**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-KSB**

 

**(MarkOne)**

**ANNUALREPORT UNDER SECTION 13 OR 15(d)**

**OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended February 28, 2006**

 

**TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from                      to                      **

 

**Commission file number 000-23425**

 

**BURZYNSKIRESEARCH INSTITUTE, INC.**

(Name of small business issuer in its charter)

 

| **Delaware**                                                    | ** ** | **76-0136810**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **9432 Old Katy Road, Suite 200  Houston, Texas**               | ** ** | **77055**                             |
| (Address of principal executive offices)                        |       | (Zip Code)                            |

 

Issuer’s telephone number:  **(713) 335-5697**

 

Securities registered under Section 12(b) of the Exchange Act:

**None**

 

Securities registered under Section 12(g) of the Exchange Act:

**Common Stock, $.001 par value**

 

Check whether the issuer (1)filed all reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports) and (2) has been subject tosuch filing requirements for the past 90 days. Yes  ý  No  o

 

Check if there is no disclosureof delinquent filers in response to Item 405 of Regulation S-B containedherein, and no disclosure will be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-KSB or any amendment to thisForm 10-KSB. ý

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act.

Yes o No ý

 

State issuer’s revenues forits most recent fiscal year:  $0.

 

As of May 10, 2006131,388,444 shares of the Registrant’s Common Stock were outstanding, and theaggregate market value of the Common Stock held by non-affiliates wasapproximately $2,925,000 based on the last reported sales price on May 10, 2006

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Documents incorporated by reference:            **None.**

 

Transitional Small Business Disclosure Format (Check One):  Yes  o;  No.  ý

 

 

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**BURZYNSKI RESEARCH INSTITUTE, INC.**

 

**FORM 10-KSB**

 

**FISCAL YEAR ENDED FEBRUARY 28, 2006**

 

**TABLE OF CONTENTS**

 
| **PART I**   | ** **                                                                                                        | ** ** |
|--------------|-------------------------------------------------------------------------------------------------------------------|------------|
|         |                                                                                                              |       |
| ITEM 1.      | DESCRIPTION OF BUSINESS                                                                                           |       |
| ITEM 2.      | DESCRIPTION OF PROPERTY                                                                                           |       |
| ITEM 3.      | LEGAL PROCEEDINGS                                                                                                 |       |
| ITEM 4.      | SUBMISSION OF MATTERS TO A  VOTE OF SECURITY HOLDERS                                                              |       |
|         |                                                                                                              |       |
| **PART II**  | ** **                                                                                                        | ** ** |
|         |                                                                                                              |       |
| ITEM 5.      | MARKET FOR COMMON EQUITY,  RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY  SECURITIES  |       |
| ITEM 6.      | MANAGEMENT’S DISCUSSION AND  ANALYSIS OR PLAN OF OPERATION                                                   |       |
| ITEM 7.      | FINANCIAL STATEMENTS                                                                                              |       |
| ITEM 8.      | CHANGES IN AND DISAGREEMENTS  WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE                             |       |
| ITEM 8A.     | CONTROLS AND PROCEDURES                                                                                           |       |
| ITEM 8B.     | OTHER INFORMATION                                                                                                 |       |
|         |                                                                                                              |       |
| **PART III** | ** **                                                                                                        | ** ** |
|         |                                                                                                              |       |
| ITEM 9.      | DIRECTORS, EXECUTIVE  OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE  EXCHANGE ACT |       |
| ITEM 10.     | EXECUTIVE COMPENSATION                                                                                            |       |
| ITEM 11.     | SECURITY OWNERSHIP OF  CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS                   |       |
| ITEM 12.     | CERTAIN RELATIONSHIPS AND  RELATED TRANSACTIONS                                                                   |       |
| ITEM 13.     | EXHIBITS                                                                                                          |       |
| ITEM 14.     | PRINCIPAL ACCOUNTANT FEES  AND SERVICES                                                                           |       |

 

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**FORWARD LOOKING STATEMENTS**

 

This report contains forward-looking statements,including statements regarding future financial performance and results andother statements that are not historical facts. Such statements are included in“Description of Business,” “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and elsewhere in this report. When used inthis report, words such as “may,” “will,” “should,” “could,” “anticipate,” “believe,”“expect,” “estimate,” “intend,” “plan,” “predict,” “potential,” “continue” andsimilar expressions are intended to identify forward-looking statements withinthe meaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. Although theCompany believes that the expectations reflected in these forward-lookingstatements are reasonable, there can be no assurance that actual results ordevelopments anticipated by the Company will be realized or, even if realized,that they will have the expected effects on its business or operations. Actualresults could differ materially from those contemplated by the forward-lookingstatements as a result of certain factors beyond the Company’s controlincluding: the ability to develop safe and efficacious drugs, the failure toachieve positive clinical trials, the failure to successfully commercialize ourproducts, competition and technological change and existing and futureregulations affecting our business.

 

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# **PART I**

 

## **ITEM 1.**                                  DESCRIPTION OF BUSINESS

 

**General**

 

Burzynski Research Institute,Inc. (the “Company”) was incorporated under the laws of the State of Delawarein 1984 in order to engage in the research, production, marketing, promotionand sale of certain medical chemical compounds composed of growth-inhibitingpeptides, amino acid derivatives and organic acids which are known under thetrade name “Antineoplastons.”  TheCompany believes Antineoplastons are useful in the treatment of human cancerand is currently conducting Phase II clinical trials of Antineoplastonsrelating to the treatment of cancer. Antineoplastons have not been approved forsale or use by the Food and Drug Administration of the United States Departmentof Health and Human Services (“FDA”) or anywhere in the world. In the eventAntineoplastons receive such approval and are registered in the United States,Canada, or Mexico, of which there can be no assurance, the Company willcommence commercial operations, which shall include the production, marketing,promotion and sale of Antineoplastons in the United States, Canada, or Mexico. In2004, the FDA approved the designation of Antineoplastons as an “orphan drug”under the Orphan Drug Act of 1983. See “—Orphan Drug Designation” below for adetailed description of this designation and its meaning. The Company currentlyprovides Antineoplastons solely for the use of Stanislaw R. Burzynski, M.D.,Ph.D. (“Dr. Burzynski”) in clinical research.

 

The Company has not generatedany significant operating revenue since its inception. The Company’s solesource of funding for its operations has been and continues to be payments madeby Dr. Burzynski from funds generated from Dr. Burzynski’s medical practicepursuant to various arrangements between the Company and Dr. Burzynski. *See*“*CertainRelationships and Related Transactions*.”  The Company reports funds pursuant to sucharrangements as additional paid-in capital. *See*“*Management’s Discussion and Analysis of Financial Condition and Resultsof Operations*.”  TheCompany does not expect to generate significant operating revenue until suchtime, if any, as Antineoplastons are approved for use and sale by the FDA. However,the Company may seek additional funding for operations through the sale of itssecurities.

 

**Antineoplastons**

 

Dr. Burzynski commenced hiscancer research in 1967 focusing on the isolation of various biochemicalsproduced by the human body as part of the body’s possible defense againstcancer. In the course of his research, Dr. Burzynski identified certainpeptides, amino acid derivatives and organic acids in these biochemicals whichappear to inhibit the growth of cancer cells. These derivatives were given thename “Antineoplastons” by Dr. Burzynski.

 

Antineoplastons are found in thebodily fluids of humans and food and were initially isolated by Dr. Burzynskifrom normal human blood and urine. Dr. Burzynski believes these substancescounteract the development of cancerous growth through a biochemical processwhich does not inhibit the growth of normal tissues. To date, Dr. Burzynskihas developed six formulations of natural Antineoplastons and six synthetic formulationsof Antineoplastons. All of the Phase II clinical trials currently sponsored bythe Company involve the use of four formulations of synthetic Antineoplastonsknown as A10 and AS2-1 in capsules and injections. The Company is alsoconducting laboratory research involving new generations of Antineoplastons A10and AS2-1.

 

**Orphan Drug Designation**

 

On September 7, 2004, the FDA granted “orphan drug”status to the Company’s Antineoplastons under the Orphan Drug Act of 1983. Inenacting the Orphan Drug Act of 1983, Congress sought to provide incentives topromote the development of drugs for the treatment of rare diseases. A drug maybe considered for orphan drug designation if the drug is intended to treat arare disease or condition affecting fewer than 200,000 people in the UnitedStates or, even if the drug treats a disease affecting more than 200,000 peoplein the United States, the drug is not expected to be profitable from sales inthe United States. Subject to applicable laws and regulations, the firstsponsor to obtain FDA marketing approval for a drug with orphan drugdesignation for the designated disease or condition receives limited marketingexclusivity for seven years; no other sponsor may bring to market the “samedrug” for the treatment of the same disease or condition for a period of sevenyears from the date the application is approved by the FDA. A drug with orphandrug designation must meet the same criteria for safety and efficacy as a

 

3

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drug without orphan drug designation. Please see “—GovernmentRegulation” for a complete description of the regulatory approval process withthe FDA and other regulatory agencies.

 

**Phase II ClinicalTrials**

 

The Company began Phase IIclinical studies in 1994 with four studies. At that time, a number of patientswere also receiving Antineoplastons at Dr. Burzynski’s clinic in Houston, Texas(the “Burzynski Clinic”) outside these clinical trials. On February 23, 1996,the FDA requested that all then-current patients of the Burzynski Clinicdesiring to continue Antineoplaston treatment be admitted to a Phase II Study,according to Protocol CAN-1. This action resulted in the formation of sixcohorts of patients in the CAN-1 study, with the largest group suffering fromprimary brain tumors. New patients either were admitted to the CAN-1 study orhave been admitted to one of the other studies sponsored by the Company, asappropriate.

 

The Company currently sponsors 27ongoing Phase II clinical trials, which are conducted pursuant toinvestigational new drug applications (“INDs”) filed with the FDA and approvedby an Institutional Review Board (“IRB”) designated according to federalregulations. All clinical trials except one are for the treatment of a widevariety of cancers using only a combination of Antineoplastons A10 and AS2-1. Theone exception involves the treatment of breast cancer using A10 capsules incombination with the FDA-approved drug Methotrexate. Most of the trials involvethe use of intravenous formulations of Antineoplastons; however, a few trialsuse oral formulations. Dr. Burzynski acts as principal investigator for allclinical trials pursuant to a Royalty Agreement between the Company and Dr.Burzynski. See “*Certain Relationships and Related Transactions*.”  All of the clinical trials are conducted atthe Burzynski Clinic. Each trial provides for the admission of up to 40patients, except the CAN-1 study, in which 133 patients were enrolled, and theBT-34 and BT-35 studies, in which up to 20 patients will be enrolled. Pleasesee “—Active Phase II Clinical Trials” for a list of all of these clinicaltrials.

 

Prior to approving a New DrugApplication (“NDA”), the FDA requires that a drug’s safety and efficacy bedemonstrated in “well-controlled” clinical trials. Several types of controlsare acceptable to the FDA. One of these is a “Historic Control.”  Under a “Historic Control” if the course of adisease is well-known, the response of patients taking a drug can be comparedto a historic group of patients with that disease who have not had medicalintervention. For example, it is known that the tumors of patients sufferingfrom primary malignant brain tumors (“PMBT”) will continue to grow, eventuallycausing the patient’s death. If a drug is administered to a patient with PMBTand the tumors of the patient disappear or shrink significantly, an assumptionis made that there has been a response to the drug.

 

**All ofthe Company’s clinical trials, except one, involve the use of Historic Controls.Further, all trials except the CAN-1 study are “prospective clinical trials” (“PCT”).**A PCT is aclinical trial wherein patients are accrued into and follow the clinical trialprotocol from the very beginning of the trial. A retrospective trial is a trialin which data from patients treated prior to the start of a clinical trial isconsidered. Results of retrospective trials are, in most instances, notacceptable to the FDA. **Inaddition, there are no clinical trials being conducted that involve “doubleblind” studies and all but one clinical trial involve no randomization intomultiple treatment groups.**

 

The ultimate goal of anytreatment for cancer is patient survival. However, the FDA has determined thatrequiring exhaustive data showing improved patient survival may unnecessarilydelay the approval of new cancer drugs. For that reason, the FDA may grantmarketing approval for a new drug product on the basis of adequate andwell-controlled clinical trials establishing that the drug has an effect on asurrogate endpoint (“Milestone”) that is reasonably likely to predict clinicalbenefit. Each of the Company’s Phase II trials describes such Milestones whichare used to determine success or failure of the treatment employed. In most ofthe trials, the Milestones are radiographic evidence of tumor shrinkage byX-ray, computer aided tomography or magnetic resonance imaging. Whereappropriate, tumor markers such as Prostate Specific Antigen, blood counts, orbone marrow biopsy are used in order to assess a tumor’s growth.

 

Where tumor size is used as theMilestone, each clinical trial protocol describes a “complete response” as acomplete disappearance of all tumors with no reoccurrence of tumors for atleast four weeks. A “partial response” is described as at least a 50% reductionin total tumor size, with such reduction lasting at least four weeks. An “objectiveresponse” is described as either a complete or partial response for protocolsAD-02, BL-02, BR-10, BR-14, BT-06, BT-09, BT-10, BT-11, BT-12, BT-13, BT-14,BT-15, BT-17, BT-18, BT-21, BT-22, BT-23, BT-24, BT-35, CO-03, ES-02, LA-04,LY-03, LY-06, LY-09, LY-12, MA-02, NE-02, PA-02, PR-06 and UP-02. “Stable

 

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disease” is described as less than 50% reductionin size but no more than 50% increase in size of the tumor mass, lasting for atleast twelve weeks. An objective response for protocols BT-07 and BT-20 isdescribed as either complete or partial response or stable disease. Anobjective response for protocol BT-34 is no sign of tumor recurrence. Anobjective response for protocol MM-02 is at least 75% reduction in theproduction of serum myeloma protein, at least 95% reduction in myeloma proteinsin urine and less than 5% bone marrow myeloma cells. “Progressive disease” isdescribed as more than 50% increase in total tumor mass or occurrence of newtumors.

 

The protocols of the Company’sclinical trials involve a two-stage design, wherein the first stage proceedsuntil the Company admits twenty patients into the trial. After a specified timeperiod, if there are zero responses by the first twenty patients, the trialwill be discontinued and the drug declared to have less than desired activity. Ifthere is at least one response, the trial will be continued until forty patientshave been accrued. If the study continues, the following conclusions accordingto protocols based on forty patients can be made:  If there are three or fewer responses, thenthere is less than desired activity. If there are four or more responses, thenthere is sufficient evidence to conclude that the Antineoplaston regimen usedshows beneficial activity.

 

As of May 26, 2006, eleven ofthe prospective clinical trials have reached a Milestone. These are:

 

•                  ProtocolBT-07, involving the study of Antineoplastons A10 and AS2-1 in patients withglioblastoma multiforme, not treated with radiation therapy or chemotherapy. Thisstudy is already completed.

 

•                  Protocol BT-09,involving the study of Antineoplastons A10 and AS2-1 in patients with braintumors.

 

•                  ProtocolBT-11, involving the study of Antineoplastons A10 and AS2-1 in patients withbrain stem glioma.

 

•                  ProtocolBT-12, involving the study of Antineoplastons A10 and AS2-1 in children withprimitive neuroectodermal tumors (PNET).

 

•                  Protocol BT-13, involving the studyof Antineoplastons A10 and AS2-1 in children with low grade astrocytoma, a typeof PMBT.

 

•                  Protocol BT-15, involving the studyof Antineoplastons A10 and AS2-1 in adult patients with anaplastic astrocytoma,a type of PMBT.

 

•                  Protocol BT-18,involving a study of Antineoplastons A10 and AS2-1 in the treatment of “mixedglioma,” a type of PMBT.

 

•                  ProtocolBT-20, involving the study of Antineoplastons A10 and AS2-1 in patients withglioblastoma multiforme, which recurred after standard radiation and/orchemotherapy. This study is already completed.

 

•                  ProtocolBT-21, involving the study of Antineoplastons A10 and AS2-1 in adults withprimary malignant brain tumors.

 

•                  ProtocolBT-23, involving a study of Antineoplastons A10 and AS2-1 in children withvisual pathway glioma.

 

•                  ProtocolBT-34, involving the study of maintenance treatment with Antineoplastons A10and AS2-1 capsules for patients with malignancies in complete responsefollowing initial intravenous treatment with Antineoplastons A10 and AS2-1.

 

There can be no assurance thatthe results of any of these trials can be repeated or that the other clinicaltrials will result in the same or similar responses.

 

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The results of Protocols BT-07, BT-09,BT-11, BT-12, BT-13, BT-15, BT-18, BT-20, BT-21, BT-23 and BT-34 are set forthbelow (as of May 26, 2006).

 
| **Protocol  Number** | ** ** | **Patients  Accrued** | ** ** | **Evaluable  Patients** | ** ** | **Number and  Percentage of  Patients Showing  Complete  Response** | ** ** | **Number and  Percentage of  Patients Showing  Partial Response** | ** ** | **Number and  Percentage of  Patients  Showing Stable  Disease** | ** ** | **Number and  Percentage of  Patients  Showing  Progressive Disease** | ** ** |
|----------------------|------------|-----------------------|------------|-------------------------|------------|---------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| BT-07                |       | 40                    |       | 24                      |       | 2                                                                   | 8.3        | %                                                                 | 1          | 4.2                                                              | %          | 2                                                                     | 8.3        | % | 18 | 79.2 | % |
| BT-09                |       | 29                    |       | 23                      |       | 4                                                                   | 17.4       | %                                                                 | 6          | 26.1                                                             | %          | 9                                                                     | 39.1       | % | 4 | 17.4 | % |
| BT-11                |       | 35                    |       | 25                      |       | 5                                                                   | 20.0       | %                                                                 | 4          | 16.0                                                             | %          | 9                                                                     | 36.0       | % | 7 | 28.0 | % |
| BT-12                |       | 13                    |       | 11                      |       | 3                                                                   | 27.3       | %                                                                 | 1          | 9.1                                                              | %          | 3                                                                     | 27.3       | % | 4 | 36.4 | % |
| BT-13                |       | 11                    |       | 9                       |       | 5                                                                   | 55.6       | %                                                                 | 1          | 11.1                                                             | %          | 3                                                                     | 33.3       | % | 0 | 0.0 | % |
| BT-15                |       | 25                    |       | 18                      |       | 3                                                                   | 16.7       | %                                                                 | 2          | 11.1                                                             | %          | 7                                                                     | 38.9       | % | 6 | 33.3 | % |
| BT-18                |       | 17                    |       | 10                      |       | 3                                                                   | 30.0       | %                                                                 | 1          | 10.0                                                             | %          | 2                                                                     | 20.0       | % | 4 | 40.0 | % |
| BT-20                |       | 40                    |       | 22                      |       | 1                                                                   | 4.5        | %                                                                 | 1          | 4.5                                                              | %          | 12                                                                    | 54.5       | % | 8 | 36.4 | % |
| BT-21                |       | 35                    |       | 20                      |       | 2                                                                   | 10.0       | %                                                                 | 2          | 10.0                                                             | %          | 7                                                                     | 35.0       | % | 9 | 45.0 | % |
| BT-23                |       | 12                    |       | 8                       |       | 3                                                                   | 37.5       | %                                                                 | 1          | 12.5                                                             | %          | 3                                                                     | 37.5       | % | 1 | 12.5 | % |
| BT-34                |       | 5                     |       | 5                       |       | 5                                                                   | 100.0      | %                                                                 | 0          | 0.0                                                              | %          | 0                                                                     | 0.0        | % | 0 | 0.0 | % |

 

**ThePhase II Study according to Protocol CAN-1 included 35 evaluable brain tumor patients.Complete and partial responses were obtained in patients diagnosed withglioblastoma multiforme, astrocytoma, oligodendroglioma, mixed glioma,medulloblastoma, and malignant meningioma. The treatment with AntineoplastonsA10 and AS2-1 resulted in 48.6% cases of objective responses and 34.4% cases ofstable disease. The largest group of evaluable patients involved in the studyhad glioblastoma multiforme. Six of the cases were classified as complete andpartial responses, four obtained stabilization and four developed progressionof the disease. One of the glioblastoma patients is now alive and completelyfree from tumor for over twelve years after her pathology diagnosis.**

 

Notwithstanding the response results of the trialsthat have reached a Milestone, management believes it is likely that the FDAmay require additional clinical trials based upon such protocols to beconducted by an institution not affiliated with the Company or Dr. Burzynskibefore advising that an NDA filing is warranted. **In addition, the FDA has indicated it will not acceptthe efficacy data, but will accept toxicity data generated by the Phase IIstudy according to Protocol CAN-1 because the trial was partially retrospective.**At this time, the Company cannot predict if and/or when itwill submit an NDA to the FDA, nor can the Company estimate the number or typeof additional trials the FDA may require. Further, there can be no assurancethat an NDA for Antineoplastons, as a treatment for cancer, will ever beapproved by the FDA.

 

No assurance can be given thatany new IND for clinical tests on humans will be approved by the FDA for humanclinical trials on cancer or other diseases, that the results of such humanclinical trials will prove that Antineoplastons are safe or effective in thetreatment of cancer or other diseases, or that the FDA would approve the saleof Antineoplastons in the United States.

 

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**Active Phase IIClinical Trials**

 

The following table sets forththe title of each active Protocol, the subject of the Protocol with datessubmitted to the FDA and approved by the IRB and the number of personscurrently enrolled in each study. All of the following trials are PhaseII studies and, except as otherwise indicated, are of Antineoplastons A10 andAS2-1 in patients with the conditions listed. For purposes of this table,active means that the study is still under open enrollment. In addition, all ofthe studies listed have a maximum of 40 patients who may ultimately participatein the study, except for protocols BT-34 and BT-35, which have a maximum of 20patients who may ultimately participate in the study. The information in thistable is updated as of May 26, 2006.

 
| **Title of  Protocol** | ** ** | **Subject  of Protocol**                                                                                                                                                                                             | ** ** | **Number  of  Persons Enrolled** | ** ** |
|------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| AD-02                  |       | Carcinoma of the Adrenal Gland                                                                                                                                                                                       |       | 5                                |       |
| BL-02                  |       | Carcinoma of the Bladder                                                                                                                                                                                             |       | 4                                |       |
| BR-10                  |       | Protocol for Randomized Controlled Trial Comparing  Methotrexate Treatment Alone to the Combination of Methotrexate and  Antineoplaston A10                                                                          |       | 8                                |       |
| BT-06                  |       | Children with High Grade Glioma                                                                                                                                                                                      |       | 9                                |       |
| BT-08                  |       | Anaplastic Astrocytoma                                                                                                                                                                                               |       | 17                               |       |
| BT-09                  |       | Brain Tumors                                                                                                                                                                                                         |       | 29                               |       |
| BT-10                  |       | Children with Brain Tumors                                                                                                                                                                                           |       | 17                               |       |
| BT-11                  |       | Brain Stem Glioma                                                                                                                                                                                                    |       | 35                               |       |
| BT-12                  |       | Children with Primitive Neuroectodermal (PNET)                                                                                                                                                                       |       | 13                               |       |
| BT-13                  |       | Children with Low Grade Astrocytoma                                                                                                                                                                                  |       | 11                               |       |
| BT-14                  |       | Children with Rhabdoid Tumor of the Central Nervous  System                                                                                                                                                          |       | 4                                |       |
| BT-15                  |       | Adult Patients with Anaplastic Astrocytoma                                                                                                                                                                           |       | 25                               |       |
| BT-17                  |       | Adult Patients with Oligodendroglioma                                                                                                                                                                                |       | 12                               |       |
| BT-18                  |       | Adult Patients with Mixed Glioma                                                                                                                                                                                     |       | 17                               |       |
| BT-21                  |       | Adult Patients with Primary Malignant Brain Tumors                                                                                                                                                                   |       | 35                               |       |
| BT-22                  |       | Children with Primary Malignant Brain Tumors                                                                                                                                                                         |       | 6                                |       |
| BT-23                  |       | Children with Visual Pathway Glioma                                                                                                                                                                                  |       | 12                               |       |
| BT-34                  |       | Maintenance Treatment with Antineoplastons A10 and  AS2-1 Capsules for Patients with Malignancies in Complete Response Following  Initial Intravenous Treatment with Antineoplastons A10 and AS2-1                   |       | 5                                |       |
| BT-35                  |       | Maintenance Treatment with Antineoplastons A10 and  AS2-1 Capsules for Patients with Malignancies in Partial Response or Stable  Disease Following Initial Intravenous Treatment with Antineoplastons A10 and  AS2-1 |       | 1                                |       |
| LA-04                  |       | Large Cell, Undifferentiated Carcinoma of the Lung                                                                                                                                                                   |       | 9                                |       |
| LY-03                  |       | Non-Hodgkin’s Lymphoma                                                                                                                                                                                          |       | 4                                |       |
| LY-06                  |       | Non-Hodgkin’s Lymphoma, Low Grade                                                                                                                                                                               |       | 31                               |       |
| MA-02                  |       | Mesothelioma                                                                                                                                                                                                         |       | 8                                |       |

 

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| **Title of  Protocol** | ** ** | **Subject  of Protocol**        | ** ** | **Number  of  Persons Enrolled** | ** ** |
|------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| ME-02                  |       | Malignant Melanoma              |       | 13                               |       |
| MM-02                  |       | Multiple Myeloma                |       | 5                                |       |
| PA-02                  |       | Carcinoma of the Pancreas       |       | 15                               |       |
| UP-02                  |       | Carcinoma of an Unknown Primary |       | 8                                |       |

 

**GovernmentRegulation**

 

The FDA imposes substantialrequirements upon, and conditions precedent to, the introduction of therapeuticdrug products through lengthy and detailed laboratory and clinical testing procedures,sampling activities and other costly and time consuming procedures. To obtainFDA approval for Antineoplastons, we must submit extensive preclinical andclinical data and supporting information to the FDA to establish the safety andefficacy of Antineoplastons. The approval process takes many years, requiresthe expenditure of substantial resources and may involve ongoing requirementsfor post-marketing studies. Additional government regulation may be establishedthat could prevent or delay regulatory approval of Antineoplastons. Moreover,there can be no assurance that the Company can satisfy FDA requirements to gainapproval for Antineoplastons in the United States or that FDA approval for thesale of Antineoplastons in the United States will be obtained. If regulatoryapproval is granted, the approval may include significant limitations on theindicated uses for which Antineoplastons may be marketed.

 

The effect of the FDA drugapproval process for Antineoplastons may impose costly procedures upon theCompany’s activities which may furnish a competitive advantage to the othercompanies that compete with the Company in the field of cancer treatment drugs.The extent of potentially adverse government regulations which might arise fromfuture legislation or administrative action cannot be predicted.

 

The Investigational New DrugApplication Process in the United States is governed by regulations establishedby the FDA which strictly control the use and distribution of investigationaldrugs in the United States. The guidelines require that an IND, filed by asponsor, contain sufficient information to justify administering the drug tohumans, that the application include relevant information on the chemistry,pharmacology and toxicology of the drug derived from chemical, laboratory andanimal or in vitro testing, and that a protocol be provided for the initialstudy of the new drug to be conducted on humans.

 

In order to conduct a clinicaltrial of a new drug in humans, a sponsor must prepare and submit to the FDA acomprehensive IND. Such application must contain an investigator’s brochure, adescription of the composition, manufacture and control of the drug substanceand the drug product, sufficient information to assure the properidentification, quality, purity and strength of the investigational drug, adescription of the drug substance, including its physical, chemical, andbiological characteristics, the general method of preparation of the drugsubstance, a list of all components including interactive ingredients, adequateinformation about pharmacological and toxicological studies of the druginvolving laboratory animals or in vitro tests on the basis of which thesponsor has concluded that it is reasonably safe to conduct the proposedclinical investigation and a summary of any previous human experience with thedrug. Where there has been widespread use of the drug outside of the UnitedStates or otherwise, it is possible in some limited circumstances to usewell-documented clinical experience in place of some other pre-clinical work.

 

The focal point of the IND is onthe general investigational plan and the protocols for specific human studies. Theplan is carried out in three phases: Phase I includes the initial introduction of an investigational new druginto humans and may be conducted in patients or normal volunteer subjects. Thestudies are closely monitored to determine the metabolism and pharmacologicactions of the drug in humans, the potential side effects and, if possible, togain early evidence on effectiveness. During Phase I testing, sufficientinformation about the drug is gathered to design well-controlled,scientifically valid Phase II studies. Phase II includes controlled clinicalstudies conducted to evaluate the effectiveness of the drug for a particularindication in patients with the disease or condition under study and todetermine the common short-term side effects and risks associated with the drug.Phase II studies are controlled, closely monitored and conducted in a relativelysmall number of patients, usually involving no more than several hundredsubjects. Phase III includes expanded controlled and uncontrolled trials and

 

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are intended to gather the additional informationabout effectiveness and safety that is needed to evaluate the overallbenefit-risk relationship of the drug and to provide an adequate basis forphysician labeling. Phase III studies usually include anywhere from severalhundred to several thousand subjects.

 

An IND will automatically becomeeffective 30 days after receipt by the FDA, unless before that time the FDAraises concerns about issues such as the conduct of the trials as outlined inthe IND. After the IND becomes effective, the investigation is permitted toproceed, during which the sponsor must keep the FDA informed of new studies,including animal studies, make progress reports on the study or studies coveredby the IND, and also be responsible for informing FDA and clinicalinvestigators immediately of unforeseen serious side effects or injuries. Therecan be no assurance that Phase I, Phase II or Phase III testing will becompleted successfully by the Company within any specified period of time, ifat all. Furthermore, the Company or the FDA may suspend clinical trials at anytime on various grounds, including a finding that the subjects or patients arebeing exposed to an unacceptable health risk.

 

Assuming successful completionof the clinical studies, the results of the studies, together with otherdetailed information, including, among other information, details concerningthe manufacture and composition of the drug, proposed labeling, environmentalimpact and the scientific rationale for the drug, its intended use and thepotential benefits of the drug product, are submitted to the FDA in the form ofan NDA requesting approval to market the drug. If the FDA finds the NDAsubmission and the manufacturing process to be acceptable, the FDA will issuean approval letter. If the FDA does not find the NDA submission or themanufacturing process to be sufficient, it will issue a “not approvable letter”describing the deficiencies in the NDA and allowing the NDA applicant to eitheramend the NDA, withdraw the NDA or request a hearing. Even if the NDA isamended or a hearing is held, the FDA ultimately may decide that the NDA doesnot satisfy the regulatory criteria for approval. In addition, as a result ofthe Company’s use of Milestones to predict the benefits of Antineoplastons, theFDA may subject any such approval to the requirement that the Company study thedrug further, to verify and describe its clinical benefit (Phase IV testing). Further,the FDA may also impose post-marketing restrictions on Antineoplastons. The FDAmay withdraw approval of any drug if the Phase IV trials fail to verifyclinical benefit, use of the drugs demonstrates that post-marketingrestrictions are inadequate to assure safe use of the drug, the Company failsto adhere to the post-marketing restrictions agreed upon, the promotionalmaterials are false or misleading or other evidence demonstrates that the drugis not shown to be safe or effective under its conditions of use.

 

The testing and approval processrequires substantial time, effort and financial resources, and there can be noassurance that any approval will be granted for any product or that approvalwill be granted according to any schedule. Moreover, if regulatory approval ofa drug is granted, the approval will be limited to specific indications. Therecan be no assurance that any of the Company’s product candidates will receiveregulatory approvals for commercialization.

 

The FDA has implemented anaccelerated review process for pharmaceutical agents that treat serious orlife-threatening disease and conditions, subject to payment of user fees. Approvalmay be conditioned on a requirement that, following product launch, a companycontinue to study the drug to verify and describe its clinical benefit. Under “fasttrack” procedures, the FDA may withdraw approval on an expedited basis if thecompany fails to show due diligence in conducting post-marketing clinicaltrials or if the post-approval clinical trials fail to demonstrate that theproduct is safe or effective. Whenappropriate, the Company intends to pursue opportunities for accelerated reviewof its products. The Company cannot predict the ultimate effect of this reviewprocess on the timing or likelihood of FDA review of any of its products.

 

Please see “—Orphan DrugDesignation” for a description of the FDA’s orphan drug designation under theOrphan Drug Act of 1983 as it applies to the Company’s Antineoplastons.

 

Even if the regulatory approvals for the Company’sproducts are obtained, its products and its manufacturing facility are subjectto continuous review and periodic inspection. The FDA will requirepost-marketing reporting to monitor the safety of the Company’s products. TheCompany’s drug manufacturing facility must be inspected and approved by the FDAand must comply with the FDA’s current good manufacturing practice regulations,which are strictly enforced. Full technical compliance requires manufacturersto expend funds, time and effort in the area of production and quality control.In addition, discovery of problems with a product after approval or failure tocomply with applicable FDA or other applicable regulatory requirements mayresult in restrictions on a

 

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product, manufacturer, or holder of an approved NDA, includingrestrictions on the product, manufacturer or facility, including warningletters, suspension of regulatory approvals, operating restrictions, delays inobtaining new product approvals, withdrawal of the product from the market,product recalls, fines, injunctions and criminal prosecution. New governmentrequirements may be established that could delay or prevent regulatory approvalof the Company’s products under development.

 

The Company’s research and development involves thecontrolled use of hazardous materials, chemicals and various radioactivecompounds. Although the Company believes its procedures for handling anddisposing of those materials comply with state and federal regulations, therisk of accidental contamination or injury from these materials cannot beeliminated. If an accident of this type occurs, the Company could be heldliable for resulting damages, which could be material to its financialcondition and business. The Company is also subject to numerous environmental,health and workplace safety laws and regulations, including those governinglaboratory procedures and the handling of biohazardous materials. Additionalfederal, state and local laws and regulations affecting the Company may beadopted in the future. Any violation of these laws and regulations, and thecost of compliance, could materially and adversely affect the Company. **The Company spends approximately $100,000 per yearon environmental compliance matters and expects to spend approximately $65,000 forrepairs and upgrades during the fiscal year ending February 28, 2007.**

 

**Research AndDevelopment**

 

The Company’s principal researchand development efforts currently focus on Antineoplastons. The anticanceractivity of these compounds has been documented in preclinical studiesemploying the methods of cell culture, pharmacology, cell biology, molecularbiology, experimental therapeutics and animal models of cancer. At the level ofPhase II clinical studies, the Company believes the anticancer activity ofAntineoplastons is supported by preliminary results from ongoing, FDA-authorized,Phase II clinical trials.

 

The cellular mechanismunderlying the anticancer effects of Antineoplastons continues to beinvestigated in both the Company’s own basic preclinical research program andin independent laboratories around the world. A review of this work suggestsseveral mechanisms that may underlie the antineoplastic activity ofAntineoplastons. For example, it has been found, in cell culture experiments,that Antineoplastons induce pathologically undifferentiated cancer cells toassume a more normal state of differentiation. Cell culture experiments havealso shown that Antineoplaston components can kill some cancer cells byactivating the cell’s intrinsic “suicide” program. It must be noted that datacollected in cell culture experiments may or may not indicate the mechanism ofaction of Antineoplastons in humans.

 

At a more molecular orsub-cellular level, cell culture experiments have shown that Antineoplastonscan block biochemical pathways involving oncogenes required to produce abnormalcell growth. In addition, cell culture experiments have shown thatAntineoplastons can increase the expression of anticancer tumor suppressorgenes. Although these experiments were conducted using human cancer cells, theymay or may not indicate the mechanism of Antineoplaston action in humans.

 

In addition to the originalfamily of Antineoplaston compounds (the “Parental Generation”), the Companycontinues its development of a second generation of Antineoplastons. In cellculture experiments, the second generation Antineoplastons, which weredeveloped by the Company, have been shown to be significantly more potent thanthe Parental Generation.

 

The Company is also developing athird generation of structurally altered Antineoplastons that the Companybelieves will exhibit markedly improved anticancer activity in human cancercell lines that have been resistant to the Parental Generation. However,increases of antineoplastic activity in cell culture experiments may or may nottranslate into increased efficacy in humans.

 

The Company is also involved inongoing studies examining the pharmacokinetics (absorption, distribution,metabolism, and excretion) and pharmacodynamics (dose-response) ofAntineoplastons in patients with neoplastic disease.

 

The Company uses variousscientific reagents from several different suppliers to conduct its researchactivities.

 

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Total research and developmentcosts for the fiscal years ended February 28, 2006 and 2005 were approximately $4,435,000and $4,665,000, respectively.

 

**IntellectualProperty**

 

Since 1984, eight patentsinvolving the formulation, preparation, manufacture, production, use, dosageand treatment of cancer with Antineoplastons (the “Patents”) have been issued toDr. Burzynski by the United States Patent Office and the Patent Offices of 34other countries. The Patents for cancer treatment and diagnosis in the UnitedStates and Canada are licensed to the Company pursuant to a License Agreementdated June 29, 1983, as superseded by an Amended License Agreement dated April24, 1989 and a Second Amended License Agreement dated March 1, 1990(collectively, the “License Agreement”). Pursuant to the License Agreement, theCompany holds an exclusive right in the United States, Canada, and Mexico (the “Territory”)to use, manufacture, develop, sell, distribute, sub-license and otherwiseexploit all of Dr. Burzynski’s rights, title, and interests, including patentrights, in Antineoplastons in the treatment and diagnosis of cancer. See “*Certain Relationships and Related Transactions.*”  The Company will not be able to exploit suchrights until such time as Antineoplastons are approved, of which there can beno assurance, by the FDA for sale in the United States. The License Agreementis to continue in effect until the expiration of the last Patent that waslicensed under the agreement or termination pursuant to certain other provisions.The Company and Dr. Burzynski also entered into a Royalty Agreement, datedMarch 25, 1997, and a First Amended Royalty Agreement, dated September 29, 1997(collectively, the “Royalty Agreement”), pursuant to which Dr. Burzynski willreceive a royalty interest from all future sales, distribution, and manufactureof Antineoplastons by the Company. The Company owns, pursuant to the LicenseAgreement, exclusive rights to eight issued United States Patents, three issuedCanadian Patents and one issued Mexican Patent. The Company has one patentapplication pending in Canada.

 

The five initial United StatesPatents (the “Initial Patents”) relate to: (i) Determination of Antineoplastonsin body tissue or fluids as a testing procedure to aid in the diagnosis ofcancer; (ii) Processes for the preparation of purified fractions of Antineoplastonsfrom human urine; (iii) Processes for the synthetic production ofAntineoplastons and methods of treating neoplastic disease (cancer); (iv)Administration of Antineoplastons to humans; and (v) Methods of synthesizingA-10. The Initial Patents expire from September 11, 2001 to January 11, 2009,however the Company does not believe the expiration of any of the InitialPatents will have a material adverse effect on the Company.

 

The sixth United States Patent(the “2000 U.S. Patent”) covers Liposomal Antineoplaston therapies withmarkedly improved anti-cancer activity. The 2000 U.S. Patent expires on May 14,2017.

 

The seventh United States Patent(the “2001 U.S. Patent”) is for a treatment regimen for the administration ofphenylacetylglutamine, phenylacetylisoglutamine, and/or phenylacetate. The 2001U.S. Patent expires on July 23, 2018.

 

The eighth United States Patent(the “2005 U.S. Patent”) relates to a divisional application to the 2001 U.S.Patent. The 2005 U.S. Patent issued in September 2005 and will expire July2018.

 

The three Canadian Patents (the “CanadianPatents”) relate to: (i) Processes for the preparation of purified fractions ofAntineoplastons from human urine, (ii) Processes for the synthetic productionof Antineoplastons and methods of treating neoplastic disease (cancer) and(iii) Liposomal Formulation of Antineoplastons. The Canadian Patents expired orwill expire on November 14, 2006, June 4, 2002 and May 14, 2017, respectively;however, the Company does not believe the expiration of the Canadian Patentswill have a material adverse effect on the Company.

 

The Mexican Patent relates to atreatment regimen for the administration of phenylacetylglutamine. This patentwill expire in the year 2019.

 

The pending patent applicationin Canada relates to a treatment regimen for the administration ofphenylacetylglutamine. Should this patent be granted, of which there can be noassurance, it would expire in the year 2019.

 

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The Company also depends uponunpatented proprietary technology, and may determine in appropriatecircumstances that its interest would be better served by reliance upon tradesecrets or confidentiality agreements rather than patents.

 

The Company’s success willdepend in part on its ability to enforce patent protection for its products,preserve its trade secrets, and operate without infringing on the proprietaryrights of third parties in the United States, Canada, and Mexico. Because ofthe substantial length of time and expense associated with bringing newproducts through development and regulatory approval to the marketplace, thepharmaceutical and biotechnology industries place considerable importance onobtaining and maintaining patent and trade secret protection for newtechnologies, products and processes. There can be no assurance that theCompany will develop additional products and methods that are patentable orthat present or future patents will provide sufficient protection to theCompany’s present or future technologies, products and processes. In addition,there can be no assurance that others will not independently developsubstantially equivalent proprietary information, design around the Company’spatents or obtain access to the Company’s know-how or that others will notsuccessfully challenge the validity of the Company’s patents or be issuedpatents which may prevent the sale of one or more of the Company’s productcandidates, or require licensing and the payment of significant fees orroyalties by the Company to third parties in order to enable the Company toconduct its business. Legal standards relating to the scope of claims and thevalidity of patents in the fields in which the Company is pursuing research anddevelopment are still evolving, are highly uncertain and involve complex legaland factual issues. No assurance can be given as to the degree of protection orcompetitive advantage any patents issued to the Company will afford, thevalidity of any such patents or the Company’s ability to avoid violating orinfringing any patents issued to others. Further, there can be no guaranteethat any patents issued to or licensed by the Company will not be infringed bythe products of others. Litigation and other proceedings involving the defenseand prosecution of patent claims can be expensive and time-consuming, even inthose instances in which the outcome is favorable to the Company, and canresult in the diversion of resources from the Company’s other activities. Anadverse outcome could subject the Company to significant liabilities to thirdparties, require the Company to obtain licenses from third parties or requirethe Company to cease any related research and development activities or sales.

 

The Company depends upon theknowledge, experience and skills (which are not patentable) of its keyscientific and technical personnel. To protect its rights to its proprietaryinformation, the Company requires all employees, consultants, advisors andcollaborators to enter into confidentiality agreements which prohibit thedisclosure of confidential information to anyone outside the Company andrequire disclosure and assignment to the Company of their ideas, developments,discoveries and inventions. There can be no assurance that these agreementswill effectively prevent the unauthorized use or disclosure of the Company’sconfidential information.

 

Antineoplaston agents is atrademark registered with the U.S. Patent and Trademark Office.

 

**Competition**

 

There are many companies,universities, research teams and scientists, both private andgovernment-sponsored, that are engaged in research to produce cancer treatmentagents and that have greater financial resources and larger research staffs andfacilities than the Company. In addition, there are other companies and entities,both private and government-sponsored, that are engaged in research aimed atcompounds similar or related to the Company’s Antineoplastons. To the extentthat the United States Government also conducts research or supports othercompanies or individuals in their research, such companies or individuals mayhave a competitive advantage over the Company.

 

**Employees**

 

**As of May10, 2006, the Company had three employees, all of whom were full-time employees.None of the Company’s employees is a party to a collective bargaining agreement.The Company considers the relations with its employees to be good.**

 

## **ITEM 2.**                                  DESCRIPTIONOF PROPERTY

 

The Company does not own orinvest in real estate, interests in real estate, real estate mortgages orsecurities of or interests in persons primarily engaged in real estateactivities.

 

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The Company conducts itsbusiness in premises owned by Dr. Burzynski and his wife, Dr. Barbara Burzynski(the “Burzynskis”). Pursuant to arrangements with the Burzynskis (see “*Certain Relationships and RelatedTransactions—Research Funding Arrangements*”), the Company occupies(i) 675 square feet at 12707 Trinity Drive, Stafford, Texas for office,laboratory and medical research purposes and (ii) 540 square feet at 9432 OldKaty Road, Suite 200 for its executive offices. Management of the Companybelieves that each of these properties is adequately covered by insurance.

 

On November 26, 2005, theCompany completed the sale of selected equipment to Dr. Burzynski, the Company’sPresident and Chief Executive Officer, in an arms-length transaction approvedby both of the Company’s disinterested directors. The equipment sold to Dr.Burzynski is not necessary for the Company’s ongoing operations and was soldfor a purchase price of $95,000. The amount of the purchase price was based onan independent third party appraisal received by the Company’s disinteresteddirectors to assist them in approving the sale of the equipment to Dr.Burzynski. This sale of equipment will not affect the Company’s operations inany significant way.

 

## **ITEM 3.**                                  LEGALPROCEEDINGS

 

The Company’s activities are subject to regulation byvarious governmental agencies, including the FDA, which regularly monitor theCompany’s operations and often impose requirements on the conduct of itsclinical trials and other aspects of the Company’s business operations. TheCompany’s policy is to comply with all such regulatory requirements. From timeto time, the Company is also subject to potential claims by patients and otherpotential claimants commonly arising out of the operation of a medical practice.The Company seeks to minimize its exposure to claims of this type whereverpossible.

 

Currently, the Company is not aparty to any material pending legal proceedings. Moreover, the Company is notaware of any such legal proceedings that are contemplated by governmentalauthorities with respect to the Company or any of its properties.

 

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

 

No matter was submitted to a vote of security holdersduring the fourth quarter of the fiscal year ended February 28, 2006.

 

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# **PART II**

 

## **ITEM 5.**                                  MARKET FOR COMMONEQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OFEQUITY SECURITIES

 

Since October 15, 2001, theCompany’s Common Stock has remained in good standing for trading on the OTCBB. Nevertheless,a public trading market having the characteristics of depth, liquidity andorderliness depends upon the existence of market makers as well as the presenceof willing buyers and sellers, which are circumstances over which the Companydoes not have control. There can be no assurance that the market will providesignificant liquidity for the Company’s Common Stock. As a result, aninvestment in the Company’s Common Stock may be highly illiquid. Investors maynot be able to sell their shares readily or at all when the investor needs ordesires to sell.

 

The following table sets forthclosing high and low bid prices of the shares of Common Stock of the Companyfor the periods indicated (as reported by Pink Sheets LLC).

 
| ** **     | ** ** | **Price Range** | ** ** |
|----------------|------------|-----------------|------------|
| ** **     | ** ** | **High**        | ** ** | **Low** | ** ** |
| 2004           |       |            |       |   |   |
| First Quarter  |       | $               | 0.16       |   | $ | 0.15 |   |
| Second Quarter |       | 0.46            |       | 0.12 |   |
| Third Quarter  |       | 1.01            |       | 0.26 |   |
| Fourth Quarter |       | 0.36            |       | 0.26 |   |
|           |       |            |       |   |   |
| 2005           |       |            |       |   |   |
| First Quarter  |       | $               | 0.37       |   | $ | 0.23 |   |
| Second Quarter |       | 0.35            |       | 0.25 |   |
| Third Quarter  |       | 0.30            |       | 0.13 |   |
| Fourth Quarter |       | 0.18            |       | 0.08 |   |

 

The quotations set forth abovereflect inter-dealer prices, without retail mark-up, mark-down or commission,and may not represent actual transactions.

 

As of May 10, 2006, there were approximately2,036 holders of record of the Company’s Common Stock, as shown on the recordsof the Transfer Agent and Registrar of the Common Stock. Since many shares maybe held by investors in nominee names, such as the name of their broker ortheir broker’s nominee, the number of record holders often bears littlerelationship to the number of beneficial owners of the Common Stock.

 

The Company has never paid cashdividends on its Common Stock and the Board of Directors intends to retain allof its earnings, if any, to finance the development and expansion of itsbusiness. However, there can be no assurance that the Company can successfullyexpand its operations, or that such expansion will prove profitable. Futuredividend policy will depend upon the Company’s earnings, capital requirements,financial condition and other factors considered relevant by the Company’sBoard of Directors.

 

## **ITEM 6.**                                  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OFOPERATION

 

The following is a discussion of the financialcondition of the Company as of February 28, 2006 and 2005 and the results ofoperations for the fiscal years ended February 28, 2006 and 2005. It should beread in conjunction with the financial statements and the notes theretoincluded elsewhere in this report. The following discussion containsforward-looking statements.

 

**Introduction**

 

The Company has generated no significant revenue sinceits inception, and does not expect to generate any operating revenues untilsuch time, if any, as Antineoplastons are approved for use and sale by the FDA.The Company’s sole source of funding is Dr. Burzynski, who funds the Company’soperations from his medical practice pursuant to certain agreements between Dr.Burzynski and the Company*. See*“*CertainRelationships and Related*

 

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*Transactions*.”  Funds received by the Company from Dr.Burzynski are reported as additional paid-in capital to the Company.

 

The Company is primarily engagedas a research and development facility of Antineoplaston drugs currently beingtested for use in the treatment of cancer, and provides consulting services. TheCompany is currently conducting 27 FDA-approved clinical trials. The Companyholds the exclusive right in the United States, Canada and Mexico to use,manufacture, develop, sell, distribute, sublicense and otherwise exploit allthe rights, titles and interest in Antineoplaston drugs used in the treatmentof cancer, once the drugs are approved for sale by the FDA*. See*“*Certain Relationships and RelatedTransactions.*”

 

**Results OfOperations**

 

***Fiscal Year Ended February 28, 2006Compared to Fiscal Year Ended February 28, 2005***

 

Research and development costs were approximately$4,435,000 and $4,665,000 for the fiscal years ended February 28, 2006 and2005, respectively. The decrease of $230,000 or 5% was due to a decrease inpersonnel cost of $99,000, a decreases in material costs of $306,000, and adecrease in other research and development costs of $16,000, offset by anincrease in facility and equipment costs of $44,000, and an increase inconsulting and quality control costs of $147,000.

 

General and administrative expenses were approximately$216,000 and $295,000 for the fiscal years ended February 28, 2006 and 2005,respectively. The decrease of $79,000 or 27% was due to a decrease in legal andprofessional fees of $74,000, and a decrease in other general andadministrative expenses of $5,000.

 

The Company had net losses of approximately $4,601,000and $4,966,000 for the fiscal years ended February 28, 2006 and 2005,respectively. The decrease in the net loss from 2005 to 2006 was primarily dueto an overall decrease in research and development cost and general andadministrative expenses of the Company described above, offset by an increasein gain on sale of assets.

 

As of February 28, 2006, the Company had totalstockholders’ deficit of $(28,279).

 

**Liquidity andCapital Resources**

 

The Company’s operations havebeen funded entirely by Dr. Burzynski with funds generated from Dr. Burzynski’smedical practice. Effective March 1, 1997, the Company entered into a ResearchFunding Agreement with Dr. Burzynski (the “Research Funding Agreement”),pursuant to which the Company agreed to undertake all scientific research inconnection with the development of new or improved Antineoplastons for thetreatment of cancer and Dr. Burzynski agreed to fund the Company’sAntineoplaston research for that purpose. Under the Research Funding Agreement,the Company hires such personnel as is required to conduct Antineoplastonresearch, and Dr. Burzynski funds the Company’s research expenses, includingexpenses to conduct the clinical trials. Dr. Burzynski also provides theCompany laboratory and research space as needed to conduct the Company’sresearch activities. The Research Funding Agreement also provides that Dr.Burzynski may fulfill his funding obligations in part by providing the Companysuch administrative support as is necessary for the Company to manage itsbusiness. Dr. Burzynski pays the full amount of the Company’s monthly andannual budget of expenses for the operation of the Company, together with otherunanticipated but necessary expenses which the Company incurs. In the event theresearch results in the approval of any additional patents for the treatment ofcancer, Dr. Burzynski shall own all such patents, but shall license to theCompany the patents based on the same terms, conditions and limitations as arein the current license between Dr. Burzynski and the Company. Dr. Burzynski hasunlimited and free access to all equipment which the Company owns, so long assuch use does not conflict with the Company’s use of such equipment, includingwithout limitation, all equipment used in the manufacturing of Antineoplastonsused in the clinical trials. The amounts which Dr. Burzynski is obligatedto pay under the agreement shall be reduced dollar for dollar by the following:(1) any income which the Company receives for services provided to othercompanies for research and/or development of other products, less suchidentifiable marginal or additional expenses necessary to produce such income,or (2) the net proceeds of any stock offering or private placement which theCompany receives during the term of the agreement up to a maximum of $1,000,000in a given Company fiscal year.

 

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Effective February 29, 2004, theCompany and Dr. Burzynski extended the term of the Research Funding Agreementuntil February 28, 2005, with an automatic renewal for two additional one-yearterms, unless one party notifies the other party at least thirty days prior tothe expiration of the term of the agreement of its intention not to renew theagreement. The Research Funding Agreement has been extended until February 28,2007 in accordance with its terms.

 

The Research Funding Agreementautomatically terminates in the event that Dr. Burzynski owns less than fiftypercent of the outstanding shares of the Company, or is removed as Presidentand/or Chairman of the Board of the Company, unless Dr. Burzynski notifies theCompany in writing of his intention to continue the agreement notwithstandingthis automatic termination provision.

 

The Company estimates that itwill spend approximately $4.5 million in the fiscal year ending February 28,2007. The Company estimates that ninety-five percent (95%) of this amount willbe spent on research and development and the continuance of FDA-approvedclinical trials. While the Company anticipates that Dr. Burzynski will continueto fund the Company’s research and FDA-related costs, there is no assurancethat Dr. Burzynski will be able to continue to fund the Company’s operationspursuant to the Research Funding Agreement or otherwise. However, because thenet assets available to Dr. Burzynski from his personal assets and the assetsof his medical practice currently exceed the Company’s projected twelve-monthfunding requirements, the Company believes Dr. Burzynski will be financiallyable to fund the Company’s operations at least through the fiscal year endingFebruary 28, 2007. **In addition, Dr.Burzynski’s medical practice has successfully funded the Company’s researchactivities over the last 22 years and, in 1997, his medical practice wasexpanded to include traditional cancer treatment options such as chemotherapy,immunotherapy and hormonal therapy in response to FDA requirements that cancerpatients utilize more traditional cancer treatment options in order to beeligible to participate in the Company’s Antineoplaston clinical trials. As aresult of the expansion of Dr. Burzynski’s medical practice, the financialcondition of the medical practice has improved Dr. Burzynski’s ability to fundthe Company’s operations.**

 

Because the Company currently isentirely dependent upon the contributions for research provided by Dr.Burzynski under the Research Funding Agreement, the Company would not be ableto continue conducting its clinical trials if Dr. Burzynski ceased funding theCompany’s research. In such event, the Company would be required to findimmediate funding which may not be available on acceptable terms or at all. Ifthis were to occur and the Company were not able to find adequate sources offunding, the Company would be required to cease operations. Even with Dr.Burzynski’s continued contributions under the Research Funding Agreement, theCompany may be required to seek additional capital through equity or debtfinancing or the sale of assets until the Company’s operating revenues aresufficient to cover operating costs and provide positive cash flow; however,there can be no assurance that the Company will be able to raise suchadditional capital on acceptable terms to the Company. In addition, there canbe no assurance that the Company will ever achieve positive operating cashflow.

 

## **ITEM 7.**                                  FINANCIAL STATEMENTS

 

The Company’s Annual FinancialStatements, Notes to Financial Statements and the report of Fitts, Roberts& Co., P.C., independent registered public accounting firm, with respectthereto, referred to in the Table of Contents to the Financial Statements,appear elsewhere in this report beginning on **Page F-1**.

 

## **ITEM 8.**                                  CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

## **ITEM 8A.**                         CONTROLS AND PROCEDURES

 

Within the 90 days prior to the date of this report,the Company carried out an evaluation, under the supervision and with theparticipation of the Company’s management, including the Company’s principalexecutive officer and principal financial officer, of the effectiveness of theCompany’s disclosure controls and procedures pursuant to Rule 13a-14 under theSecurities Exchange Act of 1934, as amended. Based upon that evaluation, theCompany’s principal executive officer and principal financial officer concludedthat the Company’s disclosure

 

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controls and procedures are effective in timely alerting them tomaterial information required to be included in periodic Securities andExchange Commission filings.

 

There were no significant changes in the Company’sinternal controls or in other factors that could significantly affect internalcontrols subsequent to the date of the evaluation above.

 

## **ITEM 8B.**                         OTHER INFORMATION

 

None.

 

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# **PART III**

 

## **ITEM 9.**                                  DIRECTORS, EXECUTIVEOFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THEEXCHANGE ACT

 

Set forth below are the names,ages and positions of the Company’s directors and executive officers:

 
| **Name**                             | ** ** | **Age** | ** ** | **Office**                                     | ** ** |
|--------------------------------------|------------|---------|------------|------------------------------------------------|------------|
| Stanislaw R. Burzynski, M.D.,  Ph.D. |       | 63      |       | Director, President,  Secretary, and Treasurer |       |
| Robert Waldbillig, Ph.D.             |       | 66      |       | Vice President of Research                     |       |
| Barbara Burzynski, M.D.              |       | 66      |       | Director                                       |       |
| Michael  H. Driscoll, J.D.           |       | 60      |       | Director                                       |       |
| Carlton Hazlewood, Ph.D.             |       | 70      |       | Director                                       |       |

 

STANISLAW R. BURZYNSKI, M.D.,PH.D., has been the President and Chairman of the Board of Directors of theCompany since its inception in 1984. He also serves as the Company’s Secretaryand Treasurer. Dr. Burzynski is a physician in private practice in Houston,Texas specializing in the treatment of cancer. Dr. Burzynski is the husband ofBarbara Burzynski, M.D., who is a director of the Company.

 

Currently listed in Who’s Who InThe World and a member in good standing with both the American and WorldMedical Associations, Dr. Burzynski is an internationally recognized physicianand scientist who has pioneered the development and use of biologically activepeptides in diagnosing, preventing, and treating cancer since 1967. In 1967,Dr. Burzynski graduated with distinction with an M.D. degree from the MedicalAcademy in Lublin, Poland, finishing first in his class of 250, and he subsequentlyearned his Ph.D. in Biochemistry.

 

From 1970 to 1977, he was aresearcher and Assistant Professor at Baylor College of Medicine in Houston. AtBaylor, Dr. Burzynski’s research was sponsored and partially funded by theNational Cancer Institute. Also at Baylor, he authored andco-authored sixteen publications, including five concerning his research onpeptides and their effect on human cancer. Four of these publications were alsoco-authored by other doctors associated with M.D. Anderson Hospital and TumorInstitute and Baylor College of Medicine. In May 1977, Dr. Burzynski received aCertificate of Appreciation from Baylor College of Medicine and in that sameyear founded the Company.

 

Dr. Burzynski is a member of theAmerican Medical Association, American Association for Cancer Research, HarrisCounty Medical Society, New York Academy of Sciences, Society for Neuroscience,Texas Medical Association, the Society of Sigma Xi, and the Society ofNeuro-oncology and has privileges at Twelve Oaks Medical Center at River Oaks locatednear the Burzynski Research Institute in Houston. He is the author of 215scientific publications, presenter of scientific papers at major internationalconventions, and has been awarded 196 patents covering 42 countries for hisAntineoplaston treatment and other inventions. Other groups are working inconjunction with him, including researchers at the University of Kurume MedicalSchool in Japan.

 

ROBERT WALDBILLIG, PH.D., hasserved as Vice President of Research since 1995. From 1993 to 1995, Dr.Waldbillig served as Director of Preclinical Pharmacology at GeneMedicine, aHouston biotech company. From 1986 to 1993, Dr. Waldbillig performed researchon growth factors in the central nervous system at the National Institutes ofHealth. Prior to that, he performed research on growth factors in the brain atthe University of Florida. Dr. Waldbillig is the author of numerouspublications in national and international peer reviewed scientific journalsand is also the inventor of numerous patented anti-cancer drugs. Dr. Waldbilligreceived his B.S. (cum laude) from Kent State University in 1969 and his Ph.D.in brain research from the University of Minnesota in 1973.

 

BARBARA BURZYNSKI, M.D., aDirector since 1984 and the wife of Dr. Burzynski, has been the Chairman of theDepartment of Pharmacy of the Burzynski Clinic since 1977. From January 1976 toJuly 1977, she was a Research Assistant in the Department of Pediatrics atBaylor College of Medicine. She was a physician at the Medical Academy, Lublin,Poland, from 1970 to 1975. Dr. Barbara Burzynski graduated with an M.D. in 1966from the Medical Academy, Lublin, Poland, and has published six publications onstudies with Antineoplastons.

 

18

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MICHAEL H. DRISCOLL, J.D. hasbeen a Director of the Company since 1984. Mr. Driscoll was formerly a judgeand served as the County Attorney of Harris County, Texas from 1981 until heretired in 1997.

 

CARLTON HAZLEWOOD, PH.D. hasbeen a Director of the Company since 1997. He also serves as Chairman of theIRB, an independent review board for the Company’s clinical trials designatedaccording to federal regulations. Dr. Hazlewood currently operates his ownconsulting company, Research Consultant’s International, and is president ofPetroclean, L.L.C. In addition, Dr. Hazlewood was employed in variouscapacities by the Baylor College of Medicine from 1965 until December 31, 1997,where he was a professor of Molecular Biology and Biophysics. Dr. Hazlewoodreceived his Ph.D. in Medical Physiology from the University of Tennessee. Dr.Hazlewood is a prolific writer on medical topics and has been recognized forhis research with numerous awards, honors and research grants.

 

**Audit CommitteeFinancial Expert**

 

The Company has not establishedan Audit Committee. Therefore, the Board of Directors has not designated any ofits members as an “audit committee financial expert” as defined by therules and regulations of the Securities and Exchange Commission.

 

**Section 16(a)Beneficial Ownership Reporting Compliance**

 

Based solely upon a review ofForms 3 and 4 and amendments thereto furnished to the Company under Rule16a-3(e) during the fiscal year ended February 28, 2006 and Form 5 andamendments thereto furnished to the Company with respect to such period, theCompany is not aware of any director, officer, or beneficial owner of more than10% of any class of equity securities of the Company registered pursuant toSection 12 of the Securities Exchange Act of 1934 (the “Exchange Act”) that hasfailed to file on a timely basis, as disclosed in the above forms, reportsrequired by Section 16(a) of the Exchange Act during the Company’s most recentfiscal year.

 

**Code of Ethics**

 

The Company has adopted a codeof ethics that applies to our chief executive officer, chief financial officer,chief accounting officer and all persons performing similar functions. TheCompany hereby undertakes to provide a copy of this code of ethics to anyperson, without charge upon request made in writing to: Investor Relations,9432 Old Katy Road, Suite 200, Houston, Texas 77055.

 

## **ITEM 10.**                           EXECUTIVECOMPENSATION

 

**SUMMARY COMPENSATION TABLE**

 
| ** **                                                                   | ** ** | **Annual Compensation**  | ** ** | **Long-Term Compensation** | ** **                |
|------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------|---------------------------|
| **Name and Principle Position**                                              | ** ** | **Fiscal  Year  Ending** | ** ** | **Salary($)**              | ** **                | **Bonus  ($)** | ** ** | **Other Annual  Compensation  ($)** | ** ** | **Restricted  Stock  Awards($)** | ** ** | **Securities  Underlying  Options/SARs($)** | ** ** | **LTIP  Payouts  ($)** | ** ** | **All Other  Compensation  ($)** | ** ** |
| Stanislaw R. Burzynski,  M.D., Ph.D., President,  Secretary and Treasurer(1) |       | 2004  2005  2006         |       | -0-  -0-  -0-              |                      | -0-  -0-  -0- |   | -0-  -0-  -0- |   | -0-  -0-  -0- |   | -0-  -0-  -0- |   | -0-  -0-  -0- |   | -0-  -0-  -0- |   |
|                                                                         |       |                     |       |                       |                      |   |   |   |   |   |   |   |   |   |   |   |   |
| Robert Waldbillig,  Ph.D., Vice President of  Research                       |       | 2004  2005  2006         |       | $  $  $                    | 109,337  118,965  121,443 |   | -0-  -0-  -0- |   | -0-  -0-  -0- |   | -0-  -0-  -0- |   | -0-  -0-  -0- |   | -0-  -0-  -0- |   | -0-  -0-  -0- |   |
|                                                                              |            |                          |            |                            |                           |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)                                  In May of 2000, Dr. Burzynski began drawing hisentire salary through his medical practice and is not currently compensated bythe Company for his services.

 

**Directorsdo not receive any compensation for serving as directors; however, directorsare reimbursed for all ordinary and necessary expenses incurred in attendingmeetings of the Board of Directors or otherwise incurred in their capacity asdirectors. In addition, any director also serving as a director of the IRB, theindependent review board for the Company’s clinical trials designated accordingto federal regulations, is compensated by the IRB approximately $1,600****annually for serving as a director ofthe IRB.**

 

19

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## **ITEM 11.**                           SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth, as of May 10, 2006,the number of outstanding shares of Common Stock (the Company’s only class ofvoting securities) owned by (i) each person known by the Company tobeneficially own more than 5% of its outstanding Common Stock, (ii) eachdirector, (iii) each named executive officer, and (iv) all officers anddirectors as a group. The address for all of the beneficial owners listed belowis the Company’s address.

 
| **Name of****beneficial owner**                                          | ** ** | **Amount and nature of  beneficial ownership** | ** ** | **Percent of class (1)** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------------|------------|--------------------------|------------|
| ** **                                                               | ** ** | ** **                                     | ** ** | ** **               | ** ** |
| Stanislaw R. Burzynski, M.D., Ph.D.                                      |       | 106,444,190                                    |       | 81.0                     | %          |
| Robert Waldbillig, Ph.D.                                                 |       | 0                                              |       |                     | *          |
| Barbara Burzynski, M.D.                                                  |       | 106,444,190                                    | (2)        | 81.0                     | %          |
| Michael H. Driscoll                                                      |       | 570,000                                        |       |                     | *          |
| Carlton Hazlewood                                                        |       | 0                                              |       |                     | *          |
| All Current Directors and Executive Officers as a group (5 persons) |       | 107,994,190                                    |       | 81.45                    | %          |

 

----

*                                         Less than onepercent.

 

(1)                                  Percentages shownare based upon 131,388,444 shares of Common Stock outstanding as of May 10, 2006.Certain shares are deemed beneficially owned by more than one person listed inthe table.

 

(2)                                  All of theshares listed above for Dr. Barbara Burzynski are included in the total numberof shares for Dr. Burzynski, her husband.

 

## **ITEM 12.**                           CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

 

Dr. Burzynski is the President, Secretary, Treasurer and Chairman of theBoard of the Company, as well as the beneficial owner of 81.0% of the Company’soutstanding Common Stock. Since 1983, Dr. Burzynski has personally funded andsupported the Company’s operations out of funds generated from his medicalpractice pursuant to various agreements with the Company.

 

**License Agreement**

** **

The Company entered into the License Agreement with Dr. Burzynski whichgives the Company the exclusive right in the Territory (composed of the UnitedStates, Canada and Mexico) to use, manufacture, develop, sell, distribute,sublicense and otherwise exploit all of his rights, title and interests in Antineoplastonsin the treatment and diagnosis of cancer, including but not limited to anypatent rights which may be granted in these countries. The License Agreementwill terminate upon the earlier of the expiration of the last patent licensedto the Company, or termination by Dr. Burzynski, at his option, if he isremoved as a director or officer of the Company without his consent, if theCompany files for bankruptcy or is the subject of any proceeding underapplicable bankruptcy laws where such proceeding is not dismissed within 90 daysfrom the date a petition is filed, or if any shareholder or group ofshareholders acting in concert becomes the beneficial owner of the Company’ssecurities having voting power equal to or greater than the voting power of thesecurities Dr. Burzynski holds. Amendments to the License Agreement on April24, 1984 and on March 1, 1990 granted Dr. Burzynski the limited right tomanufacture, use, and exploit Antineoplastons in the Company’s exclusiveterritory solely for the purpose of enabling Dr. Burzynski to treat patients inhis medical practice until such date that the FDA may approve the sale ofAntineoplastons for the treatment of cancer in the United States.

 

**Research FundingArrangements**

 

Effective March 1, 1997, theCompany entered into the Research Funding Agreement with Dr. Burzynski andterminated all of the prior funding agreements between the Company and Dr. Burzynski. Pursuant to the Research FundingAgreement:

 

20

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•                                          The Companyagreed to undertake all scientific research in connection with the developmentof new or improved Antineoplastons for the treatment of cancer and otherdiseases. The Company will hire such personnel as is required to fulfill itsobligations under the agreement;

 

•                                          Dr. Burzynskiagreed to fund in its entirety all basic research which the Company undertakesin connection with the development of other Antineoplastons or refinements toexisting Antineoplastons for the treatment of cancer and other diseases;

 

•                                          Dr. Burzynskiagreed to pay the expenses to conduct the clinical trials for the Company;

 

•                                          Dr. Burzynskiagreed to provide the Company such laboratory, research space and office spaceas the Company needs at no charge to the Company;

 

•                                          The partiesagreed that Dr. Burzynski may fulfill his obligations in part by providing suchadministrative staff as is necessary for the Company to manage its business, atno cost to the Company;

 

•                                          Dr. Burzynskiagreed to pay the full amount of the monthly and annual budget of expenses forthe operation of the Company, together with such other unanticipated butnecessary expenses which the Company incurs. Payments from Dr. Burzynski to theCompany of the monthly budget shall be made in two equal installments on thefirst and fifteenth of each month;

 

•                                          In the eventthe research described in the agreement results in the approval of anyadditional patents, Dr. Burzynski shall own all such patents, but shall licenseto the Company the patents based on the same terms, conditions and limitationsas provided by the License Agreement;

 

•                                          Dr. Burzynskishall have unlimited and free access to all equipment which the Company owns,so long as such use is not in conflict with the Company’s use of suchequipment, including without limitation to all equipment used in manufacturingof Antineoplastons used in the clinical trials;

 

•                                          The amountswhich Dr. Burzynski is obligated to pay under the agreement shall be reduceddollar for dollar by the following:

 

•                                          Any income which the Company receives forservices provided to other companies for research and/or development of otherproducts, less such identifiable marginal or additional expenses necessary toproduce such income (such as the purchase of chemicals, products or equipmentsolely necessary to engage in such other research and development activity);and

 

•                                          The net proceeds of any stock offering or privateplacement which the Company receives during the term of the agreement up to amaximum of $1,000,000 in a given Company fiscal year.

 

Effective February29, 2004, the term of the Research Funding Agreement was extended to February28, 2005, and is automatically renewable for two additional one-year termsthereafter, unless one party notifies the other party at least thirty days priorto the expiration of the term of the agreement of its intention not to renewthe agreement. In addition to the foregoing termination provisions, theagreement automatically terminates in the event that Dr. Burzynski owns lessthan fifty percent of the outstanding shares of the Company, or is removed asPresident and/or Chairman of the Board of the Company, unless Dr. Burzynskinotifies the Company in writing of his intention to continue the agreementnotwithstanding this automatic termination provision. Subject to the foregoing,the term of the Research Funding Agreement is currently extended until February28, 2007.

 

**Royalty Agreement**

 

The Company and Dr. Burzynskientered into the Royalty Agreement, pursuant to which Dr. Burzynski agreed toact as the principal clinical investigator of the clinical trials necessary forobtaining FDA approval for

 

21

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interstate marketing of Antineoplastons. TheCompany and Dr. Burzynski agreed that in the event the Company receives FDAapproval for interstate marketing and distribution, of which there can be noassurance, the Company shall pay Dr. Burzynski a royalty of 10% (ten percent)of the Company’s gross income, which royalty shall be paid on all grossreceipts from all future sales, distributions and manufacture ofAntineoplastons.

 

Pursuant to the RoyaltyAgreement, Dr. Burzynski retains the right to either (i) produce Antineoplastonproducts for use in his medical practice to treat up to 1,000 patients, at anyone time, without paying any fees to the Company or (ii) purchase from theCompany Antineoplaston products to treat up to 1,000 patients, at any one time,at a price equal to cost plus 10% (ten percent). Dr. Burzynski has theright to lease or purchase all the manufacturing equipment located at 12707Trinity Drive, Stafford, Texas at a fair market price. The Royalty Agreementfurther provides that the Company will have the right, when and ifAntineoplastons are approved for use and sale by the FDA, (i) to produce allAntineoplaston products to be sold or distributed in the United States, Canadaand Mexico for the treatment of cancer and (ii) to lease from Dr. Burzynski theentire premises located at 12707 Trinity Drive, Stafford, Texas at terms andrates competitive with those available in the real estate market at that time,provided that Dr. Burzynski does not need the facility for his use.

 

**Sale of Assets**

** **

Certain items of equipmentpreviously owned by the Company were sold to Dr. Burzynski in September 2005. Item2 of Part I of this Form 10-KSB includes a description of such sale.

 

**Other Transactions**

 

**SinceTadeusz Burzynski’s death on June 13, 1998, the Company has paid his widow,Zofia Burzynski, $1,000 per month as death benefit payments. Tadeusz Burzynskiwas formerly an officer and a director of the Company and the brother of Dr.Burzynski.**

 

## **ITEM 13.**                           EXHIBITS

 
| **EXHIBIT  NO.** | ** ** | **EXHIBIT NAME**                                                                                                                                                                                                                                                               |
|------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |       |                                                                                                                                                                                                                                                                           |
| 3.1              |       | Certificate of Incorporation  of the Company, as amended (incorporated by reference from Exhibit 3(i) –  (iii) to Form 10-SB filed with the Securities and Exchange Commission on  November 25, 1997 (File No. 000-23425)).                                          |
|             |       |                                                                                                                                                                                                                                                                           |
| 3.2              |       | Amended  Bylaws of the Company (incorporated by reference from Exhibit (3)(iv) to Form  10-SB filed with the Securities and Exchange Commission on November 25, 1997  (File No. 000-23425)).                                                                                   |
|             |       |                                                                                                                                                                                                                                                                           |
| 4.1              |       | Form  of Certificate Representing Common Stock (incorporated by reference from  Exhibit 4.1 to Form 10-KSB filed with the Securities and Exchange Commission  on May 2, 2001 (File No. 000-23425)).                                                                            |
|             |       |                                                                                                                                                                                                                                                                           |
| 10.1             |       | License  Agreement, effective as of June 29, 1983, by and between the Company and Dr.  Stanislaw R. Burzynski (incorporated by reference from Exhibit 10(1) to Form  10-SB filed with the Securities and Exchange Commission on November 25, 1997  (File No. 000-23425)).      |
|             |       |                                                                                                                                                                                                                                                                           |
| 10.2             |       | Amended  License Agreement, dated April 2, 1984, by and between the Company and Dr.  Stanislaw R. Burzynski (incorporated by referenced from Exhibit 10(2) to Form  10-SB filed with the Securities and Exchange Commission on November 25, 1997  (File No. 000-23425)).       |
|             |       |                                                                                                                                                                                                                                                                           |
| 10.3             |       | Second  Amended License Agreement, dated March 1, 1990, by and between the Company  and Dr. Stanislaw R. Burzynski (incorporated by reference from Exhibit 10(3)  to Form 10-SB filed with the Securities and Exchange Commission on November  25, 1997 (File No. 000-23425)). |

 

22

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| 10.4   |   | Research  Funding Agreement, effective as of March 1, 1997, by and between the Company  and Dr. Stanislaw R. Burzynski (incorporated by reference from Exhibit 10(4)  to Form 10-SB filed with the Securities and Exchange Commission on November  25, 1997 (File No. 000-23425)).                        |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                      |
| 10.5   |   | First  Amendment to Research Funding Agreement, effective as of March 1, 2001, by  and between the Company and Dr. Stanislaw R. Burzynski (incorporated by  reference from Exhibit 10.5 to Form 10-KSB filed with the Securities and  Exchange Commission on May 2, 2001 (File No. 000-23425)).           |
|   |   |                                                                                                                                                                                                                                                                                                      |
| 10.6   |   | Second  Amendment to the Research Funding Agreement, effective as of February 29,  2004, by and between the Company and Dr. Stanislaw R. Burzynski (incorporated  by reference from Exhibit 10.6 to Form 10-KSB filed with the Securities and  Exchange Commission on June 1, 2004 (File No. 000-23425)). |
|   |   |                                                                                                                                                                                                                                                                                                      |
| 10.7   |   | Royalty  Agreement, dated March 25, 1997, by and between the Company and Dr. Stanislaw  R. Burzynski (incorporated by reference from Exhibit 10(5) to Form 10-SB  filed with the Securities and Exchange Commission on November 25, 1997 (File  No. 000-23425)).                                          |
|   |   |                                                                                                                                                                                                                                                                                                      |
| 10.8   |   | First  Amended Royalty Agreement, dated September 29, 1997, by and between the  Company and Dr. Stanislaw R. Burzynski (incorporated by reference from  Exhibit 10(6) to Form 10-SB filed with the Securities and Exchange Commission  on November 25, 1997 (File No. 000-23425)).                        |
|   |   |                                                                                                                                                                                                                                                                                                      |
| 24     |   | Power  of Attorney (Included with the Signature Page).                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                      |
| 31.1   |   | Certification  pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934,  as amended, filed herewith (Chief Executive Officer and Principal Financial  Officer).                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                      |
| 32.1   |   | Certification  furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer and Principal  Financial Officer).                                                                                                            |

 

23

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## **ITEM 14.**                           PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The following table sets forth the aggregate feesbilled to the Company by its principal accounting firm, Fitts, Roberts &Co., P.C., for fiscal years ended February 28, 2006 and 2005, respectively:

 
| ** **         | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|--------------------|------------|------------|------------|------------|------------|
| ** **         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Audit Fees (1)     |       | $          | 33,400     |       | $          | 38,160 |   |
|               |       |       |       |       |       |
| Audit-Related Fees |       | $          | 0          |       | $          | 0 |   |
|               |       |       |       |       |       |
| Tax Fees           |       | $          | 0          |       | $          | 0 |   |
|               |       |       |       |       |       |
| All Other Fees     |       | $          | 0          |       | $          | 0 |   |
|               |       |       |       |       |       |
| Total              |       | $          |       |       | $          | 38,160 |   |

 

----

(1)                                  The2006 amount includes estimated fees of $16,000 to complete the audit.

 

**Audit Fees** werefor professional services rendered for the audit of the Company’s consolidatedfinancial statements and review of the interim consolidated financialstatements included in quarterly reports and services that are normallyprovided by Fitts, Roberts & Co., P.C. inconnection with statutory and regulatory filings or engagements.

 

**Audit-Related Fees**are for assurance and related services that are reasonably related to theperformance of the audit or review of the Company’s consolidated financial statementsand are not reported under “Audit Fees.” There were no Audit-Related Fees incurred in fiscal years 2006 or 2005.

 

**Tax Fees** werefor professional services for federal and state tax compliance, tax advice andtax planning. There were no Tax Fees incurred in fiscal years 2006 or 2005.

 

**All Other Fees**were for services other than the services reported above. There were no OtherFees incurred in fiscal years 2006 or 2005.

 

**Audit Committee’s Pre-ApprovalPolicies and Procedures**. As disclosed above in Item 9, theCompany does not have an Audit Committee. The Board of Directors has notadopted any pre-approval policies or procedures.

 

24

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### **SIGNATURES**

 

In accordance with Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|                | **BURZYNSKI  RESEARCH INSTITUTE, INC.** |
|---------------------|-----------------------------------------|
|                |                                    |
|                |                                    |
|                | By:                                     | /s/  Stanislaw R. Burzynski |   |
|                |                                    | Stanislaw  R. Burzynski, President, |
|                |                                    | Secretary,  Treasurer and Chairman of the |
|                |                                    | Board  of Directors |
|                |                                    |   |
|                |                                    |   |
| Date:  May 30, 2006 |                                    |   |

 

25

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Each person whose signatureappears below constitutes and appoints Dr. Stanislaw R. Burzynski his/her trueand lawful attorney-in-fact and agent, with full power of substitution andresubstitution, severally, for him/her in his/her name, place and stead, in anyand all capacities, to sign any and all amendments to this report, and to filethe same, with all exhibits thereto and other documents in connectiontherewith, with the Securities and Exchange Commission, granting unto saidattorney-in-fact and agent full power and authority to do and perform each andevery act and thing requisite and necessary to be done in and about thepremises, as fully to all intents and purposes as he/she might or could do inperson, hereby ratifying and confirming all that said attorney-in-fact andagent may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements ofthe Securities Act of 1934, this report has been signed below by the followingpersons in the capacities and on the dates indicated.

 

 
| /s/  Stanislaw R. Burzynski          |   |                |
|--------------------------------------|--------|---------------------|
| Stanislaw  R. Burzynski              |   | Date:  May 30, 2006 |
| President,  Secretary, Treasurer and |   |                |
| Chairman  of the Board of Directors  |   |                |
|                                 |   |                |
|                                 |   |                |
| /s/  Barbara Burzynski               |   |                |
| Barbara  Burzynski                   |   | Date:  May 30, 2006 |
| Director                             |   |                |
|                                 |   |                |
|                                 |   |                |
| /s/  Michael H. Driscoll             |   |                |
| Michael  H. Driscoll                 |   | Date:  May 30, 2006 |
| Director                             |   |                |
|                                 |   |                |
|                                 |   |                |
| /s/  Carlton Hazlewood               |   |                |
| Carlton  Hazlewood                   |   | Date:  May 30, 2006 |
| Director                             |   |                |

 

26

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**Burzynski Research Institute, Inc.**

 

 

**Financial Statements**

 

 

**For the years ended**

**February 28, 2006 and 2005**

 

----

 

CONTENTS

 
| Report of Independent Registered Public Accounting Firm |   |   |
|---------------------------------------------------------|--------|--------|
|                                                    |   |   |
| Balance  Sheets                                         |   |   |
|                                                    |   |   |
| Statements  of Operations                               |   |   |
|                                                    |   |   |
| Statement of Stockholders’ Deficit                 |   |   |
|                                                    |   |   |
| Statements  of Cash Flows                               |   |   |
|                                                    |   |   |
| Notes to Financial Statements                           |   |   |

 

F-2

----

 

REPORT OF REGISTERED PUBLICACCOUNTING FIRM

 

To the Board of Directors and Stockholders

  of Burzynski Research Institute, Inc.

 

We have audited the accompanying balancesheets of Burzynski Research Institute, Inc. as of February 28, 2006and 2005, and the related statements of operations, stockholders’ deficit, andcash flows for the years then ended. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audits to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion,the financial statements referred to above present fairly, in all materialrespects, the financial position of Burzynski Research Institute, Inc. asof February 28, 2006 and 2005 and the results of their operations andtheir cash flows for the years then ended, in conformity with U.S. generallyaccepted accounting principles.

 

 
| /s/ Fitts, Roberts & Co., P.C. |   |
|-----------------------------------------|--------|
|                                    |
| May 30, 2006                       |
| Houston, Texas                          |

 

F-3

----

 

**BURZYNSKI RESEARCH INSTITUTE, INC.**

**BALANCE SHEETS**

**February 28, 2006 and February 28, 2005**

 
| ** **                                                                                                | ** ** | **2006**    | ** ** | **2005**    | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| ASSETS                                                                                                    |       |        |       |        |       |
|                                                                                                      |       |        |       |        |       |
| Current  assets                                                                                           |       |        |       |        |       |
|                                                                                                      |       |        |       |        |       |
| Cash and  cash equivalents (Note 1)                                                                       |       | $           | 17,797     |        | $          | 16,984 |   |
| Other  current assets                                                                                     |       | —      |       | —      |       |
|                                                                                                      |       |        |       |        |       |
| Total  current assets                                                                                     |       | 17,797      |       | 16,984      |       |
|                                                                                                      |       |        |       |        |       |
| Property and  equipment, net of accumulated depreciation and amortization (Notes 1,3 and 5)               |       | 3,620       |       | 48,870      |       |
|                                                                                                      |       |        |       |        |       |
| Total assets                                                                                              |       | $           | 21,417     |        | $          | 65,854 |   |
|                                                                                                      |       |        |       |        |       |
| LIABILITIES  AND STOCKHOLDERS’ DEFICIT                                                               |       |        |       |        |       |
|                                                                                                      |       |        |       |        |       |
| Current  liabilities                                                                                      |       |        |       |        |       |
|                                                                                                      |       |        |       |        |       |
| Accounts  payable                                                                                         |       | $           | 14,046     |        | $          | 47,249 |   |
| Accrued  liabilities                                                                                      |       | 35,650      |       | 39,396      |       |
|                                                                                                      |       |        |       |        |       |
| Total  current liabilities                                                                                |       | 49,696      |       | 86,645      |       |
|                                                                                                      |       |        |       |        |       |
| Total  liabilities                                                                                        |       | 49,696      |       | 86,645      |       |
|                                                                                                      |       |        |       |        |       |
| Commitments,  contingencies and related parties (Notes 2, 5 and 8)                                        |       |        |       |        |       |
|                                                                                                      |       |        |       |        |       |
| Stockholders’  deficit                                                                               |       |        |       |        |       |
|                                                                                                      |       |        |       |        |       |
| Common  stock, $.001 par value; 200,000,000 shares authorized, 131,388,444 shares  issued and outstanding |       | 131,389     |       | 131,389     |       |
| Additional  paid-in capital                                                                               |       | 70,469,459  |       | 65,876,210  |       |
| Discount on  common stock                                                                                 |       | (100        | )          | (100        | )          |
| Retained  deficit                                                                                         |       | (70,629,027 | )          | (66,028,290 | )          |
|                                                                                                      |       |        |       |        |       |
| Total  stockholders’ deficit                                                                         |       | (28,279     | )          | (20,791     | )          |
|                                                                                                      |       |        |       |        |       |
| Total  liabilities and stockholders’ deficit                                                         |       | $           | 21,417     |        | $          | 65,854 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

F-4

----

 

**BURZYNSKI RESEARCHINSTITUTE, INC.**

**STATEMENTS OF OPERATIONS**

**For the Years Ended February 28,2006 and February 28, 2005**

 
| ** **                                | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
|                                      |       |       |       |       |       |
| Revenue                                   |       |       |       |       |       |
| Gain on sale  of assets                   |       | $          | 53,640     |       | $          | — |   |
|                                      |       |       |       |       |       |
| Operating  expenses                       |       |       |       |       |       |
| Research and  development (Notes 1 and 2) |       | 4,434,538  |       | 4,665,124  |       |
| General and  administrative               |       | 215,949    |       | 295,135    |       |
| Depreciation  (Notes 1 and 3)             |       | 3,890      |       | 5,280      |       |
|                                      |       |       |       |       |       |
| Total  operating expenses                 |       | 4,654,377  |       | 4,965,539  |       |
|                                      |       |       |       |       |       |
| Net loss  before provision for taxes      |       | (4,600,737 | )          | (4,965,539 | )          |
|                                      |       |       |       |       |       |
| Provision  for income tax (Notes 1 and 6) |       | —     |       | —     |       |
|                                      |       |       |       |       |       |
| Net loss                                  |       | $          | (4,600,737 | )          | $          | (4,965,539 | ) |
|                                      |       |       |       |       |       |
| Earnings per  share information:          |       |       |       |       |       |
| Basic and  diluted                        |       |       |       |       |       |
| (Loss) per  common share                  |       | $          | (0.04      | )          | $          | (0.04 | ) |

 

The accompanying notes are an integral part ofthese financial statements.

 

F-5

----

 

**BURZYNSKI RESEARCHINSTITUTE, INC.**

**STATEMENT OF STOCKHOLDERS’ DEFICIT**

**For the Years Ended February 28,2006 and February 28, 2005**

 
| ** **                                                                | ** ** | ** ** | ** ** | **Additional** | ** ** | **Discount on** | ** ** | ** **   | ** ** |
|---------------------------------------------------------------------------|------------|------------|------------|----------------|------------|----------------------|------------|--------------|------------|
| ** **                                                                | ** ** | **Common** | ** ** | **Paid-in**    | ** ** | **Common**           | ** ** | **Retained** | ** ** |
| ** **                                                                | ** ** | **Stock**  | ** ** | **Capital**    | ** ** | **Stock**            | ** ** | **Deficit**  | ** ** |
|                                                                      |       |       |       |           |       |                 |       |         |       |
| Balance February 29,  2004                                           |       | $          | 131,389    |           | $          | 60,898,836           |       | $            | (100       | ) | $ | (61,062,751 | ) |
|                                                                      |       |       |       |           |       |                 |       |         |       |
| Cash  contributed by S.R. Burzynski M.D., Ph.D.                           |       | —     |       | 752,000        |       | —               |       | —       |       |
|                                                                      |       |       |       |           |       |                 |       |         |       |
| FDA clinical  trial expenses paid directly by S.R. Burzynski M.D., Ph. D. |       | —     |       | 4,225,374      |       | —               |       | —       |       |
|                                                                      |       |       |       |           |       |                 |       |         |       |
| Net loss                                                                  |       | —     |       | —         |       | —               |       | (4,965,539   | )          |
|                                                                      |       |       |       |           |       |                 |       |         |       |
| Balance February 28,  2005                                           |       | 131,389    |       | 65,876,210     |       | (100                 | )          | (66,028,290  | )          |
|                                                                      |       |       |       |           |       |                 |       |         |       |
| Cash  contributed by S.R. Burzynski M.D., Ph.D.                           |       | —     |       | 590,000        |       | —               |       | —       |       |
|                                                                      |       |       |       |           |       |                 |       |         |       |
| FDA clinical  trial expenses paid directly by S.R. Burzynski M.D., Ph. D. |       | —     |       | 4,003,249      |       | —               |       | —       |       |
|                                                                      |       |       |       |           |       |                 |       |         |       |
| Net loss                                                                  |       | —     |       | —         |       | —               |       | (4,600,737   | )          |
|                                                                      |       |       |       |           |       |                 |       |         |       |
| Balance February 28,  2006                                           |       | $          | 131,389    |           | $          | 70,469,459           |       | $            | (100       | ) | $ | (70,629,027 | ) |

 

The accompanyingnotes are an integral part of these financial statements.

 

F-6

----

 

**BURZYNSKI RESEARCH INSTITUTE, INC.**

**STATEMENTS OF CASH FLOWS**

**For the Years Ended February 28, 2006 and February 28,2005**

 
| ** **                                                                       | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|----------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                                                             |       |      |       |      |       |
| CASH FLOWS  FROM OPERATING ACTIVITIES                                            |       |      |       |      |       |
| Net loss                                                                         |       | $         | (4,600,737 | )         | $          | (4,965,539 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities: |       |      |       |      |       |
| Depreciation                                                                     |       | 3,890     |       | 5,280     |       |
| FDA clinical  trial expenses paid directly by S.R. Burzynski M.D., Ph. D.        |       | 4,003,249 |       | 4,225,374 |       |
| Gain on sale  of assets                                                          |       | (53,640   | )          |      |       |
| (Increase)  decrease in                                                          |       |      |       |      |       |
| Other  current assets                                                            |       | —    |       | 1,000     |       |
| Increase  (decrease) in                                                          |       |      |       |      |       |
| Accounts  payable                                                                |       | (33,203   | )          | (8,865    | )          |
| Accrued  liabilities                                                             |       | (3,746    | )          | (11,228   | )          |
|                                                                             |       |      |       |      |       |
| NET CASH  (USED) IN OPERATING ACTIVITIES                                         |       | (684,187  | )          | (753,978  | )          |
|                                                                             |       |      |       |      |       |
| CASH FLOWS  FROM INVESTING ACTIVITIES                                            |       |      |       |      |       |
| Proceeds  from sale of property and equipment                                    |       | 95,000    |       | —    |       |
|                                                                             |       |      |       |      |       |
| NET CASH  PROVIDED BY INVESTING ACTIVITIES                                       |       | 95,000    |       | —    |       |
|                                                                             |       |      |       |      |       |
| CASH FLOWS  FROM FINANCING ACTIVITIES                                            |       |      |       |      |       |
| Additional  paid-in capital                                                      |       | 590,000   |       | 752,000   |       |
|                                                                             |       |      |       |      |       |
| NET CASH  PROVIDED BY FINANCING ACTIVITIES                                       |       | 590,000   |       | 752,000   |       |
|                                                                             |       |      |       |      |       |
| NET INCREASE  (DECREASE) IN CASH                                                 |       | 813       |       | (1,978    | )          |
|                                                                             |       |      |       |      |       |
| CASH AT  BEGINNING OF YEAR                                                       |       | 16,984    |       | 18,962    |       |
|                                                                             |       |      |       |      |       |
| CASH AT END  OF YEAR                                                             |       | $         | 17,797     |      | $          | 16,984 |   |
|                                                                             |       |      |       |      |       |
| SUPPLEMENTAL  CASH FLOW DISCLOSURES:                                             |       |      |       |      |       |
| Cash Paid  During the Year For:  Interest                                        |       | $         | 73,857     |      | $          | 55,843 |   |

 

The accompanying notes are an integral part ofthese financial statements.

 

F-7

----

 

BURZYNSKI RESEARCH INSTITUTE, INC.

NOTES TO FINANCIAL STATEMENTS

 

**1.****             Background,Basis of Presentation, Economic Dependency and Significant Accounting Policies:**

 

# Background andBasis of Presentation

 

The financial statements of Burzynski Research Institute, Inc. (BRI orthe Company), a Delaware corporation, include expenses incurred related toclinical trials, which were sanctioned by the U.S. Food and Drug Administration(FDA) in 1993, for antineoplaston drugs used in the treatment of cancer. Theseexpenses incurred directly by S.R. Burzynski, M.D., Ph.D. (Dr. Burzynski) havebeen reported as research and development costs and as additional paid-incapital. Other funds received from Dr. Burzynski have also been reported asadditional paid-in capital. Expenses related to Dr. Burzynski’s medicalpractice (unrelated to the clinical trials) have not been included in thesefinancial statements. Dr. Burzynski is the President, Chairman of the Board andowner of over 80% of the outstanding stock of Burzynski Research Institute,Inc., and also is the inventor and original patent holder of certain drugproducts knows as “antineoplastons”, which he has licensed to the Company.

 

The Company and Dr. Burzynski have entered various agreements, asfurther described in Note 2, which provide the Company the exclusive right inthe United States, Canada and Mexico to use, manufacture, develop, sell,distribute, sublicense and otherwise exploit all the rights, titles andinterest in antineoplaston drugs used in the treatment of cancer, once the drugis approved for sale by the FDA.

 

BRI’s administrative offices are located in Houston, Texas; itsresearch and production facilities are in Stafford, Texas. The Company operatesprimarily as a research and development facility of antineoplaston drugscurrently being tested for the use in the treatment of cancer, and providesconsulting services. Segment information is not presented since all of theCompany’s operations are attributed to a single reportable segment. The Companyhas had no significant revenue from external sources. BRI is currentlyconducting clinical trials on various antineoplastons in accordance with FDA regulations,however, at this time none of the antineoplaston drugs have received FDAapproval; further, there can be no assurance FDA approval will be granted.

 

Economic Dependency

 

BRI has generated no significant revenues since its inception. As ofFebruary 28, 2006, the Company had a working capital deficit of approximately$32,000 and accumulated deficit of approximately $71,000,000. For the yearsended February 28, 2006 and February 28, 2005 the Company incurred losses ofapproximately $4,601,000 and $4,966,000, respectively.

 

F-8

----

 

Dr. Burzynskihas funded the capital and operational needs of the Company since its inceptionfrom revenues generated through his medical practice pursuant to various agreementsas described in Note 2.

 

BRI is economically dependent on its fundingfrom Dr. Burzynski through his medical practice. Management estimates thatapproximately one-fifth of Dr. Burzynski’s patients are admitted and treated aspart of the clinical trial programs which the FDA regulates. The FDA imposesnumerous regulations and requirements regarding these patients and the Companyis subject to inspection at any time by the FDA. These regulations are complexand subject to interpretation and though it is management’s intention to complyfully with all such regulations, there is the risk that the Company is not incompliance and is thus subject to sanctions imposed by the FDA.

 

In addition, as with any medical practice,Dr. Burzynski is subject to potential claims by patients and other potentialclaimants commonly arising out of the operation of a medical practice. Therisks associated with Dr. Burzynski’s medical practice directly affect hisability to fund the operations of BRI.

 

It is the intention of the directors andmanagement to seek additional capital through the sale of securities. Theproceeds from such sales will be used to fund BRI’s operating deficit until itachieves positive operating cash flow. However, there can be no assurance thatthe Company will be able to raise such additional capital.

 

Significant Accounting Policies

 

## ***Cash and Cash Equivalents***

## ** **

The Company considers all highly liquidinvestments purchased with an original maturity of three months or less to becash equivalents.

 

## ***Property and Equipment***

## ** **

Property and equipment are recorded at costand depreciated using the straight-line method over the estimated useful livesof the assets, which range from 5 to 31.5 years. Expenditures for majorrenewals and betterments that extend the useful lives of property and equipmentare capitalized; maintenance and repairs are charged against earnings asincurred. Upon disposal of assets, the related cost and accumulateddepreciation are removed from the accounts and any resulting gain or loss is recognizedcurrently.

 

F-9

----

 

## ***Income Taxes***

## ** **

The Company uses the liability method ofaccounting for income taxes, under which deferred income taxes are recognizedfor the tax consequences of temporary differences by applying the enactedstatutory tax rate applicable to future years to differences between financialstatement carrying amounts and the tax basis of existing assets andliabilities. Valuation allowances are established when necessary to reducedeferred tax assets to the amount expected to be realized. Income tax expenseis the tax payable or refundable for the period plus or minus the change duringthe period in deferred tax assets and liabilities. The costs incurred relatedto the conduct of FDA approved clinical trials incurred directly by Dr.Burzynski within his medical practice are taxed directly to Dr. Burzynski andare not included in the Company’s tax provision. The portion of the Texasfranchise tax that is based on income is treated as income taxes and includedin the income tax provision.

 

***Loss Per CommonShare***

 

Basic anddiluted loss per common share information for all periods is presented underthe requirements of FASB Statement No. 128, “Earnings per share”. Basic lossper common share has been computed using the weighted average number of commonshares outstanding during the period. Potentially dilutive securities have beenexcluded from the computation of diluted loss per common share, as theirinclusion would be antidilutive.

 

### ***Management Estimates***

### ** **

The preparation of financial statements inconformity with generally accepted accounting principles requires management tomake estimates and assumptions that affect reported amounts of assets andliabilities at the dates of the financial statements and the reported amountsof revenues and expenses during the reported periods. The significant estimatesare the allocation of payroll and other expenses between the clinical trialexpenses reported with Burzynski Research Institute, Inc. expenses and Dr.Burzynski’s medical practice expenses. Department managers reviews at leastquarterly the duties of each employee in their department and estimate thepercentage of time each employee spends between clinical trials and the medicalpractice. Payroll costs are allocated between clinical trials and the medicalpractice based on these percentages. Other expenses are allocated based on thepercentage of payroll allocated to either clinical trials or the medicalpractice. Management believes that the estimates and allocations arereasonable. Actual results could differ from these estimates.

 

F-10

----

 

***Stock Options***

 

As permitted under generally accepted accounting principles,stock-based awards granted to employees are accounted for following APB 25, asfurther described in Note 7. Accordingly, the Company has not recognizedcompensation expense for its stock-based awards to employees. No additionalcompensation expense would be incurred during 2006 or 2005 if compensationcosts for the Company’s stock-based compensation plans had been determinedbased on the fair value approach of SFAS 123.

 

In December 2004, the Financial Accounting Standards Board (“FASB”)published FASB Statement No. 123 (revised 2004), “Share-Based Payment” (FAS123(R)” or the “Statement”). FAS 123 (R) requires that the compensation costrelating to share-based payment transactions, including grants of employeestock options, be recognized in financial statements. That cost will bemeasured based on the fair value of the equity or liability instruments issued.FAS 123 (R) covers a wide range of share-based compensation arrangementsincluding stock options, restricted share plans, performance-based awards,share appreciation rights, and employee share purchase plans. FAS 123 (R) is areplacement of FASB Statement No. 123, Accounting*forStock-Based Compensation*, and supersedes APB Opinion No. 25, *Accounting for Stock Issued to Employees*, and its relatedinterpretive guidance (APB 25).

 

The effect of the Statement will be to require entities to measure thecost of employee services received in exchange for stock options based on thegrant-date fair value of the award, and to recognize the cost over the periodthe employee is required to provide services for the award. FAS 123 (R) permitsentities to use any option-pricing model that meets the fair value objective inthe Statement.

 

The Company will be required to apply FAS 123 (R) as of the beginningof its first annual period that begins after December 15, 2005, which will bethe year ending February 28, 2007.

 

FAS 123 (R) allows two methods for determining the effects of thetransition: the modified prospective transition method and the modifiedretrospective method of transition. Under the modified prospective transitionmethod, and entity would use the fair value based accounting method for allemployee awards granted, modified, or settled after the effective date. As ofthe effective date, compensation cost related to the non vested portion ofawards outstanding as of that date would be based on the grant-date fair valueof those awards as calculated under the original provisions of Statement No.123; that is, an entity would not remeasure the grant-date fair value estimateof the unvested portion of awards granted prior to the effective date.

 

F-11

----

 

An entity will have the further option to either apply the Statement toonly the quarters in the period of adoption and subsequent periods, or applythe Statement to all quarters in the fiscal year of adoption. Under themodified retrospective method of transition, an entity would revise itspreviously issued financial statements to recognize employee compensation costfor prior periods presented in accordance with the original provisions ofStatement No. 123.

 

The Company has not yet completed its study of the transition methodsor made any decisions about how it will adopt FAS 123 (R).

 

### ***Research and Development***

### ** **

Research and development cost are charged to operations in the periodincurred. Equipment used in research and development activities, which havealternative uses, are capitalized.

 

***Fair Value of FinancialInstruments***

 

The carrying value of cash, receivables and accounts payablesapproximates fair value due to the short maturity of these instruments. None ofthe financial instruments are held for trading purposes.

 

**2.****             AgreementsWith, and Other Related Party Transactions:**

 

The Company has agreements with its majority shareholder and PresidentDr. Burzynski as further described below:

 

License Agreement

 

Dr. Burzynski is the owner of patents involving the formulation,preparation, manufacture, production, use, dosage and treatment withantineoplastons. The United States Patent Office and Patent Offices and PatentOfficers of twenty-eight other countries have issued the patents. The Patentsfor cancer treatment and diagnosis in the United States and Canada are licensedto the Company pursuant to a License Agreement.

 

F-12

----

 

The License Agreement grants to the Company the exclusive right, in theUnited States, Canada, and Mexico, to use, manufacture, develop, sell,distribute, sub-license and otherwise exploit all of Dr. Burzynski’s rights,title, and interests, including patent rights, in antineoplaston drugs in thetreatment and diagnosis of cancer. The Company will not be able to exploit suchrights until such time as antineoplastons are approved, of which there can beno assurance, by the FDA for sale in the United States and the appropriateauthority in Canada and Mexico.

 

The Agreement gives Dr. Burzynski the right to distribute, use andotherwise exploit antineoplastons in connection with treatment of patients inhis medical practice until such time as the FDA approves them for sale.

 

The License Agreement will terminate upon the earlier of the expirationof the last patent licensed to the Company, or termination by Dr. Burzynski, athis option, if he is removed as a director or officer of the Company without hisconsent, if the Company files for bankruptcy or if any shareholder or group ofshareholders acting in concert becomes the beneficial owner of the Company’ssecurities having voting power equal to or greater than the voting power of thesecurities Dr. Burzynski holds.

 

Under the License Agreement, the Company currently owns exclusiverights to eight (8) issued United States Patents, three (3) issued CanadianPatents and one (1) issued Mexican Patent. The Company has one patentapplication pending in Canada.

 

The five initial United States Patents (the “Initial Patents”) relateto: (i) Determination of Antineoplastons in body tissue or fluids as a testingprocedure to aid in the diagnosis of cancer; (ii) Processes for the preparationof purified fractions of Antineoplastons from human    urine;(iii) Processes for the synthetic production of Antineoplastons and methods oftreating neoplastic disease (cancer); (iv) Administration of Antineoplastons tohumans; and (v) Methods of synthesizing A-10. The Initial Patents expire fromDecember 12, 2001 to January 11, 2009; however, the Company does not believethe expiration of any of the Initial Patents will have a material adverseeffect on the Company.

 

The sixth United States Patent (the “2000 U.S. Patent”) covers LiposomalAntineoplaston therapies with markedly improved anti-cancer activity. The 2000U.S. Patent expires May 14, 2017.

 

The seventh United States Patent (the “2001 U.S. Patent”) is for atreatment regimen for the administration of phenylacetylglutamine,phenylacetylisoglutamine, and/or phenylacetate. The 2001 U.S. Patent expires onJuly 23, 2018.

 

F-13

----

 

The eighth United States Patent (the “2005U.S. Patent”) relates to a divisional application to the 2001 U.S. Patent. The2005 U.S. Patent issued in September 2005 and will expire July 2018.

 

The three Canadian Patents (the “CanadianPatents”) relate to: (i) Processes for the preparation of purified fractions ofAntineoplastons from human urine, (ii) Processes for the synthetic productionof Antineoplastons and methods of treating neoplastic disease (cancer) and(iii) Liposomal Formulation of Antineoplastons. The Canadian Patents expire onNovember 14, 2006, June 4, 2002 and May 14, 2017, respectively; however, theCompany does not believe the Canadian Patents than expired in 2002 or expire in2006 will have a material adverse effect on the Company.

 

The Mexican Patent relates to a treatment regimen for theadministration of phenylacetylglutamine. This patent will expire January 14,2019.

 

Thepending patent application in Canada relates to a treatment regimen for theadministration of phenylacetylglutamine. Should this patent be granted, ofwhich there can be no assurance, it would expire in the year 2019.

 

Research Funding Agreement

 

Effective March 1, 1997, Dr. Burzynski restructured his fundingarrangement with the Company and entered into a Research Funding Agreement.Under this agreement the two parties agreed to the following:

 

1.             BRIagrees to undertake all scientific research in connection with the developmentof new or improved antineoplastons for the treatment of cancer. BRI will hiresuch personnel as is required to fulfill its obligations under the agreement.

 

2.             Dr.Burzynski agrees to fund in its entirety all basic research, which BRIundertakes in connection with the development of other antineoplastons orrefinements to existing antineoplastons for the treatment of cancer.

 

3.             AsFDA approval of antineoplastons will benefit both parties, Dr. Burzynski agreesto pay the expenses to conduct the clinical trials for BRI.

 

F-14

----

 

4.             Dr.Burzynski agrees to provide BRI such laboratory and research space as BRI needsat the Trinity Drive facility in Stafford, Texas, and such office space as isnecessary at Trinity Drive and at his medical facility.

 

5.             Inthe event the research described in the agreement results in the approval ofany additional patents for the treatment of cancer, Dr. Burzynski shall own allsuch patents, but shall license to BRI the patents based on the same terms,conditions and limitations as is in the current license between the parties.

 

6.             Dr.Burzynski shall have unlimited and free access to all equipment which BRI owns,so long as such use is not in conflict with BRI’s use of such equipment,including without limitation to all equipment used in manufacturing ofantineoplastons used in the clinical trials.

 

7.             Theamounts, which Dr. Burzynski is obligated to pay under the agreement, shall bereduced dollar for dollar by the following:

 

a.             Anyincome which BRI receives for services provided to other companies for researchand/or development of other products, less such identifiable marginal oradditional expenses necessary to produce such income (such as the purchase ofchemicals, products or equipment solely necessary to engage in such otherresearch and development activity.

 

b.             Thenet proceeds of any stock offering or private placement, which BRI receivesduring the term of the engagement up to a maximum of $1,000,000 in a given BRIfiscal year.

 

8.             Effective February 29, 2004, the term of theResearch Funding Agreement was extended to February 28, 2005, and isautomatically renewable for two additional one-year terms thereafter, unless oneparty notifies the other party at least thirty days prior to the expiration ofthe term of the agreement of its intention not to renew the agreement. Inaddition to the foregoing termination provisions, the agreement automaticallyterminates in the event that Dr. Burzynski owns less than fifty percent of theoutstanding shares of the Company, or is removed as President and/or Chairman of the Board of the Company, unless Dr.Burzynski notifies the Company in writing of his intention to continue theagreement notwithstanding this automatic termination provision. Subject to theforegoing, the term of the Research Funding Agreement is currently extendeduntil February 28, 2007.

 

F-15

----

 

Royalty Agreement

 

The Company entered into a royalty agreement with Dr. Burzynski wherebyupon receiving FDA approval for interstate marketing and distribution, theCompany agrees to pay Dr. Burzynski a royalty interest equivalent to 10% of theCompany’s gross income, which royalty interest shall include gross receiptsfrom all future sales, distributions and manufacture of antineoplastons. Dr.Burzynski will have the right to either produce antineoplaston products for usein his medical practice to treat up to 1,000 patients without paying any feesto the Company, or purchase from the Company antineoplaston products for use inhis medical practice to treat up to 1,000 patients at a price of the Company’scost to produce the antineoplaston products plus 10%. Dr. Burzynski will also havethe right to either lease or purchase all the manufacturing equipment locatedat 12707 Trinity Drive, Stafford, Texas at a fair market price. The Companywill also have the right to lease from Dr. Burzynski the entire premise locatedat 12707 Trinity Drive, Stafford, Texas at arms-length terms at ratescompetitive with those available in the market at that time, provided that Dr.Burzynski does not need the facility for his use.

 

The term of this agreement is indefinite and will continue until suchtime as both parties agree it is not in their mutual interest to continue.

 

Other Related Party Transactions

 

Since Tadeusz Burzynski’s death on June 13, 1998, the Company has paidhis widow $1,000 per month as death benefit payments. Tadeusz Burzynski was formerlyan officer and a director of the Company and the brother of Dr. Burzynski.

 

Dr. Burzynski owns the production facility located at Trinity Drive.There is no formal lease agreement between Dr. Burzynski and BRI; however, theResearch Funding Agreement described above provides that Dr. Burzynski willallow the Company the use of the building. In addition, the Royalty Agreementstates that after FDA approval is granted (though approval is not assured) theCompany may rent the facility at competitive rates if Dr. Burzynski does notneed the facility for his use. The actual facility costs are included in thefinancial statements as set forth in note 5. In addition, Dr. Burzynski’smedical clinic performs certain administrative functions such as accounting, andallows BRI the use of some office space at no charge to the Company. Since Mayof 2000, Dr. Burzynski’s entire salary is paid through his medical practice andhe is not compensated by BRI for his services.

 

On November 26, 2005 the Company sold to Dr. Burzynski productionequipment and leasehold improvements appraised by an independent appraiser for$95,000.

 

F-16

----

 

The Company has received all significantfunding from Dr. Burzynski through either cash contributed to BRI or thepayment of the cost to conduct FDA approved clinical trials through his medicalpractice, as disclosed in Note 1. Following is a summary of the capitalcontributed and clinical trial costs paid by Dr. Burzynski.

 
| ** **                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |
| Capital  contributed              |       | $        | 590,000    |     | $          | 752,000 |   |
| Clinical  trial costs paid direct |       | $        | 4,003,249  |     | $          | 4,225,374 |   |

 

**3.****             Propertyand Equipment:**

 

Property and equipment consists of the following as of February 28th:

 
| ** **                                 | ** ** | **Estimated**    | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------------|------------|------------|------------|------------|------------|
| ** **                                 | ** ** | **Useful Lives** | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|                                       |       |             |       |       |       |       |       |
| Production  equipment                      |       | 5 - 10 years     |       | $          | —     |       | $          | 3,314,342 |   |
| Leasehold  improvements                    |       | 5 - 31.5 years   |       | —     |       | 1,543,490  |       |
| Furniture  and equipment                   |       | 5 - 10 years     |       | 15,577     |       | 634,755    |       |
| Equipment                                  |       | 4 - 5 years      |       | —     |       | 288,943    |       |
| Total  property and equipment              |       |             |       | 15,577     |       | 5,781,530  |       |
|                                       |       |             |       |       |       |       |       |
| Accumulated  depreciation and amortization |       |             |       | (11,957    | )          | (5,732,660 | )          |
|                                       |       |             |       |       |       |       |       |
|                                       |       |             |       | $          | 3,620      |       | $          | 48,870 |   |

 

Depreciationand amortization expense for the years ended February 28, 2006, and 2005 was$3,890 and $5,280, respectively.

 

**4.****             EmployeeBenefits:**

 

The Company has a self-funded employeebenefit plan providing health care benefits for all its employees. It alsoprovides for them group dental insurance, short-term and long-term disabilityinsurance, and life insurance. Employees pay pre-tax premiums from $40 to $400per month depending upon the insurance coverage selected by the employee.Employees can select from two coverage plans, which have a $200 or $300deductible, varying out-of-pocket maximums, and a maximum lifetime benefit of$1,000,000 per covered participant.

 

F-17

----

 

Due to stop-loss insurance, benefits payableby the Company are limited to $25,000 per person during the policy year. TheCompany charged to operations a provision of $341,918 for 2006 and $353,644 for2005, which represents the sum of actual claims paid and an estimate ofliabilities relating to claims, both asserted and unasserted, resulting fromincidents that occurred during the year. These amounts include costs related toemployees of the medical clinic that have been allocated to the Company.

 

The Company has a qualified 401(k) plan whichcovers substantially all employees meeting certain eligibility requirements.Participants may contribute a portion of their compensation to the plan, up tothe maximum amount permitted under Section 401(k) of the Internal Revenue Code.At the Company’s discretion, it can match a portion of the participants’contributions. The Company’s matching contribution was $262 and $-0- for theyears ended February 28, 2006 and 2005, respectively.

 

**5.****             Leasecommitments:**

 

Dr. Burzynski leases certain equipment used in the clinical trialsunder leases maturing in two to three years. Rent expense incurred under theseleases was approximately $69,425 and $69,655 for the years ended February 28,2006, and 2005, respectively. Future minimum lease payments are as follows:

 
| 2007   |   | 64,984 |    |
|--------|--------|--------|---------|
| 2008   |   | 38,457 |    |
| 2009   |   | 5,802  |    |
|   |   |   |    |
|   |   | $      | 109,243 |   |
|        |        |        |         |  |

 

In addition, as explained in Note 2, Dr. Burzynski owns the facilityused by the Company to perform research and produce its drug products. There iscurrently no lease agreement; however, the facility’s costs are included in theaccompanying financial statements. Those costs include not only utilities andexpenses normally incurred by a tenant but also mortgage interest, insurance,property taxes and building depreciation. Interest, insurance, property taxesand building depreciation totaled $181,055 and $162,629 for 2006 and 2005,respectively.

 

F-18

----

 

**6.****             Income Taxes:**

 

The costs incurred related to the conduct of FDA approved clinicaltrials incurred directly by Dr. Burzynski within his medical practice arededucted by Dr. Burzynski and are not included in the Company’s tax provision.

 

The actual income tax benefit attributable to the Company’s losses forthe years ended February 28, 2006 and 2005 differ from the amounts computed byapplying the U.S. federal income tax rate of 34% to the pretax loss as a resultof the following:

 
| ** **                            | ** ** | **2006**  | ** ** | **2005**  | ** ** |
|---------------------------------------|------------|-----------|------------|-----------|------------|
|                                  |       |      |       |      |       |
| Expected  benefit                     |       | $         | (1,564,251 | )         | $          | (1,688,283 | ) |
| Taxed  directly to Dr. Burzynski      |       | 1,564,251 |       | 1,688,283 |       |
| Other  adjustments                    |       | 2,545     |       | 4,024     |       |
| Change in  valuation allowance        |       | (2,545    | )          | (4,024    | )          |
| Texas franchise  tax, based on income |       | —    |       | —    |       |
|                                  |       |      |       |      |       |
| Income tax  expense                   |       | $         | —     |      | $          | — |   |

 

The components of the Company’s deferredincome tax assets as of February 28, 2006 and 2005 are as follows:

 
| ** **                                    | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
|                                          |       |     |       |     |       |
| Deferred tax  assets:                         |       |     |       |     |       |
| Net  operating loss carryforwards             |       | $        | 396,754    |     | $          | 382,463 |   |
| Excess book  (tax) depreciation               |       | (920     | )          | 12,002   |       |
| Accrued  expenses                             |       | 5,684    |       | 6,225    |       |
| Alternative  minimum tax credit carryforwards |       | 42,603   |       | 42,603   |       |
|                                          |       |     |       |     |       |
| Total  deferred tax assets                    |       | 444,121  |       | 443,293  |       |
| Less valuation  allowance                     |       | (444,121 | )          | (443,293 | )          |
|                                          |       |     |       |     |       |
| Net deferred  tax assets                      |       | $        | —     |     | $          | — |   |

 

F-19

----

 

The Company’s ability to utilize netoperating loss carryforwards and alternative minimum tax credit carryforwardswill depend on its ability to generate adequate future taxable income. TheCompany has no historical earnings on which to base an expectation of futuretaxable income. Accordingly, a valuation allowance for the total deferred taxassets has been provided.

 

The Company has net operating loss carryforwards available to offsetfuture income in the amount of $1,166,923 as of February 28, 2006. The netoperating loss carryforwards expire as follows:

 
| **Year  ending**        | ** ** | ** ** | ** ** |
|-------------------------|------------|------------|------------|
| **February 28, or 29,** |       |       |       |
|                    |       |       |       |
| 2013                    |       | $          | 303,069    |   |
| 2016                    |       | $          | 11,818     |   |
| 2017                    |       | $          | 511,871    |   |
| 2018                    |       | $          | 50,786     |   |
| 2020                    |       | $          | 49,976     |   |
| 2021                    |       | $          | 24,117     |   |
| 2022                    |       | $          | 19,315     |   |
| 2023                    |       | $          | 75,450     |   |
| 2024                    |       | $          | 59,706     |   |
| 2025                    |       | $          | 13,732     |   |
| 2026                    |       | $          | 47,083     |   |

 

In addition, the Company has alternativeminimum tax credit carryforwards of $42,603.

 

**7.****             StockOptions:**

 

Statement of Financial Accounting Standards No. 123, “Accounting forStock-based Compensation” (FAS 123) defines a fair value based method ofaccounting for employee stock options or similar equity instruments and encouragesall entities to adopt that method of accounting for all of their employee stockcompensation plans. Under the fair value based method, compensation cost ismeasured at the grant date based on the value of the award and is recognizedover the service period of the award, which is usually the vesting period.However, FAS 123 also allows entities to continue to measure compensation costsfor employee stock compensation plans using the intrinsic value method ofaccounting prescribed by Accounting Principles Board (APB) Opinion No. 25,“Accounting for Stock Issued to Employees” (APB 25). The Company has adoptedFAS 123 and has elected to remain with the accounting prescribed by APB 25.

 

F-20

----

 

On September 14, 1996 the Company granted 600,000 stock options, withan exercise price of $.35 per share, to an officer who is no longer with theCompany. The options vested as follows:

 
| 400,000 options |   | September 14, 1996 |
|-----------------|--------|--------------------|
| 100,000 options |   | June 1, 1997       |
| 100,000 options |   | June 1, 1998       |

 

The options are valid in perpetuity. In addition, for a period of 10years from the grant date, they increase in the same percentage of any newshares of stock issued; however, no additional shares have been issued sinceSeptember 14, 1996. None of the options have been exercised as of February 28,2006.

 

**8.****             Commitmentsand Contingencies and Supply Source:**

 

As described in Note 2, the Company entered a Royalty Agreement withDr. Burzynski. Under that agreement, upon FDA approval, the Company isobligated to provide Dr. Burzynski the right to produce antineoplaston productsto treat up to 1,000 patients without paying any fees to the Company or theright to purchase antineoplaston products to treat up to 1,000 patients at costplus 10%.

 

The Company produced antineoplaston products to treat approximately 100patients during the years ended February 28, 2006 and 2005. Managementestimates the current production facilities have the capacity to produceproduct to treat approximately 1,500 patients. There is space available at thecurrent site to expand the facility for increased capacity if necessary.

 

The Companyreceived approximately twenty nine percent and fifteen percent of the chemicalsused in producing antineoplastons from two individual suppliers during the yearended February 2006 and forty four percent from a single supplier during theyear ended February 2005. The Company has established additional vendors tosupply these chemicals.

 

F-21

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