**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-K**

| x          |   | **ANNUAL REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                               |
|------------|--------|-----------------------------------------------------------------------------------------------------------------------------------|
| ** ** |   | **FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005**                                                                                   |
| ** ** |   | **OR**                                                                                                                            |
| o          |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                           |
| ** ** |   | **FOR THE TRANSITION PERIOD  FROM                 TO** |

 

**COMMISSIONFILE NO. 001-14888**

**INOVIO BIOMEDICAL CORPORATION**

(EXACT NAME OF REGISTRANTAS SPECIFIED IN ITS CHARTER)

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

REGISTRANT’S TELEPHONENUMBER, 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 REGISTEREDPURSUANT TO SECTION 12(G) OF THE 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

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

| Large accelerated filer   o |   | Accelerated  filer   x |   | Non-accelerated  filer   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, 2005was approximately $59,226,062 based on $3.11, the closing price on that date ofthe Registrant’s Common Stock on the American Stock Exchange.

Thenumber of shares outstanding of the Registrant’s Common Stock, $0.001 parvalue, was 29,699,739 as of March 9, 2006.

**DOCUMENTS INCORPORATED BYREFERENCE**

Wehave incorporated by reference into Part III of this Annual Reportportions of our proxy statement for the 2006 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.

 

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**TABLE OF CONTENTS**

| PART I                                                                                                               |   | 2   |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|-----|--------|
| ITEM 1. BUSINESS                                                                                                          |   | 2   |   |
| ITEM 1A. RISK FACTORS                                                                                                     |   | 28  |   |
| ITEM 1B. UNRESOLVED STAFF COMMENTS                                                                                        |   | 44  |   |
| ITEM 2. PROPERTIES                                                                                                        |   | 44  |   |
| ITEM 3. LEGAL PROCEEDINGS                                                                                                 |   | 44  |   |
| ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY  HOLDERS                                                              |   | 44  |   |
| PART II                                                                                                              |   | 44  |   |
| ITEM 5. MARKET FOR COMPANY’S COMMON EQUITY, RELATED  STOCKHOLDER MATTERS AND ISSUER REPURCHASES OF EQUITY SECURITIES |   | 44  |   |
| ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA                                                                              |   | 47  |   |
| ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS                       |   | 48  |   |
| ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES  ABOUT MARKET RISK                                                      |   | 61  |   |
| ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                                       |   | 61  |   |
| ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS  ON ACCOUNTING AND FINANCIAL DISCLOSURE                             |   | 61  |   |
| ITEM 9A. CONTROLS AND PROCEDURES                                                                                          |   | 61  |   |
| ITEM  9B. OTHER INFORMATION                                                                                               |   | 64  |   |
| PART III                                                                                                             |   | 64  |   |
| ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE  COMPANY                                                                 |   | 64  |   |
| ITEM 11. EXECUTIVE COMPENSATION                                                                                           |   | 64  |   |
| ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL  OWNERS AND MANAGEMENT                                                  |   | 64  |   |
| ITEM 13. CERTAIN RELATIONSHIPS AND RELATED  TRANSACTIONS                                                                  |   | 64  |   |
| ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                           |   | 64  |   |
| PART IV                                                                                                              |   | 65  |   |
| ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                                       |   | 65  |   |
| SIGNATURES                                                                                                                |   | 70  |   |
| CONSOLIDATED FINANCIAL STATEMENTS                                                                                         |   | F-1 |   |

 

THIS ANNUAL REPORT ON FORM 10-KCONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.SUCH STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, STATEMENTS CONTAINING THEWORDS “BELIEVES,” “ANTICIPATES,” “EXPECTS,” “ESTIMATES” AND WORDS OF SIMILARMEANING. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM ANY FORWARD-LOOKINGSTATEMENTS, WHICH REFLECT MANAGEMENT’S OPINIONS ONLY AS OF THE DATE OF THISREPORT, AS A RESULT OF SUCH RISKS AND UNCERTAINTIES. WE UNDERTAKE NO OBLIGATIONTO REVISE OR PUBLICLY 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 DISCUSSED ELSEWHEREIN THIS ANNUAL REPORT AND IN OTHER DOCUMENTS WE FILE FROM TIME TO TIME WITH THESECURITIES AND EXCHANGE COMMISSION, INCLUDING OUR QUARTERLY REPORTS ON FORM 10-Q.READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKINGSTATEMENTS.

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**PART I**

**ITEM 1. BUSINESS**

**OVERVIEW**

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 executive offices are located at 11494Sorrento Valley Road, San Diego, California 92121-1318, and our telephonenumber is (858) 597-6006. Our website address is www.inovio.com. EffectiveApril 4, 2005, our American Stock Exchange ticker symbol changed from “GEB” to“INO.”

We are a San Diego-based biomedical companywhose technology platform is based on medical devices that use electroporationtherapy to enhance the delivery of drugs and genes into cells. We aredeveloping and seeking to commercialize medical therapies to address a numberof diseases with critical unmet treatment needs using electroporation therapy.Our Selective Electrochemical Tumor Ablation (“SECTA”) therapy is in Phase IIIclinical trials, consisting of sites in the United States and Europe for thetreatment of recurrent head and neck cancer. In addition, we are currently conductingpre-marketing studies to support the commercialization of the SECTA system inEurope. Our system, which uses a generator together with disposable needleapplicators, delivers electrical pulses to tumors injected with the genericdrug Bleomycin. The distinctive feature of the system, we believe, 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. Since Inovio intends todemonstrate these attributes in the current clinical studies, the statements asto the benefits of SECTA are prospective. Prior to commercial sales of theSECTA system in the European Union (“EU”), we are required to CE Mark thesystem. The CE Mark is an international symbol of quality and compliance. Thecompletion of the European pre-marketing studies in 2006 is required prior tothe commercial launch of the SECTA system in Europe and will represent animportant milestone for us.

The primary front line treatment of solid tumorsinvolves surgical resection and/or radiation to debulk and control tumor growthprior to initiating systemic therapy with chemotherapeutic agents. Because ofthe concern of microscopic disease in the tissue surrounding a tumor and thatit is often difficult or impossible for surgeons to determine the border, ormargins, between healthy and diseased tissue, surgeons will often remove, orresect an area outside of the obvious tumor mass to ensure that they haveexcised all of the cancerous tissue. This can result in the loss of functionand appearance of the surrounding tissues and organs, reducing the patient’squality of life. Examples include the loss of speech from resection of tumorson the tongue or larynx or loss of erectile function from resection of theprostate. Recent advances in non-surgical forms of tumor ablation, such ascryoablation, microwave and high frequency radio ablation therapy, fail to meetthe clinical need to preserve normal healthy tissue. Given the desire forimproved outcomes in the surgical resection of a large number of solid tumorssuch as those of the head and neck, skin, pancreas, breast and prostate, webelieve that there will be significant demand for our technology from patientsand surgical oncologists.

As part of our MedPulser® product line, we have alsobeen developing devices for the delivery of DNA for vaccinations and genetherapy. To our knowledge, we were the first company to initiate a clinicalstudy involving the use of electroporation to deliver therapeutic genes inhuman patients. This was done in collaboration with investigators at theMoffitt Regional 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 cytokines in an attempt tostimulate immunity 

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against the patient’stumor. In 2004, we also extended our license with Vical, Inc.(NASDAQ:VICL) to include a worldwide exclusive license for the use ofelectroporation together with Vical’s “naked” DNA technology for theirdevelopment of an HIV DNA vaccine. We also executed a major licensing deal withmilestone and royalty payments with Merck & Co., Inc. (NYSE:MRK)for the development of proprietary DNA vaccines for cancer and infectiousdisease using electroporation. In addition, in January 2005, we acquiredInovio AS, a Norwegian company, to expand our patent portfolio in the area ofintramuscular electroporation. The Inovio AS acquisition included collaborationwith the University of Southampton, UK on a Phase I clinical study for theelectroporation of a DNA vaccine for prostate carcinoma.   As a result, our DNA electroporation deliverytechnology is currently being evaluated in four independent Phase I clinicaltrials together with these partners (Moffitt, Vical, Merck and Southampton).Most recently we executed a collaborative commercialization agreement withTripep AB (Stockholm:TPEP.ST) to co-develop an HCV therapeutic vaccine, whichis likely to result in another Phase I clinical trial this year.

We believe that our compelling asset base ofintellectual property and scientific and engineering accomplishments, combinedwith our clinical results to date, position us as a leader in electroporationbased electrochemical ablation of solid tumors and DNA delivery.

Inovio maintains thatattempts to pioneer new therapies based on DNA have been hampered by the sideeffects associated with the use of viral vectors, genetically engineeredviruses used as carriers or vectors to deliver DNA to the cell, for DNAdelivery. In addition to safety issues, viral vectors are difficult andexpensive to manufacture. Because electroporation has proven efficient and safein animal experiments, we have been developing MedPulser® DNA Delivery Systemsfor different target tissues. By engineering different applicators and choosingappropriate electroporation parameters, we believe that we can deliverclinically significant DNA to the muscle, tumor tissue, skin or vasculature.This should facilitate attempts to use DNA for therapies ranging fromvaccination to gene therapy of single or multiple gene defects, includingcancer and vascular diseases.

**AVAILABLE INFORMATION**

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*.

**RECENT DEVELOPMENTS**

In January 2006, Inovio signed a collaborativeagreement with Tripep AB to co-develop a therapeutic HCV DNA vaccine usingelectroporation. Under the terms of this agreement, Inovio has pledged lessthan $20,000 in electroporation equipment toward the Phase I study of theproprietary Tripep vaccine in exchange for a minimum of 33% of the licensingrevenues or commercial income that might be derived from the vaccine. Under theterms of the agreement, Tripep will only commercialize theelectroporation-based vaccine with Inovio equipment. The initial Phase I clinicalstudy was designed to determine the safety of the DNA vaccine in normal healthyvolunteers. If Inovio decides not to continue to support the co-development,the Company will retain a minimum profit share of sub-licensing fees orcommercial revenues going forward.

In January 2006, we announced that we have beengranted two new U.S. patents relating to the use of electroporation to deliveruseful therapeutic agents in humans. The first patent (Patent No. 6,958,060)includes claims for in vivo electroporation of muscle tissue. We believe thatthis patent enhances the 

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intellectual property for *in vivo* applications of electroporation and expands thecoverage of our primary patents directed at basic electroporation methodologies.This is important to our multiple strategic partners. The second patent (PatentNo. 6,972,013) includes methods claims for the use of electroporation todeliver DNA and other nucleic acids into skin for the purpose of DNAvaccination and gene therapy. We believe DNA electroporation of the skinexpands the delivery options available in the development of next generationDNA vaccines and gene therapeutics. Partnerships in this area are currentlybeing pursued.

On December 30, 2005, we completed a privateplacement of an aggregate of approximately $15,795,080 in gross cash proceedsthrough the sale of our common stock to institutional and accredited investorsthat included 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 (including $2,430,000 due from one of the investors as part of aprevious funding commitment made, and promissory note delivered, in connectionwith the January 2005 private financing discussed below); (2) anaggregate of 734 shares of our outstanding Series A, B and C CumulativeConvertible Preferred Stock; and (3) 1,142,593 shares of our outstandingcommon stock.  The common stock issued waspriced at $2.40 per share, which represented a premium to the closing price on December 15,2005. In addition, we issued to the investors five-year warrants to purchase35% of the number of shares of common stock they acquired in the offering at anexercise price of approximately $2.93 per share, a 25% premium to the closingprice on December 15, 2005. As a result of the use by existing holders ofour Preferred Stock and Common Stock to acquire our shares and warrants in thisprivate placement, we recorded a non-cash imputed dividend charge of $8,329,112in our consolidated statement of operations for the year ended December 31,2005. This imputed dividend charge was calculated using guidance contained inEmerging Issues Task Force (“EITF”) Issue No. 00-27, Application ofIssue No. 98-5 to Certain Convertible Instruments.

In October 2005, we announced the initiation of aPhase I clinical trial to treat locally recurrent cancer after a mastectomy orpartial mastectomy using our Selective Electrochemical Tumor Ablation, orSECTA, therapy. This study is designed to demonstrate the safety of our SECTAtherapy in controlling metastatic breast cancer lesions that recur on the chestwall. This is potentially a significant consequence of breast conservingtherapy in which the majority of woman have positive margins, requireadditional resection and experience cancer recurrence with chest wall lesions. SECTAcould potentially meet this clinical need if proven successful in destroyingbreast cancer lesions and thus provide important quality of life benefits tobreast cancer patients. This FDA-approved study is a multi-center, open label,single treatment arm trial and may enroll up to 24 patients with locallyrecurrent or metastatic in-breast carcinoma after partial mastectomy(lumpectomy) or cutaneous or sub-cutaneous recurrent or metastatic carcinoma ofthe breast or chest wall following mastectomy. The primary endpoint of thisstudy is an assessment of the safety profile of Inovio’s electroporation-basedSECTA therapy in conjunction with Bleomycin injected into a lesion. Secondaryendpoints include an assessment of histopathology and objective tumor responsethrough 24 weeks. We plan to initiate a Phase II clinical trial if the resultsfrom the Phase I study are positive.

In October 2005, we announced the granting of anew patent for transdermal applications (i.e. applications to the skin) of ourtechnology. This patent claims an apparatus that uses electroporation todeliver a therapeutic agent to and through the skin for medical applications,such as delivering drugs or agents for cosmetic purposes. This patent expandsInovio’s protected intellectual property to a handheld electroporation devicethat can be battery powered and offers a variety of electrode configurations.

In September 2005, we announced the award ofapproximately $1 million by the United States Department of Defense for thedevelopment of our gene delivery electroporation technology for application tovaccinations against infectious diseases, including potential bioterrorismagents. The United 

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States Congressappropriated the funding in the Defense Appropriations Bill for 2005. Theappropriation is a continuation of the initial United States Army grantreceived by Inovio AS in Norway in 2004. The Inovio gene delivery system is aproprietary process for gene-based immunization. It utilizes intramuscularelectroporation of DNA, encoding selected antigens to induce immune responses.Compared to conventional vaccines, DNA vaccines delivered using electroporationpotentially afford several important advantages in enhancing the time of onsetand the level of immunity generated. This may be critical in attempting toaddress threats posed by pandemics or bioterrorism. Numerous genes can beisolated from potential infectious organisms, sequenced, and then synthesizedfor vaccination of the population or military in order to induce a protectiveimmune response. We expect to realize the majority of the awarded funds fromthis grant beginning in 2006.

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, or pDNA, encoding IL-2 followed byelectroporation, the local application of electrical pulses designed to enhancethe uptake of the pDNA into tumor cells. The pDNA is designed to cause cellswithin the tumor to produce high levels of IL-2 protein locally andthereby stimulate the immune system to attack the tumor without the systemictoxicities associated with injected IL-2. The protocol for this trialcontemplates that treatments will be administered once a week in two four-weekcycles, with each cycle followed by a four-week observation period. The initialdose-escalation phase of the trial will enroll up to three patients each atdoses of 0.5 mg, 1.5 mg and 5 mg delivered to a single tumor lesion perpatient, with a final group receiving 5 mg in each of three tumor lesions perpatient. Up to 17 additional patients will be treated at the highest tolerateddose. The primary endpoint in the trial is safety. Secondary efficacy endpointswill also be monitored.

In July 2005, we received a $2 million milestonepayment from Merck & Co., Inc. (“Merck”) resulting from theachievement of a milestone by Merck for a plasmid-based vaccine using Inovio’sMedPulser® DNA Delivery System. The milestone relates to Inovio’s license andcollaboration agreement with Merck that was initiated in May 2004 for thedevelopment of certain DNA vaccines. Further development of the product byMerck may lead to additional milestone payments and royalties to Inovio. Wereceived this milestone payment for our contribution to the collaboration.Under the agreement, Merck will fund all of the clinical development costs.

In May 2005, Merck exercised an option for anon-exclusive license for an additional antigen to be used with Inovio’sMedPulser® DNA Delivery System, which is being developed for use with certainof Merck’s DNA vaccine research programs. This option was also created underour 2004 license and research collaboration agreement with Merck and brings thetotal number of antigens licensed by Merck to three. A limited number ofadditional options for further target antigens remain available to Merck underour 2004 license and research collaboration agreement. We received the optionfee of $500,000, which is characterized as a license payment on our financialstatements, in June of 2005. This payment, along with other licensepayments received from Merck in 2004 and 2005, will be amortized over theremaining minimum term of our agreement with Merck. Under the terms of ourlicensing agreement, Merck may elect to exercise an additional three targetantigens which would lead to the payment of additional option fees to Inovio.

In April 2005, we announced the initiation of aPhase I/II clinical trial undertaken in collaboration with the University ofSouthampton of our DNA delivery technology. This trial has been approved by theMedicines and Healthcare products Regulatory Agency (MHRA) of the UnitedKingdom and will investigate our DNA delivery technology to deliver atherapeutic plasmid-based DNA vaccine to skeletal muscles with the aim oftreating recurrent prostate cancer. The trial is sponsored and led by theUniversity 

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of Southampton toinvestigate whether its DNA vaccine 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 oralternatively using our proprietary DNA delivery system. This technology, whichhas been shown in preclinical studies to induce antigen production andgeneration of an immune response against the tumor antigen, uses electroporationto enhance the entry and uptake of plasmid DNA into the muscle cells.

In March 2005, we announced the granting of apatent for a vascular application of our technology, in particular for theinvention that brief electrical pulses of relatively high field strengthapplied to blood vessels cause a widening of the inner diameter, or lumen, ofthe treated vessels. This allows for enhanced blood flow while lowering localblood pressure. We believe this procedure may have the potential to be appliedbeneficially to patients who suffer from partially or totally blocked arteriesor veins, either by administering electrical field pulses by themselves or inconjunction with angioplasty.

In March 2005, we initiated a Phase I clinicaltrial to treat pancreatic cancer using our SECTA, therapy. The FDA has grantedus orphan designation for this indication. The primary endpoint of this studyis to determine the safety profile of the MedPulser® electroporation therapy inconjunction with intralesionally-injected (i.e. tumor injected) Bleomycin forthe treatment of unresectable (i.e. unable to be removed by surgery) locallyadvanced pancreatic cancer. The secondary endpoints are to assess objectivetumor response, patient pain, and weight loss over 24 weeks following electroporationtherapy. Our aim is to complete enrollment of up to 12 patients by mid-2006.Given the extreme morbidity and mortality associated with pancreatic carcinoma,any treatment that would slow the growth of the tumor would be expected toreduce morbidity and extend survival. If the results, from the Phase I studyare positive, we may elect to initiate a Phase II study in pancreatic cancer tomove closer to the approval of SECTA for this disease.

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**BUSINESS OBJECTIVES**

Going forward, wehave the following business objectives:

1.                Conclude patientenrollment of Phase III recurrent and second primary head and neck cancer studyin the U.S. and EU (see “Oncology—Overview”);

2.                Conclude theEuropean pre-marketing clinical study of new and recurrent primary squamouscell carcinoma head & neck (SCCHN) cancers to support thecommercialization of our SECTA therapy using our MedPulser® electroporationsystem in the EU (see “Oncology—Overview”);

3.                Conclude the Europeanpre-marketing clinical study of primary and recurrent skin cancers to supportcommercialization of our SECTA therapy using our MedPulser® electroporationsystem (see “Oncology—Overview”);

4.                Conclude patientenrollment in the Phase I pancreas cancer study in the U.S. and EU (see “Oncology—Overview”);

5.                Conclude patientenrollment in the Phase I breast cancer study to treat locally recurrent cancerafter a mastectomy or partial mastectomy in the U.S. and EU (see “Oncology—Overview”);

6.                Obtain codes forreimbursement  our SECTA therapy andearly sales of the MedPulser® electroporation therapy system for the treatmentof head and neck or cutaneous cancers in the EU (see “Oncology—Overview”);

7.                Enter into furtherindustry relationships for the use of our electroporation technology in thedelivery of specific therapeutic genes (see “Gene Therapy—Overview”);

8.                Initiateadditional Phase I human clinical studies involving the use of electroporationwith DNA, most likely in the areas of infectious disease and cancer (see “GeneTherapy—Overview”); and

9.                Concludea strategic global or regional license (i.e. European) with a partner for themarketing rights to the SECTA therapy for treating solid tumors.

**DRUG AND GENE DELIVERY**

We develop equipmentdesigned to enable the use of electroporation to achieve efficient andcost-effective delivery into patients of therapeutic drugs or genes targeting avariety of illnesses. Although there are many diseases where improved drug orgene delivery is important, we believe that our greatest opportunities lie inapplying electroporation to the areas of oncology and gene therapy (includingDNA vaccines), where we are focusing our major efforts.

**ONCOLOGY**

**OVERVIEW**

In the area of oncology, we completed Phase IIclinical trials in the United States using our MedPulser® electroporationtherapy system to deliver Bleomycin for the treatment of late stage head andneck cancer and have since initiated Phase III clinical trials. When usingelectroporation to deliver Bleomycin for treatment of cancer we refer to thistherapy as Selective Electrochemical Tumor Ablation (SECTA). Bleomycin is aneffective generic chemotherapeutic agent that induces single and double strandDNA breaks in cancer cells. However, because of its molecular size andelectrical charge, it is difficult to achieve a therapeutic dose by systemicadministration due in part to poor uptake across the tumor cell membrane. Wehave chosen Bleomycin as the chemotherapeutic agent for the treatment of solidtumors for three important reasons. First, Bleomycin has been approved by theFDA, the Health Protection Branch in Canada and across the EU, and has beenused as a chemotherapeutic agent in North America 

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for the treatment ofcertain cancers for more than 25 years. Second, Bleomycin is believed tohave unmatched selectivity and efficacy in killing cancerous cells, whendelivered by electroporation, enhancing its cytotoxicity nearly 5000 fold overapplication without electroporation. Third, the local injection of Bleomycin atthe concentrations recommended for electroporation do not appear to harm normalhealthy tissue. We believe these factors contribute to the apparent tissuepreservation feature of SECTA that may provide differentiating attributes forInovio’s tumor ablation system over that of its competitors.

We initially made head and neck (“H&N”) andcutaneous cancers our highest priority. A Phase II trial using ourelectroporation technology and Bleomycin to treat late stage recurrent H&Nsquamous cell carcinoma produced a 25% complete response and 57% objectiveresponse, which we believe are excellent results for this disease stage. In asubsequent European early stage oral cavity squamous cell carcinoma trial, 16out of 20 patients (80%) showed no viable cancer cells after four weeks, whichwe believe demonstrates SECTA’s potential as a primary treatment for H&Ncancer. In a cutaneous cancer trial, 130 of 146 tumors (89%) demonstrated acomplete response. Results to date suggest SECTA, using significantly smallerchemotherapeutic doses of Bleomycin than in conventional chemotherapy, matchesor exceeds tumor response and survival results of current traditionaltherapies, i.e. primarily surgery, while preserving healthy tissue, minimizingsystemic drug exposure and undesirable side effects, affording improved qualityof life outcomes and potentially lower treatment costs. It is critical thatSECTA may preserve a patient’s appearance and ability to speak, smell, eat, ortaste, which may uniquely enhance the quality of life of patients sufferingfrom the harsh side effects of cancer and its associated standards of care suchas surgery or radiation.

We have completed a number of other clinical studiesusing the SECTA system to deliver Bleomycin for the treatment of liver andpancreatic cancer, basal cell carcinoma and Kaposi’s sarcoma. The results fromthe clinical studies we carried out have allowed us to achieve CE Markcertification qualifying the MedPulser® electroporation therapy system forcommercial distribution in the European Union. We are continuing to carry outand expand our market seeding clinical studies in the EU using the SECTA systemto deliver Bleomycin for the treatment of skin cancer and both early and latestage head and neck cancer.

In addition to our work inhead and neck cancer, we plan to use the SECTA system to deliver Bleomycin forthe treatment of other cancers. We are currently reviewing a number of othercancer indications in order to assess our competitive advantage for thetreatment of cancers and the size of the market that we might serve.

**PARTNERSHIPS AND COLLABORATIONS**

On September 20,2000, the University of South Florida Research, Inc. (“USF”) granted us anexclusive worldwide license to its rights for certain patents and patentapplications generally related to needle electrodes. We jointly developed theseelectrodes 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 31,2005, no royalty 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. Heller,Jaroszeski, and Gilbert.

**ELECTROPORATIONPRINCIPLE OF OPERATION**

**OVERVIEW**

Most drugs and all genes must enter through a cellmembrane into a cell in order to perform their useful function. However,gaining entry into a cell through the outer cell membrane can be a significantchallenge. In the 1970s it was discovered that the brief application ofhigh-intensity, pulsed electric fields can create temporary and reversible permeability,or pores, in the cell membrane. This pulse-induced 

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permeabilization of thecellular membrane is generally referred to as electroporation. One observableeffect of cell membrane electroporation is less restricted exchange ofmolecules between the cell exterior and interior—the benefit being that it canallow and enhance the uptake of, for example, a biopharmaceutical agentpreviously injected into local tissue. The extent of membrane permeabilizationdepends upon various electrical, physical, chemical, and biological parameters.

The transient, reversible nature of this electricalpermeabilization of membranes is the underlying basis of Inovio’s SelectiveElectrochemical Tumor Ablation (SECTA) therapy. That is, as a component of theSECTA therapy, the MedPulser® electroporation instrument generates electricfields in target tissues to induce electroporation which increases tumor celluptake of molecules such as chemotherapeutic drugs and even large moleculessuch as DNA. Furthermore, most cell types and tissues can be successfullyelectroporated as long as applicators with the appropriate configuration ofneedle electrodes can be used to expose cells and tissues to the electricfield.

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 surrounding healthy tissues bydelivery of fields exceeding a critical maximum value is one key to the effectivenessof the MedPulser® electroporation instrument.

The principle of operationof the MedPulser® electroporation instrument is the creation, within theconfines of a series of conductive needle-electrodes arranged in a six-needlehexagonal array, of a pulsed electric field of sufficient strength to induce atransient increase in the permeability of membranes of the cells enclosedwithin the field. The MedPulser® electroporation instrument supplies a seriesof precisely timed, short duration pulses of a very specific voltage to pairsof the applicator needle-electrodes and automatically sequences these pulsesamong the pairs of opposed needles comprising the needle array. This “sequencing”of pulses assures complete and uniform coverage of the electric field withinthe needle array and consequently complete and uniform electroporation of thecell membranes.

**SELECTIVEELECTROCHEMICAL TUMOR ABLATION THERAPY**SYSTEM

**OVERVIEW**

The Selective Electrochemical Tumor Ablation (SECTA)therapy consists of our MedPulser® electroporation device, which significantlyenhances local cellular uptake of useful biopharmaceuticals, in conjunctionwith a designated chemotherapeutic agent called Bleomycin. SECTA is designed todestroy malignant tissue without harming normal healthy tissue.

The system has two components: (1) a pulsegenerator that creates the electric field; and (2) a sterile, disposableelectrode applicator for single patient use. The applicators presently usedcontain needle electrode arrays that are inserted into the tumor tissue. Theapplicators vary in needle length, needle gauge, electrode needle spacing, tipangle and handle configuration to allow the physician to access a wide range oftumors. New configurations of electrode applicators have been contemplated forfuture development to address future customer requirements.

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 and in doing so may improve patient quality of life and reducetreatment and hospitalization costs.

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**MEDPULSER®ELECTROPORATION INSTRUMENT**

**OVERVIEW**

The MedPulser® electroporation instrument is designedto enable the delivery of controlled electrical pulses to facilitate the uptakeof useful biopharmaceuticals.

The pulse generator is designed for ease of use, suchthat minimal user input is needed to apply the therapy. Based on the size andanatomical location of the tumor to be treated, a physician selects the mostappropriate electrode applicator. The applicator is then connected to the pulsegenerator of the MedPulser® electroporation instrument. The applicator sendsinformation for that particular applicator’s size and shape to the pulsegenerator, which automatically selects the appropriate treatment parameters.Currently, several different electrode applicator configurations are available.The system is designed such that the installed base of the MedPulser®electroporation instrument allows for a wide variety of new electrode applicatorconfigurations. In addition, the system incorporates other features to minimizethe possibility 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 certified by anindependent test laboratory as meeting international electrical safetyrequirements.

In the U.S., the SECTA therapy is currently regulatedas a combination drug-device system. As a result, we will be required to obtainboth drug and device approvals from the FDA. In order to collect the datanecessary to achieve these approvals, we have filed an IND and are conductinghuman clinical trials. Phase I and II clinical trials have successfully beencompleted. We are currently engaged in Phase III clinical trials and aftersuccessful completion we intend to submit a U.S. New Drug Application (“NDA”).We will also submit a device Pre-Market Approval or 510(k) application asappropriate for FDA approval of the device. We are unable, due to thecomplexities of completing Phases I, II, and III clinical trials, toestimate the length of time or cost involved in obtaining approvals from theFDA.

In most of the rest of theworld, we anticipate that the MedPulser® electroporation instrument will beregulated as a device. In the EU, the MedPulser® Electroporation Therapy Systemcomes under Medical Device Directive 93/42/EEC (“MDD”) which means that priorto marketing the MedPulser® Electroporation Therapy System we are required toCE Mark the device. This process includes certification of the quality systemto the requirements of the Directive. We have achieved CE Mark certificationfor the MedPulser® Electroporation Therapy System, which allows us todistribute it in the European community. In many of the EU countries, Bleomycinis approved for intra-tumoral, intra-lesional, local, intramuscularor subcutaneous administration. While the administration of approved drugsoutside the label indication may be at the discretion of the physician andhospital 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 such afiling cannot be reasonably determined at this time.

**MARKET**

We aim to market our SECTAsystem to deliver chemotherapeutic agents, such as Bleomycin, for the treatmentof cancer. We believe that electroporation therapy can address many diseases,but we have focused on oncology’s significant unmet medical needs. There isstill much that scientists do not know about cancer; consequently, there aresignificant unmet needs in its treatment. We have initially targeted thoseindications, such as head and neck cancer, for which current treatments resultin a poor quality of life and high morbidity and mortality rates.

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**TREATMENT OF HEAD AND NECK TUMORS**

The SECTA therapyis easily understood and used by physicians in the operating room or outpatientclinic:

·       Thepatient is given general anesthesia in a hospital operating room setting orconscious sedation in the outpatient clinic.

·       Thephysician selects and connects the sterile applicator appropriate for thenature and location of the tumor.

·       Thedrug is injected into the selected tissue, followed by a brief interval lastingonly a few minutes.

·       Theapplicator needles are then inserted into the tumor.

·       Thephysician activates the electrical pulse using a foot pedal.

·       Theapplicator is reinserted in an overlapping pattern to cover the entire tissuearea requiring treatment.

·       Aftertreatment, the needle array applicator is discarded.

The entire procedure canbe completed within 20 minutes or less and typically needs to be done onlyonce. The dosage of drug used is based on tumor volume and is typically a smallfraction (one-third to as little as one-fiftieth) of the dosage that would beused if injected systemically into the patient’s bloodstream duringchemotherapy. As a result of the lower, locally administered dosage, sideeffects associated with systemic administration have been eliminated. Injury tonormal tissue adjacent to the tumors does not appear significant as normalgranulation accompanies the necrosis of the tumor cells to yield new functionaltissue to replace diseased tissue destroyed by the procedure.

**CLINICAL TRIALS**

**ONCOLOGY**

**Phase III Studies**

We are enrolling patients in our two Phase IIIpivotal studies to evaluate the use of the SECTA system as a treatment forrecurrent and second primary SCCHN. Both trials have sites in North America,the EU and the rest of the world. Both protocols will compare our SECTA therapyto surgery in patients with resectable recurrent or second primary SCCHN. Theprimary endpoint is to demonstrate that patients treated with electroporationtherapy have superior preservation of function (e.g. eating in public, diet,and talking) compared with those who have surgery. Secondary endpoints includelocal tumor control and survival (with results that are non-inferior to resultsachieved by surgical treatment) as well as safety, and pharmacoeconomics.

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 (now referred to as the SECTAtherapy) to treat recurrent squamous cell carcinoma of the head and neck inlate stage patients who had failed conventional therapies such as surgery orchemotherapy. We also obtained IND clearance from the Canadian HealthProtection Branch to initiate the Phase II trials in Canada. TwoPhase II protocols were initiated. The first Phase II study was asingle crossover controlled study evaluating the effectiveness of SECTA withBleomycin to treat tumors that failed an initial Bleomycin-alonetreatment. The second Phase II protocol was a single arm study thatevaluated the effect of EPT with Bleomycin as the only treatment.

Twenty-five patients (37 tumors) were enrolled in thecrossover-controlled study and initially received Bleomycin treatmentalone without electroporation. None of the tumors treated in this manner showeda 

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complete response1 and only one tumor demonstrated a partialclinical response2.Seventeen of these patients subsequently had lesions treated with Bleomycin andEPT. Of the 20 lesions treated, 55% achieved an objective clinical response3. This provided convincingevidence of the enhancing effect of SECTA to ablate tumors with the combinationof Bleomycin and electroporation.

In the open-label Phase II (single arm) study,all patients received full Bleomycin and EPT as their initial treatment. Amongthe 25 patients (31 tumors) treated, 58% achieved an objective clinicalresponse. Interestingly, this second Phase II confirmed the results of thefirst Phase II trial in which patients first received Bleomycin alone and thenwere 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 and EPT for localized primary or recurrent oral cavitysquamous cell carcinoma. Sixteen of 20 patient tumors (80%) had noevidence of cancer cells by histopathology assessment following Bleomycin EPTfour weeks after treatment, which we believe validates the potential of EPT asa primary local treatment for H&N cancer.

Theresults of these H&N cancer studies are provided in the table below.

| ** **                              | ** ** | ** **           | ** ** | ** **                              | ** ** | ** **          | ** ** | **Objective TumorResponse(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             |       |                                    |       |                |       |                                |       |   |   |   |   |   |   |   |   |   |   |
|                                         |            |                      |            |                                         |            |                     |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |

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(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 Studies**

We are currently enrolling patients in our Phase Istudy 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 study is to establish SECTAas a viable alternative to surgery for recurrence and as an alternative tomastectomy (i.e. to preserve breasts). Recurrent breast cancer is oftenresponsive to therapy and patients with local-regional disease including  chest wall recurrences may become long-termsurvivors with appropriate therapy. However, chest wall recurrences areproblematic for the surgical oncologist to remove or for the medical oncologistto effectively treat with systemic chemotherapy. For this reason, there issignificant unmet clinical need for a new approach.

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The primary endpoint of the Phase I breast cancerstudy is to determine the safety profile of the MedPulser® electroporationtherapy in conjunction with intralesionally-injected Bleomycin for thetreatment of cutaneous and subcutaneous metastatic or locally recurrent breastcancer. The secondary endpoints are to verify response by histology and toinitially assess tumor response rates. We aim to complete enrollment of up to12 patients by the third quarter of 2006.

We are currently enrolling patients in our Phase Istudy to treat pancreatic cancer using our SECTA therapy. The FDA has grantedus orphan designation for this indication. The ultimate goal of the Company isto establish SECTA as an important new approach to possibly extend survival butrealistically alleviate and control pain while enhancing patients’ quality oflife.

The primary endpoint of thePhase I pancreas study is to determine the safety profile of the MedPulser®electroporation therapy in conjunction with intralesionally-injected Bleomycinfor the treatment of unresectable or incurable locally advanced pancreaticcancer. The secondary endpoints are to assess objective tumor response, patientpain, and weight loss over 24 weeks following electroporation therapy. Ourelectroporation therapy using Bleomycin has been shown to have anti-tumoractivity against resistant human pancreatic adenocarcinoma cells in previous *in vitro* and *in vivo*studies. We aim to complete enrollment of up to 12 patients by the thirdquarter of 2006. We would anticipate that any tumor regression induced by SECTAmight prolong overall survival with some diminution in pain as well as the needfor pain management, an important quality of life factor for patients withpancreatic carcinoma.

**Pre-Marketing Studies**

We are enrollingpatients in two pre-marketing European clinical studies, one in patients withprimary or recurrent SCCHN as well as a second independent study involvingpatients with primary or recurrent cutaneous or subcutaneous tumors. Bothstudies are consistent with the intended use of the SECTA system and aredesigned to support the commercialization in the EU. Prior clinical trialsestablished the safety and performance of the SECTA system for the treatment ofthese tumors, leading to achieving the CE Mark. The European clinicalstudies will:

·       documentthe clinical and pharmacoeconomic benefits of the SECTA system in supportof  sales with coding and reimbursementwithin 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 in 2007; and

·       generateadditional clinical  data to support orsupplement applications and approvals in North America.

Each study will enroll approximately 80-100patients at about 60 hospitals located in the UK, Germany, Italy, France,Austria, and other western European countries. The studies will evaluate theSECTA system’s pharmacoeconomic impact on the cost of operative andpost-operative care. It will also examine patient quality of life, preservationof organ function (i.e. ability to speak, swallow, and eat in public), andlocal tumor control in the SCCHN study group. These data will help to definethe overall benefits of the SECTA system for the treatment of SCCHN relative tothe standard of care which is often surgery and frequently compromises apatient’s ability to speak or swallow and may be grossly disfiguring. TheEuropean studies differ from the current U.S. Phase III clinical trials,which are controlled two-armed trials for the purpose of collecting clinicaldata to support the filing market applications in the U.S. and are restrictedto the treatment of recurrent SCCHN.

Inlate 1997 and early 1998, we received regulatory approval to initiate clinicaltrials for head and neck cancer, metastatic cancer of the liver, pancreaticcancer, metastatic melanoma and Kaposi’s sarcoma and 

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to initiate an expanded metastatic melanoma study.These trials involved treating multiple lesions with Bleomycin andelectroporation and control lesions with Bleomycin-only on each patient. Theoverall results of the cutaneous cancer studies sponsored by us are provided inthe table below.

| ** ** | ** ** | ** ** | ** ** | **Bleomycin-Electroporation Tumor Response** | ** ** | **Bleomycin-alone Tumor  Response** | ** ** |
|------------|------------|------------|------------|--------------------------------------------------------|------------|------------------------------------------|------------|
| **Study**  | ** ** | ** ** | ** ** | **# Patients**                                    | ** ** | **# Lesions**                       | ** ** | **Objective  Response** | ** ** | **# Lesions** | ** ** | **Objective  Response(1)** | ** ** |
| Melanoma   |       |       | 44         |                                                   |       |                                     | 178        |   |   |   | 141(79 | %) |   |   | 61 |   |   |   | 13(21 | %) |   |
| BCC        |       |       | 25         |                                                   |       |                                     | 64         |   |   |   | 64(100 | %) |   |   | 8 |   |   |   | 1(13 | %) |   |
| KS         |       |       | 5          |                                                   |       |                                     | 13         |   |   |   | 13(100 | %) |   |   | 11 |   |   |   | 6(55 | %) |   |
|            |            |            |            |                                                        |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Objective tumor response includes completeand partial responses to treatment.

The overall average tumor response rate followingelectroporation with Bleomycin to cutaneous and subcutaneous cancer was 86%(ranging from 79% for metastatic melanoma to 100% for basal cell carcinoma (“BCC”)and kaposi’s sarcoma (“KS”)) compared with an overall tumor response rate of25% for Bleomycin-alone treated lesions (ranging from 13% for BCC, 21%for metastatic melanoma to 55% for KS 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 achievedCE Mark certification in March 1999. To date, the SECTA system is CEmarked as an electroporation device indicated for the treatment of head andneck cancer and for cutaneous and subcutaneous cancers with Bleomycin. This allowsus to market our SECTA system within the countries of the European EconomicArea (EEA) which includes all countries of the European Union.

**DNA VACCINE/GENE THERAPY**

Inovio is building a DNAfranchise around the use of its proprietary electroporation technology togetherwith DNA. The flagship of our development efforts involve the licensingagreement with Merck and Vical in which these companies are supporting thedevelopment and registration of the therapies using Inovio devices underlicensing and supply agreements executed with the Company. This strategy ofutilizing development partners distinguishes the DNA franchise from that of theoncology franchise in which Inovio is sponsoring the development efforts. Inthe case of DNA licensing, development programs are only initiated togetherwith corporate partners who will sustain the commercialization activities. Thefollowing describes the clinical studies involving DNA therapies that have beeninitiated under collaborative agreements to further the development of thistechnology application.

**Phase I**

In December 2004, we initiated a Phase Iclinical trial with the H. Lee Moffitt Cancer Center using our MedPulser® DNAElectroporation Therapy System to deliver plasmid DNA to tumors with the aim oftreating malignant melanoma. The trial is sponsored by the H. Lee MoffittCancer Center and will measure the safety of our MedPulser® DNA ElectroporationTherapy System to deliver plasmid DNA into tumor cells to mount an immuneresponse. In this Phase I open-label study, plasmid DNA encoding acytokine is delivered directly to tumors in patients with malignant melanomathrough electroporation using the MedPulser® DNA Electroporation TherapySystem. This technology enables the entry and significant uptake of plasmid DNAinto the tumor cells, ultimately leading to cytokine production. The intent ofthis procedure is to induce an immune response that will eliminate the cancer.

In April 2005, we initiateda UK Medicines and Healthcare products Regulatory Agency (MHRA) approvedPhase I/II clinical trial undertaken in collaboration with the University ofSouthampton. The study uses our electroporation technology to deliver atherapeutic plasmid-based DNA vaccine to skeletal 

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muscles with the aim oftreating recurrent prostate cancer. Our electroporation technology is beingused to deliver a therapeutic plasmid-based DNA vaccine to skeletal muscleswith the aim of treating recurrent prostate cancer. The trial, sponsored andled by the University of Southampton, will investigate whether the DNA vaccine,developed in the laboratory of Professor Freda Stevenson at the University ofSouthampton, can stimulate patients to develop immune responses againstprostate cancer and whether use of our electroporation system enhances thisresponse. In this Phase I/II open-label study, plasmid DNA encoding a prostatetumor antigen is delivered directly to skeletal muscles in patients withrecurrent prostate cancer either by simple injection or using our proprietaryelectroporation technology. This technology uses electroporation to enable theentry and uptake of plasmid DNA into the muscle cells. It has been shown inpreclinical studies to induce antigen production and generation of an immuneresponse against the tumor antigen.

In July 2005, we initiated with VicalIncorporated a Phase I study of an investigational method of deliveringinterleukin-2 (IL-2), a potent immune system stimulant, forpatients with recurrent metastatic melanoma. Intravenous delivery of IL-2protein is approved as a treatment for metastatic melanoma, but frequentlycauses severe systemic toxicities. The novel treatment approach being studiedin this trial involves direct injection into a tumor lesion of plasmid DNA(pDNA) encoding IL-2 followed by electroporation using our MedPulser® DNA Electroporation Therapy System,the local application of electrical pulses designed to enhance the uptake ofthe pDNA into tumor cells. The pDNA is designed to cause cells within the tumorto produce high levels of IL-2 protein locally and stimulate the immunesystem to attack the tumor without the associated systemic toxicities relatedto the administration of recombinant IL-2 intravenously.

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**RESEARCH AND DEVELOPMENT**

We have in the past directed research and developmentactivities to the areas of oncology, gene therapy, vascular therapy,transdermal delivery and dermatology. Currently, our areas of focus areoncology and gene therapy.

The following tablesummarizes our programs in the area of oncology, the primary indications foreach product and the current status of development. “Pre-Clinical Studies”means the program is at the stage where results from animal studies have beenobtained. “Human Clinical Studies” means that human data is available. In March 1999,we achieved CE Mark for the EU. This certification allows us to market ourSECTA system within the countries of the EU. Commercial launch is dependent onhaving compelling data from the ongoing market seeding trials andpharmacoeconomic data with which to obtain national reimbursement or hospitalpurchasing under approved codes.

**ClinicalDevelopment Status**

| ** **                                                                                               | ** ** | **Pre-Clinical  Studies** | ** ** | **Human Clinical Studies*** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------------------|------------|
| **Progress in Pre-Clinical Development  and Clinical Trials Applications** | ** ** | ** **                | ** ** | **In Vitro**                     | ** ** | **In Vivo** | ** ** | **Phase I** | ** ** | **Phase  II** | ** ** | **Phase  III/IV ***** | ** ** |
| Therapeutic Drug  Delivery                                                                               |       |                      |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Oncology**                                                                                             |       |                      |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Head & Neck                                                                                     | ** ** | ** **                | **P**      |                                  | ** ** | ** ** | **P** |   | ** ** | **P** | ** ** | ** ** | **P** |   | ** ** | ** ** | IP |   |   |
| Cutaneous BCC & SCC                                                                             | ** ** | ** **                | **P**      |                                  | ** ** | ** ** | **P** |   | ** ** | **P** | ** ** | ** ** | **P** |   | ** ** | ** ** | IP |   |   |
| Melanoma                                                                                                 | ** ** | ** **                | **P**      |                                  | ** ** | ** ** | **P** |   | ** ** | **P** | ** ** | ** ** | **P** |   | ** ** | ** ** | IP |   |   |
| Kaposi’s Sarcoma                                                                                    | ** ** | ** **                | **P**      |                                  | ** ** | ** ** | **P** |   | ** ** | **P** |   |   |   |   |   |   |   |   |   |
| Pancreas                                                                                                 | ** ** | ** **                | **P**      |                                  | ** ** | ** ** | **P** |   | ** ** | IP |   |   |   |   |   |   |   |   |   |
| Liver                                                                                                    | ** ** | ** **                | **P**      |                                  | ** ** | ** ** | **P** |   | ** ** | **P** | ** ** |   |   |   |   |   |   |   |   |
| Breast                                                                                                   | ** ** | ** **                | **P**      |                                  | ** ** | ** ** | **P** |   | ** ** | IP |   |   |   |   |   |   |   |   |   |
| Prostate                                                                                                 | ** ** | ** **                | **P**      |                                  | ** ** | ** ** | **P** |   |   |   |   |   |   |   |   |   |   |   |   |
| Hepatocellular Carcinoma                                                                                 | ** ** | ** **                | **P**      |                                  | ** ** | ** ** | **P** |   |   |   |   |   |   |   |   |   |   |   |   |
| Lewis Lung Carcinoma                                                                                     | ** ** | ** **                | **P**      |                                  | ** ** | ** ** | **P** |   |   |   |   |   |   |   |   |   |   |   |   |
| Non-Small Cell Lung                                                                                      | ** ** | ** **                | **P**      |                                  | ** ** | ** ** | **P** |   |   |   |   |   |   |   |   |   |   |   |   |
| Fibrosarcoma                                                                                             | ** ** | ** **                | **P**      |                                  | ** ** | ** ** | **P** |   |   |   |   |   |   |   |   |   |   |   |   |
| Glioma                                                                                                   | ** ** | ** **                | **P**      |                                  | ** ** | ** ** | **P** |   |   |   |   |   |   |   |   |   |   |   |   |
| Ovarian                                                                                                  | ** ** | ** **                | **P**      |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Dermatology**                                                                                          |       |                      |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Vitamin C                                                                                                | ** ** | ** **                | **P**      |                                  | ** ** | ** ** | **P** |   |   |   |   |   |   |   |   |   |   |   |   |
| Warts                                                                                                    | ** ** | ** **                | **P**      |                                  | ** ** | ** ** | **P** |   |   |   |   |   |   |   |   |   |   |   |   |
| **Vascular**                                                                                             | ** ** | ** **                | **P**      |                                  | ** ** | ** ** | **P** |   |   |   |   |   |   |   |   |   |   |   |   |
| **DNA  Delivery**                                                                                        |       |                      |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| DNA Vaccines                                                                                             | ** ** | ** **                | **P**      |                                  | ** ** | ** ** | **P** |   |   | IP**** |   |   |   |   |   |   |   |   |   |
| Gene Therapy                                                                                             | ** ** | ** **                | **P**      |                                  | ** ** | ** ** | **P** |   | ** ** | **P**** |   |   |   |   |   |   |   |   |   |
| Gene  Immunotherapy                                                                                      | ** ** | ** **                | **P**      |                                  | ** ** | ** ** | **P** |   |   | IP***** |   |   |   |   |   |   |   |   |   |
|                                                                                                          |            |                           |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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**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

**             Ex-vivo Phase Istudy

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***      Phase IV trial in EUonly

****            2Phase I trials with Cytokine DNA with Moffitt Cancer Center and Vical

*****     2Phase I trials for DNA Vaccines with Merck and the University of Southampton

Our research anddevelopment efforts in the field of oncology focus on preparing for a strategicalliance with a major partner in oncology that will market, sell and distributethe SECTA system in the major territories (e.g. North America, Europe andAsia). The Company expects that it would receive upfront milestones and royaltypayments on the sales of the devices by the commercial partner. It is possiblethat Inovio might manufacture and supply devices to the partner. If it were todo so, then Inovio could expect to derive additional income from the sale ofthe devices to the partner at an agreed upon “transfer price” at which theCompany would recover the cost of goods for manufacturing the product andrelated overheads as well as receive a negotiated profit. Preparations for astrategic alliance include the organization and summarizing of engineering,pre-clinical and clinical data and records to facilitate prospective partnersin carrying out the appropriate due diligence of the opportunity. The expansionof the SECTA system to additional indications is intended to involvepre-clinical and engineering work regarding the treatment of additional typesof cancers, and the design and manufacture of new types of electrodeapplicators, such as a specialized applicator for treating laryngeal cancer. Weintend to develop second-generation electroporation devices for cancertreatment including devices that minimize muscle contractions and a devicespecifically targeted for treating deep-seated tumors, such as prostate tumors.Finally, we intend to continue to strengthen our intellectual property positionin the oncology area by pursuing patent protection of any new inventions. Theseinvestments should add significant value to the opportunity and allow forpartnering at a high valuation for the Company.

**COMPETITION**

***Current Treatment Practices***

*Surgery*

In 90% of cases, theprimary treatment for localized and operable tumors or lesions is surgicalresection alone or in combination with other modalities such as radiationtherapy. Given the ability to cut an appropriate margin around the tumor inorder to avoid recurrence from microscopic disease populating the periphery ofthe tumor mass makes surgery highly effective for early stage cancers. Howeveraccessibility of a tumor often prevents the use of surgery or limits the marginthat can be removed especially at sites such as the tongue where the loss oftissue results in the loss of critical function such as speech. The drawback toresecting tissue is potential disfigurement or debilitating effects on organfunction. Surgery also requires additional cost in the form of hospitalizationand 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.

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*Chemotherapy*

Post-surgeryor in cases where surgery is contraindicated, chemotherapy is often used totreat systemic disease and may frequently be combined with radiation therapy.Typically it is used under the following circumstances:

·       When cancer is disseminatedrequiring treatment of systemic or metastatsis disease

·       Where the prognosis forlocal regional disease is poor due to the likelihood of disease progression

·       Where surgery iscontraindicated e.g. certain liver or pancreatic carcinoma;

·       For palliation, to achievetumor shrinkage to ameliorate tumor symptoms or complications.

The cytotoxicity of many existing anti-cancer drugs iswell proven, but with undesirable proven side effects including alopecia (lossof hair), nausea, vomiting, myelosuppression and in some cases drug 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.

***Alternative Treatments***

*Radio FrequencyAblation*

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.

*PhotodynamicTherapy*

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 retreat, 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 (see below).

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**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 Therapyor 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 head and neck cancers. While asimilar therapy is available commercially in China, it is not approved in theUS. Recent reports suggest that the therapy, which attempts to restore normalcell death activity to tumors through the introduction of the p53 gene, mayonly be effective 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 the antibodiestarget growth factor receptors required for tumor cell growth, they can oftenblock the stimulation needed for cell growth and/or cause antibody-mediatedcell killing of the tumor cell. Thus products like Herceptin®, Erbitux®,Rituxin® and Avastin® 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 primary cancers front line therapyfor which surgery is the current therapeutic mainstay.

The use of vaccination has long held t interest asanother potential modality that could prove beneficial in treating and limitingsystemic disease. The problem has been that tumors do not display antigensunique to the tumor cell that the immune system can use to specifically targetfor selective destruction of malignant tissue. It turns out that tumorsover-express normal cellular products that the immune system ignores due to aprocess called tolerization wherein the immune system is educated not torecognize self antigens early in development. As a result, it has provendifficult to use conventional vaccination strategies to break or overcometolerance and generate immunity against tumor cells. However, the use of DNAvaccines with electroporation may overcome this barrier (see below).

 

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**DNA DELIVERY**

**OVERVIEW**

In the context of this section, DNA delivery refers tothe transfer of DNA plasmids encoding antigenic or therapeutic molecules intocells of humans or animals to prevent or treat diseases. Therapeutic DNAdelivery can be performed either *ex vivo*or *in vivo. Ex vivo* DNA deliveryinvolves the delivery of DNA into cells outside the body. Typically, a smallamount of tissue or blood is removed from the patient and the cells within thattissue are propagated outside the body. After they have grown to a sufficientmass, new genetic information in the form of DNA is introduced into the cells.The genetically modified cells, typically blood or bone marrow or skin cellsare then returned to the patient, usually by blood transfusion or direct engraftment.*In vivo* DNA delivery is theintroduction of genetic information directly into cells within the patient’sbody. Theoretically, any tissue or cell type in the body can be used, and thebest choice is dependent upon the specific goals of treatment and indicationsbeing treated. For internal tissue targets, a gene may be transfused throughthe bloodstream to the organ or site of action or it may be injected at thedesired site and then electroporated to allow the gene to pass through the cellmembrane of the cells present at the treatment site. Once the DNA is inside thecell, it finds its way to the nucleus where RNA copies are made from thetherapeutic genes encoded in that DNA. The RNA copies are then translated intospecific proteins, which either accumulate inside the cell or are secreted intothe cellular environment from where they eventually enter the lymph orbloodstream. Thus, therapeutic genes may either act locally or systemically.

If the gene products are important for metabolicprocesses such as insulin production, the intent of the therapy will be tosupport long term expression of needed gene products. If the gene productsstimulate the immune system, the intent of therapy will be to generate immunityfor clinical benefit. While the term gene therapy has traditionally been usedto address the former application, it can encompass both applications. Inoviouses the term gene therapy as it has been traditionally used to cover theformer applications which provide long term expression of needed gene productsand uses the term DNA vaccination for applications that involve the expressionsof antigens for vaccination.

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

Methods in the past, including a variety of viralvectors, lipid formulations, the “gene gun” approach, and “naked” DNAinjection, have not been successful. Reasons include toxicity, safety issues,low efficiency, and concerns about economic feasibility. Of the more than 700gene therapy and DNA vaccine clinical trials started in the U.S. to date, nonehave progressed to regulatory approval. We believe that the DNA deliveryproblem must be solved if the promise of gene therapy and DNA vaccines are tobe 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, transfectionis significantly greater with resultant gene expression generally enhanced 10to 1000-fold. This increase makes many gene therapy and DNA vaccinationprojects feasible without unduly compromising safety or cost.

In recent years, DNA vaccine projects have increasedin number and scope while pharmaceutical companies have slowed or shelved mostgene therapy projects. This shift was prompted both by serious incidents in thegene therapy area caused by the toxicity of viral vectors, and by a strong demandfor better vaccines. Within a few years, surprisingly rapid progress has beenachieved in the development and testing of DNA vaccines. This trend is alsoreflected in our shift from gene therapy to DNA vaccines. The latter are nowthe subject of most of our DNA delivery projects and partnerships. In December 2004,the first 

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patient was treated withelectroporation 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 associated with the use of electroporation in these clinical DNAstudies.

We believe that thegreatest obstacle to making DNA vaccines and gene therapy a reality, namely thesafe, efficient, and economical delivery of the DNA plasmid construct into thetarget 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 may become the method of choice forDNA delivery into cells in many applications of DNA vaccination and genetherapy.

**DNA VACCINES**

DNA vaccines consist of DNA plasmid molecules encodinga selected antigen or fragment of an antigen that are introduced into cells ofhumans or animals with the purpose of evoking an immune response to the encodedantigen, either to prevent a disease (prophylactic vaccines) or to treat anexisting disease (therapeutic vaccines). The information encoded in the vaccineDNA plasmid molecules directs the cells to produce proteins (“antigens”) thattrigger the immune system to mount two responses: the production of antibodiesand the activation of “killer cells.” These responses can neutralize oreliminate infectious agents (viruses, bacteria, and other microorganisms) orabnormal cells (e.g. malignant tumor cells). DNA vaccines have severaladvantages over traditional vaccines in that they are completelynon-pathogenic, may be effective against diseases which cannot be controlled bytraditional vaccines, and are relatively easy and inexpensive to produce. Thesevaccines are also stable at normal environmental conditions for extendedperiods of time and do not require continuous refrigeration. A potentiallymajor advantage of DNA vaccines is their short development cycle. In principle,vaccines against newly identified infectious agents may be developed withinweeks or months, as opposed to traditional vaccines that take years ofdevelopment.

We have acquiredconsiderable expertise in the delivery and efficacy evaluation of DNA vaccines,both against infectious agents and complex diseases, such as cancer. In mostcases, we have chosen skeletal muscle as the target tissue for vaccinedelivery. However, skin is also an attractive target for DNA vaccination and wehave developed and patented technology for DNA delivery into skin cells aswell.

**GENE THERAPY**

Gene therapy, as well as DNA vaccination, involves theintroduction of new genetic information into cells for therapeutic purposes.However, in gene therapy, cells of the body are transfected with a specificgene to compensate for genetic defects that result in a deficiency of aspecific protein factor. In this context, one goal of gene therapy is toconvert target cells or tissues into “protein factories” for the production andsecretion of a normal protein for local or systemic treatment. Many geneticillnesses, including those currently treated by regular injection of a missingprotein, can potentially be “cured” by supplying the functional gene to asufficient number of cells under conditions which allow these cells to producea therapeutically effective dose of the protein for an extended period of time.

Currently, single-gene recessive genetic disorders arethe most accessible targets for correction by gene therapy, but ultimatelyresearchers believe that polygenic and acquired diseases will be treated usinggenes as pharmaceutical agents. In principle, any aspect of metabolism can bemanipulated by modifying gene function, and it is this application of genetherapy that has enormous potential, extending far beyond the treatment of raregenetic diseases. For example, the ability to influence cellular metabolism byintroducing specific genes has led to extensive investigations into the use ofgene therapy for cancer treatment. By adding a tumor suppressor gene to certaintypes of cancers, the uncontrolled growth of those 

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cells potentially could bebrought under normal regulation. Likewise, transfecting tumor cells with genescapable of inducing programmed cell death may result in tumor regression.

As mentioned earlier, genetherapy can be performed by delivering DNA either *ex vivo* or *in vivo*.We have focused on *in vivo* DNAdelivery, in particular delivery into skeletal muscle tissue. To a lesserextent, we have also explored DNA delivery into skin, cancer tissue and bloodvessel walls for gene therapy purposes.

**STRATEGY**

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 suited as compared to competingtechnologies to meet the requirements for DNA vaccines and gene therapy. Wehave adopted the strategy of co-developing DNA vaccine and gene therapyapplications with corporate partners where possible, or licensing our genedelivery technology for specific genes or specific medical indications. In mostcases, we provide proprietary instruments and expertise to optimize thedelivery of genes for particular applications, and a partner company providesits proprietary gene or gene regulation technology. Our collaboration withpartners allows pre-clinical research and clinical trials to be undertakenwhich may lead to the introduction of a new treatment and /or products in themarketplace at a rate and range which we would not be able to support on our own.Our goal is to enter into additional agreements to license our electroporationtechnology for use in the delivery of specific genes in 2006 and 2007. See “BusinessObjectives” for further discussion of our corporate strategy and goals.

**MEDPULSER® DNA DELIVERY SYSTEM**

**OVERVIEW**

DNA vaccines have tremendous potential as therapeuticagents for treating various diseases. One of the key obstacles to successfulDNA treatments are the limitations associated with current delivery systems.These viral and lipid delivery systems are complex, expensive and have showninconsistent effectiveness. Electroporation provides a straight forward, costeffective method for delivering DNA into cells with high efficiency and minimalcomplications.

The MedPulser® DNA Delivery System has been developedto optimize the delivery of DNA into muscle cells. The modified system issimilar to the MedPulser® Electroporation System and SECTA Therapy describedabove. The primary differences are in the parameters of the electric pulsesdelivered 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.

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**PARTNERSHIPSAND COLLABORATIONS**

**DNA VACCINES**

InJanuary, 2006 we signed an agreement with Sweden-based Tripep AB todevelop a therapeutic vaccine for hepatitis C virus (HCV). The vaccine will bebased on Tripep’s proprietary HCV antigen construct and delivered to infectedindividuals using our MedPulser DNADelivery System. Initiation of a Phase I clinical trial is expected to begin in2006 and will be performed in Sweden. The terms of the development agreementcall for each party to fund a portion of the Phase I and subsequent Phase IItrials and share profit according to their contribution. Inovio will initiallyget a 33% ownership in the overall product with the option to increase this to50% after the completion of the Phase I trial.

In September, 2005 weannounced that we were awarded an appropriation of approximately $1 million bythe United States Department of Defense for the development of a gene deliveryelectroporation technology for vaccination against infectious diseases,including potential bioterrorism agents. The United States Congressappropriated the funding in the Defense Appropriations Bill for 2005. Theappropriation is a continuation of the first United States Army grant receivedby Inovio AS in Norway last year. Inovio is working closely on this projectwith Dr. Connie Schmaljohn, a world renowned virologist and chief of theDepartment of Molecular Virology at the United States Army Medical ResearchInstitute of Infectious Diseases, USAMRIID, at Ft. Detrick, Maryland.

In July 2005 we announcedthe initiation of a Phase I clinical trial under the direction of VicalIncorporated to evaluate the safety of electroporation of a gene encoding IL-2delivered to melanoma lesions. This trial resulted from an agreement weestablished with Vical in October 2004 wherein Vical licensed our DNAdelivery technology for use with HIV and melanoma (using IL-2) astargets. This agreement was based on an option agreement established with Vicalin October of 2003 for a worldwide exclusive license for the use ofour proprietary in vivo electroporation delivery technology in combination withVical’s vaccine and therapeutic DNA technology.

In July, 2005 we announcedthe receipt of a $2 million milestone payment from Merck & Co., Inc.(“Merck”) for filing of an investigational New Drug application. This trial wasinitiated under a collaboration and licensing agreement established with Merckin May, 2004 to develop and commercialize our MedPulser® DNA DeliverySystem for use with certain of Merck’s DNA vaccine programs. This developmentand commercialization agreement was an extension of an initial evaluationagreement established in 2003. Under the terms of the agreement, Merck receivedthe right to use our proprietary technology for two specific antigens with an optionto extend the agreement to include a limited number of additional targetantigens. In addition, Merck obtained a non-exclusive license to theintellectual 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 announcedthat Merck & Co., Inc. exercised an option for a non-exclusivelicense for an additional antigen to be used with Inovio’s MedPulser® DNADelivery System. This option exercise was provided for under the 2004 licenseand research collaboration agreement between Merck and Genetronics BiomedicalCorporation, now Inovio Biomedical Corporation, discussed in the priorparagraph, and brought the total number of antigens licensed by Merck to three.We received an option fee for the additional target antigen. Under the terms ofour licensing agreement with Merck, Inovio is eligible for milestone androyalty payments if certain development goals and commercialization of thedevice are achieved by Merck.

In April, 2005 weannounced the initiation of a UK Medicines and Healthcare products RegulatoryAgency (MHRA) approved Phase I/II clinical trial undertaken in collaborationwith the University of Southampton. Our electroporation technology will be usedto deliver a therapeutic plasmid-based DNA vaccine to skeletal muscles with theaim of treating recurrent prostate cancer. The trial, sponsored and led 

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by theUniversity of Southampton, will investigate whether the DNA vaccine, developedin the laboratory of Professor Freda Stevenson at the University ofSouthampton, can stimulate patients to develop immune responses againstprostate cancer and whether use of Inovio’s electroporation system enhancesthis response. In this Phase I/II open-label study, plasmid DNA encoding aprostate tumor antigen is delivered directly to skeletal muscles in patientswith recurrent prostate cancer either by simple injection or using ourproprietary electroporation technology.

In January, 2005, weacquired privately-held Inovio AS, a Norwegian company. Inovio’s use ofelectroporation for gene therapy and DNA vaccines is a complement to ourexisting electroporation therapy program. The acquisition expanded ourintellectual property in electroporation, and included the Phase I/II DNAvaccine clinical trial in the UK mentioned above.

**GENE THERAPY**

In August, 2004 we wereawarded a grant by the National Institutes of Health to conduct research in thefield of vascular gene therapy. The $100,000 Phase I grant, entitled “*Ex vivo* venous gene delivery by pulsed electric fields,” wasawarded through the Small Business Innovative Research (SBIR) program. Vasculardiseases are the number one cause of death in the U.S. and other industrializedcountries. Vascular transplants, a frequently used method to treat these diseases,unfortunately suffer from a high failure rate, resulting in a significant unmettreatment need. The SBIR grant supports our research aimed at making vasculartransplants more effective and longer lasting.

In February, 2004 weentered into an agreement with RMR to permit us to commercialize RMR’selectroporation methods and devices on a worldwide exclusive basis. Thisextends a long-standing relationship with the University of South Floridascientists and RMR founders Drs. Richard Heller, Mark Jaroszeski, andRichard Gilbert. This relationship dates back to the co-development of ourMedPulser® Electroporation Instrument for treatment of all types of solidtumors including head and neck cancers. RMR is the collective effort of threescientists, collaborating with the University of South Florida and the H. LeeMoffitt Cancer Center and Research Institute.

The research carried outunder the above agreements may result in our entering into long-term licenseagreements with the other parties and should provide us with additional datathat we believe will assist us in assessing the efficacy of using ourMedPulser® Electroporation Therapy System for delivery of DNA vaccines and genetherapy. The data should also further assist us in our licensing and commercializationefforts.

In December of 2004,we initiated a Phase I clinical trial with the H. Lee Moffitt CancerCenter using our MedPulser® Electroporation Therapy System to deliver plasmidDNA to tumors with the aim of treating malignant melanoma. The trial is sponsoredby the H. Lee Moffitt Cancer Center and will measure the safety of Inovio’selectroporation system to deliver IL-12 encoding plasmid DNA into tumorcells to mount an immune response. In this Phase I open-label study,plasmid DNA encoding a cytokine is delivered directly to tumors in patientswith malignant melanoma through electroporation using the MedPulser®Electroporation Therapy System. This technology enables the entry andsignificant uptake of plasmid DNA into the tumor cells, ultimately leading tointratumoralcytokine production. The intent of this procedure is to induce animmune response that will eliminate the cancer.

In addition to the abovecollaboration and licensing arrangements, we may develop our own genetherapeutic through early stage clinical trials and partner the product forlate 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.

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**MARKET**

**DNA VACCINES**

We believe that there is asignificant unmet clinical need to develop more efficacious vaccines thatstimulate cellular immunity or can be applied in therapeutic settings such ascancer, hepatitis C or HIV infection. For these applications, scientistsbelieve that DNA vaccines may offer an improvement over classical vaccination.Our scientists believe that electroporation of naked DNA is critical inmaximizing the efficiency of DNA vaccination in meeting the unmet clinical needfor therapeutic vaccines. The Company therefore plans to work with itscorporate partners to develop electroporation for the delivery of DNA vaccinesto capture what some analysts consider to be a multi-billion dollarmarket opportunity. DNA vaccines also represent a technology platform that isof interest to government agencies concerned with warfighter preparedness andbioterrorism threat neutralization. We are working with the U.S. government todevelop the technology for selected infectious disease targets.

**GENE THERAPY**

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, one of the most prevalent genetic diseases, there is presently noeffective and sustainable treatment available. EPO deficiency affects cancerpatients undergoing chemotherapy and patients with chronic kidney failure,among others.

In addition to the manydiseases caused by single gene defects, the two major polygenic disease groups,vascular disease and cancer, are prime targets for gene therapy.

**RESEARCH ANDDEVELOPMENT**

Thefollowing table summarizes the ongoing programs in the area of gene therapy,the primary indications for each product and the current status of development.

| **Programs**                                                  | ** ** | ** **            | ** ** | **Development Status**                   | ** ** | **Ongoing Partnership or Collaboration** |
|---------------------------------------------------------------|------------|-----------------------|------------|------------------------------------------|------------|------------------------------------------|
| *In  vivo*Gene Transfer to Muscle or Tumor                    |       |                  |       |                                     |
| (a) Cytokines                                            |       | Ph. I clinical trials |       | Moffitt Cancer Center, Vical             |
| (b) DNA vaccines                                         |       | Ph. I clinical trials |       | Merck, Vical, University of Southampton, |
|                                                          |       | Pre-clinical data     |       | Tripep AB , U.S. Navy, U.S. Army         |
| In vivo Gene Transfer to Blood Vessels—undisclosed  gene |       | Pre-clinical  data    |       |                                     |

 

We intend to proceed withthe joint projects that we are currently working on with our partners as setout above. We also intend to expand ongoing collaborations and forge newalliances and research collaborations with the goal of having theserelationships mature into license agreements.

In addition, we may conductpre-clinical research for other DNA delivery projects that we intend to developourselves. Projects presently under evaluation are focused on developingtherapeutic vaccines for infectious diseases. Other research and developmentactivities will target improvements in DNA delivery, both *in vivo* and *ex vivo*, and the strengthening of our intellectual propertyposition in the fields of DNA delivery, gene therapy, and DNA vaccines.

**COMPETITION**

The main competitivetechnologies in the area of DNA delivery are the following:

·       ViralDNA delivery;

·       LipidDNA delivery; and

·       Theinjection of “naked” DNA.

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To our knowledge, we arepresently the only US company that has publicly announced that it has thecapability to manufacture electroporation equipment incompliance with the U.S.and European Quality System Regulations. We also believe we are the onlyCompany that is in clinical trials using electroporation for DNA delivery. Ourcompetitors include several companies that either have rights to intellectualproperty related to electroporation devices, to electroporation methods, or toapplications of electroporation.

**MEDICALDEVICE MANUFACTURING**

We are a medical devicemanufacturer and, as such, operate in a regulated industry. We must comply witha variety of manufacturing, product development and quality regulations inorder to be able to distribute our products commercially around the world. InEurope, we must comply with the MDD. We have a Quality System certified by ourinternational Notified Body to be in compliance with the international QualitySystem Standard, ISO13485, and meeting the Annex II Quality System requirementsof the MDD. We completed an Annex II Conformity Assessment procedure andachieved our CE Mark of the MedPulser® Electroporation Therapy System in March 1999.This CE Mark clears the MedPulser® Electroporation Therapy System for sale inthe European Economic Area which includes the European Union.

In the U.S., we arerequired to maintain facilities, equipment, processes and procedures that arein compliance with quality systems regulations. Our systems have beenconstructed to be in compliance with these regulations and our ongoingoperations are conducted within these systems. Commercially distributed deviceswithin the U.S. must be developed under formal design controls and be submittedto the FDA for clearance or approval. As we prepare for U.S. marketing, alldevelopment activity is performed according to formal procedures to ensurecompliance with all design control regulations.

We employ modernmanufacturing methods and controls to optimize performance and control costs.Internal capabilities and core competencies are strategically determined tooptimize our manufacturing efficiency. We utilize contract manufacturers forkey operations, such as clean room assembly and sterilization, which are noteconomically conducted in-house. We also outsource significant sub-assemblies,such as populated printed circuit boards, where capital requirements ormanufacturing volumes do not justify vertical integration. As we transitionfrom late-stage development activities into higher volume manufacturingactivities, internal capabilities will be modified and added, as appropriate,to meet our changing priorities.

Currently, the durableelectronic generator in the MedPulser® Electroporation Therapy System isassembled from outsourced populated printed circuit boards, and then tested,packaged and inventoried at our manufacturing facility. The disposableapplicators used with the MedPulser® Electroporation Therapy System areassembled and sterilized in a clean room at outside contract manufacturers.Future manufacturing of applicators for clinical trials and commercialdistribution is planned to be done in a clean room that is currently beingbuilt in our manufacturing facility.

***BTX INSTRUMENTDIVISION***

We were originally foundedas Biotechnologies and Experimental Research, Inc. (“BTX”) in San Diego,California in 1983. We established a reputation and leadership position in thefield of electroporation by developing a product line of instruments forscientific research. BTX sold its first product in 1985. In the early 1990s, weextended our focus to include human therapeutics.

In January 2003, weclosed the sale of the non-cash assets of the BTX division to HarvardBioscience, Inc. The terms of the sale were $3.7 million in cash,subject to possible adjustments, and a royalty on net sales of certain BTXproducts above certain sales targets. This transaction allowed us to focus onour electroporation-based therapies for humans.

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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. During the three-month period ended September 30,2004, we realized a gain of $33,347 from the write-off of an accrued warrantyliability related to the sale of the BTX division.

**REVENUE ANDINTEREST INCOME**

Thefollowing table provides the revenue obtained from licensing and research anddevelopment agreements and interest income, net, generated by us for the pastthree fiscal 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.

| ** **                                                         | ** ** | **Year Ended**         | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                         | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** | **December 31,  2003** | ** ** |
| License fee and  milestone payments                                |       |                        | $          | 2,563,283 |   |   |   | $ | 214,351 |   |   |   | $ | 5,882 |   |   |
| Revenue under  collaborative research and development arrangements |       |                        | 1,492,145  |   |   |   | 945,591 |   |   |   | 74,647 |   |   |
| Grant revenue                                                      |       |                        | 1,368,280  |   |   |   | 7,157 |   |   |   | — |   |   |
| Interest income, net                                               |       |                        | 207,675    |   |   |   | 247,555 |   |   |   | 45,017 |   |   |

 

We, like many biomedicalcompanies, devote a substantial portion of our annual budget to research anddevelopment. Research and development expenses totaled $11.5 million,$6.5 million and $2.1 million for the years ended December 31,2005, 2004 and 2003, respectively. These amounts far exceed revenue fromresearch arrangements and contribute substantially to our losses.

**INTELLECTUALPROPERTY**

Our success and ability tocompete depends upon our intellectual property. As of December 31, 2005,we have been issued 57 U.S. patents and two additional U.S. patent applicationsallowed and awaiting issuance. We have also been granted patents in individualcountries, including European patents that have been validated in numerous EUcountries, such that we now have collectively 151 issued foreign patents inthose foreign jurisdictions. We also have numerous pending patent applicationsin the U.S. and foreign jurisdictions. We have further in-licensed additionalpatents from Inovio, AS comprising 4 presently issued US and 4 presently issuedforeign patents with additional pending patent applications.

**EMPLOYEES**

As of February 16,2006,  we employed 27 people on afull-time basis and 16  people underconsulting and project employment agreements. Of the combined total, 23 were inproduct research, which includes research and development, quality assurance,and clinical, three in engineering, three in manufacturing, and 14 in generaland administrative, which includes corporate development, informationtechnology, legal, investor relations, finance, and corporate administration.None of our employees are subject to collective bargaining agreements. Weconsider our employee relations to be good.

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**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 WEARE UNABLE TO DEVELOP COMMERCIALLY SUCCESSFUL PRODUCTS, INCLUDING OUR MEDPULSER®ELECTROPORATION THERAPY SYSTEM IN VARIOUS MARKETS FOR MULTIPLE INDICATIONS,PARTICULARLY FOR THE TREATMENT OF HEAD AND NECK CANCER, OUR BUSINESS WILL BEHARMED AND WE MAY BE FORCED TO CURTAIL OR CEASE OPERATIONS.**

Our ability to achieve and sustain operatingprofitability depends on our ability to successfully commercialize ourMedPulser® Electroporation Therapy System in various markets for use intreating solid tumors, particularly for the treatment of head and neck 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 Therapy System. In particular, our ability toachieve and sustain profitability will depend in large part on our ability tocommercialize our MedPulser® Electroporation Therapy System for the treatmentof head and neck cancer in Europe and the United States. While we have achievedCE Mark , which applies to Europe for our MedPulser® Electroporation TherapySystem for use in treating solid tumors; the products related to the CE Markhas 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 Therapy System forthe treatment of head and neck cancer or other types of cancer or indicationsin the United States or in other countries or, if approved, that we willachieve significant level of sales. If we fail to commercialize our products,we may be forced to curtail or cease operations.

We have started additional clinical studies fordifferent indications, such as breast and pancreas, and are also in thepre-clinical stages of research and development with new product candidatesusing our electroporation technology. These new indications and productcandidates will require significant costs to advance through the developmentstages. If such product candidates are advanced through clinical trials, theresults of such trials may not gain FDA approval. Even if approved, ourproducts may not be commercially successful. If we fail to develop andcommercialize our products, we may be forced to curtail or cease operations.

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 ceaseoperations. 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.

**WEWILL HAVE A NEED FOR SIGNIFICANT FUNDS IN THE FUTURE AND THERE IS NO GUARANTEETHAT WE WILL BE ABLE TO OBTAIN THE FUNDS WE NEED.**

Developing a new medical device and conductingclinical trials is expensive. Our product development efforts may not lead to commercialproducts, either because our product candidates fail to be found safe oreffective in clinical trials or because we lack the necessary financial orother 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 commercialinfrastructure and the conduct of our clinical trials and pre-clinicalresearch.

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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® Electroporation Therapy System;

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

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

·       Achange in the degree of success in our Phase III clinical trial of MedPulser®Electroporation Therapy System and in our other clinical 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. We cannot promise that we will enter intoany such contracts or receive such grants or, if we do, that our partners andthe grants will provide enough funding to meet our needs.

In the past, we have raised funds by public and privatesale of our stock, and we are likely to do this in the future to raise neededfunds. Sale of our stock to new private or public investors usually results inexisting stockholders becoming “diluted.” The greater the number of sharessold, the greater the dilution. A high degree of dilution can make it difficultfor the price of our stock to rise rapidly, among other things. Dilution alsolessens a stockholder’s voting power.

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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.

**THEMARKET FOR OUR STOCK IS VOLATILE, WHICH COULD ADVERSELY AFFECT AN INVESTMENT INOUR STOCK.**

Our share price andvolume are highly volatile. This is not unusual for biomedical companies of oursize, age, and with a discrete market niche. It also is common for the tradingvolume and price of biotechnology stocks to be unrelated to a company’soperations, i.e. to go up or down on positive news and to go up or down on nonews. Our stock has exhibited this type of behavior in the past, and may wellexhibit it in the future. The historically low trading volume of our stock, inrelation to many other biomedical companies of our size, makes it more likelythat a severe fluctuation in volume, either up or down, will affect the stockprice.

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

·       Adverseclinical trial results;

·       Ourinability to obtain additional capital;

·       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,especially if we do not win 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 clinical trials are open-ended and, therefore, there is a risk thatinformation regarding the success of our clinical trials may be obtained by thepublic prior to a formal announcement by us. These factors, as well as theother factors described in this Report, could significantly affect the price ofour stock.

**WE HAVEA HISTORY OF LOSSES, WE EXPECT TO CONTINUE TO INCUR LOSSES AND WE MAY NOTACHIEVE OR MAINTAIN PROFITABILITY**

As of December 31, 2005, we had an accumulateddeficit of $114.3 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. We are evaluating potentialpartnerships as an additional way to fund operations. We will continue to relyon outside sources of financing to meet our capital needs beyond next year. Theoutcome of these matters cannot be predicted at this time.

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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 second quarter of 2007.

**IF WEDO NOT HAVE ENOUGH 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.

**ASMALL NUMBER OF LICENSING PARTNERS ACCOUNT FOR A SUBSTANTIAL PORTION OF OURREVENUES AND OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD SUFFER IFWE LOSE THESE LICENSING PARTNERS OR FAIL TO ADD ADDITIONAL LICENSING PARTNERSIN 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 fail to replace thecontract with new business, our revenue could be adversely affected. Untilcommercialization of our MedPulser® Electroporation Therapy System, we expectthat a limited number of licensing partners will continue to account for asubstantial portion of our revenue in each quarter in the foreseeable future.During the year ended December 31, 2005, one licensing partner, Merck,accounted for approximately 70% or $3.8 million of our consolidated revenue.

**PRE-CLINICALAND CLINICAL 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 drug is never guaranteed. The FDA will make this determination based onthe results 

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from our pre-clinicaltesting and clinical trials and has substantial discretion in the approvalprocess. Despite the time and experience exerted, failure can occur at anystage, and we could 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 Therapy System, for the treatmentof recurrent and second primary head and neck cancers. In addition, we areconducting two Phase IV (or Pre-Marketing) clinical trials of our MedPulser®Electroporation Therapy System for the treatment of new and recurrent head andneck cancers and new and recurrent primary skin cancers, and have started aPhase I clinical trial of our MedPulser® Electroporation TherapySystem for the treatment of breast and pancreas cancers. Current or futureclinical trials may demonstrate the MedPulser® ElectroporationTherapy System is neither safe nor effective.

Any delays or difficulties we encounter in ourpre-clinical research and clinical trials, in particular the Phase III clinicaltrials of our MedPulser® Electroporation Therapy System for the treatment ofrecurrent head and neck 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 Therapy System or any otherproduct candidates.

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, pharmaceutical andbiotechnology companies have suffered significant setbacks. Not only arecommercialization timelines pushed 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 abreviated inour industry as SAEs, whether due to our technology or other procedures. Todate, there have been seven SAEs that were at least possibly related to ourtechnology that resulted in death, a life-threatening experience, orhospitalization or prolongation of existing hospitalization. All seven of theseserious adverse events were reported to the FDA. The SAEs were excessivebleeding in the tumor bed, edema of larynx, sudden death (suspected heartfailure), weight loss, sudden death (cause unknown), obstruction of the airway,and death (suspected internal bleeding). Because our studies are controlled andongoing, we cannot assure you that these or other serious adverse events willnot delay or prevent approval 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;

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·       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 your investment.

Despite the FDA’s designation of our MedPulser®Electroporation Therapy System as a Fast Track product, such FDA designation isindependent of the FDA’s Priority Review and Accelerated Approval designationsand we may encounter delays in the regulatory approval process due toadditional information requirements from the FDA, unintentional omissions inour PMA for our MedPulser® Electroporation Therapy System, or other delays inthe 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,then the testing of our human-use products could be shelved. In the event theclinical trials are not successful, we will have to determine whether to putmore money into the program to address its deficiencies or whether to abandonthe clinical development programs for the products in the tested indications.Loss of the human-use product line would be a significant setback for ourcompany.

Becausethere are so many variables inherent in clinical trials, we cannot predictwhether any of our future regulatory applications to conduct clinical trialswill be approved by the FDA or other regulatory authorities, whether ourclinical trials will commence or proceed as planned, and whether the trialswill ultimately be deemed to be successful. To date, our experience has beenthat submission and approval of clinical protocols has taken longer thandesired or expected.

**OUR BUSINESSIS HIGHLY 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 having certaincharacteristics). 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.

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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 canbe withdrawn, or limited, if previously unknown problems arise with ourhuman-use product or data arising from its use.

**WECOULD BE SUBSTANTIALLY DAMAGED IF PHYSICIANS AND HOSPITALS PERFORMING OURCLINICAL TRIALS 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 trial correctly.Deviations from protocol may make the clinical data not useful and the trialcould be essentially worthless.

*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 to observeproper safety measures such as the mishandling of used medical needles, whichmay result in the transmission of infectious and deadly diseases, such as HIVand AIDS. This increases our liability, affects the data, and can damage ourreputation.

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.

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**EVENIF OUR PRODUCTS ARE APPROVED BY REGULATORY AUTHORITIES, IF WE FAIL TO COMPLYWITH ON-GOING REGULATORY REQUIREMENTS, OR IF WE EXPERIENCE UNANTICIPATEDPROBLEMS WITH 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.

**FAILURETO COMPLY WITH FOREIGN REGULATORY REQUIREMENTS GOVERNING HUMAN CLINICAL TRIALSAND MARKETING APPROVAL FOR OUR HUMAN-USE EQUIPMENT COULD PREVENT US FROMSELLING OUR PRODUCTS IN FOREIGN MARKETS, WHICH MAY ADVERSELY AFFECT OUROPERATING RESULTS AND FINANCIAL CONDITIONS.**

For marketing ourMedPulser® Electroporation Therapy System outside the United States, therequirements governing the conduct of clinical trials, product licensing,pricing and reimbursement vary greatly from country to country and may requireadditional testing. The time required to obtain approvals outside the UnitedStates may differ from that required to obtain FDA approval. We may not obtainforeign regulatory approval on a timely basis, if at all. Approval by the FDAdoes not ensure approval by regulatory authorities in other countries, andapproval by one foreign regulatory authority does not ensure approval byregulatory authorities in other countries or by the FDA. Failure to comply withthese regulatory requirements or to obtain required approvals could impair ourability to develop these markets and could have a material adverse effect onour results of operations and financial condition.

**IF WECANNOT MAINTAIN OUR EXISTING CORPORATE AND ACADEMIC ARRANGEMENTS AND ENTER INTONEW ARRANGEMENTS, WE MAY BE UNABLE TO DEVELOP PRODUCTS EFFECTIVELY, OR ATALL.**

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, 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. We cannotcontrol the amount and timing of resources our collaborative partners devote toour research and testing programs or product candidates, or their compliancewith regulatory requirements which can vary because of factors unrelated tosuch programs or product candidates. These relationships may in some cases beterminated at the discretion of our collaborative partners with only limitednotice 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 

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project’s jointcollaboration 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 collaborative programs.

**OUR ABILITY TO ACHIEVE SIGNIFICANTREVENUES FROM SALES OR LEASES OF HUMAN-USE PRODUCTS WILL DEPEND ON ESTABLISHINGEFFECTIVE SALES, MARKETING AND DISTRIBUTION CAPABILITIES OR RELATIONSHIPS ANDWE CURRENTLY LACK SUBSTANTIAL EXPERIENCE IN THESE AREAS.**

To market our products, we will need to develop sales,marketing and distribution capabilities. In order to develop or otherwiseobtain these capabilities, we may have to enter into marketing, distribution orother similar arrangements with third parties in order to sell, market anddistribute our products successfully. To the extent we enter into any sucharrangements with third parties, our product revenue is likely to be lower thanif we directly marketed and sold our products, and any revenue we receive willdepend upon the efforts of such third parties. We may be unable to developsufficient sales, marketing and distribution capabilities to commercialize ourproducts successfully.

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 or seek todevelop our own marketing capability, we may not be able to successfullycommercialize any product.

**WERELY ON COLLABORATIVE AND LICENSING RELATIONSHIPS TO FUND A PORTION OF OURRESEARCH AND DEVELOPMENT EXPENSES. IF WE ARE UNABLE TO MAINTAIN OR EXPANDEXISTING RELATIONSHIPS, OR INITIATE NEW RELATIONSHIPS, WE WILL HAVE TO DEFER ORCURTAIL RESEARCH AND DEVELOPMENT ACTIVITIES IN ONE OR MORE 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. We do not currently intend to packageBleomycin together with the equipment for sale, but if it should be necessaryor desirable to do this, we would need a reliable source of the drug. At thistime we do not have a fixed source of Bleomycin for inclusion with equipment oralone. If it becomes necessary or desirable to include Bleomycin in ourpackage, we would have to form a relationship with another provider of thisgeneric drug before any product could be launched.

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.

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Nevertheless,there is 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 our business,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

·       Collaborativeassociations can damage a company’s reputation if they go awry and thus, byassociation or otherwise, the scientific or medical community may develop anegative 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.

**WERELY HEAVILY ON OUR PATENTS AND PROPRIETARY RIGHTS TO ATTRACT PARTNERSHIPS ANDMAINTAIN MARKET POSITION.**

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 confirm that our key technologies areadequately protected. If we determine that any of our patents require eitheradditional disclosures or revisions to existing information, we may ask thatsuch patents be reexamined or reissued, as applicable, by the United StatesPatent 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 competitive.

*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 owned byanother person and/or be charged with infringement. Defending or indemnifying athird party against a charge of infringement can involve lengthy and costlylegal actions, and there can be no 

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guarantee of a successfuloutcome. Biotechnology companies comparable to us in size and financialposition have gone out of business after fighting and losing an infringementbattle. If we or our partners were prevented from using or selling ourhuman-use equipment, then our business would be materially adversely affected.

*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 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 over valuable companyinformation, which could negatively affect our competitive position.

**IF WEARE NOT SUCCESSFUL DEVELOPING OUR CURRENT PRODUCTS, OUR BUSINESS MODELMAY CHANGE AS OUR PRIORITIES AND OPPORTUNITIES CHANGE. OUR BUSINESSMAY NEVER DEVELOP TO 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.

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

The MedPulser® DNA Delivery System and any of ourother Gene Therapy or DNA Vaccine product candidates under development could bebroadly described as gene therapies. A number of clinical trials are beingconducted by other pharmaceutical companies involving gene therapy, including compoundssimilar to, or competitive with, our product candidates. The announcement ofadverse results from these clinical trials, such as serious unwanted andunexpected side effects attributable to treatment, or any response by the FDAto such clinical trials, may impede the timing of our clinical trials, delay orprevent us from obtaining regulatory approval or negatively influence publicperception of our product candidates, which could harm our business and resultsof operations and depress the value of 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.

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To date, there have not been any serious adverseevents in any gene therapy clinical trials in which our technology was used.These current gene therapy clinical trials are being sponsored by several ofour partners. In the future, if one or a series of serious adverse events wereto occur during a gene therapy clinical trial in which our technology was usedby a partner, the partner would be responsible for reporting all such events tothe FDA and other regulatory agencies as required by law. Such serious adverseevents, whether treatment-related or not, could result in negative publicperception of our treatments and require additional regulatory review or othermeasures, which could increase the cost of or prolong our gene therapy clinicaltrials or require us to halt the clinical 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.

**WECANNOT PREDICT THE SAFETY PROFILE OF THE USE OF OUR MEDPULSER ELECTROPORATIONSYSTEM WHEN USED IN COMBINATION WITH OTHER THERAPIES.**

Our trials involve the useof our MedPulser® Electroporation System in combination with Bleomycin, an anti-cancerdrug. While the data we have evaluated to date suggest the MedPulser®Electroporation Therapy System does not increase the adverse effects of othertherapies, we cannot predict if this outcome will continue to be true orwhether possible adverse side effects not directly attributable to the otherdrugs will compromise the safety profile of our MedPulser® ElectroporationTherapy System when used in certain combination therapies or if used off-labelwith other drugs by physicians.

**WERUN THE RISK THAT OUR TECHNOLOGY WILL BECOME OBSOLETE OR LOSE ITS COMPETITIVEADVANTAGE.**

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 many reasons why a competitor might be moresuccessful 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.

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*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.

**ANYACQUISITION WE MIGHT MAKE MAY BE COSTLY AND DIFFICULT TO INTEGRATE,MAY DIVERT MANAGEMENT RESOURCES OR DILUTE STOCKHOLDER VALUE.**

We have consideredand made strategic acquisitions in the past, including Inovio AS in January 2005,and, in the future, may acquire or make investments in complementary companies,products or technologies. As part of our business strategy, we may acquireassets or businesses principally relating to or complementary to our currentoperations, and we have in the past evaluated and discussed such opportunitieswith interested parties. Any acquisitions we undertake will be accompanied bythe 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;and

·       Possibledilution to our stockholders.

In addition, geography maymake the integration of businesses more difficult. We may not be successful inovercoming these risks or any other problems encountered in connection with anyacquisitions.

**CHANGESIN FOREIGN EXCHANGE RATES MAY AFFECT OUR FUTURE OPERATING RESULTS.**

In January 2005, weacquired Inovio AS, a Norweigan company. During the year ended December 31,2005, Inovio AS contributed approximately $1.3million to our revenue, which amounted to approximately 24% of our totalrevenue. Inovio AS conducts its operations primarily in foreign currencies,including the Euro, Norwegian Kroner and Swedish Krona. Fluctuation in thevalues of these foreign currencies relative to the U.S. dollar will affect ourfinancial results which are reported in US dollars and will cause U.S. dollartranslation of such currencies to vary from one period to another. We cannotpredict the effect of exchange rate fluctuations upon future operating results.

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**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.

**OURDEPENDENCE UPON NON-MARKETED PRODUCTS, LACK OF EXPERIENCE IN MANUFACTURING ANDMARKETING HUMAN-USE PRODUCTS, AND OUR CONTINUING DEFICIT MAY RESULT INEVEN FURTHER FLUCTUATIONS 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.

**THEREIS A RISK OF PRODUCT 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 orothers using, selling, or buying our equipment. Product liability risks areinherent in our business and will exist even after the products are approvedfor sale. If and when our human-use equipment is commercialized, we run the riskthat use (or misuse) of the equipment will result in personal injury. Thechance of such an occurrence will increase after a product type is on themarket.

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 claims directly.If we did have to make payment against a claim, then it would impact ourfinancial ability to perform the research, development, and sales activities wehave 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 

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broughtagainst us, if successful and of sufficient magnitude, could negatively impactour financial performance, even if we have insurance.

**WECANNOT BE CERTAIN THAT WE WILL BE ABLE TO MANUFACTURE OUR HUMAN-USE EQUIPMENTIN SUFFICIENT 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 an internationalbody, we have never undergone a quality systems inspection by the FDA. We maynot be able to pass an FDA inspection when it occurs. If our facilities arefound not to be up to the FDA standards in sufficient time, prior to UnitedStates launch of product, then it will result in a delay or termination of ourability to produce the human-use equipment in our facility. Any delay inproduction will have a negative effect on our business. While there are notarget dates set forth for launch of our products in the United States, we planon launching these products once we successfully perform a Phase III clinicalstudy, obtain the requisite regulatory approval, and engage a partner who hasthe financial 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.

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 WELOSE KEY PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL, HIGHLYSKILLED PERSONNEL REQUIRED TO DEVELOP OUR PRODUCTS OR OBTAIN NEWCOLLABORATIONS, OUR BUSINESS 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 us fromachieving our business objectives. We face intense competition for personnelfrom other companies, universities, public and private research institutions,government entities and other organizations.

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**WEMAY NOT MEET ENVIRONMENTAL GUIDELINES AND AS A RESULT COULD BE SUBJECT TOCIVIL AND CRIMINAL 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 arecurrently in compliance with all material applicable environmental regulations,if we are found to not comply with environmental regulations, or if we areinvolved with contamination or injury from these materials, then we may besubject to civil and criminal penalties. This would have a negative impact onour reputation and finances, and could result in a slowdown or even completecessation of our business.

**OURFACILITIES ARE LOCATED NEAR KNOWN EARTHQUAKE FAULT ZONES, AND THE OCCURRENCE OFAN EARTHQUAKE OR OTHER CATASTROPHIC DISASTER COULD CAUSE DAMAGE TO OURFACILITIES AND EQUIPMENT.**

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, the nature of our researchactivities could cause significant delays in our programs and make it difficultfor us to recover from a disaster. The insurance we maintain may not beadequate 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.

**WEARE EXPOSED TO POTENTIAL RISKS FROM RECENT LEGISLATION REQUIRING COMPANIES TOEVALUATE INTERNAL CONTROLS UNDER SECTION 404 OF THE SARBANES-OXLEY ACT OF2002.**

As directed by Section 404 of the Sarbanes-OxleyAct of 2002 (“Section 404”), the Securities and Exchange Commissionadopted rules requiring public companies to include a report of managementon our internal controls over financial reporting in our annual reports on Form 10-Kthat contains 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, 2005, we did identifytwo significant control deficiencies that did not rise to the level of materialweaknesses, as defined by the Public Company Accounting Oversight Board(PCAOB). Although we will continue to diligently and vigorously review ourinternal controls over financial reporting in order to ensure compliance withthe Section 404 requirements, any control system, regardless of how welldesigned, operated and evaluated, can provide only reasonable, not absolute,assurance that its objectives will be met.

If, during any year, ourindependent registered public accounting firm is not satisfied with ourinternal controls over financial reporting or the level at which these controlsare documented, designed, operated, 

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testedor assessed, or if the independent registered public accounting firm interpretsthe requirements, rules or regulations differently than we do, then ourindependent registered public accounting firm may decline to attest tomanagement’s assessment or may issue a report that is qualified. This couldresult in an adverse reaction in the financial marketplace due to a loss ofinvestor confidence in the reliability of our financial statements, whichultimately could negatively impact the market price of our stock.

**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 new lease runs through February 28,2010. The annual rent for this leased property is $452,767 in the first fouryears of the original lease term. The annual rent for the fifth and final yearof the original lease term is $480,207. At the end of the original lease term,we have the option of renewing this lease for an additional five-year leaseterm at an annual rate equal to the fair market rental value of the property,as defined in the lease agreement.

In connection with this new lease, we issued a warrantto purchase 50,000 shares of our common stock at $5.00 per share to thelandlord of this leased facility in December 2004. This warrant isimmediately exercisable and expires five years from the date of issuance. Thiswarrant 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.

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 2005.

**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.

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Thetable below sets forth the quarterly high and low sales prices of our commonshares in the two most recent fiscal years. Such prices prior to September 13,2004 have been adjusted to give effect to the reverse stock split.

| ** **                                           | ** ** | **American  Stock  Exchange  US$** | ** ** |
|------------------------------------------------------|------------|------------------------------------|------------|
| **Year ended December 31, 2005** | ** ** | ** **                         | ** ** | **High** | ** ** | **Low** | ** ** |
| First quarter                                        |       | 5.01                               |       | 3.42 |   |
| Second quarter                                       |       | 3.70                               |       | 2.45 |   |
| Third quarter                                        |       | 3.24                               |       | 2.60 |   |
| Fourth quarter                                       |       | 2.86                               |       | 1.99 |   |
| **Year ended December 31, 2004**                | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| First quarter                                        |       | 7.76                               |       | 5.00 |   |
| Second quarter                                       |       | 6.92                               |       | 4.84 |   |
| Third quarter                                        |       | 5.20                               |       | 2.64 |   |
| Fourth quarter                                       |       | 4.45                               |       | 2.37 |   |

 

As of March 9, 2006,we had approximately 476 stockholders of record. This figure does not includebeneficial owners who hold shares in nominee name. The closing price per shareof our common stock on March 9, 2006 was $2.76, as reported on the AMEX.

*Recent Sales ofUnregistered Securities*

Previously reported.

*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 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 Stockare entitled to receive an annual dividend at the rate of 6%, payablequarterly. Holders of Series A and B Preferred Stock are entitled toreceive this quarterly dividend through September 30, 2006. Thesedividends are payable in cash unless the closing price of our common shares forthe 20 trading days immediately preceding the dividend payment date is equal toor greater than the conversion price of such shares, in which event we mayelect to pay the dividends to the holders in common stock. Currently, theconversion price of such shares is $2.40 per share for our Series APreferred Stock and $2.80 per share for our Series B Preferred Stock.During the three years in the period ended December 31, 2005, we paiddividends to the holders of our Series A and B Preferred Stock through theissuance of 55,518 shares of our common stock valued at $179,956 and in cash of$60,235 during 2005; through the issuance of 73,072 shares of our common stockvalued at $322,397 in 2004; and through the issuance of 84,595 shares of ourcommon stock valued at $357,587 in 2003.

The holders of our Series CPreferred Stock  are entitled to receivean annual dividend at the rate of 6%, payable quarterly. Holders of Series CPreferred Stock are entitled to receive this quarterly dividend through June 30,2007. These dividends are payable in cash unless the closing price of ourcommon shares for the 20 trading days immediately preceding the dividendpayment date is equal to or greater than the conversion price of such shares,in which event we may elect to pay the dividends to the holders in commonstock. Currently, the conversion price of such shares is $6.80 per share.During the two years in the period 

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ended December 31,2005, we paid dividends to the holders of our Series C PreferredStock  in cash of $553,694, and  through the issuance of 30,124 shares of ourcommon stock valued at $133,693, and $276,315 in cash during 2004.

*Repurchases*

We did not repurchase anyof our equity securities during the fourth quarter of fiscal 2005.

*Equity CompensationPlans*

Our equity compensation plan information is providedas set forth in Part III, Item 11 herein.

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**ITEM 6.**             SELECTEDCONSOLIDATED FINANCIAL DATA

Thefollowing table sets forth our selected consolidated financial data for theperiods indicated, derived from consolidated financial statements prepared inaccordance with U.S. generally accepted accounting principles. The selectedoperations data for each of the three years in the period ended December 31,2005 and the Balance Sheet data as of December 31, 2005 and 2004 arederived from our audited financial statements included later in this Form 10-K.The selected Statement of Operations data for year ended December 31, 2002and the nine months ended December 31, 2001 and the Balance Sheet data asof December 31, 2003, 2002 and 2001 were derived from our auditedfinancial statements, which are not included in this Form 10-K. Thedata set forth below should be read in conjunction with our ConsolidatedFinancial Statements and the Notes thereto included elsewhere in this Reportand “Item 7. Management’s Discussion and Analysis of Financial Conditionand Results of Operations” set forth below. Effective June 15, 2001, ourBoard of Directors approved the change of our fiscal year-end from March 31to December 31 and accordingly operations data for the nine months ended December 31,2001 are presented.

| ** **                                                                    | ** ** | **Year Ended  December 31,**

**2005*** | ** ** | **Year Ended  December 31,**

**2004** | ** ** | **Year Ended  December 31,  2003** | ** ** | **Year Ended  December 31,  2002** | ** ** | **Nine Months  Ended  December 31,  2001** | ** ** |
|-------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------|------------|
| Operations Data:                                                              |       |                                              |       |                                             |       |                                         |       |                                         |       |                                                 |       |   |   |   |   |
| License fee and  milestone payments                                           |       | $                                                 | 2,563,283  |                                             | $          | 214,351                                      |       | $                                            | 5,882      |                                                 |       | $ | 5,883 |   |   |   | $ | 981 |   |   |
| Revenue under  collaborative research and development arrangements and grants |       | 2,860,425                                         |       | 952,748                                          |       | 74,647                                       |       |                                         | 183,638    |                                                 |       |   | 109,669 |   |   |
| Loss from  continuing operations                                              |       | (15,296,852                                       | )          | (11,263,140                                      | )          | (6,588,245                                   | )          |                                         | (5,908,044 | )                                                    |       |   | (5,851,744 | ) |   |
| Gain on disposal  of assets                                                   |       | —                                            |       | 290,209                                          |       | 2,034,078                                    |       |                                         | —     |                                                 |       |   | — |   |   |
| Loss from  discontinued operations                                            |       | —                                            |       | —                                           |       | (110,740                                     | )          |                                         | (56,783    | )                                                    |       |   | (508,046 | ) |   |
| Net loss                                                                      |       | (15,296,852                                       | )          | (10,972,931                                      | )          | (4,664,907                                   | )          |                                         | (5,964,827 | )                                                    |       |   | (6,359,790 | ) |   |
| Imputed and  declared dividends                                               |       | (11,065,770                                       | )          | (732,405                                         | )          | (18,210,530                                  | )          |                                         | —     |                                                 |       |   | — |   |   |
| Loss attributable  to common stockholders                                     |       | (26,362,622                                       | )          | (11,705,336                                      | )          | (22,875,437                                  | )          |                                         | (5,967,827 | )                                                    |       |   | (6,359,790 | ) |   |
| *Amounts per common share—basic and diluted:*                            |       |                                              |       |                                             |       |                                         |       |                                         |       |                                                 |       |   |   |   |   |
| Loss from  continuing operations                                              |       | (0.81                                             | )          | (0.64                                            | )          | (0.49                                        | )          |                                         | (0.58      | )                                                    |       |   | (0.68 | ) |   |
| Gain (loss) from  discontinued operations                                     |       | —                                            |       | 0.02                                             |       | 0.14                                         |       |                                         | (0.01      | )                                                    |       |   | (0.08 | ) |   |
| Net loss                                                                      |       | (0.81                                             | )          | (0.62                                            | )          | (0.35                                        | )          |                                         | (0.59      | )                                                    |       |   | (0.76 | ) |   |
| Imputed and  declared dividends                                               |       | (0.58                                             | )          | (0.04                                            | )          | (1.37                                        | )          |                                         | —     |                                                 |       |   | — |   |   |
| Net loss  attributable to common stockholders                                 |       | (1.39                                             | )          | (0.66                                            | )          | (1.72                                        | )          |                                         | (0.59      | )                                                    |       |   | (0.76 | ) |   |
| Balance Sheet Data:                                                           |       |                                              |       |                                             |       |                                         |       |                                         |       |                                                 |       |   |   |   |   |
| Cash and cash  equivalents                                                    |       | 17,166,567                                        |       | 17,889,797                                       |       | 13,460,446                                   |       |                                         | 875,444    |                                                 |       |   | 1,813,100 |   |   |
| Total assets                                                                  |       | 28,978,954                                        |       | 20,951,502                                       |       | 16,228,990                                   |       |                                         | 5,419,225  |                                                 |       |   | 6,633,714 |   |   |
| Long-term  liabilities, including current portion                             |       | 1,372,331                                         |       | —                                           |       | —                                       |       |                                         | 20,642     |                                                 |       |   | 48,117 |   |   |
| Total stockholders  equity                                                    |       | 23,470,748                                        |       | 15,549,510                                       |       | 15,047,635                                   |       |                                         | 3,725,370  |                                                 |       |   | 4,963,105 |   |   |
|                                                                               |            |                                                   |            |                                                  |            |                                              |            |                                              |            |                                                      |            |  |  |  |  |  |  |  |  |  |

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*                     On January 25, 2005, we consummated theacquisition of Inovio AS, a Norwegian company. For information concerning thisacquisition, see Note 15 of Notes to our Consolidated Financial Statementsappearing later in this Report. For a discussion of the affect of thisacquisition on our operating results during 2005, see Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Results of Operations—Comparisonof Years Ended December 31, 2005 and 2004.

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

**Forward-Looking Statements**

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, 2005, 2004 and 2003.

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. Any such statements aresubject to risks and uncertainties that could cause our actual results todiffer materially from those which are management’s current expectations orforecasts. Such information is subject to the risk that such expectations orforecasts, or the assumptions underlying such expectations or forecasts, becomeinaccurate.

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 not exhaustive.Other sections of this report may include additional factors that couldadversely impact our business and financial performance. Moreover, we operatein a very competitive and rapidly changing environment. New risk factors emergefrom time to time and we cannot predict all such risk factors, nor can weassess the impact of all such risk factors on our business or the extent towhich any factor, or combination of factors, may cause actual results to differmaterially from those contained in any forward looking statements. Given theserisks and uncertainties, investors should not place undue reliance on forward-lookingstatements as a prediction of actual results. Investors should also be awarethat while we do, from time to time, communicate with securities analysts, wedo not disclose any material non-public information or other confidentialcommercial information to them. Accordingly, individuals should not assume thatwe agree with any statement or report issued by any analyst, regardless of thecontent of the report. Thus, to the extent that reports issued by securitiesanalysts contain any projections, forecasts or opinions, such reports are notour responsibility.

**Overview**

We are a San Diego-based biomedical company whosetechnology platform is based on medical devices that use ElectroporationTherapy to deliver drugs and genes into cells. We are developing and seeking tocommercialize medical therapies to address a number of diseases with criticalunmet treatment needs using Electroporation Therapy. Our SelectiveElectrochemical Tumor Ablation (“SECTA”) therapy is in Phase III clinicaltrials, consisting of sites in the United States and Europe, for the treatmentof recurrent head and neck cancer. In addition, we are currently conductingpre-marketing studies to support the commercialization of the SECTA System inEurope. Our system delivers electrical pulses to tumors injected with thegeneric drug bleomycin. The distinctive feature of the system, which uses agenerator together with disposable needle applicators, is the preservation ofhealthy tissue at the margins of the tumor.

In addition, as part of our MedPulser® product line,we have been developing devices for the delivery of DNA for vaccinations andgene therapy. The flagship of our development efforts involve the licensingagreements with Merck and Vical in which these companies will support thedevelopment and registration of the therapies using Inovio devices. Mostrecently, we executed a collaborative commercialization 

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agreement with Triped ASto co-develop a HCV therapeutic vaccine. Other activities include phase Itrials at the H. Lee Moffitt Cancer Center and the University of Southampton. Asa result of our partnerships in this area, our DNA Electroporation DeliveryTechnology is currently being evaluated in four separate phase I clinicaltrials.

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 agreement. 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 clinical products, weexpect revenues to continue to be attributable to collaborative researcharrangements, licensing fees, grants and interest income.

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, 2005, we had anaccumulated deficit of $114,269,942. 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.

**Critical Accounting Policies**

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 make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses. We base our estimates on experience and on various assumptions thatwe believe are reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from those estimates.

Our criticalaccounting 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 theagreement 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 themilestone  is substantive in nature andthe achievement of the milestone was not reasonably assured at the inception ofthe agreement. Payments for milestones which are not reasonably assured ofbeing achieved at the time of signing the agreement are treated as theculmination of a separate earnings process and are recognized as revenue when themilestones are achieved. We defer payments for milestone events which arereasonably assured and recognize them ratably over the minimum remaining periodof our performance obligations.

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*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 the shorterof the expected useful life of the underlying patents or the term of therelated license agreement.

*Goodwill.**  *Goodwill is tested for impairmenton an annual basis and between annual test if indicators of potentialimpairment exist, using a fair-value-based approach. No impairment of goodwillhas been identified during any of the periods presented.

*Intangible Assets.**  *Intangible assets, excludingGoodwill, are amortized using the straight-line method over their estimatedperiod of benefit, which is eighteen years. We evaluate the recoverability ofintangible assets periodically and take into account events or circumstancesthat warrant revised estimates of useful lives or that indicate that impairmentexists. All of our intangible assets, excluding Goodwill,  are subject to amortization. No impairment ofintangible assets has been identified during any of the periods presented.

*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, 2005.

*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.

*Valuation of Goodwill andIntangible Assets.**  *Ourbusiness acquisitions typically result in goodwill and other intangible assets,and the recorded values of those assets may become impaired in the future. Asof December 31, 2005, our goodwill and intangible assets, net ofaccumulated amortization, totaled $8,134,344. The determination of the value ofsuch intangible assets requires management to make estimates and assumptionsthat affect our consolidated financial statements. We assess potentialimpairments to intangible assets when there is evidence that events or changesin circumstances indicate that the carrying amount of an asset may not berecovered. Our judgments regarding the existence of impairment indicators andfuture cash flows related to intangible assets are based on operational performanceof our acquired businesses, market conditions and other factors. Although thereare inherent uncertainties in this assessment process, the estimates andassumptions we use are consistent with our internal planning. If theseestimates or their related assumptions change in the future, we may be requiredto record an impairment charge on all or a portion of our goodwill andintangible assets. Furthermore, we cannot predict the occurrence of futureimpairment-triggering events nor the impact such events might 

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have on ourreported asset values. Future events could cause us to conclude that impairmentindicators exist and that goodwill or other intangible assets associated withour acquired businesses are impaired. Any resulting impairment loss could havean adverse impact on our results of operations.

**Recent Accounting Pronouncements**

In May 2005, the FASB issued SFAS No. 154, *Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20and FASB Statement No. 3*. SFAS No. 154 changes therequirements for the accounting for and reporting of a change in accountingprinciple. This statement applies to all voluntary changes in accountingprinciple. It also applies to changes required by an accounting pronouncementin the unusual instance that the pronouncement does not include specifictransition provisions. When a pronouncement includes specific transitionprovisions, those provisions should be followed. SFAS No. 154 requiresretrospective application to prior periods’ financial statements for changes inaccounting principle, unless it is impractical to determine either theperiod-specific effects or the cumulative effect of the change. When it isimpractical to determine the period-specific effect of an accounting change onone or more individual prior periods presented, SFAS No. 154 requires thatthe new accounting principle be applied to the balances of assets andliabilities as of the beginning of the earliest period for which retrospectiveapplication is practical and that a corresponding adjustment be made to theopening balance of retained earnings for that period rather than being reportedas a component of income. When it is impractical to determine the cumulativeeffect of applying a change in accounting principle to all prior periods, SFAS No. 154requires that the new accounting principle be applied as if it were adoptedprospectively from the earliest date practical. SFAS No. 154 is effectivefor accounting changes and corrections of errors made in fiscal years beginningafter December 31, 2005. We are currently evaluating the effect thatadoption of SFAS No. 154 will have on our consolidated results ofoperations and financial condition, but do not expect it to have a materialimpact.

On December 16, 2004, the FASB issued SFAS No. 123(revised 2004), *Share-Based Payment* (“SFAS No. 123(R)”),which is a revision of SFAS No. 123, *Accountingfor Stock-Based Compensation* (“SFAS No. 123”) andsupersedes APB Opinion No. 25, *Accounting for StockIssued to Employees*. SFAS No. 123(R) requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the financial statements based on their fair values, beginningwith the first interim or annual period after January 1, 2006, with earlyadoption encouraged. The pro forma disclosures previously permitted underSFAS No. 123, no longer will be an alternative to financial statementrecognition. We are required to adopt SFAS No. 123(R) beginning January 1,2006. Under SFAS No. 123(R), we must determine the appropriate fair valuemodel to be used for valuing share-based payments, the amortization method forcompensation cost and the transition method to be used at date of adoption.Accordingly, the adoption of SFAS No. 123(R)’s fair value method will havea significant impact on our results of operations, although it will have noimpact on our overall financial position. Determining the exact impact ofadoption of SFAS No. 123(R) cannot be predicted at this time becauseit will depend on levels of share-based payments granted in the future and theassumptions for the variables which affect the computation. However, had weadopted SFAS No. 123(R) in prior periods, the impact of that standardwould have approximated the impact of SFAS No. 123 described in thedisclosure of pro forma net loss and net loss per share in Note 1 to ourconsolidated financial statements.

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**Results of Operations**

*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 | ) |   |
| **Other income (expense):**                                        |       |                                             |        |                                             |       |   |   |   |   |
| Interest income                                                    |       |                                             | 207,675     |                                             |       |   | 247,555 |   |   |
| Other income                                                       |       |                                             | 2,443       |                                             |       |   | — |   |   |
| Interest expense                                                   |       |                                             | —      |                                             |       |   | — |   |   |
| **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 | ) |   |

 

*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, which amounted to approximately 24% of ourrevenue, attributable to the operations of Inovio AS, a Norwegian company thatwe acquired in January 2005.

Inovio AS’ revenue primarily consists of amountsreceived from grants, which are received primarily in foreign currencies,  including Euro, Norwegian Kroner and SwedishKrona.

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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 milestone payment was received in July 2005. Under our May 2004license and collaboration agreement with Merck (the “Merck Agreement”), we mayreceive additional future milestone payments linked to the successfuldevelopment of a product if achieved.

An additional $500,000 license fee payment wasreceived from Merck in June 2005 related to the Merck Agreement, underwhich the Company and Merck seek  todevelop and commercialize our MedPulser®DNA Delivery System for use with certainof Merck’s DNA vaccine programs. The license payments received from Merck in2004 and 2005 will be amortized over the remaining minimum term of theagreement.  Royalties are payable onsales of a product utilizing the device developed 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. We will receive further payments, in the form of cashand stock of Valentis, if certain milestones are achieved under this agreement.

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. Billingsfrom 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 miscellaneous revenue was $1,411,825 for theyear ended December 31, 2005, compared to $7,157 for the year ended December 31,2004. The increase in grant and miscellaneous revenue was mainly due to revenuerecognized from our European Union and U.S. Army grants received from theacquisition of Inovio AS.

In August 2004, weannounced that we had been awarded a grant by the National Institutes of Healthto conduct research in the field of vascular gene therapy. The $100,000 Phase Igrant, entitled “Ex vivo venous gene delivery by pulsed electric fields,” wasawarded through the Small Business Innovative Research (SBIR) program and maybe followed, upon evaluation, by a Phase II award of up to $1,000,000. Vasculardiseases are the leading cause of death in the United States and otherindustrialized countries. Vascular transplants, a frequently used method totreat these diseases, unfortunately suffer from a high failure rate, resultingin a significant unmet treatment need. The SBIR grant will support our researchaimed at making vascular transplants more effective and longer lasting. Duringthe year ended December 31, 2005, we recognized $83,450 in revenue basedupon expenditures incurred under this grant.

*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 

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expenses associated withour clinical trials, and the cost of manufacturing products to support theseclinical trials. During the year ended December 31, 2005, research anddevelopment expenses also included $1,110,292, in research and developmentcosts 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 expenditures and capital resources. For instance, the duration andthe cost of clinical trials may vary significantly depending on a variety offactors including the number of patients in the trial, the number of clinicalsites in the trial, and the length of time required enrolling suitable patientsubjects. Even if earlier results are positive, we may obtain different resultsin later stages of development, which could impact our development expendituresfor a particular product. Although we spend a considerable amount of timeplanning our development activities, we may be required to alter our plan basedon new circumstances or events. Any deviation from our plan may require us toincur additional expenditures or accelerate or delay the timing of ourdevelopment spending.

Depending upon theprogress of our clinical and pre-clinical programs and our availability ofcapital, we expect our research and development expenses to continue toincrease during the year ending December 31, 2006 when compared to theyear ended December 31, 2005.

*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 control 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.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. Therewere no charges resulting from any acquisitions during the same period in 2004.

*Other Income, Net*

Other Income, net, for theyear ended December 31, 2005, was $210,118, as compared to interestincome, net, of $247,555 for the year ended December 31, 2004. Thedecrease in interest income, for the year ended December 31, 2005, ascompared to fiscal 2004, was mainly due to lower average cash and investmentsbalance during the year.

*DiscontinuedOperations*

In April 2004, we receivedthe final payment of $200,862 in connection with the sale of the BTX Divisionand recorded expenses related to this transaction of $5,000. In addition, wereceived a one-time 

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settlementpayment of $61,000 associated with the termination of a purchase agreement toacquire the BTX Division by a potential buyer. Our 2004 results reflect a gainof $33,347 we realized from the write-off in the third quarter of 2004 of anaccrued warranty liability related to the sale of the BTX division.

*Imputed and DeclaredDividends on Preferred Stock*

The holders of our Series A and B Preferred Stockare entitled to receive an annual dividend at the rate of 6%, payablequarterly. Holders of Series A and B Preferred Stock are entitled toreceive this quarterly dividend through September 30, 2006. Thesedividends are payable in cash unless the closing price of our common shares forthe 20 trading days immediately preceding the dividend payment date is equal toor greater than the conversion price of such shares, in which event we mayelect to pay the dividends to the holders in common stock. Currently, theconversion price of such shares is $2.40 per share for our Series APreferred Stock and $2.80 per share for our Series B Preferred Stock. Wepaid dividends to the holders of our Series A and B Preferred Stockthrough the issuance of a total of 55,518 of our shares of common stock valuedat $179,956 and in cash of $60,235 during 2005 and through the issuance of73,072 shares of our common stock valued 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.Holders of Series C Preferred Stock are entitled to receive this quarterlydividend through June 30, 2007. These dividends are payable in cash unlessthe closing 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 converted underthe original terms of the Series C Preferred Stock. 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 Series CPreferred Stock issuance, or $6.08 per share, to calculate the $1,942,773imputed dividend charge associated with this beneficial conversion.

During 2005, we also recorded an imputed dividendcharge of $8,329,112 during the three months ended December 31, 2005,related to the investors who converted their Series B and C PreferredStock and common stock investments into shares of common stock as part of our December 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 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.

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*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 ownership change limitations provided by the Internal Revenue Code of 1986,as amended. The annual limitation could result in the expiration of our netoperating losses and credit carryforwards before they otherwise could be used.

*Comparison of YearsEnded December 31, 2004 and 2003*

Theaudited consolidated financial data for the years ended December 31, 2004and December 31, 2003 is presented in the following table and the resultsof these two periods are used in the discussion thereafter.

| ** **                                                         | ** ** | **Year Ended  December 31, 2004** | ** **  | **Year Ended  December 31, 2003** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------------|-------------|--------------------------------------------------|------------|
| **Revenue:**                                                       |       |                                             |        |                                             |       |   |   |   |   |
| License fee and  milestone payments                                |       |                                             | $           | 214,351                                          |       |   |   | $ | 5,882 |   |   |
| Revenue under  collaborative research and development arrangements |       |                                             | 945,591     |                                             |       |   | 74,647 |   |   |
| Grants                                                             |       |                                             | 7,157       |                                             |       |   | — |   |   |
| **Total revenue**                                                  |       |                                             | 1,167,099   |                                             |       |   | 80,529 |   |   |
| **Operating expenses:**                                            |       |                                             |        |                                             |       |   |   |   |   |
| Research and development                                           |       |                                             | 6,548,599   |                                             |       |   | 2,146,909 |   |   |
| General and  administrative                                        |       |                                             | 6,129,195   |                                             |       |   | 4,566,882 |   |   |
| **Total operating expenses**                                       |       |                                             | 12,677,794  |                                             |       |   | 6,713,791 |   |   |
| **Loss from operations**                                           |       |                                             | (11,510,695 | )                                                |       |   | (6,633,262 | ) |   |
| **Other income (expense):**                                        |       |                                             |        |                                             |       |   |   |   |   |
| Interest income                                                    |       |                                             | 247,555     |                                             |       |   | 65,497 |   |   |
| Interest expense                                                   |       |                                             | —      |                                             |       |   | (20,480 | ) |   |
| **Loss from continuing operations**                                |       |                                             | (11,263,140 | )                                                |       |   | (6,588,245 | ) |   |
| Discontinued operations:                                           |       |                                             |        |                                             |       |   |   |   |   |
| Gain on disposal and  other, net                                   |       |                                             | 290,209     |                                             |       |   | 2,034,078 |   |   |
| Loss from discontinued  operations                                 |       |                                             | —      |                                             |       |   | (110,740 | ) |   |
| **Net loss**                                                       |       |                                             | (10,972,931 | )                                                |       |   | (4,664,907 | ) |   |
| Imputed and declared  dividends on preferred stock                 |       |                                             | (732,405    | )                                                |       |   | (18,210,530 | ) |   |
| **Net loss attributable to common  stockholders**                  |       |                                             | $           | (11,705,336                                      | )          |   |   | $ | (22,875,437 | ) |   |
| **Amount per common share—basic and diluted**                 |       |                                             |        |                                             |       |   |   |   |   |
| Loss from continuing  operations                                   |       |                                             | $           | (0.64                                            | )          |   |   | $ | (0.49 | ) |   |
| Gain from discontinued  operations, net                            |       |                                             | 0.02        |                                             |       |   | 0.14 |   |   |
| **Net loss**                                                       |       |                                             | (0.62       | )                                                |       |   | (0.35 | ) |   |
| Imputed and declared  dividends on preferred stock                 |       |                                             | (0.04       | )                                                |       |   | (1.37 | ) |   |
| **Net loss attributable to common stockholders**                   |       |                                             | $           | (0.66                                            | )          |   |   | $ | (1.72 | ) |   |

 

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*Revenue*

During the year ended December 31, 2004, werecorded total revenue of $1,167,099, as compared to $80,529 for the year endedDecember 31, 2003. Revenue consists of license fees, milestone paymentsand amounts received from collaborative research and development arrangementsand grants.

During the year ended December 31, 2004 and 2003,we recorded revenue under license fees and milestone payments of $214,351 and$5,882, respectively. The increase in license fees for the year ended December 31,2004, as compared to fiscal 2003, was mainly due to license revenue of $204,301recognized from the collaboration and licensing agreement with Merck signed in May 2004to developand commercialize our MedPulser DNA Delivery System, which will bedeveloped for use with certain of Merck’s DNA vaccine programs. Under the Merckagreement, we will receive milestone payments linked to the successfuldevelopment of a product if achieved. The upfront payment received from Merckin 2004 and prospective future milestone payments will be amortized over theterm of the agreement. Royalties are payable on sales of a product utilizingthe device developed under this agreement with Merck.

Revenue from license fees during the years ended December 31,2004 and 2003 included the amortization of license fees we received from anon-exclusive license and supply agreement we entered into with Valentis, Incin November 2001. We will receive further payments, in the form of cashand stock of Valentis, if certain milestones are achieved under this agreement.

During the year ended December 31,2004, we recorded revenue under collaborative research and developmentarrangements of $945,591, as compared to $74,647 for the year ended December 31,2003. The increase in revenue from collaborative research and developmentarrangements during the year ended December 31, 2004, as compared tofiscal 2003, was primarily due to revenue of $685,937 recognized from thecollaboration and licensing agreements with Merck signed in May 2004.Billings from research and development work performed pursuant to the Merckagreement are recorded as revenue to match the related research expendituresincurred pursuant to the terms of the agreement.

*Research andDevelopment Expenses*

Research and development expenses, which includeclinical trial costs, for the year ended December 31, 2004, were$6,548,599, as compared to $2,146,909 for the year ended December 31,2003. The increase in research and development expenses for the year ended December 31,2004, as compared to fiscal 2003, was primarily due to an increase in clinicaltrial expenses of approximately $3,150,000. These clinical trial expensesincluded the use of a Clinical Research Organization (“CRO”) hired inassociation with our clinical trials and costs associated with the use ofoutside clinical and regulatory consultants associated with our clinicaltrials. The remainder of the increase was mainly due to increased personnelexpenses to support internal efforts related to product development andclinical trials, increased external research expenses and additional travel andother consulting expenses associated with our clinical trials.

We initiated two Phase IIIhead and neck clinical trials during 2004 in the United States and Europe.These trials compare Electroporation Therapy to surgery using a primaryendpoint of function preservation and secondary endpoints of local tumorcontrol, disease free survival and overall survival. Shifting from a primaryendpoint of survival to a quality of life outcome allows us to carry outclinical trials that will be faster, less costly and have a higher likelihoodof success. As a result, previously announced Phase III head and neck trialsfocusing on survival as a primary endpoint have been discontinued. In addition,we initiated two European post-regulatory approval trials for skin and head andneck cancer to gather additional clinical and pharmacoeconomic data. Due to theinitiation of the clinical trials, we anticipate research and developmentexpenses from clinical and regulatory activities to increase in fiscal 2005.

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*General andAdministrative Expenses*

General and administrativeexpenses, which include business development expenses, for the year ended December 31,2004, were $6,129,195, as compared to $4,566,882 for the year ended December 31,2003. The increase in general and administrative expenses for the year ended December 31,2004, as compared to fiscal 2003, was mainly due to increased consulting andlegal expenses, increased stock option expenses recorded pursuant the issuanceof stock options for non-employee consultants and increased personnel costs.The increase in general and administrative expenses was also due to significantexternal consulting and accounting-related expenses incurred during theyear ended December 31, 2004, related to the implementation of internalcontrol over financial reporting requirements under Section 404 of theSarbanes-Oxley Act of 2002.

*Interest Income,Net*

Interest income for theyear ended December 31, 2004, was $247,555, as compared to interestincome, net, of $45,017 for the year ended December 31, 2003. The increasein interest income, net, for the year ended December 31, 2004, as comparedto fiscal 2003, was mainly due to the receipt of proceeds from financingactivities received in May 2004 and during the fourth quarter of 2003, aswell as proceeds from the exercise of warrants and stock options. This activityincreased our cash balance significantly, which, in turn, generated increasedinterest income. This increase in interest income was offset, in part, byinterest expense of $19,800 related to a bridge loan in the first quarter of2003.

*DiscontinuedOperations*

In January 2003, we closed the sale of thenon-cash assets of our BTX division to Harvard Bioscience, Inc. The termsof the sale were $3.7 million in cash, subject to possible adjustments,and a royalty on net sales of certain BTX products above certain sales targets.This transaction allowed us to focus on our electroporation-basedtherapies for humans. We realized a gain of $2,034,078 related to thistransaction during the year ended December 31, 2003.

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. In addition,we received a one-time settlement payment of $61,000 associated with thetermination of a purchase agreement to acquire the BTX Division by a potentialbuyer. Our 2004 results reflect a gain of $33,347 we realized from thewrite-off in the third quarter of 2004 of an accrued warranty liability relatedto the sale of the BTX division.

*Imputed andDeclared Dividends on Preferred Stock*

We paid dividends to the holders of our Series Aand B Preferred Stock through the issuance of 73,072 shares of our common stockvalued at $322,397 in 2004. and 84,595 common shares valued at $357,587 in2003.

We paid dividends to the holders of our Series CPreferred Stock through the issuance of a total of 30,124 shares of our commonstock valued at $137,967, and in cash of $272,041 during 2004.

During the year ended December 31,2003, in connection with the sale of the Series A and B Preferred Stock,we recorded an imputed dividend charge of $6,045,799 and $11,807,144,respectively, related to the beneficial conversion feature of this preferredstock.

**Liquidity and Capital Resources**

During the last six years, our primary uses of cashhave been to finance research and development activities including clinicaltrial activities in the Oncology and Gene Delivery Division. Since inception,we have satisfied our cash requirements principally from proceeds from the saleof equity securities.

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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 (including $2,430,000 due from one of the investors as part of aprevious funding commitment made, and promissory note delivered, to inconnection with the January 2005 private financing discussed below); (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 issuedwas priced at $2.40 per share, which represented a premium to the closing priceon December 15, 2005. In addition, we issued to the investors five-yearwarrants to purchase 35% of the number of shares of common stock they acquiredin the offering at an exercise price of approximately $2.93 per share, a 25%premium to the closing price on December 15, 2005.

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 (assuming no exercise ofthe warrants). A portion of this private placement involved investors whoconverted $3,200,000 of their previous investment in our Series CPreferred Stock into 790,123 shares of the common stock issued as part of thisprivate placement with no associated cash proceeds to us.

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

On January 25, 2005, we consummated theacquisition of Inovio A.S. We acquired the entire share capital of Inovio ASfor an aggregate purchase price of $10,000,000, which consisted of $3,000,000in cash and $7,904,494 in the issuance of shares of our Series DConvertible Preferred Stock.

As of December 31, 2005, we had working capitalof $14,185,032, as compared to $13,036,685 as of December 31, 2004. Theincrease in working capital during 2005 was primarily a result of a privateplacement that raised an aggregate of $15,795,080 through the sale of ourCommon  Stock to institutional andaccredited investors, as well as the receipt of licensing payments and theexercise of warrants and stock options. These receipts were offset, in part, byexpenditures related to our research and development and clinical trial activities,as well as various general and administrative expenses related to legal,corporate development, investor relations and finance activities.

As of December 31, 2005, we had an accumulateddeficit of $114,269,942. 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. We are evaluating potentialpartnerships as an additional way to fund operations. We will continue torely on outside sources of financing to meet our capital needs beyond nextyear. The outcome of these matters cannot be predicted at this time.

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. We expect we will fund our operations through thebeginning of the second quarter of 2007 with our current working capital.

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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 clinical trials, and selling, general, andadministrative activities, or otherwise reduce or cease operations and ourbusiness and financial results and condition would be materially adverselyaffected.

*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, 2005, 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 2006.

We arecontractually obligated to make the following operating lease payments as ofDecember 31, 2005:

| ** **                   | ** ** | **Total** | ** ** | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
|------------------------------|------------|-----------|------------|---------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| Operating lease  obligations |       | $         | 1,982,977  |                            | $          | 482,731            |       | $                  | 944,577    |                             | $          | 555,669 |   |   | $ | 0 |   |   |
|                              |            |           |            |                                 |            |                    |            |                    |            |                                  |            |  |  |  |  |  |  |  |

 

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**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 equivalents.We are subject to interest rate risk on our cash equivalents, which, as of December 31,2005, had a weighted interest rate of approximately 4.06%. During the yearended December 31, 2005, the average interest rate earned on cashequivalents was 2.77%. Under our current policies, we do not use interest ratederivative instruments to manage exposure to interest rate changes. We ensurethe safety and preservation of our invested principal funds by limiting defaultrisk, market risk and reinvestment risk. We mitigate default risk by investingin investment grade securities. A hypothetical 100 basis point adverse move ininterest rates along the entire interest rate yield curve would not materiallyaffect the fair value of our interest sensitive financial instruments. However,declines in interest rates over time will reduce our interest income.

*Foreign CurrencyRisk*

We have operated primarily in the United States andmost transactions in the fiscal year ended December 31, 2005, 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 our CRO, Quintiles Transnational Corp. While invoices fromQuintiles relating to work done on our European clinical trials are generallydenominated in U.S. dollars, our financial results could be affected by factorssuch as inflation in foreign currencies, in relation to the U.S. dollar, inmarkets where Quintiles is assisting us in conducting these clinical trials.

In January 2005, we acquired Inovio AS, aNorwegian company. We are operating Inovio AS as a wholly-owed subsidiary. Thissubsidiary’s  transactions are denominatedprimarily in foreign currencies, including Euros, Norwegian Kroner and SwedishKrona. As a result, our financial results could be affected by factors such aschanges in foreign currency exchange rates or weak economic conditions inforeign 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 2006.

**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.

**ITEM9.**                CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

**ITEM 9A.**        CONTROLSAND PROCEDURES

**Evaluationof Disclosure Controls and Procedures**

As of December 31,2005, an evaluation was carried out by our management, with the participationof our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) underthe Securities Exchange Act of 1934). Based upon that 

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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.

**InternalControls over 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, 2005, 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. Our assessmentdid not include evaluating the effectiveness of internal control over financialreporting at our recently acquired Inovio AS subsidiary, which is included inour 2005 consolidated financial statements and constituted: $8,897,807 and$7,585,326 of total and net assets, respectively, as of December 31, 2005and $1,323,896 and $3,410,390 of revenues and net loss, respectively, for theyear then ended. We did not assess the effectiveness of internal control overfinancial reporting at this newly acquired subsidiary due to the complexityassociated with assessing internal controls during the integration efforts andlimited company resources, thus making the completion of the process in 2005impractical. Based on the assessment, management determined that we maintainedeffective internal control over financial reporting as of December 31,2005.

Ernst &Young LLP, the independent registered public accounting firm that audited our consolidatedfinancial statements included in this Annual Report on Form 10-K,has issued an attestation report on our management’s assessment of theeffectiveness of our internal control over financial reporting as of December 31,2005. The report is included in this Item under the heading “Report ofIndependent Registered Public Accounting Firm on Internal Control overFinancial Reporting.”

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

The Board of Directors and Shareholders of InovioBiomedical Corporation

We have audited management’s assessment, included inthe accompanying Management’s Annual Report on Internal Control over FinancialReporting, that Inovio Biomedical Corporation (the Company) maintainedeffective internal control over financial reporting as of December 31, 2005,based on criteria established in Internal Control—Integrated Framework issuedby the Committee of Sponsoring Organizations of the Treadway Commission (theCOSO criteria). The Company’s management is responsible for maintainingeffective internal control over financial reporting and for its assessment ofthe effectiveness of internal control over financial reporting. Ourresponsibility 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 anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operating 

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effectiveness of internalcontrol, and performing such other procedures as we considered necessary in thecircumstances. We believe that our audit provides a reasonable basis for ouropinion. 

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. Acompany’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonabledetail, accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with U.S. generally accepted accounting principles, and thatreceipts and expenditures 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 ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

As indicated in the accompanying Management’s AnnualReport on Internal Control over Financial Reporting, management’s assessment ofand conclusion on the effectiveness of internal control over financialreporting did not include the internal controls of Inovio AS, which is includedin the 2005 consolidated financial statements of Inovio Biomedical Corporationand constituted $8,897,807 and $7,585,326 of total and net assets,respectively, as of December 31, 2005 and $1,323,896 and $3,410,390 of revenuesand net loss, respectively, for the period from January 25, 2005 (date ofacquisition) to December 31, 2005. Management did not assess the effectiveness of internal control overfinancial reporting at this entity due to the complexity associated withassessing internal controls during the integration efforts and the Company’slimited resources, thus making the completion of the process in 2005impractical. Our audit of internal control over financial reporting of InovioBiomedical Corporation also did not include an evaluation of the internalcontrol over financial reporting of Inovio AS.

In our opinion, management’s assessment that InovioBiomedical Corporation maintained effective internal control over financialreporting as of December 31, 2005, is fairly stated, in all material respects,based on the COSO criteria.  Also, in ouropinion, Inovio Biomedical Corporation maintained, in all material respects, effectiveinternal control over financial reporting as of December 31, 2005, based on theCOSO criteria.

Wehave also audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the consolidated balance sheets ofInovio Biomedical Corporation as of December 31, 2005 and 2004, and therelated consolidated statements of operations, stockholders' equity, and cashflows for each of the three years in the period ended December 31, 2005 ofInovio Biomedical Corporation and our report dated March 1, 2006 expressed anunqualified opinion thereon.

|                                      | /s/ Ernst & Young LLP |
|-------------------------------------------|--------------------------------|
| San Diego, California  March 1, 2006 |                           |

 

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

There have not been anychanges in our internal control over financial reporting (as defined inRules 13a—15(f) and 15d—15(f) under the Securities Exchange Actof 1934) that occurred during the fourth quarter of our fiscal year endedDecember 31, 2005, that have materially affected, or are reasonably likelyto materially affect, our internal 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 2005fiscal 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 asExhibit 14.1 and which we have incorporated as Exhibit 14.1 to thisReport. The Code of Ethics is available free of charge and may be requested bymail from our ****Investor Relations Department, InovioBiomedical Corporation,****11494 Sorrento Valley Rd.San Diego, CA 92121-1318 or by telephone at 877-446-6846 (877-4-INOVIO).

We intend to satisfy thedisclosure requirements under the Securities Exchange Act of 1934, as amended,regarding an amendment to, or a waiver from, our Code of Ethics by posting suchinformation 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 2005 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 2005 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 2005 fiscal year.

**ITEM 14.**         PRINCIPALACCOUNTANT FEES AND SERVICES

The information requiredby this Item 14 is hereby incorporated by reference from our definitive proxystatement, to be filed pursuant to Regulation 14A within 120 daysafter the end of our 2005 fiscal year.

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**PART IV**

**ITEM 15.**         EXHIBITSAND FINANCIAL STATEMENT SCHEDULES

1.                 FinancialStatements

Consolidatedfinancial statements required to be filed hereunder are indexed on Page F-1hereof.

2.                 FinancialStatement Schedules

Schedulesnot listed herein have been omitted because the information required to be setforth therein is not applicable or is included in the Financial Statements ornotes thereto.

3.                 Exhibits

Thefollowing exhibits are filed 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 number 2.1 of the Registrant’s  Registration Statement on Form S-4, as amended  (File No. 333-56978), filed with the Securities and Exchange  Commission on April 5, 2001).                                                                                |
| 3.1             |       | Certificate of  Incorporation (incorporated by reference to exhibit number 3.1 of the  Registrant’s Registration Statement on Form S-3  (File No. 333-108752) filed with the Securities and Exchange  Commission on September 12, 2003).                                                                                 |
| 3.1             | (a)        | 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 Current Report on Form 8-K filed September 16,  2004).                                                                                               |
| 3.2             |       | Amended and Restated  Bylaws (incorporated by reference to exhibit number 3.2 of the  Registrant’s Form 10-Q for the three months ending  September 30, 2002).                                                                                                                                                                     |
| 3.3             |       | Certificate of  Designations, Rights and Preferences of Series A Cumulative Convertible  Preferred Stock (incorporated by reference to exhibit number 3.3 of the  Registrant’s Registration Statement on Form S-3  (File No. 333-108752) filed with the Securities and Exchange  Commission on September 12, 2003). |
| 3.4             |       | Certificate of  Designations, Rights and Preferences of Series B Cumulative Convertible  Preferred Stock (incorporated by reference to exhibit number 3.4 of the  Registrant’s Registration Statement on Form S-3  (File No. 333-108752) filed with the Securities and Exchange  Commission on September 12, 2003). |
| 3.5             |       | Certificate of  Designations, Rights and Preferences of Series C Convertible Preferred  Stock of Registrant (incorporated by reference to Registration Statement on  Form S-3 filed June 21, 2004).                                                                                                                                     |
| 3.6             |       | Certificate of Decrease  of Shares of Series C Cumulative Convertible Preferred Stock of  Registrant (incorporated by reference to Registration Statement on  Form S-3 filed June 21, 2004).                                                                                                                                            |
| 3.7             |       | Certificate of  Designations, Rights and Preferences of Series D Convertible Preferred  Stock of Registrant (incorporated by reference to Current Report on  Form 8-K filed January 31, 2005).                                                                                                                                          |

65

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| 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 with the Securities and  Exchange Commission 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 number 10.6 of the Registrant’s Form 10-Q  for the three months ending September 30, 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  number 10.7 of the Registrant’s Form 10-Q for the three  months ending September 30, 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  number 10.8 of the Registrant’s Form 10-Q for the three  months ending September 30, 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  number 10.9 of the Registrant’s Form 10-Q for the three  months ending September 30, 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 number 4.2 of the Registrant’s Registration Statement on  Form S-3 (File No. 333-108752) filed with the  Securities and Exchange Commission 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 10.4) (incorporated by reference to exhibit  number 4.3 of the Registrant’s Registration Statement on Form S-3  (File No. 333-108752) filed with the Securities and Exchange  Commission 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 10.4) (incorporated by reference to exhibit  number 4.4 of the Registrant’s Registration Statement on Form S-3  (File No. 333-108752) filed with the Securities and Exchange  Commission 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 number 4.5 of the Registrant’s  Registration Statement on Form S-3 (File No. 333-108752)  filed with the Securities and Exchange Commission 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 number 4.6 of the Registrant’s Registration Statement on  Form S-3 (File No. 333-108752) filed with the  Securities and Exchange Commission on September 12, 2003).                                                          |
| 4.11 |   | Specimen common stock  certificate (incorporated by reference to exhibit number 4.8 of the  Registrant’s Registration Statement on Form S-3  (File No. 333-108752) filed with the Securities and Exchange  Commission on September 12, 2003).                                                                                                                                                                   |
| 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 Registration Statement on Form S-3 filed  June 21, 2004).                                                                                                                                                                          |

66

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| 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  Registration Statement on Form S-3 filed 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 Registration Statement on Form S-3  filed 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 Registration Statement on Form S-3  filed 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 number 4.16 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). |
| 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 Current Report on Form 8-K filed 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 Current Report on Form 8-K  filed 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 Current Report on  Form 8-K filed January 31, 2005).                                                                                                                                                                                                                                                                   |
| 10.1 |   | Amended 2000 Stock  Option Plan (incorporated by reference to exhibit number 10.2 of the  Registrant’s Form 10-Q for the three months ending September 30,  2001).                                                                                                                                                                                                                                                                                                         |
| 10.2 |   | Forms of Incentive and  Nonstatutory Stock Option Agreements used in connection with the 2000 Stock  Option Plan (incorporated by reference to exhibit number 99.2 of the  Registrant’s Registration Statement on Form S-4  (File No. 333-58168) filed with the Securities and Exchange  Commission on April 2, 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 number 4.1 of the Registrant’s Registration  Statement on Form S-3 (File No. 333-108752) filed  with the Securities and Exchange Commission 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 number 99.1 of the Registrant’s  Registration Statement on Form S-3, as amended  (File No. 333-76738), filed with the Securities and Exchange  Commission on February 25, 2002).                                                                                                                                        |
| 10.5 |   | Employment Agreement  dated October November 15, 2001 by and between the Registrant and  James L. Heppell (incorporated by reference to exhibit number 10.24  of the Registrant’s Form 10-K for the year ending  December 31, 2001).                                                                                                                                                                                                                        |
| 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 number 10.5 of the Registrant’s Form 10-Q for the  three months ending September 30, 2000).                                                                                                                                                                                      |

67

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| 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 with the Securities and Exchange Commission on  January 7, 2003).             |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.8  |   | Financial Consultant  Agreement, dated October 3, 2002, between the Registrant and Catalyst  Capital, LLC (incorporated by reference to exhibit number 4.7 of  the Registrant’s Registration Statement on Form S-3  (File No. 333-108752) filed with the Securities and Exchange  Commission on September 12, 2003).               |
| 10.9  | (a)    | Amendment to Financial Consultant Agreement, dated  July 14, 2003, between the Registrant and Catalyst Capital, LLC  (incorporated by reference to exhibit number 4.7(a) of the  Registrant’s Registration Statement on Form S-3  (File No. 333-108752) filed with the Securities and Exchange  Commission on September 12, 2003). |
| 10.10 |   | 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 Current Report on Form 8-K filed January 13,  2005).                                                                                                                        |
| 10.11 |   | Form of Promissory  Notes issued by the Registrant on January 10, 2005, including a schedule  of note holders (incorporated by reference to Current Report on Form 8-K  filed January 10, 2005).                                                                                                                                                       |
| 10.12 | † | 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 Quarterly Report on Form 10-Q filed August 13,  2004).                                                |
| 10.13 |   | 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 Current Report on Form 8-K filed  January 10, 2005).                                                                                              |
| 10.14 |   | Stock Purchase Agreement  dated January 25, 2005 by and among the Registrant, Inovio AS and  the Shareholders of Inovio AS (incorporated by reference to Current Report on  Form 8-K filed January 31, 2005).                                                                                                                                          |
| 10.15 |   | Lease Agreement by and  between the Registrant and Nexus Sorrento Glen LLC dated August 26, 1999  (incorporated by reference to exhibit number 10.15 of the Registrant’s  Registration Statement on Form S-1, as amended  (File No. 333-88427), filed with the Securities and Exchange  Commission on October 5, 1999).                 |
| 10.16 |   | Lease Agreement by and  between the Registrant and Sorrento Centre Tenancy in Common dated  November 29, 2004 (incorporated by reference to exhibit  number 10.16 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).               |
| 10.17 |   | Lease Amendment #3 by  and between the Registrant and Nexus Sorrento Glen LLC dated January 21,  2005 (incorporated by reference to exhibit number 16.17 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).                       |
| 10.18 |   | Letter agreement dated  September 30, 2005 between the registrant and Verdas extending due date  of Promissory Note (incorporated by reference to exhibit number 99.1 of  the Registrant’s Report of Form 8-K, filed with the Securities and  Exchange Commission on October 6, 2005)                                                             |

68

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| 10.19 |   | Letter agreement dated  September 30, 2005 between the registrant and Baystar extending due date  of Promissory Note (incorporated by reference to exhibit number 99.2 of  the Registrant’s Report of Form 8-K, filed with the Securities and  Exchange Commission on October 6, 2005).                                 |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.20 |   | Letter agreement dated  November 30, 2005 between registrant and Verdas extending due date of  the Promssory Note (incorporated by reference to exhibit number 99.1 of  the Registrant’s Report of Form 8-K, filed with the Securities and  Exchange Commission on December 6, 2005).                                   |
| 10.21 |   | Letter agreement dated November 30, 2005  between registrant and Baystar extending due date of the Promissory Note  (incorporated by reference to exhibit number 99.2 of the Registrant’s Report  of Form 8-K, filed with the Securities and Exchange Commission on  December 6, 2005).                                 |
| 10.22 |   | Securities Purchase  Agreement dated as of December 16, 2005, among registrant and and each  purchaser identified on the signature pages thereto (incorporated by reference to exhibit  number 99.1 of the Registrant’s Report of Form 8-K, filed  with the Securities and Exchange Commission on January 6, 2006) |
| 10.23 |   | Securities Purchase  Agreement dated December 16, 2005, among Inovio Biomedical Corporation,  and each purchaser identified on the signature pages thereto  (incorporated by reference to Exhibit 99.1 to registrant’s Form 8-K  filed with the Securities and Exchange Commission on January 6, 2006).            |
| 10.24 |   | Form of Warrants  (incorporated by reference to Exhibit 99.2 to registrant’s Form 8-K  filed with the Securities and Exchange Commission on January 6, 2006).                                                                                                                                                           |
| 10.25 |   | 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).                           |
| 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 itsapplication 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.

69

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**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, 2006.
|        |   | **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, 2006  |      |
| Avtar  Dhillon       |          | (Principal  Executive Officer), Director |       |                 |      |
|                 |          |                                     |       |                 |      |
| /s/ PETER KIES       |          | Chief  Financial Officer                 |       | March 16,  2006 |      |
| Peter  Kies          |          | (Principal  Accounting Officer and       |       |                 |      |
|                 |          | Principal  Financial Officer)            |       |                 |      |
|                 |          |                                     |       |                 |      |
| /s/ FELIX THEEUWES   |          | Director                                 |       | March 16,  2006 |      |
| Felix  Theeuwes      |          |                                     |       |                 |      |
|                 |          |                                     |       |                 |      |
| /s/ JAMES L. HEPPELL |          | Director                                 |       | March 16,  2006 |      |
| James  L. Heppell    |          |                                     |       |                 |      |
|                 |          |                                     |       |                 |      |
| /s/ RIAZ BANDALI     |          | Director                                 |       | March 16,  2006 |      |
| Riaz  Bandali        |          |                                     |       |                 |      |
|                 |          |                                     |       |                 |      |
| /s/ TAZDIN ESMAIL    |          | Director                                 |       | March 16,  2006 |      |
| Tazdin  Esmail       |          |                                     |       |                 |      |
|                 |          |                                     |       |                 |      |
| /s/ GENE LARSON      |          | Director                                 |       | March 16,  2006 |      |
| Gene  Larson         |          |                                     |       |                 |      |
|                 |          |                                     |       |                 |      |
| /s/ SIMON X. BENITO  |          | Director                                 |       | March 16,  2006 |      |
| Simon X. Benito      |          |                                     |       |                 |      |

 

 

70

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**INOVIO BIOMEDICAL CORPORATION**

**Indexto Financial Statements**

|                                                                                                  | ** ** | **Page** |
|--------------------------------------------------------------------------------------------------|------------|----------|
| Report of Independent Registered Public Accounting  Firm                                         |       | F-2      |
| Consolidated  Balance Sheets as of December 31, 2005 and December 31, 2004             |       | F-3      |
| Consolidated Statements of Operations for the years  ended December 31, 2005, 2004 and 2003 |       | F-4      |
| Consolidated Statements of Stockholders’ Equity                                             |       | F-5      |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2005, 2004 and 2003 |       | F-6      |
| Notes  to Consolidated Financial Statements                                                      |       | F-7      |

 

F-1

----

**Report of Independent Registered Public AccountingFirm**

The Board of Directors and Shareholders of InovioBiomedical Corporation

We have audited the accompanying consolidated balancesheets of Inovio Biomedical Corporation (the Company) as of December 31, 2005and 2004, and the related consolidated statements of operations, stockholders'equity and cash flows for each of the three years in the period ended December31, 2005. These consolidated financial statements are the responsibility of theCompany's management. Our responsibility is to express an opinion on these consolidatedfinancial statements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe consolidated financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Inovio Biomedical Corporation at December 31, 2005 and2004, and the consolidated results of its operations and its cash flows foreach of the three years in the period ended December 31, 2005, in conformitywith U.S. generally accepted accounting principles.

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), the effectiveness of InovioBiomedical Corporation’s internal control over financial reporting as ofDecember 31, 2005, based on criteria established in Internal Control-IntegratedFramework issued by the Committee of Sponsoring Organizations of the TreadwayCommission and our report dated March 1, 2006, expressed an unqualified opinionthereon.

|                                      | /s/ Ernst & Young LLP |
|-------------------------------------------|--------------------------------|
| San Diego, California  March 1, 2006 |                           |

 

F-2

----

**InovioBiomedical Corporation**

**CONSOLIDATED BALANCE SHEETS**

| ** **                                                                                                                                                               | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                               |       |                        |       |                        |       |
| **Current  assets:**                                                                                                                                                     |       |                        |       |                        |       |
| Cash and cash  equivalents                                                                                                                                               |       | $                           | 17,166,567 |                        | $          | 17,889,797 |   |
| Accounts  receivable                                                                                                                                                     |       | 284,171                     |       | 424,157                     |       |
| Prepaid expenses  and other                                                                                                                                              |       | 870,169                     |       | 124,723                     |       |
| **Total  current assets**                                                                                                                                                |       | 18,320,907                  |       | 18,438,677                  |       |
| Fixed assets, net                                                                                                                                                        |       | 375,613                     |       | 155,253                     |       |
| Patents and other  assets, net                                                                                                                                           |       | 2,148,090                   |       | 2,357,572                   |       |
| Goodwill                                                                                                                                                                 |       | 4,290,594                   |       | —                      |       |
| Intangible  assets, net                                                                                                                                                  |       | 3,843,750                   |       | —                      |       |
| **Total  assets**                                                                                                                                                        |       | $                           | 28,978,954 |                        | $          | 20,951,502 |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                            |       |                        |       |                        |       |
| **Current  liabilities:**                                                                                                                                                |       |                        |       |                        |       |
| Accounts payable  and accrued expenses                                                                                                                                   |       | $                           | 1,864,935  |                        | $          | 2,155,592 |   |
| Accrued clinical  trial expenses                                                                                                                                         |       | 1,064,497                   |       | 2,195,816                   |       |
| Deferred revenue                                                                                                                                                         |       | 1,206,443                   |       | 1,050,584                   |       |
| **Total  current liabilities**                                                                                                                                           |       | 4,135,875                   |       | 5,401,992                   |       |
| Deferred rent                                                                                                                                                            |       | 285,875                     |       | —                      |       |
| Deferred tax  liabilities                                                                                                                                                |       | 1,076,250                   |       | —                      |       |
| Long-term  liabilities                                                                                                                                                   |       | 10,206                      |       | —                      |       |
| **Total  liabilities**                                                                                                                                                   |       | 5,508,206                   |       | 5,401,992                   |       |
| Commitments and  contingencies                                                                                                                                           |       |                        |       |                        |       |
| **Stockholders’  equity:**                                                                                                                                          |       |                        |       |                        |       |
| Preferred  stock—par value $0.001; Authorized shares: 10,000,000, issued and  outstanding: 1,562,424 and 1,441 at December 31, 2005 and 2004,  respectively    |       | 1,562                       |       | 2                           |       |
| Common stock—par  value $0.001; Authorized shares: 300,000,000, issued and outstanding:  29,468,756 and 18,420,427 at December 31, 2005 and 2004, respectively |       | 29,469                      |       | 18,420                      |       |
| Additional paid-in  capital                                                                                                                                              |       | 137,739,954                 |       | 103,438,408                 |       |
| Accumulated  deficit                                                                                                                                                     |       | (114,269,942                | )          | (87,907,320                 | )          |
| Accumulated other  comprehensive loss                                                                                                                                    |       | (30,295                     | )          | —                      |       |
| **Total  stockholders’ equity**                                                                                                                                     |       | 23,470,748                  |       | 15,549,510                  |       |
| **Total liabilities and  stockholders’ equity**                                                                                                                     |       | $                           | 28,978,954 |                        | $          | 20,951,502 |   |

 

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

F-3

----

**InovioBiomedical Corporation**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

| ** **                                                           | ** ** | **Year ended  December 31,  2005** | ** **  | **Year ended  December 31,  2004** | ** ** | **Year ended  December 31,  2003** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------|-------------|----------------------------------------------|------------|----------------------------------------------|------------|
| **Revenue:**                                                         |       |                                         |        |                                         |       |                                         |       |
| License fee and  milestone payments                                  |       | $                                            | 2,563,283   |                                         | $          | 214,351                                      |       | $ | 5,882 |   |
| Revenues under  collaborative research and development arrangements  |       | 1,492,145                                    |        | 945,591                                      |       | 74,647                                       |       |
| Grants and  miscellaneous revenue                                    |       | 1,411,825                                    |        | 7,157                                        |       | —                                       |       |
| **Total  revenue**                                                   |       | 5,467,253                                    |        | 1,167,099                                    |       | 80,529                                       |       |
| **Operating  expenses:**                                             |       |                                         |        |                                         |       |                                         |       |
| Research and  development                                            |       | 11,454,773                                   |        | 6,548,599                                    |       | 2,146,909                                    |       |
| General and  administrative                                          |       | 5,981,200                                    |        | 6,129,195                                    |       | 4,566,882                                    |       |
| 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                                   |       | 6,713,791                                    |       |
| **Loss  from operations**                                            |       | (15,506,970                                  | )           | (11,510,695                                  | )          | (6,633,262                                   | )          |
| **Other  income(expense):**                                          |       |                                         |        |                                         |       |                                         |       |
| Interest income                                                      |       | 207,675                                      |        | 247,555                                      |       | 65,497                                       |       |
| Other income                                                         |       | 2,443                                        |        | —                                       |       | —                                       |       |
| Interest expense                                                     |       | —                                       |        | —                                       |       | (20,480                                      | )          |
| **Loss  from continuing operations**                                 |       | (15,296,852                                  | )           | (11,263,140                                  | )          | (6,588,245                                   | )          |
| **Discontinued operations:**                                         |       |                                         |        |                                         |       |                                         |       |
| Gain on disposal  of assets                                          |       | —                                       |        | 290,209                                      |       | 2,034,078                                    |       |
| Loss from  discontinued operations                                   |       | —                                       |        | —                                       |       | (110,740                                     | )          |
| **Net  loss**                                                        |       | (15,296,852                                  | )           | (10,972,931                                  | )          | (4,664,907                                   | )          |
| Imputed and  declared dividends on preferred stock                   |       | (11,065,770                                  | )           | (732,405                                     | )          | (18,210,530                                  | )          |
| **Net  loss attributable to common stockholders**                    |       | $                                            | (26,362,622 | )                                            | $          | (11,705,336                                  | )          | $ | (22,875,437 | ) |
| **Amounts  per common share—basic and diluted:**                |       |                                         |        |                                         |       |                                         |       |
| Loss from  continuing operations                                     |       | $                                            | (0.81       | )                                            | $          | (0.64                                        | )          | $ | (0.49 | ) |
| Gain from  discontinued operations, net                              |       | —                                       |        | 0.02                                         |       | 0.14                                         |       |
| **Net  loss**                                                        |       | (0.81                                        | )           | (0.62                                        | )          | (0.35                                        | )          |
| Imputed and  declared dividends on preferred stock                   |       | (0.58                                        | )           | (0.04                                        | )          | (1.37                                        | )          |
| **Net  loss attributable to common stockholders**                    |       | $                                            | (1.39       | )                                            | $          | (0.66                                        | )          | $ | (1.72 | ) |
| **Weighted  average number of common shares—basic and diluted** |       | 19,009,189                                   |        | 17,623,559                                   |       | 13,316,624                                   |       |

 

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

F-4

----

**InovioBiomedical Corporation**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

| ** **                                                                                           | ** ** | ** **               | ** ** | ** **            | ** ** | ** **         | ** ** | ** **                | ** ** | ** **                  | ** ** | ** **      | ** ** | ** **      | ** ** | **Accumulated**        | ** ** | ** **             | ** **  |
|------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|--------------------|------------|---------------------------|------------|-----------------------------|------------|-----------------|------------|-----------------|------------|------------------------|------------|------------------------|-------------|
| ** **                                                                                           | ** ** | **Preferred stock** | ** ** | **Common stock** | ** ** | ** **         | ** ** | **Receivables from** | ** ** | ** **                  | ** ** | **other**       | ** ** | **Total**       | ** ** |
| ** **                                                                                           | ** ** | **Number of**       | ** ** | ** **            | ** ** | **Number of** | ** ** | ** **                | ** ** | **Additional paid-in** | ** ** | **executive/**  | ** ** | **Accumulated** | ** ** | **comprehensive**      | ** ** | **stockholders’** | ** **  |
| ** **                                                                                           | ** ** | **shares**               | ** ** | **Amount**            | ** ** | **shares**         | ** ** | **Amount**                | ** ** | **capital**                 | ** ** | **stockholder** | ** ** | **deficit**     | ** ** | **(loss) income** | ** ** | **equity**             | ** **  |
| Balance at  December 31, 2002                                                                   |       |                     | —     |                  |       |               | $          | —                    |       |                        |       | 12,599,639      |       |            |       | $                      | 12,600     |                   |        |   | $ | 57,175,000 |   |   |   | $ | (33,445 | ) |   | $ | (53,326,547 | ) |   | $ | (102,238 | ) |   |   | $ | 3,725,370 |   |   |
| Issuance of  Series A and B preferred stock for cash, net of issuance costs of  $1,058,864 |       |                     | 1,567      |                  |       |               | 2          |                      |       |                        | —     |            |       |            | —     |                   |       |                   | 14,611,133  |   |   |   | — |   |   | — |   |   | — |   |   |   | 14,611,135 |   |   |
| Common stock  issued for services                                                                    |       |                     | —     |                  |       |               | —     |                      |       |                        | 39,041     |            |       |            | 39         |                   |       |                   | 273         |   |   |   | — |   |   | — |   |   | — |   |   |   | 312 |   |   |
| Exercise of stock  options for cash                                                                  |       |                     | —     |                  |       |               | —     |                      |       |                        | 129,531    |            |       |            | 130        |                   |       |                   | 372,751     |   |   |   | — |   |   | — |   |   | — |   |   |   | 372,881 |   |   |
| Exercise of  warrants for cash                                                                       |       |                     | —     |                  |       |               | —     |                      |       |                        | 258,106    |            |       |            | 258        |                   |       |                   | 695,944     |   |   |   | — |   |   | — |   |   | — |   |   |   | 696,202 |   |   |
| Conversions of  preferred stock to common stock                                                      |       |                     | (720       | )                     |       |               | (1         | )                         |       |                        | 2,809,520  |            |       |            | 2,809      |                   |       |                   | (2,808      | ) |   |   | — |   |   | — |   |   | — |   |   |   | — |   |   |
| Repayment of note  receivable                                                                        |       |                     | —     |                  |       |               | —     |                      |       |                        | —     |            |       |            | —     |                   |       |                   | —      |   |   |   | 33,445 |   |   | — |   |   | — |   |   |   | 33,445 |   |   |
| Stock-based  compensation                                                                            |       |                     | —     |                  |       |               | —     |                      |       |                        | —     |            |       |            | —     |                   |       |                   | 170,959     |   |   |   | — |   |   | — |   |   | — |   |   |   | 170,959 |   |   |
| Declared dividends                                                                                   |       |                     | —     |                  |       |               | —     |                      |       |                        | 84,595     |            |       |            | 84         |                   |       |                   | 357,503     |   |   |   | — |   |   | — |   |   | — |   |   |   | 357,587 |   |   |
| Imputed dividends                                                                                    |       |                     | —     |                  |       |               | —     |                      |       |                        | —     |            |       |            | —     |                   |       |                   | 17,852,943  |   |   |   | — |   |   | — |   |   | — |   |   |   | 17,852,943 |   |   |
| Foreign currency  translation adjustment                                                             |       |                     | —     |                  |       |               | —     |                      |       |                        | —     |            |       |            | —     |                   |       |                   | —      |   |   |   | — |   |   | — |   |   | 102,238 |   |   |   | 102,238 |   |   |
| Net loss  attributable to common stockholders                                                        |       |                     | —     |                  |       |               | —     |                      |       |                        | —     |            |       |            | —     |                   |       |                   | —      |   |   |   | — |   |   | (22,875,437 | ) |   | — |   |   |   | (22,875,437 | ) |   |
| 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      | ) |   |   | — |   |   | — |   |   | — |   |   |   | — |   |   |
| Stock-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 |   |   |
| Stock-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 |   |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

F-5

 

----

**InovioBiomedical Corporation**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

| ** **                                                                                         | ** ** | **Year ended  December 31, 2005** | ** **  | **Year ended  December 31, 2004** | ** ** | **Year ended  December 31, 2003** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|-------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| **Cash flows from operating  activities:**                                                         |       |                                             |        |                                             |       |                                             |       |   |   |   |   |   |   |
| Loss from  continuing operations                                                                   |       |                                             | $           | (15,296,852                                      | )          |                                             |       | $ | (11,263,140 | ) |   |   | $ | (6,588,245 | ) |   |
| Adjustments to reconcile  loss from continuing operations to net cash used in operating activities |       |                                             |        |                                             |       |                                             |       |   |   |   |   |   |   |
| Compensation for services paid in stock options                                                    |       |                                             | 116,382     |                                             |       |                                             | 413,320    |   |   |   | 170,959 |   |   |
| Depreciation and amortization                                                                      |       |                                             | 650,817     |                                             |       |                                             | 573,041    |   |   |   | 584,413 |   |   |
| Amortization of intangible assets                                                                  |       |                                             | 206,250     |                                             |       |                                             | —     |   |   |   | — |   |   |
| Amortization of deferred tax liabilities                                                           |       |                                             | (57,750     | )                                                |       |                                             | —     |   |   |   | — |   |   |
| Charge for acquired in-process research and  development                                           |       |                                             | 3,332,000   |                                             |       |                                             | —     |   |   |   | — |   |   |
| Warrants issued in connection with debt                                                            |       |                                             | —      |                                             |       |                                             | —     |   |   |   | 19,800 |   |   |
| Deferred rent                                                                                      |       |                                             | (29,520     | )                                                |       |                                             | (22,536    | ) |   |   | (13,315 | ) |   |
| Changes in operating  assets and liabilities:                                                      |       |                                             |        |                                             |       |                                             |       |   |   |   |   |   |   |
| Accounts receivable                                                                                |       |                                             | 152,471     |                                             |       |                                             | (249,157   | ) |   |   | (99,412 | ) |   |
| Prepaid expenses and other                                                                         |       |                                             | (150,644    | )                                                |       |                                             | (177,928   | ) |   |   | 112,858 |   |   |
| Accounts payable and accrued expenses                                                              |       |                                             | (1,259,924  | )                                                |       |                                             | 2,949,629  |   |   |   | (205,284 | ) |   |
| Deferred revenue                                                                                   |       |                                             | 28,747      |                                             |       |                                             | 719,420    |   |   |   | 128,510 |   |   |
| Foreign currency translation adjustment                                                            |       |                                             | (30,295     | )                                                |       |                                             | —     |   |   |   | 102,236 |   |   |
| **Net  cash used in operating activities**                                                         |       |                                             | (12,338,318 | )                                                |       |                                             | (7,057,351 | ) |   |   | (5,787,480 | ) |   |
| **Cash  flows from investing activities:**                                                         |       |                                             |        |                                             |       |                                             |       |   |   |   |   |   |   |
| Acquisition of  business, net of cash acquired                                                     |       |                                             | (2,341,028  | )                                                |       |                                             | —     |   |   |   | — |   |   |
| Purchase of  capital assets                                                                        |       |                                             | (286,907    | )                                                |       |                                             | (102,365   | ) |   |   | (59,618 | ) |   |
| Increase in  patents and other assets                                                              |       |                                             | (447,764    | )                                                |       |                                             | (336,752   | ) |   |   | (280,499 | ) |   |
| **Net  cash used in investing activities**                                                         |       |                                             | (3,075,699  | )                                                |       |                                             | (439,117   | ) |   |   | (340,117 | ) |   |
| **Cash  flows from financing activities:**                                                         |       |                                             |        |                                             |       |                                             |       |   |   |   |   |   |   |
| Payments on obligations  under capital leases                                                      |       |                                             | —      |                                             |       |                                             | —     |   |   |   | (20,642 | ) |   |
| Proceeds from  issuance of preferred stock, net of issuance costs                                  |       |                                             | —      |                                             |       |                                             | 9,730,970  |   |   |   | 15,694,176 |   |   |
| Proceeds from  issuance of common shares, net of issuance costs                                    |       |                                             | 15,304,716  |                                             |       |                                             | 1,606,831  |   |   |   | — |   |   |
| Cash received for  common stock to be issued                                                       |       |                                             | —      |                                             |       |                                             | 607,471    |   |   |   | — |   |   |
| Payment of  preferred stock cash dividend                                                          |       |                                             | (613,929    | )                                                |       |                                             | (276,315   | ) |   |   | — |   |   |
| **Net  cash provided by financing activities**                                                     |       |                                             | 14,690,787  |                                             |       |                                             | 11,668,957 |   |   |   | 15,673,534 |   |   |
| Net cash provided by discontinued operations                                                       |       |                                             | —      |                                             |       |                                             | 256,862    |   |   |   | 3,039,065 |   |   |
| **(Decrease)  increase in cash and cash equivalents**                                              |       |                                             | (723,230    | )                                                |       |                                             | 4,429,351  |   |   |   | 12,585,002 |   |   |
| Cash and cash  equivalents, beginning of period                                                    |       |                                             | 17,889,797  |                                             |       |                                             | 13,460,446 |   |   |   | 875,444 |   |   |
| **Cash and cash equivalents, end  of period**                                                      |       |                                             | $           | 17,166,567                                       |       |                                             |       | $ | 17,889,797 |   |   |   | $ | 13,460,446 |   |   |

 

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

F-6

----

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

**1. Description of Company**

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.”  We carry out our business through our UnitedStates wholly-owned subsidiaries, Genetronics, Inc., which wasincorporated in California on June 29, 1983, and Inovio AS, a companyincorporated in Norway.

On January 25, 2005, we consummated theacquisition of Inovio A.S. We acquired the entire share capital of Inovio A.S.for an aggregate purchase price of $10,000,000, which consisted of $3,000,000in cash and $7,904,494 in the issuance of shares of our Series DConvertible Prefered Stock. See Note 15.

We are a San Diego-based biomedical companywhose technology platform is based on medical devices that use ElectroporationTherapy (“EPT”) to deliver drugs and genes into cells. We are developing andcommercializing novel medical therapies to address a number of diseases withcritical unmet treatment needs using EPT. Our MedPulser Electroporation TherapySystem is in Phase III clinical trials in the United States for the treatmentof recurrent head and neck cancer. In addition, we are currently conducting pre-marketingstudies to support the commercialization of the Medpulser ElectroporationTherapy System in Europe. Our system delivers electrical pulses to tumorsinjected with the generic drug bleomycin. The unique feature of the system,which uses a generator together with disposable needle applicators, is thepreservation of healthy tissue at the margins of the tumor.

We incurred a net lossattributable to common stockholders of $26,362,622 for the year ended December 31,2005. We had working capital of $14,185,032 and an accumulated deficit of$114,269,942 as of December 31, 2005. Our ability to continue as a goingconcern is dependent upon our ability to achieve profitable operations and toobtain additional capital. We will continue to rely on outside sources offinancing to meet our capital needs beyond 2006. The outcome of these matterscannot be predicted at this time. Further, there can be no assurance, assumingwe successfully raise additional funds, that we will achieve positive cashflow. If we are not able to secure additional funding, we will be required toscale back our research and development programs, preclinical studies andclinical trials, and general and administrative activities and may not be ableto continue in business. These consolidated financial statements do not includeany adjustments to the specific amounts and classifications of assets andliabilities, which might be necessary should we be unable to continue inbusiness. Our consolidated financial statements as of and for the year ended December 31,2005 have been prepared on a going concern basis, which contemplates the realizationof assets and the settlement of liabilities and commitments in the normalcourse of business for the foreseeable future.

**2. Summaryof Significant Accounting Policies**

*Consolidation*

These consolidatedfinancial statements include the accounts of Inovio Biomedical Corporation andits wholly-owned subsidiaries, Genetronics, Inc., a companyincorporated in the state of California and 

F-7

----

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

**1. Descriptionof Company (Continued)**

InovioAS, a company incorporated in Norway. Significant intercompany accounts andtransactions have been eliminated upon consolidation.

*Discontinuedoperations*

Our Board of Directors hasdecided to focus our attention and resources on our Drug and Gene DeliveryDivision. In connection with this decision, we sold the assets of the BTXInstrument Division in January 2003. Operating results of thesediscontinued operations are shown separately in the accompanying consolidatedstatements of operations. The BTX Instruments Division had no revenue in 2005and 2004 and $162,060 in revenue for 2003. This amount is not included asrevenue in the consolidated statements of operations based upon itsdiscontinued nature.

*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, whenpurchased, to be cash equivalents. Cash equivalents are stated at cost, whichapproximates market value. At December 31, 2005, cash equivalents included$13,910,635 in money market funds. At December 31, 2004, cash equivalentsincluded $16,376,459 of commercial paper.

*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, 2005 and 2004.

*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. Equipmentrecorded under capital lease agreements are depreciated over the shorter of theestimated useful life of the equipment or the lease term. Leaseholdimprovements are depreciated 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 

F-8

----

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

**1. Descriptionof Company (Continued)**

incurred.Depreciation expense for the years ending December 31, 2005, 2004 and 2003was $147,129, $123,014 and $179,037, respectively.

*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. Amortizationexpense for the years ending December 31, 2005, 2004 and 2003 was$503,688, $450,027 and $405,376, respectively.

License costs are recordedbased on the fair value of consideration paid and amortized using thestraight-line method over the shorter of the expected useful life of theunderlying patents or the term of the related license agreement.

*Goodwill*

Goodwill is tested forimpairment on an annual basis and between annual test 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 gross carrying amountand accumulated amortization of these intangible assets at December 31,2005 was $3,843,750 and $206,250, respectively. We expect total amortizationexpense for these intangible assets to be approximately $225,000 for each ofthe years ended December 31, 2006, 2007, 2008, 2009 and 2010, respectively.No impairment of intangible assets have been identified during any of theperiods presented.

*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 31,2005.

*Income taxes*

We account for incometaxes using the liability method of tax allocation. Future income taxes arerecognized for the future income tax consequences attributable to differencesbetween the carrying values of assets and liabilities and their respectiveincome tax bases. Future income tax assets and liabilities are measured usingenacted income tax rates expected to apply to taxable income in the years inwhich 

F-9

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

**1. Descriptionof Company (Continued)**

temporarydifferences are expected to be recovered or settled. The effect on futureincome tax assets and liabilities of a change in rates is included in earningsin the period that includes the enactment date. Future income tax assets arerecorded in the consolidated financial statements if realization is consideredmore likely than not.

*Government grants*

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.

*Revenue recognition*

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 milestone issubstantive in nature and the achievement of the milestone was not reasonablyassured at the inception of the agreement. Payments for milestones which arenot reasonably assured of being achieved at the time of signing the agreementare treated as the culmination of a separate earnings process and arerecognized as revenue when the milestones are achieved. We defer payments formilestone events which are reasonably assured and recognize them ratably overthe minimum remaining period of our performance obligations.

We have adopted a strategyof co-developing or licensing our gene delivery technology for specific genesor specific medical indications. Accordingly, we have entered intocollaborative research and development agreements and have received funding forpre-clinical research and clinical trials. Funding under these agreements,which are non-refundable, are recorded as revenue as the related researchexpenditures are incurred pursuant to the terms of the agreement and providedcollectibility is reasonably assured.

*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. The financialterms of these agreements are subject to negotiation and vary from contract tocontract and may result in uneven payment flows. Generally, these agreementsset forth the scope of work to be performed at a fixed fee or unit price.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.

F-10

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

**1. Descriptionof Company (Continued)**

*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,  2005** | ** ** | **As of  December 31,  2004** | ** ** | **As of  December 31,  2003** | ** ** |
|----------------------------------------|------------|------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| Options to  purchase common stock      |       |       | 1,141,267  |                                    |       |                                    | 1,472,841  |                                    |       |   | 1,809,378 |   |   |
| Warrants to  purchase common stock     |       |       | 5,648,036  |                                    |       |                                    | 2,435,487  |                                    |       |   | 3,148,077 |   |   |
| Convertible  preferred stock           |       |       | 2,631,512  |                                    |       |                                    | 1,605,381  |                                    |       |   | 3,273,218 |   |   |
| Total                                  |       |       | 9,420,815  |                                    |       |                                    | 5,513,709  |                                    |       |   | 8,230,673 |   |   |

 

*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 the facility lease, which has escalatingpayments and is expensed on a straight-line basis over the term of five years. Theannual rent for this leased property is $452,767 in the first four years of theoriginal lease term. The annual rent for the fifth and final year of theoriginal lease term is $480,207. At the end of the original lease term, we havethe option of renewing this lease for an additional five-year lease term at anannual rate equal to the fair market rental value of the property, as definedin the lease agreement.

*Stock-basedcompensation*

We follow Accounting Principles Board (“APB”) OpinionNo. 25, *Accounting for Stock Issued toEmployees* (APB No. 25) and related interpretations, inaccounting for our employee stock options. Under APB No. 25, because theexercise price of our options for common shares granted to employees is notless than the fair market value of the underlying stock on the date of grant,no compensation expense has been recognized. Options awarded to non-employees,including consultants, are recorded at their fair values using the Black-Scholesoption pricing model based on the vesting terms of the options. We have alsoadopted the disclosure-only alternative of SFAS No.123, *Accounting for Stock-Based Compensation*.

F-11

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

**2. Summary of SignificantAccounting Policies (Continued)**

On December 16, 2004, the FASB issued SFAS No. 123(revised 2004), *Share-Based Payment*,which is a revision of SFAS No. 123. SFAS No. 123(R) supersedesAPB Opinion No. 25, *Accounting forStock Issued to Employees*, and amends SFAS No. 95, *Statement of Cash Flows*. Generally, theapproach in SFAS No. 123(R) is similar to the approach described inSFAS No. 123. However, SFAS No. 123(R) requires all share-basedpayments to employees, including grants of employee stock options, to berecognized in the income statement based on their fair values. Pro formadisclosure is no longer an alternative. Effective January 1, 2006, theCompany adopted SFAS No. 123(R). The Company plans to use themodified-prospective method of recognition of compensation expense related toshare-based payments.

As permitted by SFAS No. 123, we currentlyaccount for share-based payments to employees using APB No. 25’sintrinsic value method and, as such, generally recognize no compensation costfor employee stock options. Accordingly, the adoption of SFAS No. 123(R)’sfair value method will have a significant impact on our result of operations,although it will have no impact on our overall financial position. The impactof adoption of SFAS No. 123(R) cannot be predicted at this timebecause it will depend on levels of share-based payments granted in thefuture. However, had we adopted SFAS No. 123(R) in prior periods, theimpact of that standard would have approximated the impact of SFAS No. 123as described in the disclosure of pro forma net loss and loss per share in ourconsolidated financial statements. SFAS No. 123(R) also requires thebenefits of tax deductions in excess of recognized compensation cost to bereported as a financing cash flow, rather than as an operating cash flow asrequired under current literature. This requirement will reduce net operatingcash flows and increase net financing cash flows in periods after adoption.While we cannot estimate what those amounts will be in the future (because theydepend on, among other things, when employees exercise stock options), therewere no amounts of operating cash flows recognized in prior periods for suchexcess tax deductions.

During the year ended December 31, 2005, in conjunctionwith the Company’s assessment of the impact of adopting SFAS 123(R), theCompany re-evaluated assumptions used in determining the pro forma expense,which included changing the expected life of the options from 9 years to 6years. For reasons noted above, certain adjustments were required to increasepro forma expenses for 2004 and 2003, resulting in an increase of $940,329 and$256,219 to the adjusted pro forma net loss and an increase of $0.05 and $0.02to the adjusted pro forma basic and diluted net loss per share for the yearsended December 31, 2004 and 2003, respectively.

Pro forma information regarding net income andearnings per share is required by SFAS No. 123, which also requires thatthe information be determined as if we had accounted for our employee stockoptions granted under the fair value method of that statement. The weighted-averagefair value of options granted to employees during the years ended December 31,2005, 2004 and 2003, was $2.90, $3.93 and $2.22, respectively.

Thefair value for these options was estimated at the date of grant using a Black-Scholesoption pricing model using the following assumptions:

| ** **               | ** ** | **Year ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Risk-free  interest rate |       | ** **3.97                             | %          | ** **4.25 | % | ** **4.25 | % |
| Expected  volatility     |       | 104                                        | %          | 110 | % | 123 | % |
| Expected life in  years  |       | 6                                          |       | 6 |   | 6 |   |
| Dividend yield           |       | —                                     |       | — |   | — |   |

 

F-12

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

**2. Summaryof Significant Accounting Policies (Continued)**

The following tableillustrates the effect on net loss attributable to stockholders if the fairvalue-based method had been applied to all outstanding and unvestedawards in each period:

| ** **                                                                                                        | ** ** | **Year ended December 31,** | ** **  |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|-------------|
| ** **                                                                                                        | ** ** | **2005**                                   | ** **  | **2004** | ** ** | **2003** | ** ** |
| Net loss  attributable to common stockholders, as reported                                                        |       | $                                          | (26,362,622 | ) | $ | (11,705,336 | ) | $ | (22,875,437 | ) |
| Deduct: Total  stock-based employee compensation expense determined under fair value  based method for all awards |       | (1,375,703                                 | )           | (1,538,667 | ) | (1,075,170 | ) |
| Pro-forma  net loss attributable to common stockholders                                                           |       | $                                          | (27,738,325 | ) | $ | (13,244,003 | ) | $ | (23,950,607 | ) |
| Basic and diluted  net loss attributable to common stockholders per share, as reported                            |       | $                                          | (1.39       | ) | $ | (0.66 | ) | $ | (1.72 | ) |
| Pro-forma basic  and diluted net loss attributable to common stockholders per share                               |       | $                                          | (1.46       | ) | $ | (0.75 | ) | $ | (1.80 | ) |

 

*Recent accountingpronouncements*

In May 2005, the FASBissued SFAS No. 154, *Accounting Changes andError Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3*.SFAS No. 154 changes the requirements for the accounting for and reportingof a change in accounting principle. This statement applies to all voluntarychanges in accounting principle. It also applies to changes required by anaccounting pronouncement in the unusual instance that the pronouncement doesnot include specific transition provisions. When a pronouncement includesspecific transition provisions, those provisions should be followed. SFAS No. 154requires retrospective application to prior periods’ financial statements forchanges in accounting principle, unless it is impractical to determine eitherthe period-specific effects or the cumulative effect of the change. When it isimpractical to determine the period-specific effect of an accounting change onone or more individual prior periods presented, SFAS No. 154 requires thatthe new accounting principle be applied to the balances of assets andliabilities as of the beginning of the earliest period for which retrospectiveapplication is practical and that a corresponding adjustment be made to theopening balance of retained earnings for that period rather than being reportedas a component of income. When it is impractical to determine the cumulativeeffect of applying a change in accounting principle to all prior periods, SFAS No. 154requires that the new accounting principle be applied as if it were adoptedprospectively from the earliest date practical. SFAS No. 154 is effectivefor accounting changes and corrections of errors made in fiscal years beginningafter December 31, 2005. We are currently evaluating the effect thatadoption of SFAS No. 154 will have on our consolidated results ofoperations and financial condition, but do not expect it to have a materialimpact.

**3. Financial Instruments**

All of our financialinstruments, including cash equivalents, accounts receivable, accounts payableand accrued expenses have carrying values that approximate fair value due totheir short-term nature.

F-13

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

**4. Major Customers and Concentration of Credit Risk**

In May 2004, weannounced that we had signed a collaboration 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 ourproprietary technology initially for two specific antigens with an option toextend the agreement to include a limited number of additional target antigens.We have received an upfront license payment under this agreement, and mayreceive milestone payments linked to the successful development of a product.Royalties would be payable on sales of a product utilizing the device developedunder the agreement. An option fee would be payable if Merck includesadditional target antigens in the agreement. Under the agreement, Merck will beresponsible for all development costs and clinical programs. During the yearended December 31, 2005 and 2004, we recorded revenue under thiscollaboration and licensing agreement of $822,634 and $890,238, respectively. Wealso recorded a milestone payment from Merck for $2,000,000 during 2005. Inaddition, as of December 31, 2005 and 2004 $187,606 and $374,177 of ourtotal accounts receivable balance of $284,171 and $424,157, respectively, wasattributable to Merck.

**5. Fixed Assets**

| ** **                                 | ** ** | **Cost** | ** ** | **Accumulated  depreciation  and  amortization** | ** ** | **Net book  value** | ** ** |
|--------------------------------------------|------------|----------|------------|--------------------------------------------------|------------|--------------------------|------------|
| **As of December 31, 2005**           |       |     |       |                                             |       |                     |       |
| Machinery, equipment and  office furniture |       | $        | 2,063,790  |                                             | $          | (1,786,301               | )          | $ | 277,489 |   |
| Leasehold improvements                     |       | 533,377  |       | (435,253                                         | )          | 98,124                   |       |
| Equipment under capital  leases            |       | 119,671  |       | (119,671                                         | )          | —                   |       |
|                                       |       | $        | 2,716,838  |                                             | $          | (2,341,225               | )          | $ | 375,613 |   |
| **As of December 31, 2004**           |       |     |       |                                             |       |                     |       |
| Machinery, equipment and  office furniture |       | $        | 1,612,392  |                                             | $          | (1,457,190               | )          | $ | 155,202 |   |
| Leasehold improvements                     |       | 435,304  |       | (435,253                                         | )          | 51                       |       |
| Equipment under capital  leases            |       | 119,671  |       | (119,671                                         | )          | —                   |       |
|                                       |       | $        | 2,167,367  |                                             | $          | (2,012,114               | )          | $ | 155,253 |   |

 

**6. Patentsand Other Assets, Net**

| ** **         | ** ** | **As of  December 31,  2005** | ** ** | **As of  December 31,  2004** | ** ** |
|--------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| Patent costs, net  |       |                                    | $          | 1,715,940                               |       |   |   | $ | 1,775,135 |   |   |
| License costs, net |       |                                    | 300,150    |                                    |       |   | 412,706 |   |   |
| Other              |       |                                    | 132,000    |                                    |       |   | 169,731 |   |   |
|               |       |                                    | $          | 2,148,090                               |       |   |   | $ | 2,357,572 |   |   |

 

Accumulated amortization of patent costs was$1,980,721and $1,498,009 as of December 31, 2005 and 2004, respectively.Accumulated amortization of license costs was $600,300 and $487,744 at December 31,2005 and 2004, respectively. We expect total depreciation and amortizationexpense related to our current patent and license costs, as well as our fixedassets, to be approximately $670,303, $558,113, $416,892, $267,364 and $197,496for the years ended December 31, 2006, 2007, 2008, 2009 and 2010,respectively.

F-14

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

**7. Accounts Payable and Accrued Expenses**

| ** **                                   | ** ** | **As of  December 31,  2005** | ** ** | **As of  December 31,  2004** | ** ** |
|----------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| Trade accounts  payable                      |       |                                    | $          | 580,332                                 |       |   |   | $ | 677,268 |   |   |
| Accrued dividends                            |       |                                    | 193,891    |                                    |       |   | 118,871 |   |   |
| Accrued  compensation                        |       |                                    | 541,934    |                                    |       |   | 484,517 |   |   |
| Accrued legal                                |       |                                    | 145,816    |                                    |       |   | 43,000 |   |   |
| Accrued expenses                             |       |                                    | 402,962    |                                    |       |   | 224,465 |   |   |
| Cash received for  common stock to be issued |       |                                    | —     |                                    |       |   | 607,471 |   |   |
|                                         |       |                                    | $          | 1,864,935                               |       |   |   | $ | 2,155,592 |   |   |

 

**8. Stockholders’ Equity**

*Reverse stock split*

Effective September 13,2004, we implemented a one-for-four reverse split of our common stock. At thetime of the reverse stock split, each four shares of our issued and outstandingcommon stock were combined into one share of our common stock. The reversestock split did not change the number of authorized shares of our common stock.The one-for-four reverse stock split was approved by the registrant’sstockholders at a special meeting on September 10, 2004, and subsequentlyapproved by our Board of Directors. All common share and per share amountsthroughout this filing have been adjusted to give effect to this reverse stocksplit. The conversion prices of our Series A, B and C Preferred Stock werealso adjusted to give effect to this reverse stock split.

*Preferred stock*

On January 25, 2005, we consummated the acquisitionof Inovio AS, a Norwegian company. As part of this acquisition, we issued1,966,292 shares of Series D Preferred Stock. Upon dissolution orliquidation of the Company, Series D Preferred Stock  holders are entitled to the liquidationpreference prior to any distribution of net assets to common shareholders at anamount equal to $3.20 per share of preferred stock, but are junior to Series A,B and C Preferred Stock. See Note 15 to these consolidated financial statementsfor further discussion of this acquisition. As of December 31, 2005,1,561,935 shares of Series D Preferred Stock were outstanding.

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 ofCommon Stock, 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 no escrow provision. As of December 31,2005, 337 shares of Series C Preferred Stock were outstanding. Uponconversion, the Series C Preferred Stock outstanding as of December 31,2005 would convert into 495,769 shares of our common stock.

F-15

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

**8. Stockholders’Equity (Continued)**

The holders of our Series C Preferred Stock willreceive an annual dividend rate of 6%, in shares of common stock or cash,payable quarterly. Holders of Series C Preferred Stock are entitled toreceive this quarterly dividend through June 30, 2007. In 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, we paid cash of $553,694 in 2005. In 2004 we issued 30,124common 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, 2005, 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. Each holder of Series Aand B Preferred Stock shall be entitled to the number of votes equal to thenumber of shares of Common Stock into which such shares of Series A and BPreferred Stock could be converted on the record date for the taking of a vote.In any event of our voluntary or involuntary liquidation, dissolution orwinding, before any distribution of our assets shall be made to or set apartfor the holders of Common Stock, the holders of Series A and B PreferredStock shall be entitled to receive payment out of our assets in an amount equalto $10,000 per share of Series A and B Preferred Stock plus anyaccumulated and unpaid dividends. The Series A Preferred Stock isconvertible into our common stock at a conversion price of $2.40 per share, andthere is no escrow provision. In connection with the sale of the Series APreferred Stock, we recorded an imputed dividend charge of $6,045,799 relatedto the beneficial conversion feature of the stock during the year ended December 31,2003. The Series B Preferred Stock is convertible into our common stock ata conversion price of $2.80 per share, and the proceeds from the sale of the Series BPreferred Stock were to remain in escrow until the achievement of specificmilestones by the Company. In October 2003, we achieved these milestonesand the $7,500,000 was released from escrow. In connection with the release ofthe Series B Preferred Stock proceeds, we recorded an imputed dividendcharge of $11,807,144 related to the beneficial conversion feature of the stockduring the year ended December 31, 2003. As of December 31, 2005, 52shares of Series A Preferred Stock and 100 shares of Series BPreferred Stock remained outstanding. Upon conversion, the Series A and BPreferred Stock would convert into a total of 573,808 shares of our commonstock.

The holders of our Series A and B Preferred Stockwill receive an annual dividend rate of 6%, in shares of common stock or cash,payable quarterly. Holders of Series A and B Preferred Stock are entitledto receive this quarterly dividend through September 30, 2006. In 2005,2004 and 2003, our Board of Directors declared dividends to the holders of our Series Aand B Preferred Stock, which were paid through the issuance of our commonstock. As part of this dividend to holders of Series A and B PreferredStock, we issued a total of 55,518 common shares valued at $179,956 and cash of$60,235 in 2005, 73,072 common shares valued at $322,397 in 2004, and 84,595common shares valued at $357,587 in 2003.

F-16

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

**8. Stockholders’Equity (Continued)**

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 at a price between $2.40 and $2.80 per share, exercisable through July 13,2008. As of December 31, 2005, warrants to purchase 547,920 shares issuedas part of this offering had been exercised, resulting in $1,436,460 of grossproceeds. In addition, we issued 39,041 shares of our common stock valued at$116,500 as a placement agent fee in conjunction with the Series A and BPreferred Stock offering.

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

*Common Stock*

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 (including$2,430,000 due from one of the investors as part of a previous fundingcommitment made, and promissory note delivered, in connection with the January 2005private financing discussed below); (2) an aggregate of 734 shares ofoutstanding Series A, B and C Cumulative Convertible Preferred Stock; and (3) 1,142,593shares of our outstanding common stock.  The common stock issued was priced at $2.40per share, which represented a premium to the closing price on December 15,2005. In addition, we issued to the investors five-year warrants to purchase35% of the number of shares of common stock they acquired in the offering at anexercise price of approximately $2.93 per share, a 25% premium to the closingprice on December 15, 2005. As a result of the use by existing holders ofour Preferred Stock and Common Stock to acquire our shares and warrants in thisprivate placement, we recorded a non-cash imputed dividend charge of $8,329,112in our consolidated statement of operations for the year ended December 31,2005. This imputed dividend charge was calculated using guidance contained inEmerging Issues Task Force (“EITF”) Issue No. 00-27, Application ofIssue No. 98-5 to 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 (assuming no exercise of thewarrants).  As of December 31, 2005,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.  At the signing, each investor provided paymentfor at least 20% of the subscription amount, the balance was to be due at theearlier of (i) September 30, 2005 or (ii) the occurrence of an “earlytriggering event,” as set forth in the agreement. The balance of the originalsubscription amount, $4,990,000, was evidenced by full recourse promissorynotes from the investor. In 

F-17

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

**8. Stockholders’Equity (Continued)**

December 2005, theinvestors 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 $160,000of its previous investment in our Series C Preferred Stock into 39,506shares of our common stock as part of this private placement.

We recorded an imputeddividend charge of $1,942,773 in January 2005, related to the investors whoconverted $3,200,000 of their previous Series C Preferred Stock investmentinto 790,123 shares of our common stock as part of this private placement. Thisimputed dividend charge was calculated using guidance contained in Emerging IssuesTask Force (“EITF”) Issue No. 00-27, *Applicationof Issue No. 98-5 to Certain Convertible Instruments*.

*Special warrants*

On June 6, 2002, we closed a private placement of2,556,472 special warrants. 1,996,393 special warrants were issued at asubscription price of $1.68 per special warrant and 560,079 special warrantswere issued at a subscription price of $1.88 per special warrant, for grossproceeds of $4,406,890. Each $1.68 special warrant was convertible, withoutadditional payment, into one share of common stock and a warrant for thepurchase of one-third of one share of common stock. Each full common stockpurchase warrant was exercisable at $2.80 per share. Total warrants at $2.80per share were 665,462. Each $1.88 special warrant was exercisable, withoutadditional payment, into one share of common stock and a warrant for thepurchase of forty percent of one share of common stock. Each full common stockpurchase warrant is exercisable at $2.60 per share. The gross proceeds of thisfinancing were reduced by issuance costs including the placement agent’scommission of 6.0% of the gross proceeds of $264,413 and other issuance costsof $306,708.

In October 2002, allspecial warrants were converted into 2,556,472 shares of common stock and889,494 common stock purchaser warrants. On June 9, 2003, our Board ofDirectors approved an extension of the expiration date from June 6, 2003until July 7, 2003, for the exercise of each of the $2.60 warrants and the$2.80 warrants that were issued in June 2002. Warrants were exercised for194,773 shares resulting in gross proceeds of $539,803. All remaining warrantsexpired on July 7, 2003.

*Warrants*

In addition to warrants granted in connection with ourPreferred Stock offerings, as discussed above, we have issued the followingadditional 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.

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. During March 2004,all of such warrants were exercised.

F-18

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

**8. Stockholders’Equity (Continued)**

In connection with the issuance of the specialwarrants on June 6, 2002, we granted warrants to the placement agent toacquire 166,250 shares of common stock for $1.88 per share. In September 2003,warrants to purchase 30,000 shares of common stock were exercised totaling$56,400 in gross proceeds. In March 2005, warrants to purchase 136,250shares of common stock were exercised totaling $256,150 in gross proceeds.

On September 15, 2000, we entered into anexclusive license agreement with the University of South Florida Research Foundation, Inc.(“USF”), whereby USF granted us an exclusive, worldwide license to USF’s rightsin patents and patent applications generally related to needle electrodes (“LicenseAgreement”). Pursuant to the License Agreement, we granted USF and itsdesignees warrants to acquire 150,000 common shares for $9.00 per share until September 14,2010. Of the total warrants granted, 75,000 vested at the date of grant and theremainder will vest upon the achievement of certain milestones. The 75,000non-forfeitable vested warrants were valued at $553,950 using the Black-Scholespricing model and were recorded as other assets with a credit to additionalpaid-in capital. The remaining 75,000 warrants are forfeitable and will bevalued at the fair value on the date of vesting using the Black-Scholespricing model.

In addition, pursuant tothe above License Agreement, we issued a total of 37,500 common shares with afair market value of $346,500 to USF and its designees for no additionalconsideration. The fair market value of the common shares on September 15,2000 was recorded as other assets and a credit to common stock and additionalpaid-in capital.

*Stock options*

We have three stock option plans pursuant to whichstock options are granted to executive officers, directors, employees andconsultants.

The 1995 Stock Option Plan (the “1995 Plan”) wasapproved by the stockholders in 1995 and subsequently amended in 1997. The 1995Plan was suspended by the Board of Directors in June 1997 and no furtheroptions will be granted pursuant to the 1995 Plan. As at December 31,2005, there were 8,375 options outstanding pursuant to the 1995 Plan.

The 1997 Stock Option Plan (the “1997 Plan”), asamended in 1999, was approved by the stockholders in July 1999. The 1997Plan was suspended by the Board of Directors in July 2000 and no furtheroptions will be granted pursuant to the 1997 Plan. As at December 31,2005, there were 81,435 options outstanding pursuant to the 1997 Plan.

The 2000 Stock Option Plan, as amended, (the “2000Plan”), effective July 31, 2000, was approved by the stockholders on August 7,2000, pursuant to which 3,750,000 common shares were reserved for issuance toour executive officers, directors, employees and consultants. The 2000 Plansupercedes all previous stock option plans. At December 31, 2005,1,183,499 options are available for future grants and 2,294,078 stock optionsare outstanding pursuant to the 2000 Plan. The options available for issuanceunder the 2000 Plan generally have a term of ten years and vest over a periodof three years. The 2000 Plan will terminate on July 30, 2010.

We account for options granted to non-employees inaccordance with EITF No. 96-18, *Accounting for EquityInstruments That Are Issued to Other Than Employees for Acquiring, or in Conjunctionwith Selling, Goods or Services*, and SFAS No. 123. The fairvalue of these options at the measurement dates was estimated using the Black-Scholespricing model.

F-19

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

**8. Stockholders’Equity (Continued)**

Total stock-based compensation for optionsgranted to non-employees for the years ended December 31, 2005, 2004 and2003, was $116,382, $413,320 and $170,959, respectively. As of December 31,2005 and 2004, 251,775 and 345,000 options remained outstanding, respectively.

Thefollowing table summarizes the stock options outstanding at December 31, 2005:

| ** **              | ** ** | **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             |       |                         | 628,411    |                         |       |   | 6.4 |   |   |   | $ | 1.47 |   |   | 586,481 |   |   | $ | 1.49 |   |   |
| $2.01-$4.00             |       |                         | 963,543    |                         |       |   | 7.8 |   |   |   | $ | 2.97 |   |   | 562,672 |   |   | $ | 2.73 |   |   |
| $4.01-$6.00             |       |                         | 567,624    |                         |       |   | 8.1 |   |   |   | $ | 4.87 |   |   | 317,623 |   |   | $ | 4.98 |   |   |
| $6.01-$8.00             |       |                         | 137,000    |                         |       |   | 6.3 |   |   |   | $ | 6.31 |   |   | 105,750 |   |   | $ | 6.31 |   |   |
| $8.01-$22.00            |       |                         | 87,310     |                         |       |   | 2.7 |   |   |   | $ | 12.01 |   |   | 87,310 |   |   | $ | 12.01 |   |   |
|                    |       |                         | 2,383,888  |                         |       |   | 7.2 |   |   |   | $ | 3.55 |   |   | 1,659,836 |   |   | $ | 3.44 |   |   |
|                         |            |                              |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Stockoption activity under our stock option plans was as follows:

| ** **                       | ** ** | **Number of  shares** | ** ** | **Weighted-average  exercise price** | ** ** |
|----------------------------------|------------|----------------------------|------------|-------------------------------------------|------------|
| Balance,  December 31, 2002 |       | 1,726,091                  |       |                                      | 4.48       |   |   |
| Granted                          |       | 696,640                    |       |                                      | 2.52       |   |   |
| Exercised                        |       | (129,531                   | )          |                                      | (2.88      | ) |   |
| Cancelled                        |       | (483,831                   | )          |                                      | (5.84      | ) |   |
| 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 |   |   |
|                                  |            |                            |            |                                           |            |  |  |  |

 

*Stockholder rightsplan*

In 2003, our stockholders approved a five-yearextension of a Stockholder Rights Plan (the “Rights Plan”) to protect ourstockholders from unfair, abusive or coercive takeover strategies. Under theRights Plan, holders of common shares are entitled to one share purchase right(“Right”) for each common share held. If any person or group makes a take-overbid, other than a bid permitted under the plan or acquires 20% or more of ouroutstanding common shares without complying with the Rights Plan, each Rightentitles the registered holder thereof to purchase, in effect, $80 equivalentof our common shares at 50% of the prevailing market price.

F-20

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

 

**9. Commitments**

Rentexpense was $553,229, $372,765 and $450,799 for the years ended December 31,2005, 2004 and 2003, respectively. We do not have any active leases undercapital lease arrangements. As of December 31, 2004, future minimum leasepayments under non-cancelable operating leases are as follows:

| 2006       |   | $       | 482,731   |   |
|------------|--------|---------|-----------|--------|
| 2007       |   | 480,327 |      |
| 2008       |   | 464,250 |      |
| 2009       |   | 475,634 |      |
| 2010       |   | 80,035  |      |
| Thereafter |   | —  |      |
| Total      |   | $       | 1,982,977 |   |

 

**10. Income Taxes**

As of December 31, 2005, we had federal andCalifornia income tax net operating loss carryforwards of approximately$70,981,828 and $ 46,564,922, respectively. The federal loss carryforwards willbegin to expire in 2008 unless previously utilized. The California losscarryforwards will continue to expire in 2006. The difference between thefederal and California 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$1,171,541, which will continue to expire in 2006 unless previously utilized,and California research tax credit carryforwards of approximately $618,734. At December 31,2005, the Company had foreign tax loss carryforwards related to the acquisitionof Inovio A.S. of approximately $3,533,618. Future realization of this assetwill result in a reduction to the extent of any remaining goodwill, then to anyremaining long-term intangibles, and the remainder, in any as a reduction ofincome 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%.

F-21

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

**10. IncomeTaxes (Continued)**

Significant components ofour deferred tax assets as of December 31, 2005 and 2004 are shown below:

| ** **                                                          | ** ** | **As of  December 31,  2005** | ** ** | **As of  December 31,  2004** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| Deferred tax assets:                                                |       |                                    |       |                                    |       |
| Capitalized research expense                                        |       | $                                       | 411,000    |                                    | $          | 874,000 |   |
| Net operating loss carryforwards                                    |       | 28,510,000                              |       | 22,648,000                              |       |
| Research and development and other tax credits                      |       | 1,596,000                               |       | 1,866,000                               |       |
| Other                                                               |       | 1,080,000                               |       | 855,000                                 |       |
|                                                                |       | 31,597,000                              |       | 26,243,000                              |       |
| Valuation  allowance                                                |       | (31,532,000                             | )          | (26,037,000                             | )          |
| Total deferred  tax assets                                          |       | 65,000                                  |       | 206,000                                 |       |
| Deferred tax  liabilities:                                          |       |                                    |       |                                    |       |
| Difference between book and tax basis for patent and  license costs |       | (65,000                                 | )          | (206,000                                | )          |
| Acquired intangibles                                                |       | (1,076,250                              | )          | —                                  |       |
| Net deferred tax liabilities                                        |       | $                                       | (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 $1,076,250 as of December 31, 2005, 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 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,  2005** | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  December 31,  2003** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| Income taxes at  statutory rates                  |       | $                                            | (5,374,000 | )                                            | $          | (3,841,000                                   | )          | $ | (2,306,000 | ) |
| State income tax,  net of federal benefit         |       | (676,000                                     | )          | (625,000                                     | )          | (245,000                                     | )          |
| Change in  valuation allowance                    |       | 4,486,000                                    |       | 4,674,000                                    |       | 2,181,000                                    |       |
| Write off of  in-process research and development |       | 1,166,000                                    |       | —                                       |       | —                                       |       |
| Other                                             |       | 340,000                                      |       | (208,000                                     | )          | 370,000                                      |       |
|                                              |       | $                                            | (58,000    | )                                            | $          | —                                       |       | $ | — |   |

 

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

F-22

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

**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 theU.S. The defined contribution plan allows the employees to contribute apercentage of their compensation each year. We currently match 50% of ouremployees’ contributions, up to 6% of 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 $62,450, $23,410 and $28,699 for the years ended December 31,2005, 2004 and 2003, respectively.

**12. Segment Information**

Our reportable business segments had historicallyincluded the BTX Instrument Division and the Drug and Gene Delivery Division.In connection with the sale of assets of the BTX Instrument Division in January 2003,the BTX Instrument Division, which was previously classified as a separatesegment, has been classified as discontinued operations for financial reportingpurposes. We now operate in one business segment.

Pursuant to ouracquisition of Inovio AS (see note 15), the Company now operates in the UnitedStates and Europe. Revenues are attributable to the geographical area based onthe location of the customer. During the year ending December 31, 2005,revenues in Europe and the United States totaled $379,250 and $5,088,003,respectively. Long-lived assets within the United States consist primarily ofpatents and other intellectual property. Long-lived assets outside the UnitedStates consist primarily of goodwill and intangible assets. As of December 31,2005, long-lived assets in Europe and the United States totaled $8,187,050 and$2,338,997, respectively.

**13. Related Party Transactions**

During the years ended December 31, 2005, 2004and 2003, we made payments of $20,930, $111,345 and $170,599, respectively, forlegal services provided by Catalyst Corporate Lawyers, where one of thepartners is the Chairman of our company. As of December 31, 2005 and 2004,we owed $0 and $6,301in fees to this firm, which is included in trade accountspayable and accrued expenses in the accompanying consolidated balance sheets.Total expenses paid to Catalyst Corporate Lawyers and included in shareissuance costs for the years ended December 31, 2005, 2004 and 2003, were$0, $34,470 and $68,219, respectively. All transactions are recorded at theirexchange amounts.

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, the investmentdivision of this CRO, Qfinance, Inc., is an investor in our Series A,B and C Preferred Stock. As of December 31, 2005, and  2004, Qfinance, Inc. owned 50, 100 and109 shares respectively, of our Series A, B and C Preferred Stock, which wereconvertible into a total of 725,769 of our common shares. Total clinical trialexpenses paid to Quintiles Transnational Corp. for the years ended December 31,2005, 2004 and 2003, were $3,542,521, $692,124 and $58,375, respectively.

F-23

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

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

| ** **                                                                    | ** ** | **Year ended  December 31,  2005** | ** ** | **Year ended  December 31,  2004** | ** ** | **Year ended  December 31,  2003** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------|------------|
| Cash paid for  interest                                                       |       | $                                            | —     |                                         |       | $                                            | —     |   |   | $ | 20,480 |   |
| Supplemental schedule of  financing activities:                               |       |                                         |       |                                         |       |                                         |       |   |   |
| Imputed dividends  on preferred stock                                         |       | $                                            | 10,271,885 |                                         |       | $                                            | —     |   |   | $ | 17,852,943 |   |
| Common stock  issued in connection with declared dividends on preferred stock |       | $                                            | 179,900    |                                         |       | $                                            | 456,090    |   |   | $ | 357,587 |   |
| Cashless exercise  of warrants                                                |       | $                                            | 43         |                                         |       | $                                            | 40         |   |   | $ | — |   |
| Conversions of  preferred stock to common stock                               |       | $                                            | 3,944      |                                         |       | $                                            | 1,741      |   |   | $ | 2,809 |   |
| Issuance of series D  preferred stock for Inovio AS acquisition               |       | $                                            | 7,904,494  |                                         |       | $                                            | —     |   |   | $ | — |   |

 

**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$10,000,000; $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, 2005, 404,357 sharesof the Series D Preferred Stock had been converted into 404,357 shares ofour 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 closing prices of the our common stock on each of thethree days prior to the Acquisition, the day of Acquisition and the three daysfollowing 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 certain strategicand commercial milestones, as set forth in the Stock Purchase Agreement andsummarized below. None of these milestones have been met as of December 31,2005. These milestones are as follows:

·       Inthe event we receive payment commitments of at least $8,000,000, of which atleast $1,000,000 must be in the form of upfront payments, through the signingof contracts involving Inovio AS’ technology through September 30, 2006,we must issue an additional $2,000,000 of Series D Preferred Stock to theshareholders of Inovio AS (“the Second Payment”). The value of each share of Series DPreferred Stock issued in connection with the Second Payment shall equal theaverage 

F-24

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

**15. InovioAS Acquisition (Continued)**

of the closing price ofour common stock as reported on the American Stock Exchange during the 30 daytrading period immediately preceding the Second Payment date.

·       Inthe event we receive payment commitments of at least $16,000,000 (including the$8,000,000 in payment commitments noted above), of which at least $2,000,000(including the $1,000,000 in upfront payments noted above) must be in the formof upfront payments, through the signing of contracts involving Inovio AS’technology through September 30, 2006, we must issue an additional$1,000,000 of Series D Preferred Stock to the shareholders of Inovio AS (“theThird Payment”). The value of each share of Series D Preferred Stockissued in connection with the Third Payment shall equal the average of the closingprice of our common stock as reported on the American Stock Exchange during the30 day trading period immediately preceding 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. Identifiableacquired intangible assets include in-process research and development of$3,332,000, and an intangible asset related to acquired contracts andintellectual property of approximately $4,050,000. The $3,332,000 assigned toacquired in-process research and development was recorded as an expense in theconsolidated statement of operations for the year ended December 31, 2005.

F-25

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

**15. InovioAS Acquisition (Continued)**

The following unauditedpro forma financial information combines the results of operations of InovioBiomedical Corporation and Inovio AS assuming the Acquisition was consummatedon January 1, 2004. The pro forma results are not necessarily indicativeof what would have occurred if the Acquisition had been in effect for theperiods presented. In addition, they are not intended to be a projection offuture results and do not reflect any synergies that might be achieved fromcombined operations.

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

----

(1)         Excludesthe effect of the $3,332,000 charge for acquired in-process research anddevelopment

**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, 2005 and 2004, are as follows:

| ** **                                                       | ** ** | **Quarter Ended  December 31,  2005** | ** ** | **Quarter Ended  September 30,  2005** | ** ** | **Quarter Ended  June 30,  2005** | ** ** | **Quarter Ended  March 31,  2005** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------------------|------------|
| Revenue                                                          |       | $                                               | 829,235    |                                             |       | $                                           | 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                    |       | (11,558,253                                     | )          |                                             | (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).

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

**16. Quarterly Financial Information (Continued)**

| ** **                                                       | ** ** | **Quarter Ended  December 31,  2004** | ** ** | **Quarter Ended  September 30,  2004** | ** ** | **Quarter Ended  June 30,  2004** | ** ** | **Quarter Ended  March 31,  2004** | ** ** |
|------------------------------------------------------------------|------------|-------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------------------|------------|
| Revenue                                                          |       | $                                               | 542,738    |                                             |       | $                                           | 455,157    |                                         |       |   | $ | 99,819 |   |   |   | $ | 69,385 |   |   |
| Loss from  continuing operations                                 |       | (3,794,416                                      | )          |                                             | (3,465,097 | )                                           |       |                                         | (2,421,995 | ) |   |   | (1,581,632 | ) |   |
| Gain on disposal  of assets                                      |       | —                                          |       |                                             | 33,347     |                                        |       |                                         | 256,862    |   |   |   | — |   |   |
| Net loss                                                         |       | (3,794,416                                      | )          |                                             | (3,431,750 | )                                           |       |                                         | (2,165,133 | ) |   |   | (1,581,632 | ) |   |
| Declared  dividends on preferred stock                           |       | (218,430                                        | )          |                                             | (238,911   | )                                           |       |                                         | (176,924   | ) |   |   | (98,140 | ) |   |
| Net loss  attributable to common stockholders                    |       | (4,012,846                                      | )          |                                             | (3,670,661 | )                                           |       |                                         | (2,342,057 | ) |   |   | (1,679,772 | ) |   |
| Amounts per  common share—basic and diluted:                |       |                                            |       |                                             |       |                                        |       |                                         |       |   |   |   |   |   |   |
| Loss from  continuing operations                                 |       | $                                               | (0.21      | )                                                |       | $                                           | (0.20      | )                                            |       |   | $ | (0.14 | ) |   |   | $ | (0.10 | ) |   |
| Discontinued  operations, net                                    |       | —                                          |       |                                             | —     |                                        |       |                                         | 0.01       |   |   |   | — |   |   |
| Declared  dividends on preferred stock                           |       | (0.01                                           | )          |                                             | (0.01      | )                                           |       |                                         | (0.01      | ) |   |   | (0.01 | ) |   |
| Net loss  attributable to common stockholders                    |       | $                                               | (0.22      | )                                                |       | $                                           | (0.21      | )                                            |       |   | $ | (0.14 | ) |   |   | $ | (0.11 | ) |   |
| Weighted average number  of common shares—basic and diluted |       | 18,341,032                                      |       |                                             | 17,813,659 |                                        |       |                                         | 17,504,685 |   |   |   | 16,318,645 |   |   |

 

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