —                   |       |                  | —     |       |       | —     |       |           | —     |             |       | 413,320         |       |   | — |   |   | — |   |   | — |   |   |   | 413,320 |   |   |
| Declared dividends                                                                       |       | —                   |       |                  | —     |       |       | 103,981    |       |           | 104        |             |       | 460,260         |       |   | — |   |   | — |   |   | — |   |   |   | 460,364 |   |   |
| Reversal of  declared dividends                                                          |       | —                   |       |                  | —     |       |       | (785       | )          |           | (1         | )                |       | (4,273          | )          |   | — |   |   | — |   |   | — |   |   |   | (4,274 | ) |   |
| Net loss  attributable to common stockholders                                            |       | —                   |       |                  | —     |       |       | —     |       |           | —     |             |       | —          |       |   | — |   |   | (11,705,336 | ) |   | — |   |   |   | (11,705,336 | ) |   |
| Balance at  December 31, 2004                                                       |       | 1,441                    |       |                  | 2          |       |       | 18,420,427 |       |           | 18,420     |             |       | 103,438,408     |       |   | — |   |   | (87,907,320 | ) |   | — |   |   |   | 15,549,510 |   |   |
| Exercise of stock  options for cash                                                      |       | —                   |       |                  | —     |       |       | 34,980     |       |           | 35         |             |       | 59,441          |       |   | — |   |   | — |   |   | — |   |   |   | 59,476 |   |   |
| Exercise of  warrants for cash                                                           |       | —                   |       |                  | —     |       |       | 136,250    |       |           | 136        |             |       | 256,014         |       |   | — |   |   | — |   |   | — |   |   |   | 256,150 |   |   |
| Cashless exercise  of warrants                                                           |       | —                   |       |                  | —     |       |       | 43,130     |       |           | 43         |             |       | (43             | )          |   | — |   |   | — |   |   | — |   |   |   | — |   |   |
| Issuance of common  stock for cash, net of issuance costs of $997,682                    |       | —                   |       |                  | —     |       |       | 6,834,408  |       |           | 6,835      |             |       | 15,398,064      |       |   | — |   |   | — |   |   | — |   |   |   | 15,404,899 |   |   |
| Issuance of  Series D preferred stock for acquisition of Inovio AS                  |       | 1,966,292                |       |                  | 1,966      |       |       | —     |       |           | —     |             |       | 7,902,528       |       |   | — |   |   | — |   |   | — |   |   |   | 7,904,494 |   |   |
| Conversions of  preferred stock to common stock                                          |       | (405,309                 | )          |                  | (406       | )          |       | 3,944,043  |       |           | 3,944      |             |       | (3,538          | )          |   | — |   |   | — |   |   | — |   |   |   | — |   |   |
| Warrants issued  for services                                                            |       | —                   |       |                  | —     |       |       | —     |       |           | —     |             |       | 120,913         |       |   | — |   |   | — |   |   | — |   |   |   | 120,913 |   |   |
| Share-based  compensation                                                                |       | —                   |       |                  | —     |       |       | —     |       |           | —     |             |       | 116,382         |       |   | — |   |   | — |   |   | — |   |   |   | 116,382 |   |   |
| Imputed and declared  dividends                                                          |       | —                   |       |                  | —     |       |       | 55,518     |       |           | 56         |             |       | 10,451,785      |       |   | — |   |   | — |   |   | — |   |   |   | 10,451,841 |   |   |
| Foreign currency  translation loss                                                       |       | —                   |       |                  | —     |       |       | —     |       |           | —     |             |       | —          |       |   | — |   |   | — |   |   | (30,295 | ) |   |   | (30,295 | ) |   |
| Net loss  attributable to common stockholders                                            |       | —                   |       |                  | —     |       |       | —     |       |           | —     |             |       | —          |       |   | — |   |   | (26,362,622 | ) |   | — |   |   |   | (26,362,622 | ) |   |
| Balance at  December 31, 2005                                                       |       | 1,562,424                |       |                  | 1,562      |       |       | 29,468,756 |       |           | 29,469     |             |       | 137,739,954     |       |   | — |   |   | (114,269,942 | ) |   | (30,295 | ) |   |   | 23,470,748 |   |   |
| Exercise of stock  options for cash                                                      |       | —                   |       |                  | —     |       |       | 148,629    |       |           | 148        |             |       | 251,280         |       |   | — |   |   | — |   |   | — |   |   |   | 251,428 |   |   |
| Issuance of common  stock for patents and other assets                                   |       | —                   |       |                  | —     |       |       | 86,956     |       |           | 87         |             |       | 128,835         |       |   | — |   |   | — |   |   | — |   |   |   | 128,922 |   |   |
| Issuance of  stockholder note receivable                                                 |       | —                   |       |                  | —     |       |       | —     |       |           | —     |             |       | 86,030          |       |   | (86,030 | ) |   | — |   |   | — |   |   |   | — |   |   |
| Issuance of common  stock for cash, net of issuance costs of $1,161,070                  |       | —                   |       |                  | —     |       |       | 4,074,067  |       |           | 4,074      |             |       | 8,734,804       |       |   | — |   |   | — |   |   | — |   |   |   | 8,738,878 |   |   |
| Issuance of common  stock for consulting services                                        |       | —                   |       |                  | —     |       |       | 49,261     |       |           | 49         |             |       | 99,951          |       |   | — |   |   | — |   |   | — |   |   |   | 100,000 |   |   |
| Conversions of  preferred stock to common stock                                          |       | (534,355                 | )          |                  | (534       | )          |       | 1,763,981  |       |           | 1,764      |             |       | (1,230          | )          |   | — |   |   | — |   |   | — |   |   |   | — |   |   |
| Share-based  compensation                                                                |       | —                   |       |                  | —     |       |       | 45,000     |       |           | 45         |             |       | 1,546,662       |       |   | — |   |   | — |   |   | — |   |   |   | 1,546,707 |   |   |
| Imputed and  declared dividends                                                          |       | —                   |       |                  | —     |       |       | 2,871      |       |           | 3          |             |       | 1,873,318       |       |   | — |   |   | — |   |   | — |   |   |   | 1,873,321 |   |   |
| Foreign currency  translation gain                                                       |       | —                   |       |                  | —     |       |       | —     |       |           | —     |             |       | —          |       |   | — |   |   | — |   |   | 67,340 |   |   |   | 67,340 |   |   |
| Net loss  attributable to common stockholders                                            |       | —                   |       |                  | —     |       |       | —     |       |           | —     |             |       | —          |       |   | — |   |   | (14,484,788 | ) |   | — |   |   |   | (14,484,788 | ) |   |
| Balance at  December 31, 2006                                                       |       | 1,028,069                |       |                  | $          | 1,028      |       |       | 35,639,521 |           |       | $                | 35,639     |            |       | $ | 150,459,604 |   |   | $ | (86,030 | ) |   | $ | (128,754,730 | ) |   | $ | 37,045 |   |   |   | $ | 21,692,556 |   |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

F-5

----

**Inovio Biomedical CorporationCONSOLIDATED STATEMENTS OF CASH FLOWS**

| ** **                                                                   | ** ** | **Year ended  December 31,  2006** | ** **  | **Year ended  December 31,  2005** | ** ** | **Year ended  December 31,  2004** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------------------------------|-------------|----------------------------------------------|------------|----------------------------------------------|------------|
| **Cash flows from operating activities:**                                    | ** ** | ** **                                   | ** **  | ** **                                   | ** ** | ** **                                   | ** ** |
| Net loss from continuing  operations                                         |       | $                                            | (12,479,124 | )                                            | $          | (15,296,852                                  | )          | $ | (11,263,140 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                         |        |                                         |       |                                         |       |
| Depreciation and  amortization                                               |       | 749,643                                      |        | 650,817                                      |       | 573,041                                      |       |
| Amortization of  intangible assets                                           |       | 225,000                                      |        | 206,250                                      |       | —                                       |       |
| Compensation for  services paid in stock options                             |       | 1,402,544                                    |        | 116,382                                      |       | 413,320                                      |       |
| Compensation for  services paid in common stock                              |       | 244,163                                      |        | —                                       |       | —                                       |       |
| Amortization of deferred  tax liabilities                                    |       | (63,000                                      | )           | (57,750                                      | )          | —                                       |       |
| Charge for acquired  in-process research and development                     |       | —                                       |        | 3,332,000                                    |       | —                                       |       |
| Deferred rent                                                                |       | (57,385                                      | )           | (29,520                                      | )          | (22,536                                      | )          |
| Revenue from conversion  of note payable                                     |       | (10,810                                      | )           | —                                       |       | —                                       |       |
| Changes in operating assets and liabilities:                                 |       |                                         |        |                                         |       |                                         |       |
| Accounts receivable                                                          |       | (57,631                                      | )           | 152,471                                      |       | (249,157                                     | )          |
| Prepaid expenses and  other                                                  |       | (400,417                                     | )           | (150,644                                     | )          | (177,928                                     | )          |
| Accounts payable and  accrued expenses                                       |       | (233,894                                     | )           | (1,259,924                                   | )          | 2,949,629                                    |       |
| Deferred revenue                                                             |       | 3,637,763                                    |        | 28,747                                       |       | 719,420                                      |       |
| **Net cash used in operating  activities**                                   |       | (7,043,148                                   | )           | (12,308,023                                  | )          | (7,057,351                                   | )          |
| **Cash flows from investing activities:**                                    | ** ** | ** **                                   | ** **  | ** **                                   | ** ** | ** **                                   | ** ** |
| Purchase of  available-for-sale securities                                   |       | (24,000,000                                  | )           | —                                       |       | —                                       |       |
| Proceeds from sales of  available-for-sale securities                        |       | 9,300,000                                    |        | —                                       |       | —                                       |       |
| Acquisition of business,  net of cash acquired                               |       | —                                       |        | (2,341,028                                   | )          | —                                       |       |
| Purchases of capital  assets                                                 |       | (46,744                                      | )           | (286,907                                     | )          | (102,365                                     | )          |
| Capitalization of  patents and other assets                                  |       | (1,318,431                                   | )           | (447,764                                     | )          | (336,752                                     | )          |
| **Net cash used in investing  activities**                                   |       | (16,065,175                                  | )           | (3,075,699                                   | )          | (439,117                                     | )          |
| **Cash flows from financing activities:**                                    | ** ** | ** **                                   | ** **  | ** **                                   | ** ** | ** **                                   | ** ** |
| Proceeds from issuance  of preferred stock, net of issuance costs            |       | —                                       |        | —                                       |       | 9,730,970                                    |       |
| Proceeds from issuance  of common shares, net of issuance costs              |       | 8,975,735                                    |        | 15,304,716                                   |       | 1,606,831                                    |       |
| Cash received for common  stock to be issued                                 |       | —                                       |        | —                                       |       | 607,471                                      |       |
| Proceeds from issuance  of shares to minority interest                       |       | 5,349,995                                    |        | —                                       |       | —                                       |       |
| Payment of preferred  stock cash dividend                                    |       | (132,343                                     | )           | (613,929                                     | )          | (276,315                                     | )          |
| **Net cash provided by financing  activities**                               |       | 14,193,387                                   |        | 14,690,787                                   |       | 11,668,957                                   |       |
| Effect of exchange rate  changes on cash                                     |       | 69,975                                       |        | (30,295                                      | )          | —                                       |       |
| Net cash provided by  discontinued operations                                |       | —                                       |        | —                                       |       | 256,862                                      |       |
| **(Decrease) increase in cash and  cash equivalents**                        |       | (8,844,961                                   | )           | (723,230                                     | )          | 4,429,351                                    |       |
| Cash and cash  equivalents, beginning of period                              |       | 17,166,567                                   |        | 17,889,797                                   |       | 13,460,446                                   |       |
| **Cash and cash equivalents, end of period**                                 |       | $                                            | 8,321,606   |                                         | $          | 17,166,567                                   |       | $ | 17,889,797 |   |

 

The accompanying notes are an integral part of these consolidated financial statements.

F-6

----

**INOVIO BIOMEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1. Description ofCompany**

We were incorporated on August 8, 1979, under thelaws of British Columbia, Canada, as Genetronics Biomedical Ltd. On June 15,2001, we completed a change in our jurisdiction of incorporation from BritishColumbia, Canada, to the state of Delaware. This change was accomplishedthrough a continuation of Genetronics Biomedical Ltd. into GenetronicsBiomedical Corporation, a Delaware corporation. On January 25, 2005, weconsummated the acquisition of Inovio AS, a Norwegian company. On March 31,2005, we changed our corporate name from “Genetronics Biomedical Corporation”to “Inovio Biomedical Corporation” by filing a Certificate of Amendment to ourCertificate of Incorporation with the State of Delaware. We also amended ourBylaws to reflect the name change. Effective April 4, 2005, our AmericanStock Exchange ticker symbol changed from “GEB” to “INO.”  On September 11, 2006, we incorporatedInovio Asia Pte. Ltd. (IAPL), a wholly-owned subsidiary of the Company, in theRepublic of Singapore. We conduct our business through our U.S. wholly-ownedsubsidiaries, Genetronics, Inc., which was incorporated in California on June 29,1983, and Inovio AS, a company incorporated in Norway.

We are a biomedical company whose technology platformis based on the science of electroporation. We are a leader in developing humantherapeutic applications of electroporation, which uses brief, controlledelectrical pulses to dramatically increase cellular uptake of usefulbiopharmaceuticals, with the industry’s most extensive patent portfoliocovering *in vivo* electroporation.We are focused on commercializing our Selective Electrochemical Tumor Ablation(SECTA) therapy and developing multiple DNA vaccines using our deliveryplatform for gene-based treatments. SECTA, our local ablation therapy for solidtumors is designed to selectively kill cancerous cells and minimize cosmetic orfunctional impacts to healthy tissue typically treated around the tumor. Inaddition, we have enhanced our technologies through various licensing andcollaboration agreements. With our partners, we are researching and developingproducts using our patented DNA delivery technologies for the prevention andtreatment of serious and life-threatening diseases.

We are currently building two major franchises basedon our MedPulser® Electroporation System: Oncology and DNAvaccines.

For oncology, our therapy uses electroporation toenhance the local uptake of the generic cytotoxic drug bleomycin sulfate toachieve tumor cell death. Our system, which uses a pulse generator togetherwith disposable needle applicators, delivers electrical pulses to tumorsinjected with the drug. We believe the distinctive feature of the system is thepreservation of healthy tissue at the margins of the tumor. We anticipate thesystem may therefore afford advantages over surgery in preserving function andimproving the quality of life for cancer patients who would otherwise facesignificant morbidity associated with cancer surgery. Our SECTA therapy is inPhase III clinical trials in the United States and Europe for the treatment ofrecurrent H&N cancer; and in Phase I/II for the treatment of recurrentbreast cancer. In addition, we are conducting pre-marketing studies to supportthe commercialization of our SECTA system in Europe. Prior to commercial salesof our SECTA system in the European Union (EU), we were required and alreadyhave obtained a CE Mark, which is recognized internationally as a symbol ofquality and compliance. Completion of the European pre-marketing studies willprovide pharmacoeconomic data to be used to seek reimbursement, as well asprovide additional efficacy and safety data and local experience withphysicians who are thought leaders in Europe. This pre-marketing data is avital component of a European commercial launch of the SECTA system and willrepresent an important milestone for us.

F-7

----

**INOVIO BIOMEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

As part of our MedPulser® product line, our efforts in tumor ablationare complemented with the development of other cancer therapies usingelectroporation therapy for the intracellular delivery of DNA-based treatments.To our knowledge, we are the first company to initiate a clinical studyinvolving the use of electroporation technology to deliver therapeutic genes inhuman subjects. This was achieved in collaboration with investigators at theMoffitt Cancer Center in Tampa, Florida in December 2004. Thisinvestigation was approved by the U.S. Food and Drug Administration (FDA) andinvolves electroporating melanomas with DNA encoded to express particularcytokines in an attempt to stimulate immunity against the patient’s tumor. In2004, we extended our license with Vical, Inc. (Vical) (NASDAQ:VICL) toinclude a worldwide license for the use of our electroporation together withVical’s “naked” DNA technology for their development of an HIV DNA vaccine. In2004, we executed a major licensing deal with milestone and royalty paymentswith Merck & Co., Inc. (Merck) (NYSE:MRK) for the development ofproprietary DNA vaccines for cancer and infectious diseases using electroporation.In January 2005, we acquired Inovio AS, a Norwegian company, to expand ourpatent portfolio in the area of intramuscular electroporation. The Inovio ASacquisition included a collaboration with the University of Southampton(Southampton), U.K. on a Phase I clinical study for the electroporation of aDNA vaccine for prostate carcinoma. Our DNA electroporation delivery technologyis now being evaluated in four independent Phase I/II clinical trials togetherwith Moffitt, Vical, Merck and Southampton, respectively. In 2006, we executeda collaborative commercialization agreement with Tripep AB (Tripep)(Stockholm:TPEP.ST) to co-develop a hepatitis C therapeutic vaccine, which islikely to result in another Phase I clinical trial this year. In November,2006, we executed another major non-exclusive license to our DNA deliverytechnology for intramuscular applications regarding certain therapeutic DNAvaccines to Wyeth Pharmaceuticals, a division of Wyeth (Wyeth) (NYSE: WYE).

We incurred a net loss attributable to commonstockholders of $14,484,788 for the year ended December 31, 2006. We hadworking capital of $21,203,490 and an accumulated deficit of $128,754,730 as ofDecember 31, 2006. Our ability to continue as a going concern is dependentupon our ability to achieve profitable operations and to obtain additionalcapital. We will continue to rely on outside sources of financing to meet ourcapital needs. The outcome of these matters cannot be predicted at this time.Further, there can be no assurance, assuming we successfully raise additionalfunds, that we will achieve positive cash flow. If we are not able to secureadditional funding, we will be required to scale back our research anddevelopment programs, preclinical studies and clinical trials, and general andadministrative activities and may not be able to continue in business. Theseconsolidated financial statements do not include any adjustments to thespecific amounts and classifications of assets and liabilities, which might benecessary should we be unable to continue in business. Our consolidatedfinancial statements as of and for the year ended December 31, 2006 havebeen prepared on a going concern basis, which contemplates the realization ofassets and the settlement of liabilities and commitments in the normal courseof business for the foreseeable future.

Certain reclassificationshave been made to the financial statements for the year ended December 31,2005 to conform to the year ended December 31, 2006 presentation.

**2. Summary of SignificantAccounting Policies**

*Consolidation*

These consolidated financial statements include theaccounts of Inovio Biomedical Corporation and its wholly-ownedsubsidiaries, Genetronics, Inc., a company incorporated in the state ofCalifornia,

F-8

----

**INOVIO BIOMEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Inovio AS, a company incorporated in Norway, andInovio Asia Pte. Ltd. (IAPL), a company incorporated in the Republic ofSingapore. All intercompany accounts and transactions have been eliminated uponconsolidation.

*Use of estimates*

The preparation ofconsolidated financial statements in accordance with U.S. generally acceptedaccounting principles requires us to make estimates and judgments that affectthe reported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities. We base our estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.

*Cash equivalents*

We consider all highlyliquid investments with original maturities of 90 days or less, when purchased,to be cash equivalents. Cash equivalents are stated at cost, which approximatesmarket value. At December 31, 2006 and 2005, cash equivalents included$2,012,769 and $13,910,635 in money market funds, respectively.

*Short-termInvestments*

Our short-term investmentsconsist of auction rate securities classified as available-for sale, which areon deposit with a major financial institution and are stated at market value. Allof our short-term investments are classified as corporate debt securities as ofDecember 31, 2006. All of our short-term investments at December 31,2006 are auction rate securities which have contractual maturities in excess often years and reset to par on a monthly basis.

*Accounts receivable*

Trade accounts receivableare recorded at invoiced amounts and do not bear interest. We perform ongoingcredit evaluations of our customers’ financial condition. Credit is extended tocustomers as deemed necessary and generally does not require collateral.Management believes that the risk of loss is significantly reduced due to thequality and financial position of our customers. No allowance for doubtfulaccounts was deemed necessary at December 31, 2006 and 2005.

*Fixed assets*

Property and equipment arestated at cost and depreciated using the straight-line method over theestimated useful life of the assets, generally three to five years. Leaseholdimprovements are amortized over the shorter of the remaining term of therelated leases or the estimated economic useful lives of the improvements.Repairs and maintenance are expensed as incurred. Depreciation and amortizationexpense for the years ending December 31, 2006, 2005 and 2004 was$206,743, $147,129 and $123,014, respectively.

F-9

----

**INOVIO BIOMEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*Patent and licensecosts*

Patents are recorded at cost and amortized using thestraight-line method over the expected useful lives of the patents or17 years, whichever is less. Cost is comprised of the consideration paidfor patents and related legal costs. If management determines that developmentof products to which patent costs relate is not reasonably certain or thatcosts exceed recoverable value, such costs are charged to operations.

License costs are recorded based on the fair value ofconsideration paid and amortized using the straight-line method over the shorterof the expected useful life of the underlying patents or the term of therelated license agreement.

Amortization expense forthe years ending December 31, 2006, 2005 and 2004 was $542,900, $503,688and $450,027, respectively.

*Cost methodinvestments*

Investments in corporate entities with less than a 20%voting interest are accounted for under the cost method. We monitor theseinvestments for impairment and make appropriate reductions in carrying valuesif we determine an impairment charge is required, based primarily on thefinancial condition and near-term prospects of these companies. As of December 31,2006 there have been no impairments noted.

The Company’s cost methodinvestments consist of minor investments in two non-public companies of $125,000and $25,000, respectively, during the year ended December 31, 2006. Thefair value of the Company’s cost method investments is not estimated if thereare no identified events or changes in circumstances that may have asignificant adverse effect on the fair value of the investments. The Companyhas determined, in accordance with SFAS 107, *Disclosuresabout Fair Value of Financial Instruments*, that it is notpracticable to estimate the fair value of the investments because the costbasis investments are in non-public companies and there is no recognizedexchange for which these investments are sold.

*Goodwill*

Goodwill is tested forimpairment on an annual basis and between annual tests if indicators ofpotential impairment exist, using a fair-value-based approach. No impairment ofgoodwill has been identified during any of the periods presented.

*Intangible Assets*

Intangible assets acquiredas part of the Inovio AS acquisition (see Note 15) are amortized using thestraight-line method over their estimated period of benefit, which is eighteenyears. We evaluate the recoverability of intangible assets periodically andtake into account events or circumstances that warrant revised estimates ofuseful lives or that indicate that impairment exists. The net carrying amountand accumulated amortization of these intangible assets at December 31,2006 was $3,618,750 and $431,250, respectively. The net carrying amount andaccumulated amortization at December 31, 2005 was $3,843,750 and $206,250,respectively. We expect total amortization expense for these intangible assetsto be approximately $225,000 for each of the years ended December 31,2007, 2008, 2009, 2010 and 2011, respectively. No impairment of intangibleassets have been identified during any of the periods presented.

F-10

----

**INOVIO BIOMEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*Long-lived assets*

We review long-livedassets, including intangible assets, for impairment whenever events or changesin circumstances indicate that the carrying amount of an asset may not berecoverable. While our current and historical operating and cash flow lossesare indicators of impairment, we believe the future discounted cash flows to bereceived from the long-lived assets will exceed the assets carrying value, andaccordingly, we have not recognized any impairment losses through December 31,2006.

*Minority Interest*

Pursuant to our October 2006private placement, our IAPL subsidiary issued 2,201,644 ordinary shares tooutside investors which created a minority interest (see Note 8). As a resultof this transaction, the Company retained a 75% ownership interest in our IAPLsubsidiary with the minority interest shareholders holding 25% as of December 31,2006.

*Income taxes*

We account for income taxes using the liability methodof tax allocation. Future income taxes are recognized for the future income taxconsequences attributable to differences between the carrying values of assetsand liabilities and their respective income tax bases. Future income tax assetsand liabilities are measured using enacted income tax rates expected to apply totaxable income in the years in which temporary differences are expected to berecovered or settled. The effect on future income tax assets and liabilities ofa change in rates is included in earnings in the period that includes theenactment date. Future income tax assets are recorded in the consolidatedfinancial statements if realization is considered more likely than not.

*Revenue recognition*

License fees comprise of initial fees and revenuederived from collaborative licensing arrangements, milestone payments, androyalties from future product sales. We have adopted a strategy ofco-developing or licensing our gene delivery technology for specific genes orspecific medical indications. Accordingly, we have entered into collaborativeresearch and development agreements and have received funding for pre-clinicalresearch and clinical trials. Funding under these agreements, which arenon-refundable, are recorded as revenue as the related research expendituresare incurred pursuant to the terms of the agreement and our involvement in theJoint Collaboration Committee, and provided collectibility is reasonablyassured.

Non-refundable milestone payments continue to berecognized upon the achievement of specified milestones when we have earned themilestone payment provided the milestone is substantive in nature and theachievement of the milestone was not reasonably assured at the inception of theagreement. Payments for milestones which are not reasonably assured of beingachieved at the time of signing the agreement are treated as the culmination ofa separate earnings process and are recognized as revenue when the milestonesare achieved. We defer payments for milestone events which are reasonablyassured and recognize them ratably over the minimum remaining period of ourperformance obligations.

We receive non-refundablegrants under available government programs. Government grants towards currentexpenditures are recorded as revenue when there is reasonable assurance that wehave complied with all conditions necessary to receive the grants,collectibility is reasonably assured, and as the expenditures are incurred.

F-11

----

**INOVIO BIOMEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

*Research anddevelopment expenses*

Since our inception,virtually all of our activities have consisted of research and developmentefforts related to developing our electroporation technologies. We expense allsuch expenditures in the period incurred. Our expenses related to clinicaltrials are based on services received and efforts expended pursuant tocontracts with multiple research institutions and clinical researchorganizations that conduct and manage clinical trials on our behalf. Thefinancial terms of these agreements are subject to negotiation and vary fromcontract to contract and may result in uneven payment flows. Generally, theseagreements set forth the scope of work to be performed at a fixed fee or unitprice. Payments under the contracts depend on factors such as the successfulenrollment of patients or the completion of clinical trial milestones. Expensesrelated to clinical trials generally are accrued based on contracted amountsapplied to the level of patient enrollment and activity according to theprotocol. If timelines or contracts are modified based upon changes in theclinical trial protocol or scope of work to be performed, we modify ourestimates accordingly on a prospective basis.

*Net loss per share*

Net loss per share is calculated in accordance withthe Financial Accounting Standards Board’s (FASB) Statement of FinancialAccounting Standards (SFAS) No. 128, *EarningsPer Share*. Basic loss per share is computed by dividing the net lossfor the year by the weighted average number of common shares outstanding duringthe year. Diluted loss per share is calculated in accordance with the treasurystock method and reflects the potential dilution that would occur if securitiesor other contracts to issue common stock were exercised or converted to commonstock. Since the effect of the assumed exercise of common stock options andother convertible securities was anti-dilutive for all periods presented, basicand diluted loss per share are the same.

Thefollowing table summarizes potential common shares that were excluded fromhistorical basic and diluted net loss per share calculation because of theiranti-dilutive effect:

| **Common stock equivalents** | ** ** | ** ** | ** ** | **As of  December 31,  2006** | ** ** | **As of  December 31,  2005** | ** ** | **As of  December 31,  2004** | ** ** |
|----------------------------------------|------------|------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| Options to  purchase common stock      |       |       | 2,798,900  |                                    |       |                                    | 1,141,267  |                                    |       |   | 1,472,841 |   |   |
| Warrants to  purchase common stock     |       |       | 8,663,700  |                                    |       |                                    | 5,648,036  |                                    |       |   | 2,435,487 |   |   |
| Convertible preferred  stock           |       |       | 1,177,959  |                                    |       |                                    | 2,631,512  |                                    |       |   | 1,605,381 |   |   |
| Non-vested common  stock               |       |       | 45,000     |                                    |       |                                    | —     |                                    |       |   | — |   |   |
| Total                                  |       |       | 12,685,559 |                                    |       |                                    | 9,420,815  |                                    |       |   | 5,513,709 |   |   |

 

*Leases*

Leases have beenclassified as either capital or operating leases. Leases which transfersubstantially all of the benefits and risks incidental to the ownership ofassets are accounted for as if there was an acquisition of an asset andincurrence of an obligation at the inception of the lease. All other leases areaccounted for as operating leases, wherein rental payments are expensed asincurred with the exception of our San Diego headquarter facility lease, whichhas escalating payments and is expensed on a straight-line basis over the termof five years. The annual rent for this leased property is $433,901 in thefirst two years of the original lease term and $452,767 for the third andfourth years. The annual rent for the fifth and final year of the originallease term is $480,207. At the end of the original lease term, we have the optionof 

F-12

----

**INOVIO BIOMEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

renewingthis lease for an additional five-year lease term at an annual rate equal tothe fair market rental value of the property, as defined in the leaseagreement.

*Share-basedcompensation*

Effective January 1, 2006 we adopted SFAS No. 123(R) usingthe modified prospective application method. Accordingly, stock-basedcompensation cost is measured at the grant date, based on the fair value of theaward, and is recognized as an expense over the employee’s requisite serviceperiod. Because we elected to use the modified prospective application method,results for prior periods have not been restated. In March 2005, theSecurities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 107,which provides supplemental implementation guidance for SFAS No. 123(R).We have applied the provisions of SAB No. 107 in our adoption of SFAS No. 123(R).

We estimate the fair value of stock options grantedusing the Black-Scholes option pricing model. The Black-Scholes option pricingmodel was developed for use in estimating the fair value of traded options,which have no vesting restrictions and are fully transferable. In addition,option valuation models require the input of highly subjective assumptions,including the expected stock price volatility and expected option life. Weamortize the fair value of the awards on a straight-line basis. All optionsgrants are amortized over the requisite service period of the awards. Expectedvolatility is based on historical volatility. The expected life of options grantedis calculated using the simplified method based on the terms and conditions ofthe options as provided in SAB No. 107. The risk-free interest rate isbased on the U.S. Treasury yield in effect at the time of grant. The forfeiturerate is based on historical data and we record share-based compensation expenseonly for those awards that are expected to vest.

Forthe purpose of calculating pro-forma information under SFAS No. 123 forperiods prior to January 1, 2006, we accounted for forfeitures as theyoccurred. Assumptions used in the Black-Scholes model are presented below:

| ** **               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------|------------|-----------------------------|------------|
| ** **               | ** ** | **2006**                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| Risk-free  interest rate |       | 4.68%-4.96                  | %          | 3.97 | % | 4.25 | % |
| Expected  volatility     |       | 98%-109                     | %          | 104 | % | 110 | % |
| Expected life in  years  |       | 6                           |       | 6 |   | 6 |   |
| Dividend yield           |       | —                      |       | — |   | — |   |

 

Total compensation cost under SFAS No. 123(R) forour stock plans for the year ended December 31, 2006 was $1,199,941, ofwhich $279,067 was included in research and development expenses and $920,874was included in general and administrative expenses. As a result of adoptingSFAS No. 123(R), the Company’s loss from operations and net loss for theyear ended December 31, 2006 is approximately $1,199,941 greater than ifthe Company had continued to account for share-based compensation underAccounting Principles Board (APB) No. 25, *Accountingfor Stock Issued to Employees,* and related interpretations. Basicand diluted net loss per share for the year ended December 31, 2006 is$(0.04) greater than if the Company had continued to account for share-basedcompensation under APB No. 25.

At December 31, 2006, there was $946,844 of totalunrecognized compensation cost, related to unvested stock options, which isexpected to be recognized over a weighted-average period of one year.

Priorto January 1, 2006, we accounted for employee stock options under themeasurement and recognition provisions of APB No. 25. Accordingly, werecorded no share-based compensation expense for 

F-13

----

**INOVIO BIOMEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

employee stock option grants as all options grantedhad exercises prices not less than the fair market value of the underlyingstock on the date of grant. In accordance with SFAS No. 123, *Accounting for Stock-Based Compensation,*weprovided pro forma net loss and net loss per share disclosures for each periodprior to the adoption of SFAS No. 123(R) as if we had applied thefair value-based method in measuring compensation expense for our share-basedcompensation plans. The following table illustrates the effect on net lossattributable to common stockholders as if the fair value-based method had beenapplied to all outstanding and unvested awards during the years ended December 31,2005 and 2004.

| ** **                                                                                            | ** ** | **Year Ended December 31,** | ** **  |
|-------------------------------------------------------------------------------------------------------|------------|-----------------------------|-------------|
| ** **                                                                                            | ** ** | **2005**                    | ** **  | **2004** | ** ** |
| Net loss  attributable to common stockholders, as reported                                            |       | $                           | (26,362,622 | ) | $ | (11,705,336 | ) |
| Deduct:  Stock-based employee compensation expense determined under fair value method  for all awards |       | (1,375,703                  | )           | (1,538,667 | ) |
| Pro forma net  loss attributable to common stockholders                                               |       | $                           | (27,738,325 | ) | $ | (13,244,003 | ) |
| Basic and diluted  net loss attributable to common stockholders per share, as reported                |       | $                           | (1.39       | ) | $ | (0.66 | ) |
| Basic and diluted pro  forma net loss attributable to common stockholders per share                   |       | $                           | (1.46       | ) | $ | (0.75 | ) |

 

*Recent accountingpronouncements*

In July 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation ofFASB Statement No. 109,” (FIN 48). FIN 48 prescribes a comprehensive modelfor how a company should recognize, measure, present, and disclose in itsfinancial statements uncertain tax positions that it has taken or expects totake on a tax return. FIN 48 will be effective for us on January 1, 2007.Management is currently evaluating the impact of this interpretation and doesnot expect the adoption of FIN 48 to have a material impact on our consolidatedfinancial statements.

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements,” (SFAS 157). SFAS 157defines fair value, establishes a framework for measuring fair value inaccordance with generally accepted accounting principles, and expandsdisclosures about fair value measurements. The provisions of this standardapply to other accounting pronouncements that require or permit fair valuemeasurements. SFAS 157 becomes effective for us on January 1, 2008. Uponadoption, the provisions of SFAS 157 are to be applied prospectively withlimited exceptions. The adoption of SFAS 157 is not expected to have a materialimpact on our consolidated financial statements.

**3. FinancialInstruments**

All of our financial instruments, including cashequivalents, accounts receivable, accounts payable and accrued expenses havecarrying values that approximate fair value due to their short-term nature.

F-14

----

**INOVIO BIOMEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**4. Major Customersand Concentration of Credit Risk**

In May 2004, we announced that we had signed acollaboration and licensing agreement with Merck & Co., Inc.(Merck) to develop and commercialize our MedPulser® DNADelivery System, which will be developed for use with certain of Merck’s DNAvaccine programs. This development and commercialization agreement is anextension of an initial evaluation agreement that was established in 2003.Under the terms of the agreement, Merck receives the right to use our proprietarytechnology initially for two specific antigens with an option to extend theagreement to include a limited number of additional target antigens. We havereceived an upfront license payment under this agreement, and may receivemilestone payments linked to the successful development of a product. Royaltieswould be payable on sales of a product utilizing the device developed under theagreement. An option fee would be payable if Merck includes additional targetantigens in the agreement. Under the agreement, Merck will be responsible forall development costs and clinical programs. During the year ended December 31,2006, 2005 and 2004, we recorded revenue under this collaboration and licensingagreement of $1,535,540, $822,634 and $890,238, respectively. We also recordeda milestone payment from Merck for $2,000,000 during 2005. In addition, as of December 31,2006 and 2005, $199,489 and $187,606 of our total accounts receivable balanceof $326,071 and $284,171, respectively, was attributable to Merck.

In October 2006, we acquired various licenses,patents and the rights to existing customer agreements from Valentis inexchange for future cash payments of $540,000 and the settlement of a royaltyobligation of $320,000. As part of this arrangement, the Company was dischargedof all other outstanding obligations in connection with a previous licensingarrangement, and received approximately $159,000 of funds previously held inescrow. During the year ended December 31, 2006 we recorded revenue fromValentis of $655,123. None of our total accounts receivable balance as of December 31,2006 was attributable to Valentis.

During the year ended December 31,2006 and 2005, we recorded revenue under our U.S. Army grant agreement of$898,932 and $684,646, respectively.

**5. Fixed Assets**

| ** **                                 | ** ** | **Cost**   | ** ** | **Accumulated  depreciation  and  amortization** | ** ** | **Net book  value** | ** ** |
|--------------------------------------------|------------|------------|------------|--------------------------------------------------|------------|--------------------------|------------|
| **As of December 31, 2006**           | ** ** | ** ** | ** ** | ** **                                       | ** ** | ** **               | ** ** |
| Machinery,  equipment and office furniture |       | $          | 1,886,946  |                                             | $          | (1,720,498               | )          | $ | 166,448 |   |
| Leasehold  improvements                    |       | 677,742    |       | (453,401                                         | )          | 224,341                  |       |
| Equipment under  capital leases            |       | 119,671    |       | (119,671                                         | )          | —                   |       |
|                                       |       | $          | 2,684,359  |                                             | $          | (2,293,570               | )          | $ | 390,789 |   |
| **As of December 31, 2005**           | ** ** | ** ** | ** ** | ** **                                       | ** ** | ** **               | ** ** |
| Machinery,  equipment and office furniture |       | $          | 1,972,853  |                                             | $          | (1,695,364               | )          | $ | 277,489 |   |
| Leasehold  improvements                    |       | 533,377    |       | (435,253                                         | )          | 98,124                   |       |
| Equipment under  capital leases            |       | 119,671    |       | (119,671                                         | )          | —                   |       |
|                                       |       | $          | 2,625,901  |                                             | $          | (2,250,288               | )          | $ | 375,613 |   |

 

F-15

----

**INOVIO BIOMEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**6. Patents and Other Assets, Net**

| ** **               | ** ** | **As of  December 31,  2006** | ** ** | **As of  December 31,  2005** | ** ** |
|--------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| Patent costs, net        |       |                                    | $          | 2,420,517                               |       |   |   | $ | 1,715,940 |   |   |
| License costs,  net      |       |                                    | 475,026    |                                    |       |   | 300,150 |   |   |
| Cost method  investments |       |                                    | 150,000    |                                    |       |   | — |   |   |
| Other                    |       |                                    | 132,000    |                                    |       |   | 132,000 |   |   |
|                     |       |                                    | $          | 3,177,543                               |       |   |   | $ | 2,148,090 |   |   |

 

Accumulated amortizationof patent costs was $2,409,080 and 1,980,721 as of December 31, 2006 and2005, respectively. Accumulated amortization of license costs was $723,755 and$600,300 at December 31, 2006 and 2005, respectively.

**7. Accounts Payable and Accrued Expenses**

| ** **              | ** ** | **As of  December 31,  2006** | ** ** | **As of  December 31,  2005** | ** ** |
|-------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| Trade accounts  payable |       |                                    | $          | 555,323                                 |       |   |   | $ | 580,332 |   |   |
| Accrued dividends       |       |                                    | 16,113     |                                    |       |   | 193,891 |   |   |
| Accrued  compensation   |       |                                    | 735,993    |                                    |       |   | 541,934 |   |   |
| Accrued legal           |       |                                    | 43,474     |                                    |       |   | 145,816 |   |   |
| Accrued expenses        |       |                                    | 659,069    |                                    |       |   | 402,962 |   |   |
|                    |       |                                    | $          | 2,009,972                               |       |   |   | $ | 1,864,935 |   |   |

 

**8. Stockholders’Equity**

*Preferred stock*

On January 25, 2005, we consummated theacquisition of Inovio AS, a Norwegian company. As part of this acquisition, weissued 1,966,292 shares of Series D Preferred Stock. Upon dissolution orliquidation of the Company, Series D Preferred Stock holders are entitledto the liquidation preference prior to any distribution of net assets to commonshareholders at an amount equal to $3.20 per share of preferred stock, but arejunior to Series C Preferred Stock. See Note 15 to these consolidatedfinancial statements for further discussion of this acquisition. As of December 31,2006 and 2005, 1,027,967 and 1,561,935 shares of Series D Preferred Stockwere outstanding, respectively.

On May 20, 2004, we closed a private preferredshare placement and raised an aggregate of $10,901,333 through the sale of our Series CPreferred Stock to institutional and accredited investors. Each holder ofPreferred Stock shall be entitled to the number of votes equal to the number ofshares of Common Stock into which such shares of Preferred Stock could beconverted on the record date for the taking of a vote. In any event of ourvoluntary or involuntary liquidation, dissolution or winding up, before anydistribution of our assets shall be made to or set apart for the holders of CommonStock, the holders of Series C Preferred Stock shall be entitled toreceive payment out of our assets in an amount equal to $10,000 per share of Series CPreferred Stock plus any accumulated and unpaid dividends. The Series CPreferred Stock is convertible into our common stock at a conversion price of$6.80 per share, and there is 

F-16

----

**INOVIO BIOMEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

no escrow provision. As ofDecember 31, 2006 and 2005, 102 and 337 shares of Series C PreferredStock, respectively, were outstanding. Upon conversion, the Series CPreferred Stock outstanding as of December 31, 2006 and 2005 would convertinto 149,992 and 495,764 shares of our common stock, respectively.

The holders of our Series C Preferred Stock areentitled to receive an annual dividend rate of 6%, in shares of common stock orcash, payable quarterly, through June 30, 2007. These dividends arepayable in cash unless the closing price of our common shares for the 20trading days immediately preceding the dividend payment date is equal to orgreater than the conversion price of such shares, in which event we may electto pay the dividends to the holders in common stock. In 2006, 2005 and 2004,our Board of Directors declared dividends to the holders of our Series CPreferred Stock, which were paid through the issuance of our common stock, aswell as cash. As part of this dividend to the holders of Series CPreferred Stock, in 2006 we paid cash of $117,204 and $14,571 of accrueddividends which were converted into common shares and warrants as part of our October 2006private placement. As part of this dividend we paid cash of $553,694 in 2005and in 2004 we issued 30,124 common shares valued at $133,693, and paid cash of$276,315.

Each holder received 35% warrant coverage at anexercise price of $8.80 per share exercisable through May 10, 2009.Warrants granted to holders of our Series C Preferred Stock entitle theseinvestors the right to acquire 561,084 shares of our common stock. Theplacement agents for the Series C Preferred Stock were also grantedwarrants entitling the agents to acquire 152,519 shares of our common stock.Each placement agent’s warrant entitles the holder to acquire one share ofcommon stock at a price of $6.80 per share, exercisable through May 10,2009. As of December 31, 2006, no warrants issued as part of this Series CPreferred Stock offering had been exercised.

On July 16, 2003 we closed a preferred shareprivate placement and raised an aggregate of $15,670,000, through the sale of$8,170,000 of our Series A Preferred Stock and $7,500,000 of our Series BPreferred Stock, to institutional and accredited investors.

The holders of our Series A and B Preferred Stockreceived an annual dividend rate of 6%, in shares of common stock or cash,payable quarterly. Holders of Series A and B Preferred Stock were entitledto receive this quarterly dividend through September 30, 2006. Thesedividends were payable in cash unless the closing price of our common sharesfor the 20 trading days immediately preceding the dividend payment date wasequal to or greater than the conversion price of such shares, in which event wemay have elected to pay the dividends to the holders in common stock. In 2006,2005 and 2004, our Board of Directors declared dividends to the holders of our Series Aand B Preferred Stock, which were paid through the issuance of our common stockand cash. As part of this dividend to holders of Series A and B PreferredStock, in 2006 we issued a total of 2,871 common shares valued at $7,693, andpaid $15,140 in cash. We issued a total of 55,518 common shares valued at$179,956 and cash of $60,235 in 2005 and 73,072 common shares valued at$322,397 in 2004. There were no shares of Series A or B Preferred Stockoutstanding on December 31, 2006. As of December 31, 2005, 52 sharesof Series A Preferred Stock and 100 shares of Series B PreferredStock remained outstanding.

Each holder received 40% warrant coverage at anexercise price of $3.00 per share exercisable through July 13, 2008.Warrants granted to holders of our Series A and B Preferred Stock entitlethese investors the right to acquire 2,433,073 shares of our common stock. Theplacement agents for the Series A and B Preferred Stock were also grantedwarrants entitling the agents to acquire 447,060 shares of our common stock.Each placement agent’s warrant entitles the holder to acquire one share ofcommon stock 

F-17

----

**INOVIO BIOMEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

at a price between $2.40and $2.80 per share, exercisable through July 13, 2008. As of December 31,2006, warrants to purchase 694,549 shares issued as part of this offering hadbeen exercised, resulting in $1,975,710 of proceeds. In addition, we issued39,041 shares of our common stock valued at $116,500 as a placement agent feein conjunction with the Series A and B Preferred Stock offering.

Upon dissolution orliquidation of the Company, the Series C Preferred Stock holders areentitled to a liquidation preference prior to any distribution of net assets tocommon shareholders.

*Common Stock*

In October 2006, we completed a private placementwith foreign investors, whereby we sold 4,074,067 shares of our common stockand issued warrants to purchase 1,425,919 shares of our common stock whichresulted in gross aggregate cash proceeds of $9,900,003. A portion of thisprivate placement involved investors who converted 115.12 shares of Series CPreferred Stock and $14,571 of accrued dividends into 479,722 shares of ourcommon stock together with warrants to purchase 167,902 shares of our commonstock. All warrants included in the private placement have a term of five yearsand are exercisable at $2.87 per share. As of December 31, 2006, nowarrants issued in connection with this private placement had been exercised.

Prior to completing the above financing, weincorporated Inovio Asia Pte. Ltd. (IAPL), a wholly-owned subsidiary of theCompany, in the Republic of Singapore and thereafter granted IAPL an exclusiveroyalty-free license to use certain of our intellectual property in exchangefor 6,584,365 ordinary shares of IAPL. In March 2007, we terminated ourlicense agreement while retaining the number of ordinary shares.

In October 2006, IAPL completed a privateplacement issuing and selling 2,201,644 of its ordinary shares for cash in theamount $5,349,995. Under the agreement, these ordinary shares were exchangedfor 2,201,644 shares of our common stock and five-year warrants to purchase upto 770,573 shares of our common stock at an exercise price of $2.87 per shareon January 14, 2007.

We recorded an imputed dividend charge of $1,851,056in October 2006 related to the investors who converted $1,151,200 of theirprevious Series C Preferred Stock investment into 473,744 shares of ourcommon stock as part of our October 2006 private placement. This imputeddividend charge was calculated using guidance contained in Emerging Issues TaskForce (EITF) Issue No. 00-27, *Application of Issue No. 98-5to Certain Convertible Instruments*.

On December 30, 2005, we completed a privateplacement resulting in $15,795,080 in gross cash proceeds through the sale ofour common stock to institutional and accredited investors that included Merck &Co. Inc. and Vical Inc., two of our strategic partners. At the closing, weissued to the investors an aggregate of 9,892,735 shares of common stock andwarrants to purchase an aggregate of 3,462,451 shares of common stock, andreceived in exchange (1) gross cash proceeds of $15,795,080; (2) anaggregate of 734 shares of outstanding Series A, B and C CumulativeConvertible Preferred Stock; and (3) 1,142,593 shares of our outstandingcommon stock. The common stock issued was priced at $2.40 per share. Thefive-year warrants to purchase 35% of the number of shares of common stock theyacquired in the offering were at an exercise price of approximately $2.93 pershare. As of December 31, 2006, no warrants issued in connection with thisprivate placement had been exercised. As a result of the use by existingholders of our Preferred Stock and Common Stock to acquire our shares andwarrants in this private placement, we recorded a non-cash imputed dividendcharge of $8,329,112 in our consolidated statement of operations for the yearended December 31, 2005. This imputed dividend charge was calculated usingguidance 

F-18

----

**INOVIO BIOMEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

contained in EmergingIssues Task Force (EITF) Issue No. 00-27, Application of Issue No. 98-5to Certain Convertible Instruments.

In January 2005, we completed a private placementto accredited investors whereby we sold 1,540,123 shares of our common stock ata purchase price of $4.05 per share and issued warrants to purchase 508,240shares of our common stock at an exercise price of $5.50 per share, whichresulted in aggregate cash proceeds of $3,037,500. As of December 31,2006, no warrants issued as part of this private placement had been exercised.

A portion of this private placement involved investorswho converted $3,200,000 of their previous investment in our Series CPreferred Stock into 790,123 shares of the common stock with no associated cashproceeds to us. In conjunction with this private placement, we received asubscription amount of $607,421 in cash in December 2004 from one investorin advance of signing the private placement agreement in January 2005. Atthe signing, each investor provided payment for at least 20% of thesubscription amount, the balance was to be due at the earlier of (i) September 30,2005 or (ii) the occurrence of an “early triggering event,” as set forthin the agreement. The balance of the original subscription amount, $4,990,000,was evidenced by full recourse promissory notes from the investor. In December 2005,the investors of this private placement either exercised their option toparticipate in the December 30, 2005 offering, discussed above, or settledtheir balances under the original transaction.

In September 2005, one investor converted$160,000 of its previous investment in our Series C Preferred Stock into39,506 shares of our common stock as part of this private placement.

We recorded an imputed dividend charge of $1,942,773in January 2005, related to the investors who converted $3,200,000 oftheir previous Series C Preferred Stock investment into 790,123 shares ofour common stock as part of this private placement.

In December 2006, we issued 45,000 fully vestedcommon shares to an employee in exchange for services rendered, and 45,000common shares which vest after three years in exchange for future services tobe rendered. The fair value of these shares was determined to be $3.15 pershare which is the closing price on the date of grant.

In July and October 2006, we issued 25,000and 24,261 common shares, respectively, to an outside consulting company inpayment of a non-refundable retainer in connection with the engagement of itsservices.

In June 2006, weissued 86,956 common shares to a licensing company in exchange for variouspatents and other assets and a $50,000 shareholder note receivable.

*Warrants*

In addition to warrants granted in connection with ourCommon and Preferred Stock offerings, as discussed above, we have issued thefollowing additional warrants.

In connection with the leasing of our new corporateheadquarters, we issued a warrant to purchase 50,000 shares of our common stockat $5.00 per share to the landlord of this leased facility in December 2004.This warrant is immediately exercisable and expires five years from the date ofissuance. This warrant was valued on the date of issuance using the Black-Scholespricing model. The fair value of this warrant, $120,913, will be recognizedratably over the five-year term of the lease as rent expense. As of December 31,2006, this warrant remained outstanding.

F-19

----

**INOVIO BIOMEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

On January 21, 2003, we entered into a $1,000,000bridge loan with a major shareholder. Warrants to purchase 15,000 shares of ourcommon stock at $0.04 per share were granted in lieu of interest being chargedto the loan. The warrants were valued at $19,800 using a fair value model andwere charged to interest expense. In February 2003, the bridge loan waspaid in full with proceeds from the sale of the BTX Division. DuringMarch 2004, all of such warrants were exercised.

On June 6, 2002, we granted warrants to aplacement agent to acquire 166,250 shares of common stock for $1.88 per share.In September 2003, warrants to purchase 30,000 shares of common stock wereexercised totaling $56,400 in gross proceeds. In March 2005, warrants topurchase 136,250 shares of common stock were exercised totaling $256,150 ingross proceeds.

On September 15,2000, we entered into an exclusive license agreement with the University ofSouth Florida Research Foundation, Inc. (USF), whereby USF granted us anexclusive, worldwide license to USF’s rights in patents and patent applicationsgenerally related to needle electrodes (“License Agreement”). Pursuant to theLicense Agreement, we granted USF and its designees warrants to acquire 150,000common shares for $9.00 per share until September 14, 2010. Of the totalwarrants granted, 75,000 vested at the date of grant and the remainder willvest upon the achievement of certain milestones. The 75,000 non-forfeitablevested warrants were valued at $553,950 using the Black-Scholes pricingmodel and were recorded as other assets with a credit to additional paid-incapital. The remaining 75,000 warrants are forfeitable and will be valued atthe fair value on the date of vesting using the Black-Scholes pricingmodel. As of December 31, 2006, no warrants issued in connection with thislicensing agreement had been exercised.

*Stock options*

We have one stock option plan, our 2000 Stock OptionPlan (the “2000 Plan”), pursuant to which we grant stock options to executiveofficers, directors, employees and consultants. The plan was adopted on July 31,2000, approved by the stockholders on August 7, 2000 and approved by thestockholders as amended through May 5, 2006. As amended, the 2000 Plancovers 4,750,000 common shares for issuance upon exercise of options grantedand to be granted. Under the 2000 Plan, we had 898,619 shares of common stockavailable for future grants and options to purchase 2,728,402 sharesoutstanding at December 31, 2006. The options granted and available forfuture grant under the 2000 Plan generally have a term of ten years and vestover a period of three years. The 2000 Plan terminates by its terms on July 30,2010.

The 2000 Plan supersedes all of our previous stockoption plans, which include our 1995 Stock Option Plan, under which we hadoptions to purchase 5,000 shares outstanding at December 31, 2006 and our1997 Stock Option Plan, under which we had options to purchase 65,498 sharesoutstanding on December 31, 2006.

We account for options granted to non-employees inaccordance with Emerging Issues Task Force (EITF) No. 96-18, *Accounting for Equity Instruments That Are Issued to Other ThanEmployees for Acquiring, or in Conjunction with Selling, Goods or Services,*and Statement of Financial Accounting Standard (SFAS) No. 123(R), *Share-Based Payment*. The fair value of these options at themeasurement dates was estimated using the Black-Scholes pricing model.

Total stock-based compensation for optionsgranted to non-employees for the years ended December 31, 2006, 2005 and2004, was $202,604, $116,382 and $413,320, respectively. As of December 31,2006 and 2005, 336,937 and 251,775 options remained outstanding, respectively.

F-20

----

**INOVIO BIOMEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

Thefollowing table summarizes the stock options outstanding at December 31,2006:

| ** **              | ** ** | **Options outstanding** | ** ** | **Options exercisable** | ** ** |
|-------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **              | ** ** | ** **                   | ** ** | **Weighted-**                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | ** **                   | ** ** | **average**                  | ** ** | ** ** | ** ** | ** ** | ** ** | **Weighted-** | ** ** |
| ** **              | ** ** | ** **                   | ** ** | **remaining**                | ** ** | ** ** | ** ** | ** ** | ** ** | **average** | ** ** |
| ** **              | ** ** | **Options**                  | ** ** | **contractual life**    | ** ** | **Weighted average** | ** ** | **Options** | ** ** | **exercise** | ** ** |
| **Exercise price** | ** ** | ** **                   | ** ** | **outstanding**              | ** ** | **(in years)** | ** ** | **exercise price** | ** ** | **exercisable** | ** ** | **price** | ** ** |
| $1.00-$2.00             |       |                         | 520,063    |                         |       |   | 5.6 |   |   |   | $ | 1.50 |   |   | 520,063 |   |   | $ | 1.50 |   |   |
| $2.01-$4.00             |       |                         | 1,661,965  |                         |       |   | 7.8 |   |   |   | $ | 2.76 |   |   | 899,152 |   |   | $ | 2.70 |   |   |
| $4.01-$6.00             |       |                         | 443,249    |                         |       |   | 7.0 |   |   |   | $ | 4.92 |   |   | 330,434 |   |   | $ | 4.98 |   |   |
| $6.01-$8.00             |       |                         | 103,125    |                         |       |   | 4.3 |   |   |   | $ | 6.30 |   |   | 103,125 |   |   | $ | 6.30 |   |   |
| $8.01-$22.00            |       |                         | 70,498     |                         |       |   | 1.5 |   |   |   | $ | 11.56 |   |   | 70,498 |   |   | $ | 11.56 |   |   |
|                    |       |                         | 2,798,900  |                         |       |   | 7.0 |   |   |   | $ | 3.22 |   |   | 1,923,272 |   |   | $ | 3.29 |   |   |
|                         |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

At December 31, 2006, the aggregate intrinsicvalue of options outstanding was $1,921,390, the aggregate intrinsic value ofoptions exercisable was $1,520,875 and the weighted average remainingcontractual term of options exercisable was 6.3 years.

At December 31, 2005, the aggregate intrinsicvalue of options outstanding was $522,929, the aggregate intrinsic value ofoptions exercisable was $476,407 and the weighted average remaining contractualterm of options exercisable was 5.7 years.

Stockoption activity under our stock option plans was as follows:

| ** **                       | ** ** | **Number of  shares** | ** ** | **Weighted-average  exercise price** | ** ** |
|----------------------------------|------------|----------------------------|------------|-------------------------------------------|------------|
| Balance,  December 31, 2003 |       | 1,809,369                  |       |                                      | $          | 2.72 |   |   |
| Granted                          |       | 624,375                    |       |                                      | 4.58       |   |   |
| Exercised                        |       | (140,821                   | )          |                                      | (1.92      | ) |   |
| Cancelled                        |       | (199,210                   | )          |                                      | (5.93      | ) |   |
| Balance, December 31, 2004  |       | 2,093,713                  |       |                                      | 3.47       |   |   |
| Granted                          |       | 622,000                    |       |                                      | 3.77       |   |   |
| Exercised                        |       | (34,980                    | )          |                                      | (1.70      | ) |   |
| Cancelled                        |       | (296,845                   | )          |                                      | (3.68      | ) |   |
| Balance, December 31, 2005  |       | 2,383,888                  |       |                                      | 3.55       |   |   |
| Granted                          |       | 872,750                    |       |                                      | 2.56       |   |   |
| Exercised                        |       | (148,628                   | )          |                                      | 1.69       |   |   |
| Cancelled                        |       | (309,110                   | )          |                                      | 4.64       |   |   |
| Balance,  December 31, 2006 |       | 2,798,900                  |       |                                      | $          | 3.22 |   |   |

 

The weighted average exercise price was $5.53 for the167,687 options which expired during the year ended December 31, 2006,$4.24 for the 139,913 options which expired during the year ended December 31,2005 and $8.02 for the 116,981 options which expired during the year ended December 31,2004.

F-21

----

**INOVIO BIOMEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

The weighted average grant date fair value per sharewas $2.18 for options granted during the year ended December 31, 2006,$3.05 for options granted during the year ended December 31, 2005 and$3.47 for options granted during the year ended December 31, 2004.

The aggregate intrinsic value of options exercised was$158,042 during the year ended December 31, 2006, $32,556 during the yearended December 31, 2005 and $424,069 during the year ended December 31,2004.

Asummary of the Company’s nonvested shares as of December 31, 2006 and activityduring the year is as follows:

| ** **                           | ** ** | **Number of  shares** | ** ** | **Weighted-average  grant-date fair value** | ** ** |
|--------------------------------------|------------|----------------------------|------------|-------------------------------------------------------|------------|
| Nonvested at  January 1, 2006   |       |                       | —     |                                                  |       |   | $ | — |   |   |
| Granted                              |       |                       | 90,000     |                                                  |       |   | 3.15 |   |   |
| Vested                               |       |                       | (45,000    | )                                                     |       |   | 3.15 |   |   |
| Forfeited                            |       |                       | —     |                                                  |       |   | — |   |   |
| Nonvested at  December 31, 2006 |       |                       | 45,000     |                                                  |       |   | $ | 3.15 |   |   |

 

As of December 31,2006 there was $139,337 of total unrecognized compensation cost related tononvested share-based compensation arrangements. That cost is expected to berecognized over a weighted-average period of 3 years.

**9. Commitments**

Rentexpense was $488,774, $553,229, and $372,765 for the years ended December 31,2006, 2005 and 2004, respectively. This amount is net of sublease income of$37,950 in 2006. We do not have any active leases under capital leasearrangements. As of December 31, 2006, future minimum lease payments undernon-cancelable operating leases are as follows:

| 2007       |   | $       | 489,224   |   |
|------------|--------|---------|-----------|--------|
| 2008       |   | 491,988 |      |
| 2009       |   | 499,490 |      |
| 2010       |   | 80,477  |      |
| 2011       |   | —  |      |
| Thereafter |   | —  |      |
| Total      |   | $       | 1,561,179 |   |

 

In the normal course ofbusiness, we are a party to a variety of agreements pursuant to which we may beobligated to indemnify the other party. It is not possible to predict themaximum potential amount of future payments under these types of agreements dueto the conditional nature of our obligations and the unique facts andcircumstances involved in each particular agreement. Historically, paymentsmade by us under these types of agreements have not had a material effect onour business, results of operations or financial condition.

F-22

----

**INOVIO BIOMEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**10. Income Taxes**

As of December 31, 2006, we had federal andCalifornia income tax net operating loss carryforwards of approximately $77,015,000and $46,886,000, respectively. The federal loss carryforwards will begin toexpire in 2008 unless previously utilized. The California loss carryforwardswill continue to expire in 2007. The difference between the federal andCalifornia tax loss carryforwards is primarily attributable to thecapitalization of research and development expenses for California income taxpurposes and the 50% to 60% limitation of California loss carryforwards. Inaddition, we have federal research tax credit carryforwards of approximately$1,257,017 which will continue to expire in 2007 unless previously utilized,and California research tax credit carryforwards of approximately $695,512which do not expire. At December 31, 2006, the Company had foreign taxloss carryforwards related to the acquisition of Inovio A.S. of approximately $3,597,507.The foreign net operating loss carryforwards begin to expire in 2011. Futurerealization of this asset will result in a reduction to the extent of anyremaining goodwill, then to any remaining long-term intangibles, and theremainder, in any as a reduction of income tax expense.

Pursuant to Internal Revenue Code Sections 382 and383, annual use of the subsidiary’s net operating loss and credit carryforwardsmay be limited because of a cumulative change in ownership of more than 50%.

Significantcomponents of our deferred tax assets and liabilities as of December 31,2006 and 2005 are shown below:

| ** **                                                          | ** ** | **As of  December 31,  2006** | ** ** | **As of  December 31,  2005** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| Deferred tax assets:                                                |       |                                    |       |                                    |       |
| Capitalized research expense                                        |       | $                                       | 785,000    |                                    | $          | 411,000 |   |
| Net operating loss carryforwards                                    |       | 30,650,000                              |       | 28,510,000                              |       |
| Research and development and other tax credits                      |       | 1,732,000                               |       | 1,596,000                               |       |
| Other                                                               |       | 3,001,000                               |       | 1,080,000                               |       |
|                                                                |       | 36,168,000                              |       | 31,597,000                              |       |
| Valuation  allowance                                                |       | (36,168,000                             | )          | (31,532,000                             | )          |
| Total deferred  tax assets                                          |       | —                                  |       | 65,000                                  |       |
| Deferred tax  liabilities:                                          |       |                                    |       |                                    |       |
| Difference between book and tax basis for patent and  license costs |       | —                                  |       | (65,000                                 | )          |
| Acquired intangibles                                                |       | (1,013,250                              | )          | (1,076,250                              | )          |
| Net deferred tax  liabilities                                       |       | $                                       | (1,013,250 | )                                       | $          | (1,076,250 | ) |

 

We have established a valuation allowance for alldeferred tax assets, including those for net operating loss and tax creditcarryforwards. Such a valuation allowance is recorded when it is more likelythan not that the deferred tax assets will not be realized.

Thenet deferred tax liability of $1,013,250 as of December 31, 2006, resultedfrom the acquisition of Inovio AS, (see Note 15) and reflects the net effect ofa temporary difference between the carrying amount of intangible assets forfinancial reporting purposes and the amount used for income tax purposes. Thisliability will be amortized over the life of the underlying intangibles, whichis 18 years, and will be 

F-23

----

**INOVIO BIOMEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

accounted as an income tax recovery. The reconciliation of income tax attributable tooperations computed at the statutory tax rates to income tax expense (recovery),using a 35% statutory tax rate, is:

| ** **                                        | ** ** | **Year ended  December 31,  2006** | ** ** | **Year ended  December 31,  2005** | ** ** | **Year ended  December 31,  2004** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| Income taxes at  statutory rates                  |       | $                                            | (4,368,000 | )                                            | $          | (5,374,000                                   | )          | $ | (3,841,000 | ) |
| State income tax,  net of federal benefit         |       | (659,000                                     | )          | (676,000                                     | )          | (625,000                                     | )          |
| Change in  valuation allowance                    |       | 4,636,000                                    |       | 4,486,000                                    |       | 4,674,000                                    |       |
| Write off of  in-process research and development |       | —                                       |       | 1,166,000                                    |       | —                                       |       |
| Other                                             |       | 328,000                                      |       | 340,000                                      |       | (208,000                                     | )          |
|                                              |       | $                                            | (63,000    | )                                            | $          | (58,000                                      | )          | $ | — |   |

 

The income tax recoveryhas been recorded as a reduction to general and administrative expenses, as itseffect is immaterial.

**11. 401(k) Plan**

In 1995, our U.S. subsidiary adopted a 401(k) ProfitSharing Plan (the “Plan”) covering substantially all of its employees in the U.S.The defined contribution plan allows the employees to contribute a percentageof their compensation each year. We currently match 50% of our employees’contributions, up to 6% of their annual compensation. This contribution isrecorded as expense in the accompanying consolidated statements of operationsas incurred. Our contributions are invested in our common shares on behalf ofthe participants.

Our contributions to thePlan totaled $44,529, $62,450 and $23,410 for the years ended December 31,2006, 2005 and 2004, respectively.

**12. SegmentInformation**

Pursuant to ouracquisition of Inovio AS (see Note 15), the Company operated in the UnitedStates and Europe. Revenues are attributable to the geographical area based onthe location of the customer. During the years ending December 31, 2006revenues in Europe and the United States totaled $261,935 and $3,206,243,respectively, and during the year ending December 31, 2005 revenues inEurope and the United States totaled $379,250 and $5,088,003, respectively.Long-lived assets within the United States consist primarily of patents andother intellectual property. Long-lived assets outside the United Statesconsist primarily of goodwill and intangible assets. As of December 31,2006, long-lived assets in Europe and the United States totaled $7,909,344 and$2,895,543, respectively, and as of December 31, 2005, long-lived assetsin Europe and the United States totaled $8,187,050 and $2,338,997,respectively.

**13. Related PartyTransactions**

During the years ended December 31, 2006, 2005and 2004, we made payments of $4,828, $20,930 and $111,345, respectively, forlegal services formerly provided by Catalyst Corporate Lawyers, where one ofthe former partners is the Chairman of our company. There was $34,470 of expensespaid to Catalyst Corporate Lawyers and included in share issuance costs for theyear ended December 31, 2004.  Therewere no such expenses in the years ended December 31, 2006 and 2005.  All transactions are recorded at theirexchange amounts.

F-24

----

**INOVIO BIOMEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

In March 2004, weannounced the selection of Quintiles Transnational Corp., a globalpharmaceutical services organization, as the clinical research organization(CRO) for our clinical trials in the U.S. and Europe. In addition, theinvestment division of this CRO, Qfinance, Inc., is an investor in ourSeries A, B and C Preferred Stock. During the year ended December 31,2006,  Qfinance, Inc. converted 50,100 and 109 shares respectively, of our Series A, B and C Preferred Stockinto a total of 725,788 of our common shares. Total clinical trial expensespaid to Quintiles Transnational Corp. for the years ended December 31,2006, 2005, and 2004, were $371,018, $3,542,521 and $692,124, respectively.

**14. Supplemental Disclosures of Cash Flow Information**

| ** **                                                                    | ** ** | **Year ended  December 31,  2006** | ** ** | **Year ended  December 31,  2005** | ** ** | **Year ended  December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| Supplemental schedule of  financing activities:                               |       |                                         |       |                                         |       |                                         |       |   |   |   |   |
| Imputed dividends  on preferred stock                                         |       |                                         | $          | 1,851,056                                    |       |                                         | $          | 10,271,885 |   |   | $ | — |   |   |
| Common stock  issued in connection with declared dividends on preferred stock |       |                                         | $          | 22,264                                       |       |                                         | $          | 179,900 |   |   | $ | 456,090 |   |   |
| Cashless exercise  of warrants                                                |       |                                         | $          | —                                       |       |                                         | $          | 43 |   |   | $ | 40 |   |   |
| Conversions of  preferred stock to common stock                               |       |                                         | $          | 1,764                                        |       |                                         | $          | 3,944 |   |   | $ | 1,741 |   |   |
| Issuance of  series D preferred stock for Inovio AS acquisition               |       |                                         | $          | —                                       |       |                                         | $          | 7,904,494 |   |   | $ | — |   |   |
| Issuance of  common stock for patents and other assets                        |       |                                         | $          | 128,922                                      |       |                                         | $          | — |   |   | $ | — |   |   |
| Issuance of  common stock in exchange for shareholder note receivable         |       |                                         | $          | 86,030                                       |       |                                         | $          | — |   |   | $ | — |   |   |
| Leasehold  improvements financed by landlord                                  |       |                                         | $          | 172,054                                      |       |                                         | $          | — |   |   | $ | — |   |   |
| Investment received in  exchange for licensing agreement                      |       |                                         | $          | 125,000                                      |       |                                         | $          | — |   |   | $ | — |   |   |

 

**15. Inovio ASAcquisition**

On January 25, 2005, we consummated theacquisition of Inovio AS, a Norwegian company (the “Acquisition”). TheAcquisition expands our intellectual property in electroporation, expands thenumber of agreements with major pharmaceutical companies, and provides for thenear-term initiation of a Phase I/II DNA vaccine clinical trial. Inovio AS is a complement to our existingelectroporation therapy program. Under the terms of the transaction, weacquired the entire share capital of Inovio for an aggregate purchase price of$10,904,494; $3,000,000 of the purchase price consisted of cash and $7,904,494 consistedof shares of our Series D Convertible Preferred Stock, par value $0.001per share, net of transaction costs. We issued 1,966,292 shares of the Series DPreferred Stock in the transaction, based on the average closing price of ourcommon stock as reported on the American Stock Exchange during the 30 tradingday period immediately preceding the closing. As of December 31, 2006,938,325 shares of the Series D Preferred Stock had been converted into938,325 shares of our common stock.

When valuing the Series D Preferred Stock issuedas part of the Acquisition for accounting purposes, we followed guidance setforth in SFAS No. 141, *BusinessCombinations*. Under SFAS No. 141, the fair value of securitiesissued as part of an acquisition should be valued based on the market price ofthose securities for a reasonable period before and after the date that theterms of the acquisition are agreed to and announced. For purposes of valuingthe Series D Preferred Stock issued as part of the Acquisition, we used anaverage fair value of $4.02 per share of Series D Preferred Stock. Thisaverage was based on the 

F-25

----

**INOVIO BIOMEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

closing prices of the ourcommon stock on each of the three days prior to the Acquisition, the day ofAcquisition and the three days following the Acquisition.

Those shareholdersof Inovio AS who received shares of Series D Preferred Stock in thetransaction (the “Series D Holders”) will also be entitled to additionalissuances of Series D Preferred Stock in the event we achieve certainstrategic and commercial milestones, as set forth in the Stock PurchaseAgreement and summarized below. None of the following milestones were achieved:

·                    Inthe event that we received payment commitments of at least $8,000,000, of whichat least $1,000,000 must be in the form of upfront payments, through thesigning of contracts involving Inovio AS’ technology through September 30,2006, we were required to issue an additional $2,000,000 of Series DPreferred Stock to the shareholders of Inovio AS (“the Second Payment”). Thevalue of each share of Series D Preferred Stock issued in connection withthe Second Payment would have equaled the average of the closing price of ourcommon stock as reported on the American Stock Exchange during the 30 daytrading period immediately preceding the Second Payment date.

·                    Inthe event that we received payment commitments of at least $16,000,000(including the $8,000,000 in payment commitments noted above), of which atleast $2,000,000 (including the $1,000,000 in upfront payments noted above)must be in the form of upfront payments, through the signing of contractsinvolving Inovio AS’ technology through September 30, 2006, we wererequired to issue an additional $1,000,000 of Series D Preferred Stock tothe shareholders of Inovio AS (“the Third Payment”). The value of each share ofSeries D Preferred Stock issued in connection with the Third Payment wouldhave equaled the average of the closing price of our common stock as reportedon the American Stock Exchange during the 30 day trading period immediatelypreceding the Third Payment date.

Underthe purchase method of accounting, the total consideration as shown in thetable below was allocated to Inovio AS’ tangible and intangible assets andliabilities based on their estimated fair values as of the date of thecompletion of the Acquisition. The total consideration was as follows:

| Fair value of  Series D Preferred Stock issued |   | $         | 7,904,494  |   |
|-----------------------------------------------------|--------|-----------|------------|--------|
| Cash                                                |   | 3,000,000 |       |
| Transaction costs                                   |   | 121,517   |       |
| Total consideration                                 |   | $         | 11,026,011 |   |

 

Theallocation of the above purchase price is as follows:

| Fair value of net  tangible assets acquired and liabilities assumed |   | $          | 487,417    |   |
|---------------------------------------------------------------------|--------|------------|------------|--------|
| Fair value of  identifiable intangible assets acquired              |   | 7,382,000  |       |
| Deferred tax  liabilities                                           |   | (1,134,000 | )          |
| Goodwill                                                            |   | 4,290,594  |       |
| Total purchase price  allocation                                    |   | $          | 11,026,011 |   |

 

Inovio AS’ results of operations for the period fromthe date of acquisition (January 25, 2005) through December 31, 2005,were included in our consolidated statement of operations for the year ended December 31,2005. Identifiable acquired intangible assets include in-process research anddevelopment of 

F-26

----

**INOVIO BIOMEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

$3,332,000, and anintangible asset related to acquired contracts and intellectual property ofapproximately $4,050,000. The $3,332,000 assigned to acquired in-processresearch and development was recorded as an expense in the consolidatedstatement of operations for the year ended December 31, 2005.

Thefollowing unaudited pro forma financial information combines the results ofoperations of Inovio Biomedical Corporation and Inovio AS assuming theAcquisition was consummated on January 1, 2004. The pro forma results arenot necessarily indicative of what would have occurred if the Acquisition hadbeen in effect for the periods presented. In addition, they are not intended tobe a projection of future results and do not reflect any synergies that mightbe achieved from combined operations.

| ** **                                              | ** ** | **Year Ended December 31,** | ** **  |
|---------------------------------------------------------|------------|-----------------------------|-------------|
| ** **                                              | ** ** | **2006**                    | ** **  | **2005** | ** ** | **2004(1)** | ** ** |
| Revenue                                                 |       | $                           | 3,468,178   |   | $ | 5,467,253 |   | $ | 1,429,981 |   |
| Net loss  attributable to common stockholders           |       | $                           | (14,484,788 | ) | $ | (23,331,206 | ) | $ | (16,269,252 | ) |
| Net loss per share  attributable to common stockholders |       | $                           | (0.46       | ) | $ | (1.23 | ) | $ | (0.83 | ) |

----

(1)Includes the effect of the$3,332,000 charge for acquired in-process research and development.

**16. QuarterlyFinancial Information (Unaudited)**

Thefollowing unaudited quarterly financial information reflects all normalrecurring adjustments, which are, in the opinion of management, necessary for afair statement of the results of the interim periods. The four quarters for pershare figures may not add for the year because of the different number ofshares outstanding during the year. Summarized unaudited quarterly data for theyears ended December 31, 2006 and 2005, are as follows:

| ** **                                                       | ** ** | **Quarter Ended  December 31,  2006** | ** ** | **Quarter Ended  September 30,  2006** | ** ** | **Quarter Ended  June 30,  2006** | ** ** | **Quarter Ended  March 31,  2006** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------------------|------------|
| Revenue                                                          |       |                                            | $          | 1,531,666                                        |       |                                        |       | $                                            | 575,829    |   |   |   | $ | 662,690 |   |   |   | $ | 697,993 |   |   |
| Net loss                                                         |       |                                            | (3,387,613 | )                                                |       |                                        | (3,408,881 | )                                            |       |   | (3,048,770 | ) |   |   | (2,633,860 | ) |   |
| Imputed and  declared dividends on preferred stock               |       |                                            | (1,867,170 | )                                                |       |                                        | (31,706    | )                                            |       |   | (34,423 | ) |   |   | (72,365 | ) |   |
| Net loss  attributable to common stockholders                    |       |                                            | (5,254,783 | )                                                |       |                                        | (3,440,587 | )                                            |       |   | (3,083,193 | ) |   |   | (2,706,225 | ) |   |
| Amounts per common  share—basic and diluted:                |       |                                            |       |                                             |       |                                        |       |                                         |       |   |   |   |   |   |   |   |   |
| Net loss                                                         |       |                                            | $          | (0.10                                            | )          |                                        |       | $                                            | (0.11      | ) |   |   | $ | (0.10 | ) |   |   | $ | (0.09 | ) |   |
| Imputed and  declared dividends on preferred stock               |       |                                            | (0.05      | )                                                |       |                                        | (0.00      | )                                            |       |   | (0.00 | ) |   |   | (0.00 | ) |   |
| Net loss  attributable to common stockholders                    |       |                                            | $          | (0.15                                            | )          |                                        |       | $                                            | (0.11      | ) |   |   | $ | (0.10 | ) |   |   | $ | (0.09 | ) |   |
| Weighted average  number of common shares—basic and diluted |       |                                            | 34,902,998 |                                             |       |                                        | 30,902,644 |                                         |       |   | 30,568,369 |   |   |   | 29,621,372 |   |   |

 

F-27

----

**INOVIO BIOMEDICAL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

 

| ** **                                                       | ** ** | **Quarter Ended  December 31,  2005** | ** ** | **Quarter Ended  September 30,  2005** | ** ** | **Quarter Ended  June 30,  2005** | ** ** | **Quarter Ended  March 31,  2005** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------------------|------------|
| Revenue                                                          |       | $                                               | 829,236    |                                             |       | $                                           | 724,480    |                                         |       |   | $ | 2,951,616 |   |   |   | $ | 961,921 |   |   |
| Net loss                                                         |       | (3,035,249                                      | )          |                                             | (2,990,799 | )                                           |       |                                         | (2,131,005 | ) |   |   | (7,139,799 | ) |   |
| Imputed and  declared dividends on preferred stock               |       | (8,523,003                                      | )          |                                             | (199,648   | )                                           |       |                                         | (197,628   | ) |   |   | (2,145,491 | ) |   |
| Net loss attributable  to common stockholders                    |       | (11,558,252                                     | )          |                                             | (3,190,447 | )                                           |       |                                         | (2,328,633 | ) |   |   | (9,285,290 | ) |   |
| Amounts per common  share—basic and diluted:                |       |                                            |       |                                             |       |                                        |       |                                         |       |   |   |   |   |   |   |
| Net loss                                                         |       | $                                               | (0.16      | )                                                |       | $                                           | (0.16      | )                                            |       |   | $ | (0.11 | ) |   |   | $ | (0.38 | ) |   |
| Imputed and  declared dividends on preferred stock               |       | (0.44                                           | )          |                                             | (0.01      | )                                           |       |                                         | (0.01      | ) |   |   | (0.12 | ) |   |
| Net loss  attributable to common stockholders                    |       | $                                               | (0.60      | )                                                |       | $                                           | (0.17      | )                                            |       |   | $ | (0.12 | ) |   |   | $ | (0.50 | ) |   |
| Weighted average number  of common shares—basic and diluted |       | 19,293,918                                      |       |                                             | 19,083,983 |                                        |       |                                         | 19,022,474 |   |   |   | 18,628,245 |   |   |

 

The net loss for the quarter ended March 31, 2005includes the recorded in-process research and development expense of $3,332,000related to the Inovio AS acquisition (see Note 15).

F-28

----