**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-KSB**

 

**(Mark One)**

**ANNUALREPORT UNDER SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended February 28,2005**

 

**TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from            to             **

 

**Commission file number 000-23425**

 

**BURZYNSKIRESEARCH INSTITUTE, INC.**

(Name of small business issuer in itscharter)

 
| **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**                                         |

 

Checkwhether the issuer (1) filed all reports required to be filed by Section 13or 15(d) of the Exchange Act during the past 12 months (or for suchshorter period that the registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes  ý  No  o

 

Checkif there is no disclosure of delinquent filers in response to Item 405 ofRegulation S-B contained herein, and no disclosure will be contained, to thebest of Registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or anyamendment to this Form 10-KSB.  ý

 

Stateissuer’s revenues for its most recent fiscal year:  $0.

 

Asof May 3, 2005, 131,388,444 shares of the Registrant’s Common Stock wereoutstanding, and the aggregate market value of the Common Stock held bynon-affiliates was approximately $6,340,000 based on the last reported salesprice on May 3, 2005.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

Documents incorporated byreference:            None.

 

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

 

 

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**BURZYNSKIRESEARCH INSTITUTE, INC.**

 

**FORM 10-KSB**

 

**FISCAL YEARENDED FEBRUARY 28, 2005**

 

**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 containsforward-looking statements, including statements regarding future financialperformance and results and other statements that are not historicalfacts.  Such statements are included in “Descriptionof Business,” “Management’s Discussion and Analysis of Financial Condition andResults of Operations” and elsewhere in this report.  When used in this report, words such as “may,”“will,” “should,” “could,” “anticipate,” “believe,” “expect,” “estimate,” “intend,”“plan,” “predict,” “potential,” “continue” and similar expressions are intendedto identify forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. Although the Company believes that the expectations reflected in theseforward-looking statements are reasonable, there can be no assurance thatactual results or developments anticipated by the Company will be realized or,even if realized, that they will have the expected effects on its business oroperations.  Actual results could differmaterially from those contemplated by the forward-looking statements as aresult of certain factors beyond the Company’s control including: the abilityto develop safe and efficacious drugs, the failure to achieve positive clinicaltrials, the failure to successfully commercialize our products, competition andtechnological change and existing and future regulations affecting ourbusiness.

 

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# **PART I**

# ** **

## **ITEM1.**           DESCRIPTION OF BUSINESS

## ** **

**General**

** **

BurzynskiResearch Institute, Inc. (the “Company”) was incorporated under the lawsof the State of Delaware in 1984 in order to engage in the research,production, marketing, promotion and sale of certain medical chemical compoundscomposed of growth-inhibiting peptides, amino acid derivatives and organicacids which are known under the trade name “Antineoplastons.”  The Company believes Antineoplastons areuseful in the treatment of human cancer and is currently conducting Phase IIclinical trials of Antineoplastons relating 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 event Antineoplastons receive suchapproval and are registered in the United States, Canada, or Mexico, of whichthere can be no assurance, the Company will commence commercial operations,which shall include the production, marketing, promotion and sale ofAntineoplastons in the United States, Canada, or Mexico.  In 2004, the FDA approved the designation ofAntineoplastons as an “orphan drug” under the Orphan Drug Act of 1983.  See “—Antineoplastons A10 and AS2-1 for theTreatment of Brain Stem Glioma” below for a detailed description of thisdesignation and its meaning.  The Companycurrently provides Antineoplastons solely for the use of Stanislaw R.Burzynski, M.D., Ph.D. (“Dr. Burzynski”) in clinical research.

 

TheCompany has not generated any significant operating revenue since itsinception.  The Company’s sole source offunding for its operations has been and continues to be payments made by Dr. Burzynskifrom funds generated from Dr. Burzynski’s medical practice pursuant tovarious arrangements between the Company and Dr. Burzynski.  *See*“*Certain Relationships and Related Transactions*.”  The Company reports funds pursuant to sucharrangements as additional paid-in capital. *See*“*Management’sDiscussion and Analysis of Financial Condition and Results of Operations*.”  The Company does not expect to generatesignificant operating revenue until such time, if any, as Antineoplastons areapproved for use and sale by the FDA.  However,the Company may seek additional funding for operations through the sale of itssecurities.

 

**Antineoplastons**

** **

Dr. Burzynskicommenced his cancer research in 1967 focusing on the isolation of variousbiochemicals produced by the human body as part of the body’s possible defenseagainst cancer.  In the course of hisresearch, Dr. Burzynski identified certain peptides, amino acidderivatives and organic acids in these biochemicals which appear to inhibit thegrowth of cancer cells.  Thesederivatives were given the name “Antineoplastons” by Dr. Burzynski.

 

Antineoplastonsare found in the bodily fluids of humans and food and were initially isolatedby Dr. Burzynski from 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 syntheticformulations of Antineoplastons.  All of thePhase II clinical trials currently sponsored by the Company involve the use offour formulations of synthetic Antineoplastons known as A10 and AS2-1 incapsules and injections.  The Company isalso conducting laboratory research involving new generations ofAntineoplastons A10 and AS2-1.

 

**AntineoplastonsA10 and AS2-1 for the Treatment of Brain Stem Glioma**

 

The Company currentlyintends to focus its efforts on the clinical development of its AntineoplastonsA10 and AS2-1 for the treatment of brain stem glioma, which was the indicationfor which it received "orphan drug" designation by the FDA.  See the paragraph below for adescription.  The Company anticipatesmeeting with the FDA during the current fiscal year to discuss its proposedclinical development of this treatment.

 

The research anddevelopment of this treatment is subject to numerous risks anduncertainties.  There can be no assurancethat the Company will be able to develop this treatment on a timely basis orbeyond that which has been completed to date. In addition, the Company has no assurance that it will have sufficientcapital available on acceptable terms or at all to continue its research anddevelopment of this treatment.  Finally,there is no assurance that the FDA will approve this treatment for commercialuse even if the Company is able to develop it timely and has the resourcesavailable to do so.  See"Management's Discussion and Analysis or Plan of Operation—Liquidity andCapital Resources" for more discussion of this treatment.

 

On September 7,2004, the FDA granted “orphan drug” status to the Company’s Antineoplastons A10 and AS2-1 for the treatment of brain stemglioma under the Orphan Drug Act of 1983.  In enacting the Orphan Drug Act of 1983,Congress sought to provide incentives to promote the development of drugs forthe treatment of rare diseases.  A drugmay be considered for orphan drug designation if the drug is intended to treata rare 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 applicablelaws and regulations, the first sponsor to obtain FDA marketing approval for adrug with orphan drug designation for the designated disease or conditionreceives limited marketing exclusivity for seven years; no other sponsor maybring to market the “same drug” for the treatment of the same disease orcondition for a period of seven years from the date the application is approvedby the FDA.  A drug with orphan drugdesignation must meet the same criteria for safety and efficacy as a

 

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drug withoutorphan drug designation.  Please see “—GovernmentRegulation” for a complete description of the regulatory approval process withthe FDA and other regulatory agencies.

 

**PhaseII Clinical Trials**

** **

TheCompany began Phase II clinical studies in 1994 with four studies.  At that time, a number of patients were alsoreceiving Antineoplastons at Dr. Burzynski’s clinic in Houston, Texas (the“Burzynski Clinic”) outside these clinical trials.  On February 23, 1996, the FDA requestedthat all then-current patients of the Burzynski Clinic desiring to continueAntineoplaston treatment be admitted to a Phase II Study, according to ProtocolCAN-1.  This action resulted in theformation of six cohorts of patients in the CAN-1 study, with the largest groupsuffering from primary brain tumors.  Newpatients either were admitted to the CAN-1 study or have been admitted to oneof the other studies sponsored by the Company, as appropriate.

 

TheCompany closed approximately half of its clinical trials during the past yeardue to low enrollment.  The Company currentlysponsors 35 ongoing 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 exceptone are for the treatment of a wide variety of cancers using only a combinationof 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 involve the use ofintravenous formulations of Antineoplastons; however, a few trials use oralformulations.  Dr. Burzynski acts asprincipal investigator for all clinical trials pursuant to a Royalty Agreementbetween the Company and Dr. Burzynski. See “*Certain Relationships and Related Transactions*.”  All of the clinical trials are conducted atthe Burzynski Clinic.  Each trialprovides for the admission of up to 40 patients, except the CAN-1 study, inwhich 133 patients were enrolled, and the BT-34 and BT-35 studies, inwhich up to 20 patients will be enrolled. Please see “—Active Phase II Clinical Trials” for a list of all of theseclinical trials.

 

Priorto approving a New Drug Application (“NDA”), the FDA requires that a drug’ssafety and efficacy be demonstrated in “well-controlled” clinical trials.  Several types of controls are acceptable tothe FDA.  One of these is a “HistoricControl.”  Under a “Historic Control” ifthe course of a disease is well-known, the response of patients taking a drugcan be compared to a historic group of patients with that disease who have nothad medical intervention.  For example,it is known that the tumors of patients suffering from primary malignant braintumors (“PMBT”) will continue to grow, eventually causing the patient’s death.  If a drug is administered to a patient withPMBT and the tumors of the patient disappear or shrink significantly, anassumption is made that there has been a response to the drug.

 

**All ofthe Company’s clinical trials, except one, involve the use of HistoricControls.  Further, all trials except theCAN-1 study are “prospective clinical trials” (“PCT”).**  A PCT isa clinical trial wherein patients are accrued into and follow the clinicaltrial protocol from the very beginning of the trial.  A retrospective trial is a trial in whichdata from patients treated prior to the start of a clinical trial is considered.  Results of retrospective trials are, in mostinstances, not acceptable to the FDA.  **In addition, there are no clinical trials beingconducted that involve “double blind” studies and all but one clinical trialinvolve no randomization into multiple treatment groups.**

 

Theultimate goal of any treatment 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 grant marketing approval for a new drugproduct on the basis of adequate and well-controlled clinical trialsestablishing that the drug has an effect on a surrogate endpoint (“Milestone”)that is reasonably likely to predict clinical benefit.  Each of the Company’s Phase II trialsdescribes such Milestones which are used to determine success or failure of thetreatment employed.  In most of thetrials, the Milestones are radiographic evidence of tumor shrinkage by X-ray,computer aided tomography or magnetic resonance imaging.  Where appropriate, tumor markers such asProstate Specific Antigen, blood counts, or bone marrow biopsy are used inorder to assess a tumor’s growth.

 

Wheretumor size is used as the Milestone, each clinical trial protocol describes a “completeresponse” as a complete disappearance of all tumors with no reoccurrence oftumors for at least four weeks.  A “partialresponse” is described as at least a 50% reduction in total tumor size, withsuch reduction lasting at least four weeks. An “objective response” is described as either a complete or partialresponse for protocols AD-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,

 

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CO-03, ES-02, LA-04, LY-03, LY-06, LY-09, LY-12, MA-02, NE-02, PA-02, PR-06and UP-02.  “Stable disease” is describedas less than 50% reduction in size but no more than 50% increase in size of thetumor mass, lasting for at least twelve weeks.  An objective response for protocols BT-07 andBT-20 is described as either complete or partial response or stabledisease.  An objective response forprotocol BT-34 is no sign of tumor recurrence. An objective response for protocol MM-02 is at least 75% reduction inthe production of serum myeloma protein, at least 95% reduction in myelomaproteins in urine and less than 5% bone marrow myeloma cells.  “Progressive disease” is described as morethan 50% increase in total tumor mass or occurrence of new tumors.

 

Theprotocols of the Company’s clinical trials involve a two-stage design, whereinthe first stage proceeds until the Company admits twenty patients into thetrial.  After a specified time period, ifthere are zero responses by the first twenty patients, the trial will bediscontinued and the drug declared to have less than desired activity.  If there is at least one response, the trialwill be continued until forty patients have been accrued.  If the study continues, the followingconclusions according to protocols based on forty patients can be made:  If there are three or fewer responses, thenthere is less than desired activity.  Ifthere are four or more responses, then there is sufficient evidence to concludethat the Antineoplaston regimen used shows beneficial activity.

 

Asof April 19, 2005, ten of the prospective clinical trials have reached aMilestone.  These are:

 

•              Protocol BT–07,involving the study of Antineoplastons A10 and AS2-1 in patients withglioblastoma multiforme, not treated with radiation therapy orchemotherapy.  This study is alreadycompleted.

 

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

 

•              Protocol BT-11,involving the study of Antineoplastons A10 and AS2-1 in patients with brainstem glioma.

 

•              Protocol BT-12,involving the study of Antineoplastons A10 and AS2-1 in children with primitiveneuroectodermal 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.

 

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

 

•              Protocol BT-23,involving a study of Antineoplastons A10 and AS2-1 in children with visual pathwayglioma.

 

•              Protocol BT-34,involving the study of maintenance treatment with Antineoplastons A10 and AS2-1capsules for patients with malignancies in complete response following initialintravenous treatment with Antineoplastons A10 and AS2-1.

 

Therecan be no assurance that the results of any of these trials can be repeated orthat the other clinical trials will result in the same or similar responses.

 

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Theresults of Protocols BT-07, BT-09, BT-11, BT-12, BT-13, BT-15, BT-18, BT-20, BT-23and BT-34 are set forth below (as of April 19, 2005).

 
| **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                    |       | 23                      |       | 2                                                                   |       | 8.7                                                               | %          | 1                                                                |       | 4.3                                                                   | %      | 2 |   | 8.7 | % | 18 |   | 78.3 | % |
| BT-09                |       | 29                    |       | 23                      |       | 4                                                                   |       | 17.4                                                              | %          | 6                                                                |       | 26.1                                                                  | %      | 9 |   | 39.1 | % | 4 |   | 17.4 | % |
| BT-11                |       | 34                    |       | 24                      |       | 5                                                                   |       | 20.8                                                              | %          | 4                                                                |       | 16.7                                                                  | %      | 7 |   | 29.2 | % | 8 |   | 33.3 | % |
| BT-12                |       | 13                    |       | 11                      |       | 3                                                                   |       | 27.3                                                              | %          | 1                                                                |       | 9.1                                                                   | %      | 3 |   | 27.3 | % | 4 |   | 36.4 | % |
| BT-13                |       | 10                    |       | 8                       |       | 5                                                                   |       | 62.5                                                              | %          | 1                                                                |       | 12.5                                                                  | %      | 2 |   | 25.0 | % | 0 |   | 0.0 | % |
| BT-15                |       | 25                    |       | 18                      |       | 3                                                                   |       | 16.7                                                              | %          | 2                                                                |       | 11.1                                                                  | %      | 7 |   | 38.9 | % | 6 |   | 33.3 | % |
| BT-18                |       | 15                    |       | 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-23                |       | 12                    |       | 8                       |       | 3                                                                   |       | 37.5                                                              | %          | 1                                                                |       | 12.5                                                                  | %      | 3 |   | 37.5 | % | 1 |   | 12.5 | % |
| BT-34                |       | 5                     |       | 5                       |       | 5                                                                   |       | 100.0                                                             | %          |                                                             |       | N/A                                                                   |   |   |   | N/A |   |   |   | N/A |   |

 

**ThePhase II Study according to Protocol CAN-1 included 35 evaluable brain tumor patients.  Complete and partial responses were obtainedin patients diagnosed with glioblastoma multiforme, astrocytoma,oligodendroglioma, mixed glioma, medulloblastoma, and malignant meningioma.  The treatment with Antineoplastons A10 and AS2-1resulted in 48.6% cases of objective responses and 34.4% cases of stabledisease.  The largest group of evaluablepatients involved in the study had glioblastoma multiforme.  Six of the cases were classified as completeand partial responses, four obtained stabilization and four developedprogression of the disease.  One of theglioblastoma patients is now alive and completely free from tumor for over twelveyears after her pathology diagnosis.**

 

Notwithstanding theresponse results of the trials that have reached a Milestone, managementbelieves it is likely that the FDA may require additional clinical trials basedupon such protocols to be conducted by an institution not affiliated with theCompany or Dr. Burzynski before advising that an NDA filing iswarranted.  **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 ifand/or when it will submit an NDA to the FDA, nor can the Company estimate thenumber or type of additional trials the FDA may require.  Further, there can be no assurance that anNDA for Antineoplastons, as a treatment for cancer, will ever be approved bythe FDA.

 

Noassurance can be given that any new IND for clinical tests on humans will beapproved by the FDA for human clinical trials on cancer or other diseases, thatthe results of such human clinical trials will prove that Antineoplastons aresafe or effective in the treatment of cancer or other diseases, or that the FDAwould approve the sale of Antineoplastons in the United States.

 

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**ActivePhase II Clinical Trials**

** **

Thefollowing table sets forth the title of each active Protocol, the subject ofthe Protocol with dates submitted to the FDA and approved by the IRB and thenumber of persons currently 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. In addition, all of the studies listed have a maximum of 40 patients whomay ultimately participate in the study, except for protocols BT-34 and BT-35,which have a maximum of 20 patients who may ultimately participate in thestudy.  The information in this table isupdated as of April 19, 2005.

 
| **Title of  Protocol** | ** ** | **Subject of Protocol**                                                                                                                                                                                              | ** ** | **Number of  Persons Enrolled** | ** ** |
|------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| AD-02                  |       | Carcinoma of the Adrenal Gland                                                                                                                                                                                       |       | 4                               |       |
| 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                               |       |
| BR-14                  |       | Advanced Breast Cancer                                                                                                                                                                                               |       | 7                               |       |
| BT-06                  |       | Children with High Grade Glioma                                                                                                                                                                                      |       | 9                               |       |
| BT-07                  |       | Glioblastoma Multiforme, not treated with radiation  and/or chemotherapy (completed and closed on July 1, 2004)                                                                                                 |       | 40                              |       |
| BT-08                  |       | Anaplastic Astrocytoma                                                                                                                                                                                               |       | 15                              |       |
| BT-09                  |       | Brain Tumors                                                                                                                                                                                                         |       | 29                              |       |
| BT-10                  |       | Children with Brain Tumors                                                                                                                                                                                           |       | 17                              |       |
| BT-11                  |       | Brain Stem Glioma                                                                                                                                                                                                    |       | 34                              |       |
| BT-12                  |       | Children with Primitive Neuroectodermal (PNET)                                                                                                                                                                       |       | 13                              |       |
| BT-13                  |       | Children with Low Grade Astrocytoma                                                                                                                                                                                  |       | 10                              |       |
| 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                                                                                                                                                                                     |       | 15                              |       |
| BT-20                  |       | Glioblastoma Multiforme, which recurred after  standard radiation and/or chemotherapy (completed and closed on January 16,  2004)                                                                               |       | 40                              |       |
| BT-21                  |       | Adult Patients with Primary Malignant Brain Tumors                                                                                                                                                                   |       | 34                              |       |
| BT-22                  |       | Children with Primary Malignant Brain Tumors                                                                                                                                                                         |       | 6                               |       |
| BT-23                  |       | Children with Visual Pathway Glioma                                                                                                                                                                                  |       | 12                              |       |
| BT-24                  |       | Ependymoma                                                                                                                                                                                                           |       | 9                               |       |
| 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                               |       |
| CO-03                  |       | Adenocarcinoma of the Colon                                                                                                                                                                                          |       | 11                              |       |

 

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| **Title of  Protocol** | ** ** | **Subject of Protocol**                                                                                                             | ** ** | **Number of  Persons Enrolled** | ** ** |
|------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ES-02                  |       | Adenocarcinoma of the Esophagus                                                                                                     |       | 8                               |       |
| 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                              |       |
| LY-09                  |       | Mantle Zone Lymphoma                                                                                                                |       | 5                               |       |
| LY-12                  |       | Primary Central Nervous System Lymphoma                                                                                             |       | 0                               |       |
| MA-02                  |       | Mesothelioma                                                                                                                        |       | 8                               |       |
| ME-02                  |       | Malignant Melanoma                                                                                                                  |       | 13                              |       |
| MM-02                  |       | Multiple Myeloma                                                                                                                    |       | 5                               |       |
| NE-02                  |       | Neuroendocrine Tumors                                                                                                               |       | 7                               |       |
| PA-02                  |       | Carcinoma of the Pancreas                                                                                                           |       | 14                              |       |
| PR-06                  |       | Antineoplastons A10 and AS2-1 Capsules in Combination  with Total Androgen Blockade in Patients with Adenocarcinoma of the Prostate |       | 2                               |       |
| UP-02                  |       | Carcinoma of an Unknown Primary                                                                                                     |       | 8                               |       |

 

**GovernmentRegulation**

 

TheFDA imposes substantial requirements upon, and conditions precedent to, theintroduction of therapeutic drug products through lengthy and detailedlaboratory and clinical testing procedures, sampling activities and othercostly and time consuming procedures.  Toobtain FDA approval for Antineoplastons, we must submit extensive preclinicaland clinical data and supporting information to the FDA to establish the safetyand efficacy of Antineoplastons.  Theapproval process takes many years, requires the expenditure of substantialresources and may involve ongoing requirements for post-marketing studies.  Additional government regulation may beestablished that could prevent or delay regulatory approval ofAntineoplastons.  Moreover, there can beno assurance that the Company can satisfy FDA requirements to gain approval forAntineoplastons in the United States or that FDA approval for the sale ofAntineoplastons in the United States will be obtained.  If regulatory approval is granted, theapproval may include significant limitations on the indicated uses for whichAntineoplastons may be marketed.

 

Theeffect of the FDA drug approval process for Antineoplastons may impose costlyprocedures upon the Company’s activities which may furnish a competitiveadvantage to the other companies that compete with the Company in the field ofcancer treatment drugs.  The extent ofpotentially adverse government regulations which might arise from futurelegislation or administrative action cannot be predicted.

 

TheInvestigational New Drug Application Process in the United States is governedby regulations established by the FDA which strictly control the use anddistribution of investigational drugs in the United States.  The guidelines require that an IND, filed bya sponsor, 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 orderto conduct a clinical trial of a new drug in humans, a sponsor must prepare andsubmit to the FDA a comprehensive IND. Such application must contain an investigator’s brochure, a descriptionof the composition, manufacture and control of the drug substance and the drugproduct, sufficient information to assure the proper identification, quality,purity and strength of the investigational drug, a description of the drugsubstance, including its physical, chemical, and biological characteristics,the general method of preparation of the drug substance, a list

 

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of all components including interactive ingredients, adequate informationabout pharmacological and toxicological studies of the drug involving laboratoryanimals or in vitro tests on the basis of which the sponsor has concluded thatit is reasonably safe to conduct the proposed clinical investigation and asummary of any previous human experience with the drug.  Where there has been widespread use of thedrug outside of the United States or otherwise, it is possible in some limitedcircumstances to use well-documented clinical experience in place of some otherpre-clinical work.

 

Thefocal point of the IND is on the general investigational plan and the protocolsfor specific human studies.  The plan iscarried out in three phases:  Phase Iincludes the initial introduction of an investigational new drug into humansand may be conducted in patients or normal volunteer subjects.  The studies are closely monitored todetermine the metabolism and pharmacologic actions of the drug in humans, thepotential side effects and, if possible, to gain early evidence oneffectiveness.  During Phase I testing,sufficient information about the drug is gathered to design well-controlled,scientifically valid Phase II studies. Phase II includes controlled clinical studies conducted to evaluate theeffectiveness of the drug for a particular indication in patients with thedisease or condition under study and to determine the common short-term sideeffects and risks associated with the drug. Phase II studies are controlled, closely monitored and conducted in arelatively small number of patients, usually involving no more than severalhundred subjects.  Phase III includesexpanded controlled and uncontrolled trials and are intended to gather theadditional information about effectiveness and safety that is needed toevaluate the overall benefit-risk relationship of the drug and to provide anadequate basis for physician labeling. Phase III studies usually include anywhere from several hundred toseveral thousand subjects.

 

AnIND will automatically become effective 30 days after receipt by the FDA,unless before that time the FDA raises concerns about issues such as the conductof the trials as outlined in the 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.  There can be no assurance that Phase I, PhaseII or Phase III testing will be completed successfully by the Company withinany specified period of time, if at 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.

 

Assumingsuccessful completion of the clinical studies, the results of the studies,together with other detailed information, including, among other information,details concerning the manufacture and composition of the drug, proposedlabeling, environmental impact and the scientific rationale for the drug, itsintended use and the potential benefits of the drug product, are submitted tothe FDA in the form of an NDA requesting approval to market the drug.  If the FDA finds the NDA submission and themanufacturing process to be acceptable, the FDA will issue an approvalletter.  If the FDA does not find the NDAsubmission or the manufacturing process to be sufficient, it will issue a “notapprovable letter” describing the deficiencies in the NDA and allowing the NDAapplicant to either amend the NDA, withdraw the NDA or request a hearing.  Even if the NDA is amended or a hearing isheld, the FDA ultimately may decide that the NDA does not satisfy theregulatory criteria for approval.  Inaddition, as a result of the Company’s use of Milestones to predict thebenefits of Antineoplastons, the FDA may subject any such approval to therequirement that the Company study the drug further, to verify and describe itsclinical benefit (Phase IV testing). Further, the FDA may also impose post-marketing restrictions onAntineoplastons.  The FDA may withdrawapproval of any drug if the Phase IV trials fail to verify clinical benefit,use of the drugs demonstrates that post-marketing restrictions are inadequateto assure safe use of the drug, the Company fails to adhere to thepost-marketing restrictions agreed upon, the promotional materials are false ormisleading or other evidence demonstrates that the drug is not shown to be safeor effective under its conditions of use.

 

Thetesting and approval process requires substantial time, effort and financialresources, and there can be no assurance that any approval will be granted forany product or that approval will be granted according to any schedule.  Moreover, if regulatory approval of a drug isgranted, the approval will be limited to specific indications.  There can be no assurance that any of theCompany’s product candidates will receive regulatory approvals forcommercialization.

 

TheFDA has implemented an accelerated review process for pharmaceutical agentsthat treat serious or life-threatening disease and conditions, subject topayment of user fees.  Approvalmay be conditioned on a

 

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requirement that,following product launch, a company continue to study the drug to verify anddescribe 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.  When appropriate, the Company intends to pursueopportunities for accelerated review of its products.  The Company cannot predict the ultimateeffect of this review process on the timing or likelihood of FDA review of anyof its products.

 

Pleasesee “—Antineoplastons A10 and AS2-1 for the Treatment of Brain Stem Glioma” fora description of the FDA’s orphan drug designation under the Orphan Drug Act of1983 as it applies to the Company’s Antineoplastons.

 

Even if the regulatoryapprovals for the Company’s products are obtained, its products and itsmanufacturing facility are subject to continuous review and periodicinspection.  The FDA will requirepost-marketing reporting to monitor the safety of the Company’s products.  The Company’s drug manufacturing facilitymust be inspected and approved by the FDA and must comply with the FDA’s currentgood manufacturing practice regulations, which are strictly enforced.  Full technical compliance requiresmanufacturers to expend funds, time and effort in the area of production andquality control.  In addition, discoveryof problems with a product after approval or failure to comply with applicableFDA or other applicable regulatory requirements may result in restrictions on aproduct, manufacturer, or holder of an approved NDA, including restrictions onthe product, manufacturer or facility, including warning letters, suspension ofregulatory approvals, operating restrictions, delays in obtaining new productapprovals, withdrawal of the product from the market, product recalls, fines,injunctions and criminal prosecution. New government requirements may be established that could delay orprevent regulatory approval of the Company’s products under development.

 

The Company’s researchand development involves the controlled use of hazardous materials, chemicalsand various radioactive compounds. Although the Company believes its procedures for handling and disposingof those materials comply with state and federal regulations, the risk ofaccidental contamination or injury from these materials cannot beeliminated.  If an accident of this typeoccurs, the Company could be held liable for resulting damages, which could bematerial to its financial condition and business.  The Company is also subject to numerousenvironmental, health and workplace safety laws and regulations, includingthose governing laboratory procedures and the handling of biohazardous materials.  Additional federal, state and local laws andregulations affecting the Company may be adopted in the future.  Any violation of these laws and regulations,and the cost of compliance, could materially and adversely affect the Company.** ****The Company spends approximately $100,000 per yearon environmental compliance matters and expects to spend an additional $30,000 forrepairs and upgrades during the fiscal year ending February 28, 2006.**

 

**ResearchAnd Development**

 

TheCompany’s principal research and development efforts currently focus on Antineoplastons.  The anticancer activity of these compoundshas been documented in preclinical studies employing the methods of cellculture, pharmacology, cell biology, molecular biology, experimentaltherapeutics and animal models of cancer. At the level of Phase II clinical studies, the Company believes theanticancer activity of Antineoplastons is supported by preliminary results fromongoing, FDA-authorized, Phase II clinical trials.

 

Thecellular mechanism underlying the anticancer effects of Antineoplastonscontinues to be investigated in both the Company’s own basic preclinicalresearch program and in independent laboratories around the world.  A review of this work suggests severalmechanisms that may underlie the antineoplastic activity of Antineoplastons.  For example, it has been found, in cellculture experiments, that Antineoplastons induce pathologicallyundifferentiated cancer cells to assume a more normal state of differentiation.Cell culture experiments have also shown that Antineoplaston components cankill some cancer cells by activating the cell’s intrinsic “suicide” program.  It must be noted that data collected in cellculture experiments may or may not indicate the mechanism of action of Antineoplastonsin humans.

 

Ata more molecular or sub-cellular level, cell culture experiments have shownthat Antineoplastons can block biochemical pathways involving oncogenesrequired to produce abnormal cell growth. In addition, cell culture experiments have shown that Antineoplastonscan increase the expression of anticancer tumor suppressor genes.  Although these experiments were conductedusing human cancer cells, they may or may not indicate the mechanism ofAntineoplaston action in humans.

 

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Inaddition to the original family of Antineoplaston compounds (the “ParentalGeneration”), the Company continues its development of a second generation ofAntineoplastons.  In cell cultureexperiments, the second generation Antineoplastons, which were developed by theCompany, have been shown to be at least a thousand times more potent than theParental Generation.

 

TheCompany is also developing a third generation of structurally alteredAntineoplastons that the Company believes will exhibit markedly improvedanticancer activity in human cancer cell lines that have been resistant to theParental Generation.  However, increasesof antineoplastic activity in cell culture experiments may or may not translateinto increased efficacy in humans.

 

TheCompany is also involved in ongoing studies examining the pharmacokinetics(absorption, distribution, metabolism, and excretion) and pharmacodynamics(dose-response) of Antineoplastons in patients with neoplastic disease.

 

TheCompany uses various scientific reagents from several different suppliers toconduct its research activities.

 

Totalresearch and development costs for the fiscal years ended February 29, 2005and February 28, 2004 were approximately $4,665,000 and $4,175,000,respectively.

 

**IntellectualProperty**

** **

Since1984, seven patents involving the formulation, preparation, manufacture,production, use, dosage and treatment of cancer with Antineoplastons (the “Patents”)have been issued to Dr. Burzynski by the United States Patent Office.  The Patents for cancer treatment anddiagnosis in the United States and Canada are licensed to the Company pursuantto a License Agreement dated June 29, 1983, as superseded by an AmendedLicense Agreement dated April 24, 1989 and a Second Amended LicenseAgreement 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, includingpatent rights, in Antineoplastons in the treatment and diagnosis ofcancer.  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 Agreement is to continue in effectuntil the expiration of the last Patent that was licensed under the agreementor termination pursuant to certain other provisions.  The Company and Dr. Burzynski alsoentered into a Royalty Agreement, dated March 25, 1997, and a FirstAmended Royalty Agreement, dated September 29, 1997 (collectively, the “RoyaltyAgreement”), pursuant to which Dr. Burzynski will receive a royaltyinterest from all future sales, distribution, and manufacture ofAntineoplastons by the Company. ** **The Company owns, pursuant to theLicense Agreement, exclusive rights to seven issued United States Patents, threeissued Canadian Patents and one issued Mexican Patent.  The Company has one patent application pendingin the United States and one patent application pending in Canada.

 

Thefive initial United States Patents (the “Initial Patents”) relate to: (i) Determinationof Antineoplastons in body tissue or fluids as a testing procedure to aid inthe diagnosis of cancer; (ii) Processes for the preparation of purifiedfractions of Antineoplastons from human urine; (iii) Processes for thesynthetic production of Antineoplastons and methods of treating neoplasticdisease (cancer); (iv) Administration of Antineoplastons to humans; and (v) Methodsof synthesizing A-10.  The InitialPatents expire from September 11, 2001 to January 11, 2009, howeverthe Company does not believe the expiration of any of the Initial Patents willhave a material adverse effect on the Company.

 

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

 

Theseventh United States Patent (the “2001 U.S. Patent”) is for a treatmentregimen for the administration of phenylacetylglutamine, phenylacetylisoglutamine,and/or phenylacetate.  The 2001 U.S.Patent expires on July 23, 2018.

 

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The Company haspreviously reported the issuance of an eighth United States patent related tothe synthesis of 4-phenylbutric acid, but has determined that such patent isnot applicable to the formulation, preparation, manufacture, production, use,dosage and treatment of cancer with Antineoplastons.

 

Thethree Canadian Patents (the “Canadian Patents”) relate to: (i) Processesfor the preparation of purified fractions of Antineoplastons from human urine, (ii) Processesfor the synthetic production of Antineoplastons and methods of treatingneoplastic disease (cancer) and (iii) Liposomal Formulation ofAntineoplastons.  The Canadian Patentsexpire on November 14, 2006, June 4, 2002 and May 14, 2017,respectively; however, the Company does not believe the expiration of theCanadian Patents will have a material adverse effect on the Company.

 

TheMexican Patent relates to a treatment regimen for the administration ofphenylacetylglutamine.  This patent willexpire in the year 2019.

 

Thepending patent application in the United States relates to a divisionalapplication to the 2001 U.S. Patent.  Thispatent application has been allowed and is expected to issue in late 2005.  Following grant, this patent will expire inthe year 2018.

 

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

 

TheCompany also depends upon unpatented proprietary technology, and may determinein appropriate circumstances that its interest would be better served byreliance upon trade secrets or confidentiality agreements rather than patents.

 

TheCompany’s success will depend in part on its ability to enforce patentprotection for its products, preserve its trade secrets, and operate withoutinfringing on the proprietary rights of third parties in the United States,Canada, and Mexico.  Because of thesubstantial length of time and expense associated with bringing new productsthrough 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 the Company will develop additionalproducts and methods that are patentable or that present or future patents willprovide sufficient protection to the Company’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 standardsrelating to the scope of claims and the validity of patents in the fields inwhich the Company is pursuing research and development are still evolving, arehighly uncertain and involve complex legal and factual issues.  No assurance can be given as to the degree ofprotection or competitive advantage any patents issued to the Company will afford,the validity of any such patents or the Company’s ability to avoid violating orinfringing any patents issued to others. Further, there can be no guarantee that any patents issued to orlicensed by the Company will not be infringed by the products of others.  Litigation and other proceedings involvingthe defense and prosecution of patent claims can be expensive and time-consuming,even in those instances in which the outcome is favorable to the Company, andcan result in the diversion of resources from the Company’s other activities.  An adverse outcome could subject the Companyto significant liabilities to third parties, require the Company to obtainlicenses from third parties or require the Company to cease any relatedresearch and development activities or sales.

 

TheCompany depends upon the knowledge, experience and skills (which are notpatentable) of its key scientific 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 beno assurance that these agreements will effectively prevent the unauthorizeduse or disclosure of the Company’s confidential information.

 

Antineoplastonagents is a trademark registered with the U.S. Patent and Trademark Office.

 

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**Competition**

** **

Thereare many companies, universities, research teams and scientists, both privateand government-sponsored, that are engaged in research to produce cancertreatment agents and that have greater financial resources and larger researchstaffs and facilities than the Company. In addition, there are other companies and entities, both private andgovernment-sponsored, that are engaged in research aimed at compounds similaror related to the Company’s Antineoplastons. To the extent that the United States Government also conducts researchor supports other companies or individuals in their research, such companies orindividuals may have a competitive advantage over the Company.

 

**Employees**

** **

**As of May 3,2005, the Company had four employees, all of whom were full-timeemployees.  None of the Company’semployees is a party to a collective bargaining agreement.  The Company considers the relations with itsemployees to be good.**

 

## **ITEM2.**           DESCRIPTIONOF PROPERTY

## ** **

TheCompany does not own or invest in real estate, interests in real estate, realestate mortgages or securities of or interests in persons primarily engaged inreal estate activities.

 

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

 

## **ITEM3.**           LEGALPROCEEDINGS

## ** **

The Company’s activitiesare subject to regulation by various governmental agencies, including the FDA,which regularly monitor the Company’s operations and often impose requirementson the conduct of its clinical trials and other aspects of the Company’sbusiness operations.  The Company’spolicy is to comply with all such regulatory requirements.  From time to time, the Company is alsosubject to potential claims by patients and other potential claimants commonlyarising out of the operation of a medical practice.  The Company seeks to minimize its exposure toclaims of this type wherever possible.

 

Currently,the Company is not a party to any material pending legal proceedings.  Moreover, the Company is not aware of anysuch legal proceedings that are contemplated by governmental authorities withrespect to the Company or any of its properties.

 

## **ITEM4.**           SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

## ** **

No matter was submittedto a vote of security holders during the fourth quarter of the fiscal yearended February 28, 2005.

 

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# **PART II**

# ** **

## **ITEM5.**        MARKETFOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUERPURCHASES OF EQUITY SECURITIES

## ** **

SinceOctober 15, 2001, the Company’s Common Stock has remained in good standingfor 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 noassurance that the market will provide significant liquidity for the Company’sCommon Stock.  As a result, an investmentin the Company’s Common Stock may be highly illiquid.  Investors may not be able to sell theirshares readily or at all when the investor needs or desires to sell.

 

Thefollowing table sets forth closing high and low bid prices of the shares ofCommon Stock of the Company for the periods indicated (as reported by PinkSheets LLC).

 
| ** **      | ** ** | **Price Range** | ** ** |
|-----------------|------------|-----------------|------------|
| ** **      | ** ** | **High**        | ** ** | **Low** | ** ** |
| 2003            |       |            |       |   |   |
| First  Quarter  |       | $               | 0.15       |   | $ | 0.05 |   |
| Second  Quarter |       | 0.09            |       | 0.06 |   |
| Third  Quarter  |       | 0.14            |       | 0.06 |   |
| Fourth  Quarter |       | 0.21            |       | 0.07 |   |
|            |       |            |       |   |   |
| 2004            |       |            |       |   |   |
| First  Quarter  |       | $               | 0.16       |   | $ | 0.11 |   |
| Second  Quarter |       | 0.46            |       | 0.12 |   |
| Third  Quarter  |       | 1.01            |       | 0.26 |   |
| Fourth  Quarter |       | 0.36            |       | 0.26 |   |

 

Thequotations set forth above reflect inter-dealer prices, without retail mark-up,mark-down or commission, and may not represent actual transactions.

 

Asof May 3, 2005, there were approximately 2,051 holders of record of theCompany’s Common Stock, as shown on the records of the Transfer Agent andRegistrar of the Common Stock.  Sincemany shares may be held by investors in nominee names, such as the name oftheir broker or their broker’s nominee, the number of record holders oftenbears little relationship to the number of beneficial owners of the CommonStock.

 

TheCompany has never paid cash dividends on its Common Stock and the Board ofDirectors intends to retain all of its earnings, if any, to finance thedevelopment and expansion of its business. However, there can be no assurance that the Company can successfullyexpand its operations, or that such expansion will prove profitable.  Future dividend policy will depend upon theCompany’s earnings, capital requirements, financial condition and other factorsconsidered relevant by the Company’s Board of Directors.

 

## **ITEM6.**           MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

## ** **

The following is adiscussion of the financial condition of the Company as of February 28,2005 and February 29, 2004 and the results of operations for the fiscalyears ended February 28, 2005 and February 29, 2004.  It should be read in conjunction with thefinancial statements and the notes thereto included elsewhere in thisreport.  The following discussioncontains forward-looking statements.

 

**Introduction**

** **

The Company has generatedno significant revenue since its inception, and does not expect to generate anyoperating revenues until such time, if any, as Antineoplastons are approved foruse and sale by the FDA.  The Company’ssole source of funding is Dr. Burzynski, who funds the Company’soperations from his medical practice pursuant to certain agreements between Dr. Burzynskiand the Company*.  See*“*Certain Relationships and Related*

 

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

 

TheCompany is primarily engaged as a research and development facility of Antineoplastondrugs currently being tested for use in the treatment of cancer, and providesconsulting services.  The Company iscurrently conducting 35 FDA-approved clinical trials.  The Company holds the exclusive right in theUnited States, Canada and Mexico to use, manufacture, develop, sell,distribute, sublicense and otherwise exploit all the rights, titles and interestin Antineoplaston drugs used in the treatment of cancer, once the drugs are approvedfor sale by the FDA*.  See*“*Certain Relationships and RelatedTransactions.*”

 

**ResultsOf Operations**

** **

***Fiscal YearEnded February 28, 2005 Compared to Fiscal Year Ended February 29,2004***

** **

Research and developmentcosts were approximately $4,665,000 and $4,175,000 for the fiscal years ended February 28,2005 and February 29, 2004, respectively. The increase of $490,000 or 12% was due to an increase in personnelcosts of $804,000, and an increase in consulting and quality control costs of$18,000, offset by decreases in material costs of $287,000,  facility and equipment costs of  $18,000, and other research and developmentcosts of $27,000.

 

General andadministrative expenses were approximately $295,000 and $196,000 for the fiscalyears ended February 28, 2005 and February 29, 2004,respectively.  The increase of $99,000 or51% was due to an increase in legal and professional fees of $95,000, and anincrease in other general and administrative expenses of $4,000.

 

The Company had netlosses of approximately $4,966,000 and $4,384,000 for the fiscal years ended February 28,2005 and February 29, 2004, respectively. The increase in the net loss from 2004 to 2005 was primarily due to anoverall increase in research and development cost and general andadministrative expenses of the Company described above.

 

As of February 28,2005, the Company had a total stockholders’ deficit of $(20,791)..

 

**Liquidityand Capital Resources**

** **

TheCompany’s operations have been funded entirely by Dr. Burzynski with fundsgenerated from Dr. Burzynski’s medical practice.  Effective March 1, 1997, the Companyentered into a Research Funding Agreement with Dr. Burzynski (the “ResearchFunding Agreement”), pursuant to which the Company agreed to undertake allscientific research in connection with the development of new or improvedAntineoplastons for the treatment of cancer and Dr. Burzynski agreed tofund the Company’s Antineoplaston research for that purpose.  Under the Research Funding Agreement, theCompany hires such personnel as is required to conduct Antineoplaston research,and Dr. Burzynski funds the Company’s research expenses, includingexpenses to conduct the clinical trials. Dr. Burzynski also provides the Company laboratory and researchspace as needed to conduct the Company’s research activities.  The Research Funding Agreement also providesthat Dr. Burzynski may fulfill his funding obligations in part byproviding the Company such administrative support as is necessary for the Companyto manage its business.  Dr. Burzynskipays the full amount of the Company’s monthly and annual budget of expenses forthe operation of the Company, together with other unanticipated but necessaryexpenses which the Company incurs.  Inthe event the research results in the approval of any additional patents forthe treatment of cancer, Dr. Burzynski shall own all such patents, butshall license to the Company the patents based on the same terms, conditionsand limitations as are in the current license between Dr. Burzynski andthe 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 amountswhich Dr. Burzynski is obligated to pay under the agreement shall bereduced dollar for dollar by the following: (1) any income which theCompany receives for services provided to other companies for research and/ordevelopment of other products, less such identifiable marginal or additionalexpenses necessary to produce such income, or (2) the net proceeds of anystock offering or private placement which the Company receives during the termof the agreement up to a maximum of $1,000,000 in a given Company fiscal year.

 

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EffectiveFebruary 29, 2004, the Company and Dr. Burzynski extended the term ofthe Research Funding Agreement until February 28, 2005, with an automaticrenewal for two additional one-year terms, unless one party notifies the otherparty at least thirty days prior to the expiration of the term of the agreementof its intention not to renew the agreement. The Research Funding Agreement has been extended until February 28,2006 in accordance with its terms.

 

TheResearch Funding Agreement automatically terminates in the event that Dr. Burzynskiowns less than fifty percent of the outstanding shares of the Company, or isremoved as President 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.

 

TheCompany estimates that it will spend approximately $4.5 million in the fiscalyear ending February 28, 2006.  TheCompany estimates that ninety-six percent (96%) of this amount will be spent onresearch and development and the continuance of FDA-approved clinical trials.

 

Asdiscussed earlier, the Company intends to focus its time and resources on thedevelopment of its Antineoplastons A10 and AS2-1 for the treatment of brainstem glioma, for which it received "orphan drug" designation by theFDA in September 2004.  The FDA's responseat the Company's intended meeting with the FDA will determine the amount ofresources that the Company will be required to spend to obtain marketingapproval of this treatment.  The Companycannot estimate at this time what such amount will be.  See "Item 1.  Description of Business—Antineoplastons A10and AS2-1 for the Treatment of Brain Stem Glioma" for additionalinformation.

 

Whilethe Company anticipates that Dr. Burzynski will continue to fund theCompany’s research and FDA-related costs, there is no assurance that Dr. Burzynskiwill be able to continue to fund the Company’s operations pursuant to theResearch Funding Agreement or otherwise. However, because the net assets available to Dr. Burzynskifrom his personal assets and the assets of his medical practice currentlyexceed the Company’s projected twelve-month funding requirements, the Companybelieves Dr. Burzynski will be financially able to fund the Company’soperations at least through the fiscal year ending February 28, 2006.  **Inaddition, Dr. Burzynski’s medical practice has successfully funded theCompany’s research activities over the last 21 years and, in 1997, his medicalpractice was expanded to include traditional cancer treatment options such aschemotherapy, immunotherapy and hormonal therapy in response to FDArequirements that cancer patients utilize more traditional cancer treatmentoptions in order to be eligible to participate in the Company’s Antineoplastonclinical trials.  As a result of theexpansion of Dr. Burzynski’s medical practice, the financial condition ofthe medical practice has improved Dr. Burzynski’s ability to fund theCompany’s operations.**

 

Becausethe Company currently is entirely dependent upon the contributions for researchprovided by Dr. Burzynski under the Research Funding Agreement, theCompany would not be able to continue conducting its clinical trials if Dr. Burzynskiceased funding the Company’s research. In such event, the Company would be required to find immediate fundingwhich may not be available on acceptable terms or at all.  If this were to occur and the Company werenot able to find adequate sources of funding, the Company would be required tocease operations.  Even with Dr. Burzynski’scontinued contributions under the Research Funding Agreement, the Company maybe required to seek additional capital through equity or debt financing or thesale of assets until the Company’s operating revenues are sufficient to coveroperating costs and provide positive cash flow; however, there can be no assurancethat the Company will be able to raise such additional capital on acceptableterms to the Company.  In addition, therecan be no assurance that the Company will ever achieve positive operating cashflow.

 

## **ITEM7.**           FINANCIAL STATEMENTS

## ** **

TheCompany’s Annual Financial Statements, Notes to Financial Statements and thereport of Fitts, Roberts & Co., P.C., independent registered publicaccounting firm, with respect thereto, referred to in the Table of Contents tothe 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.

 

## **ITEM8A.**        CONTROLS AND PROCEDURES

## ** **

Within the 90 days priorto the date of this report, the Company carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingthe Company’s principal executive officer and principal financial officer, ofthe effectiveness of the Company’s disclosure controls and procedures pursuantto Rule 13a-14 under the Securities Exchange Act of 1934, as amended.  Based upon that evaluation, the Company’sprincipal executive officer and principal financial officer concluded that theCompany’s disclosure

 

16

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controls andprocedures are effective in timely alerting them to material informationrequired to be included in periodic Securities and Exchange Commission filings.

 

There were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of the evaluationabove.

 

## **ITEM8B.**        OTHER INFORMATION

## ** **

None.

 

17

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# **PART III**

# ** **

## **ITEM9.**        DIRECTORS,EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OFTHE EXCHANGE ACT

 

Setforth below are the names, ages and positions of the Company’s directors andexecutive officers:

 
| **Name**                             | ** ** | **Age** | ** ** | **Office**                                     | ** ** |
|--------------------------------------|------------|---------|------------|------------------------------------------------|------------|
| Stanislaw R. Burzynski, M.D.,  Ph.D. |       | 62      |       | Director, President,  Secretary, and Treasurer |       |
| Dudley Anderson                      |       | 59      |       | Chief Financial Officer                        |       |
| Robert Waldbillig, Ph.D.             |       | 65      |       | Vice President of Research                     |       |
| Barbara Burzynski, M.D.              |       | 64      |       | Director                                       |       |
| Michael  H. Driscoll, J.D.           |       | 59      |       | Director                                       |       |
| Carlton Hazlewood, Ph.D.             |       | 69      |       | Director                                       |       |

 

STANISLAWR. BURZYNSKI, M.D., PH.D., has been the President and Chairman of the Board ofDirectors of the Company since its inception in 1984.  He also serves as the Company’s Secretary andTreasurer.  Dr. Burzynski is aphysician in private practice in Houston, Texas specializing in the treatmentof cancer.  Dr. Burzynski is the husbandof Barbara Burzynski, M.D., who is a director of the Company.

 

Currentlylisted in Who’s Who In The World and a member in good standing with both theAmerican and World Medical Associations, Dr. Burzynski is aninternationally recognized physician and scientist who has pioneered thedevelopment and use of biologically active peptides in diagnosing, preventing,and treating cancer since 1967.  In 1967,Dr. Burzynski graduated with distinction with an M.D. degree from theMedical Academy in Lublin, Poland, finishing first in his class of 250, and he subsequentlyearned his Ph.D. in Biochemistry.

 

From1970 to 1977, he was a researcher and Assistant Professor at Baylor College ofMedicine in Houston.  At Baylor, Dr. Burzynski’sresearch was sponsored and partially funded by the National Cancer Institute.  Also at Baylor, he authored and co-authoredsixteen publications, including five concerning his research on peptides andtheir effect on human cancer.  Four ofthese publications were also co-authored by other doctors associated with M.D.Anderson Hospital and Tumor Institute and Baylor College of Medicine.  In May 1977, Dr. Burzynski receiveda Certificate of Appreciation from Baylor College of Medicine and in that sameyear founded the Company.

 

Dr. Burzynskiis a member of the American Medical Association, American Association forCancer Research, Harris County Medical Society, New York Academy of Sciences,Society for Neuroscience, Texas Medical Association, the Society of Sigma Xi, andthe Society of Neuro-oncology and has privileges at Twelve Oaks Medical Centerat River Oaks located near the Burzynski Research Institute in Houston.  He is the author of 215 scientificpublications, presenter of scientific papers at major international conventions,and has been awarded 196 patents covering 42 countries for his Antineoplastontreatment and other inventions.  Othergroups are working in conjunction with him, including researchers at theUniversity of Kurume Medical School in Japan.

 

DUDLEYANDERSON was elected as the Company’s Chief Financial Officer on October 14,2004.  From May 1996 to April 2004,Mr. Anderson served as General Manager of DRACO, Ltd. in Houston, TX.  From April 2001 to November 2001,he served as General Manager – Advanced Technology of Cooperheat-MQS, Inc.in Houston.  Mr. Anderson has nearly30 years of corporate financing experience, including raising capital, riskassessment, financial, economic and competitive analysis, budgeting andforecasting and strategic business development. He received his B.A. in Economics and M.B.A. in Finance and Marketingfrom the University of Connecticut.

 

ROBERTWALDBILLIG, PH.D., has served as Vice President of Research since 1995.  From 1993 to 1995, Dr. Waldbillig servedas Director of Preclinical Pharmacology at GeneMedicine, a Houston biotechcompany.  From 1986 to 1993, Dr. Waldbilligperformed research on growth factors in the central nervous system at the NationalInstitutes of Health.  Prior to that, heperformed research on growth factors in the brain at the University ofFlorida.  Dr. Waldbillig is theauthor of numerous publications in national and international peer reviewedscientific

 

18

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journals and is also the inventor of numerous patented anti-cancerdrugs.  Dr. Waldbillig received hisB.S. (cum laude) from Kent State University in 1969 and his Ph.D. in brainresearch from the University of Minnesota in 1973.

 

BARBARABURZYNSKI, M.D., a Director since 1984 and the wife of Dr. Burzynski, hasbeen the Chairman of the Department of Pharmacy of the Burzynski Clinic since1977.  From January 1976 to July 1977,she was a Research Assistant in the Department of Pediatrics at Baylor Collegeof Medicine.  She was a physician at theMedical Academy, Lublin, Poland, from 1970 to 1975.  Dr. Barbara Burzynski graduated with anM.D. in 1966 from the Medical Academy, Lublin, Poland, and has published sixpublications on studies with Antineoplastons.

 

MICHAELH. DRISCOLL, J.D. has been a Director of the Company since 1984.  Mr. Driscoll was formerly a judge andserved as the County Attorney of Harris County, Texas from 1981 until heretired in 1997.

 

CARLTONHAZLEWOOD, PH.D. has been a Director of the Company since 1997.  He also serves as Chairman of the IRB, anindependent review board for the Company’s clinical trials designated accordingto federal regulations.  Dr. Hazlewoodcurrently operates his own consulting company, Research Consultant’sInternational, and is president of Petroclean, L.L.C.  He is also the owner of Applied AdvancedTechnology and BRI-IRB of Houston.  Inaddition, Dr. Hazlewood was employed in various capacities by the BaylorCollege of Medicine from 1965 until December 31, 1997, where he was aprofessor of Molecular Biology and Biophysics. Dr. Hazlewood received his Ph.D. in Medical Physiology from theUniversity of Tennessee.  Dr. Hazelwoodis a prolific writer on medical topics and has been recognized for his researchwith numerous awards, honors and research grants.

 

**AuditCommittee Financial Expert**

** **

TheCompany has not established an Audit Committee. Therefore, the Board of Directors has not designated any of its membersas an “audit committee financial expert” as defined by the rules andregulations of the Securities and Exchange Commission.

 

**Section 16(a) BeneficialOwnership Reporting Compliance**

** **

Basedsolely upon a review of Forms 3 and 4 and amendments thereto furnished to theCompany under Rule 16a-3(e) during the fiscal year ended February 28,2005 and Form 5 and amendments thereto furnished to the Company withrespect to such period, the Company is not aware of any director, officer, orbeneficial owner of more than 10% of any class of equity securities of theCompany registered pursuant to Section 12 of the Securities Exchange Actof 1934 (the “Exchange Act”) that has failed to file on a timely basis, asdisclosed in the above forms, reports required by Section 16(a) ofthe Exchange Act during the Company’s most recent fiscal year.

 

**Code of Ethics**

** **

TheCompany has adopted a code of ethics that applies to our chief executiveofficer, chief financial officer, chief accounting officer and all personsperforming similar functions.  The Companyhereby undertakes to provide a copy of this code of ethics to any person,without charge upon request made in writing to: Investor Relations, 9432 OldKaty Road, Suite 200, Houston, Texas 77055.

 

## **ITEM10.**         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.,   |       | 2003                     |       | -0-                         |       | -0-        |       | -0- |   | -0- |   | -0- |   | -0- |   | -0- |   |
| Ph.D.,  President, Secretary     |       | 2004                     |       | -0-                         |       | -0-        |       | -0- |   | -0- |   | -0- |   | -0- |   | -0- |   |
| and  Treasurer(1)                |       | 2005                     |       | -0-                         |       | -0-        |       | -0- |   | -0- |   | -0- |   | -0- |   | -0- |   |
| Dudley  Anderson, Chief          |       | 2003                     |       | -0-                         |       | -0-        |       | -0- |   | -0- |   | -0- |   | -0- |   | -0- |   |
| Financial  Officer(2)            |       | 2004                     |       | -0-                         |       | -0-        |       | -0- |   | -0- |   | -0- |   | -0- |   | -0- |   |
|                             |       | 2005                     |       | -0-                         |       | -0-        |       | -0- |   | -0- |   | -0- |   | -0- |   | -0- |   |
| Robert  Waldbillig,              |       | 2003                     |       | $                           | 113,400    |       | -0-        |   | -0- |   | -0- |   | -0- |   | -0- |   | -0- |   |
|                                  |            |                          |            |                             |            |            |            |  |  |  |  |  |  |  |  |  |  |  |

 

19

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| ** **                       | ** ** | **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** | ** ** |
| ** **                       | ** ** | ** **               | ** ** | **($)**                     | ** ** | **($)**    | ** ** | **($)** | ** ** | **($)** | ** ** | **($)** | ** ** | **($)** | ** ** | **($)** | ** ** |
| Ph.D.,  Vice President of        |       | 2004                     |       | $                           | 109,337    |       | -0-        |   | -0- |   | -0- |   | -0- |   | -0- |   | -0- |   |
| Research                         |       | 2005                     |       | $                           | 118,965    |       | -0-        |   | -0- |   | -0- |   | -0- |   | -0- |   | -0- |   |

 

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(1)           In May of 2000, Dr. Burzynski began drawing his entire salarythrough his medical practice and is not currently compensated by the Companyfor his services.

(2)           Mr. Anderson became Chief Financial Officer on October 14,2004.  He receives his entire salary fromthe Burzynski Clinic.  During the fiscalyear ended February 28, 2005, none of Mr. Anderson’s salary wasallocated to the Company; however, effective March 1, 2005, 50% of Mr. Anderson’ssalary is allocated to the Company.

 

**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 directoralso serving as a director of the IRB, the independent review board for theCompany’s clinical trials designated according to federal regulations, iscompensated by the IRB approximately $1,600****annually for serving as a director of the IRB.**

 

20

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## **ITEM11.**      SECURITY OWNERSHIPOF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

## ** **

The following table setsforth, as of May 3, 2005, the number of outstanding shares of Common Stock(the Company’s only class of voting securities) owned by (i) each personknown by the Company to beneficially own more than 5% of its outstanding CommonStock, (ii) each director, (iii) each named executive officer, and (iv) allofficers and directors as a group.  The addressfor all of the beneficial owners listed below is 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                     | %          |
| Dudley  Anderson                                                     |       | 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 (6 persons) |       | 107,014,190                                     |       | 81.4                     | %          |

 

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*              Less than onepercent.

 

(1)           Percentages shownare based upon 131,388,444 shares of Common Stock outstanding as of May 3,2005.  Certain shares are deemedbeneficially owned by more than one person listed in the table.

 

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

 

## **ITEM12.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

## ** **

Dr. Burzynskiis the President, Secretary, Treasurer and Chairman of the Board of the Company,as well as the beneficial owner of 81.0% of the Company’s outstanding CommonStock.  Since 1983, Dr. Burzynskihas personally funded and supported the Company’s operations out of fundsgenerated from his medical practice pursuant to various agreements with the Company.

 

**LicenseAgreement**

** **

TheCompany entered into the License Agreement with Dr. Burzynski which givesthe Company the exclusive right in the Territory (composed of the UnitedStates, Canada and Mexico) to use, manufacture, develop, sell, distribute, sublicenseand 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 Agreement will terminate upon theearlier of the expiration of the last patent licensed to the Company, ortermination by Dr. Burzynski, at his option, if he is removed as adirector or officer of the Company without his consent, if the Company filesfor bankruptcy or is the subject of any proceeding under applicable bankruptcylaws where such proceeding is not dismissed within 90 days from the date apetition is filed, or if any shareholder or group of shareholders acting inconcert becomes the beneficial owner of the Company’s securities having votingpower equal to or greater than the voting power of the securities Dr. Burzynskiholds.  Amendments to the LicenseAgreement on April 24, 1984 and on March 1, 1990 granted Dr. Burzynskithe limited right to manufacture, use, and exploit Antineoplastons in theCompany’s exclusive territory solely for the purpose of enabling Dr. Burzynskito treat patients in his medical practice until such date that the FDA mayapprove the sale of Antineoplastons for the treatment of cancer in the UnitedStates.

 

**ResearchFunding Arrangements**

** **

EffectiveMarch 1, 1997, the Company entered into the Research Funding Agreementwith Dr. Burzynski and terminated all of the prior funding agreementsbetween the Company and Dr. Burzynski. Pursuant to the Research Funding Agreement:

 

21

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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 suchpersonnel as is required to fulfill its obligations 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 providingsuch administrative staff as is necessary for the Company to manage itsbusiness, at no 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 the Company of the monthly budgetshall be made in two equal installments on the first and fifteenth of eachmonth;

 

•              In the eventthe research described in the agreement results in the approval of anyadditional patents, Dr. Burzynski shall own all such patents, but shalllicense to the Company the patents based on the same terms, conditions andlimitations as 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 bereduced dollar 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 to producesuch income (such as the purchase of chemicals, products or equipment solelynecessary 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.

 

EffectiveFebruary 29, 2004, the term of the Research Funding Agreement was extendedto February 28, 2005, and is automatically renewable for two additionalone-year terms thereafter, unless one party notifies the other party at leastthirty days prior to the expiration of the term of the agreement of itsintention 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 ofthe outstanding shares of the Company, or is removed as President and/orChairman of the Board of the Company, unless Dr. Burzynski notifies theCompany in writing of his intention to continue the agreement notwithstandingthis automatic termination provision. Subject to the foregoing, the term of the Research Funding Agreement iscurrently extended until February 28, 2006.

 

**RoyaltyAgreement**

** **

TheCompany and Dr. Burzynski entered into the Royalty Agreement, pursuant towhich Dr. Burzynski agreed to act as the principal clinical investigatorof the clinical trials necessary for obtaining FDA approval for

 

22

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interstate marketing of Antineoplastons. The Company and Dr. Burzynski agreed that in the event the Companyreceives FDA approval for interstate marketing and distribution, of which therecan be no assurance, the Company shall pay Dr. Burzynski a royalty of 10%(ten percent) of the Company’s gross income, which royalty shall be paid on allgross receipts from all future sales, distributions and manufacture ofAntineoplastons.

 

Pursuantto the Royalty Agreement, Dr. Burzynski retains the right to either (i) produceAntineoplaston products for use in his medical practice to treat up to 1,000patients, at any one time, without paying any fees to the Company or (ii) purchasefrom the Company Antineoplaston products to treat up to 1,000 patients, at anyone time, at a price equal to cost plus 10% (ten percent).  Dr. Burzynski has the right to lease orpurchase all the manufacturing equipment located at 12707 Trinity Drive,Stafford, Texas at a fair market price. The Royalty Agreement further provides that the Company will have theright, when and if Antineoplastons are approved for use and sale by the FDA, (i) toproduce all Antineoplaston products to be sold or distributed in the UnitedStates, Canada and Mexico for the treatment of cancer and (ii) to leasefrom Dr. Burzynski the entire premises located at 12707 Trinity Drive,Stafford, Texas at terms and rates competitive with those available in the realestate market at that time, provided that Dr. Burzynski does not need thefacility for his use.

 

**Other Transactions**

** **

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

 

## **ITEM13.**         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)).     |
|                 |       |                                                                                                                                                                                                                                                                                                                  |
| 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                                                                                                             |

 

23

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|   |   | 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)).                   |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 14     |   | Code of Ethics of Burzynski  Research Institute, Inc.                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 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).                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 31.2   |   | Certification pursuant to Rules 13a-14  and 15d-14 of the Securities Exchange Act of 1934, as amended, filed herewith  (Chief 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).                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 32.2   |   | Certification furnished  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer).                                                                                                                                                                 |

 

24

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## **ITEM14.**         PRINCIPAL ACCOUNTANT FEES AND SERVICES

## ** **

The following table setsforth the aggregate fees billed to the Company by its independent registeredpublic accounting firm, Fitts, Roberts & Co., P.C., for fiscal yearsended February 28, 2005 and February 29, 2004, respectively:

 
| ** **         | ** ** | **2005** | ** ** | **2004** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Audit Fees (1)     |       | $        | 36,560     |     | $          | 27,100 |   |
|               |       |     |       |     |       |
| Audit-Related Fees |       | $        | 0          |     | $          | 0 |   |
|               |       |     |       |     |       |
| Tax Fees           |       | $        | 0          |     | $          | 0 |   |
|               |       |     |       |     |       |
| All Other Fees     |       | $        | 0          |     | $          | 0 |   |
|               |       |     |       |     |       |
| Total              |       | $        | 36,560     |     | $          | 27,100 |   |

 

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(1)           The 2005 amountincludes estimated fees of $16,000 to complete the audit.

 

**Audit Fees** werefor professional services rendered for the audit of BRI’s financial statementsand review of the interim financial statements included in quarterly reportsand services that are normally provided by Fitts,Roberts & Co., P.C. in connection with statutory and regulatoryfilings or engagements.

 

**Audit-Related Fees**are for assurance and related services that are reasonably related to theperformance of the audit or review of BRI’s financial statements and are notreported under “Audit Fees.”  There wereno Audit-Related Fees incurred in fiscal years 2005 or 2004.

 

**Tax Fees** werefor professional services for federal and state tax compliance, tax advice andtax planning.  There were no Tax Feesincurred in fiscal years 2005 or 2004.

 

**All Other Fees**were for services other than the services reported above.  There were no Other Fees incurred in fiscalyears 2005 or 2004.

 

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

 

25

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### **SIGNATURES**

### ** **

In accordance with Section 13or 15(d) of the Securities Exchange Act of 1934, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 
|                          | **BURZYNSKI RESEARCH INSTITUTE,  INC.** |
|-------------------------------|-----------------------------------------|
|                          |                                    |
|                          |                                    |
|                          | By:                                     | /s/ Stanislaw R. Burzynski |
|                          |                                    | Stanislaw R. Burzynski,  President, |
|                          |                                    | Secretary, Treasurer and  Chairman of the |
|                          |                                    | Board of Directors |
|                          |                                    |   |
|                          |                                    |   |
|                          | By:                                     | /s/ Dudley Anderson |
|                          |                                    | Dudley Anderson, Chief  Financial Officer |
|                          |                                    |
| Date:  May 27, 2005 |                                    |

 

26

----

 

Each person whose signatureappears below constitutes and appoints Dr. Stanislaw R. Burzynski his/hertrue and 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 27, 2005 |
| President, Secretary,  Treasurer and |                    |
| Chairman of the Board of  Directors  |                    |
|                                 |                    |
|                                 |                    |
| /s/ Barbara Burzynski                |                    |   |
| Barbara Burzynski                    | Date: May 27, 2005 |
| Director                             |                    |
|                                 |                    |
|                                 |                    |
| /s/ Michael H. Driscoll              |                    |   |
| Michael H. Driscoll                  | Date: May 27, 2005 |
| Director                             |                    |
|                                 |                    |
|                                 |                    |
| /s/ Carlton Hazlewood                |                    |   |
| Carlton Hazlewood                    | Date: May 27, 2005 |
| Director                             |                    |

 

27

----

 

**Burzynski Research Institute, Inc.**

 

 

**Financial Statements**

 

 

**For the years ended**

**February 28, 2005 and February 29,2004**

 

----

 

CONTENTS

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

 

F-2

----

 

REPORT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM

 

To the Board of Directors and Stockholders

   ofBurzynski Research Institute, Inc.

 

 

We have audited the accompanying balancesheets of Burzynski Research Institute, Inc. as of February 28, 2005and February 29, 2004, and the related statements of operations,stockholders’ equity, and cash flows for the years then ended.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan andperform the audits to obtain reasonable assurance about whether the financial statementsare free of material misstatement.  Anaudit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve 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, 2005 and February 29, 2004 and the results of theiroperations and their cash flows for the years then ended, in conformity with U.S.generally accepted accounting principles.

 

 
| /s/ Fitts, Roberts & Co., P.C. |   |
|-----------------------------------------|--------|
|                                    |
| May 26, 2005                       |
| Houston, Texas                          |

 

F-3

----

 

**BURZYNSKIRESEARCH INSTITUTE, INC.**

**BALANCE SHEETS**

**February 28,2005 and February 29, 2004**

 
| ** **                                                                                                | ** ** | **2005**    | ** ** | **2004**    | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|
| ASSETS                                                                                                    |       |        |       |        |       |
|                                                                                                      |       |        |       |        |       |
| Current  assets                                                                                           |       |        |       |        |       |
|                                                                                                      |       |        |       |        |       |
| Cash and  cash equivalents (Note 1)                                                                       |       | $           | 16,984     |        | $          | 18,962 |   |
| Other  current assets                                                                                     |       | —      |       | 1,000       |       |
|                                                                                                      |       |        |       |        |       |
| Total  current assets                                                                                     |       | 16,984      |       | 19,962      |       |
|                                                                                                      |       |        |       |        |       |
| Property and  equipment, net of accumulated depreciation and amortization (Notes 1,3 and 5)               |       | 48,870      |       | 54,150      |       |
|                                                                                                      |       |        |       |        |       |
| Total assets                                                                                              |       | $           | 65,854     |        | $          | 74,112 |   |
|                                                                                                      |       |        |       |        |       |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                |       |        |       |        |       |
|                                                                                                      |       |        |       |        |       |
| Current  liabilities                                                                                      |       |        |       |        |       |
|                                                                                                      |       |        |       |        |       |
| Accounts  payable                                                                                         |       | $           | 47,249     |        | $          | 56,114 |   |
| Accrued  liabilities                                                                                      |       | 39,396      |       | 50,624      |       |
|                                                                                                      |       |        |       |        |       |
| Total  current liabilities                                                                                |       | 86,645      |       | 106,738     |       |
|                                                                                                      |       |        |       |        |       |
| Total  liabilities                                                                                        |       | 86,645      |       | 106,738     |       |
|                                                                                                      |       |        |       |        |       |
| Commitments,  contingencies and related parties (Notes 2, 5 and 8)                                        |       |        |       |        |       |
|                                                                                                      |       |        |       |        |       |
| Stockholders’  equity (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                                                                               |       | 65,876,210  |       | 60,898,836  |       |
| Discount on  common stock                                                                                 |       | (100        | )          | (100        | )          |
| Retained  deficit                                                                                         |       | (66,028,290 | )          | (61,062,751 | )          |
|                                                                                                      |       |        |       |        |       |
| Total  stockholders’ equity (deficit)                                                                |       | (20,791     | )          | (32,626     | )          |
|                                                                                                      |       |        |       |        |       |
| Total  liabilities and stockholders’ equity                                                          |       | $           | 65,854     |        | $          | 74,112 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

F-4

----

 

**BURZYNSKIRESEARCH INSTITUTE, INC.**

**STATEMENTS OF OPERATIONS**

**For theYears Ended February 28, 2005 and February 29, 2004**

 
| ** **                                | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|-------------------------------------------|------------|------------|------------|------------|------------|
|                                      |       |       |       |       |       |
| Revenue                                   |       |       |       |       |       |
| Other income                              |       | $          | —     |       | $          | 500 |   |
|                                      |       |       |       |       |       |
| Operating  expenses                       |       |       |       |       |       |
| Research and  development (Notes 1 and 2) |       | 4,665,124  |       | 4,175,174  |       |
| General and  administrative               |       | 295,135    |       | 195,732    |       |
| Depreciation  (Notes 1 and 3)             |       | 5,280      |       | 13,424     |       |
|                                      |       |       |       |       |       |
| Total  operating expenses                 |       | 4,965,539  |       | 4,384,330  |       |
|                                      |       |       |       |       |       |
| Net loss  before provision for taxes      |       | (4,965,539 | )          | (4,383,830 | )          |
|                                      |       |       |       |       |       |
| Provision  for income tax (Notes 1 and 6) |       | —     |       | —     |       |
|                                      |       |       |       |       |       |
| Net loss                                  |       | $          | (4,965,539 | )          | $          | (4,383,830 | ) |
|                                      |       |       |       |       |       |
| Earnings per  share information:          |       |       |       |       |       |
| Basic and  diluted                        |       |       |       |       |       |
| (Loss) per  common share                  |       | $          | (0.04      | )          | $          | (0.03 | ) |

 

The accompanying notes are an integral part of these financialstatements.

 

F-5

----

 

**BURZYNSKI RESEARCH INSTITUTE, INC.**

**STATEMENTSOF STOCKHOLDERS’ EQUITY**

**For the Years Ended February 28, 2005 and February 29,2004**

 
| ** **                                                                | ** ** | **Common  Stock** | ** ** | **Additional  Paid-in  Capital** | ** ** | **Discount on  Common  Stock** | ** ** | **Retained  Deficit** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------|------------|----------------------------------|------------|--------------------------------|------------|-----------------------|------------|
|                                                                      |       |              |       |                             |       |                           |       |                  |       |
| Balance February 28,  2003                                           |       | $                 | 131,389    |                             | $          | 56,542,945                     |       | $                     | (100       | ) | $ | (56,678,921 | ) |
|                                                                      |       |              |       |                             |       |                           |       |                  |       |
| Cash  contributed by S.R. Burzynski M.D., Ph.D.                           |       | —            |       | 679,000                          |       | —                         |       | —                |       |
|                                                                      |       |              |       |                             |       |                           |       |                  |       |
| FDA clinical  trial expenses paid directly by S.R. Burzynski M.D., Ph. D. |       | —            |       | 3,676,891                        |       | —                         |       | —                |       |
|                                                                      |       |              |       |                             |       |                           |       |                  |       |
| Net loss                                                                  |       | —            |       | —                           |       | —                         |       | (4,383,830            | )          |
|                                                                      |       |              |       |                             |       |                           |       |                  |       |
| 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 | ) |

 

The accompanying notes arean integral part of these financial statements.

 

F-6

----

 

**BURZYNSKIRESEARCH INSTITUTE, INC.**

**STATEMENTS OF CASH FLOWS**

**For theYears Ended February 28, 2005 and February 29, 2004**

 
| ** **                                                                       | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|----------------------------------------------------------------------------------|------------|-----------|------------|-----------|------------|
|                                                                             |       |      |       |      |       |
| CASH FLOWS  FROM OPERATING ACTIVITIES                                            |       |      |       |      |       |
| Net loss                                                                         |       | $         | (4,965,539 | )         | $          | (4,383,830 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities: |       |      |       |      |       |
| Depreciation                                                                     |       | 5,280     |       | 13,424    |       |
| FDA clinical  trial expenses paid directly by S.R. Burzynski M.D., Ph. D.        |       | 4,225,374 |       | 3,676,891 |       |
| (Increase)  decrease in                                                          |       |      |       |      |       |
| Other  current assets                                                            |       | 1,000     |       | (1,000    | )          |
| Increase  (decrease) in                                                          |       |      |       |      |       |
| Accounts  payable                                                                |       | (8,865    | )          | 32,730    |       |
| Accrued  liabilities                                                             |       | (11,228   | )          | 3,556     |       |
|                                                                             |       |      |       |      |       |
| NET CASH  (USED) IN OPERATING ACTIVITIES                                         |       | (753,978  | )          | (658,229  | )          |
|                                                                             |       |      |       |      |       |
| CASH FLOWS  FROM INVESTING ACTIVITIES                                            |       |      |       |      |       |
| Purchases of  property and equipment                                             |       | —    |       | (3,735    | )          |
|                                                                             |       |      |       |      |       |
| NET CASH  (USED) IN INVESTING ACTIVITIES                                         |       | —    |       | (3,735    | )          |
|                                                                             |       |      |       |      |       |
| CASH FLOWS  FROM FINANCING ACTIVITIES                                            |       |      |       |      |       |
| Additional  paid-in capital                                                      |       | 752,000   |       | 679,000   |       |
|                                                                             |       |      |       |      |       |
| NET CASH  PROVIDED BY FINANCING ACTIVITIES                                       |       | 752,000   |       | 679,000   |       |
|                                                                             |       |      |       |      |       |
| NET INCREASE  (DECREASE) IN CASH                                                 |       | (1,978    | )          | 17,036    |       |
|                                                                             |       |      |       |      |       |
| CASH AT  BEGINNING OF YEAR                                                       |       | 18,962    |       | 1,926     |       |
|                                                                             |       |      |       |      |       |
| CASH AT END  OF YEAR                                                             |       | $         | 16,984     |      | $          | 18,962 |   |
|                                                                             |       |      |       |      |       |
| SUPPLEMENTAL  CASH FLOW DISCLOSURES:                                             |       |      |       |      |       |
| Cash Paid  During the Year For:                                                  |       |      |       |      |       |
| Interest                                                                         |       | $         | 55,843     |      | $          | 58,023 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

F-7

----

 

BURZYNSKI RESEARCH INSTITUTE, INC.

NOTES TOFINANCIAL STATEMENTS

 

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

 

# Background andBasis of Presentation

 

The financial statements of BurzynskiResearch Institute, Inc. (BRI or the Company), a Delaware corporation,include expenses incurred related to clinical trials, which were sanctioned bythe U.S. Food and Drug Administration (FDA) in 1993, for antineoplaston drugsused in the treatment of cancer.  Theseexpenses incurred directly by S.R. Burzynski, M.D., Ph.D. (Dr. Burzynski)have been reported as research and development costs and as additional paid-incapital.  Other funds received from Dr. Burzynskihave also been reported as additional paid-in capital.  Expenses related to Dr. Burzynski’smedical practice (unrelated to the clinical trials) have not been included inthese financial statements.  Dr. Burzynskiis the President, Chairman of the Board and owner of over 80% of theoutstanding stock of Burzynski Research Institute, Inc., and also is theinventor and original patent holder of certain drug products knows as “antineoplastons”,which he has licensed to the Company.

 

The Company and Dr. Burzynski haveentered various agreements, as further described in Note 2, which provide theCompany 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 drug is approved for sale by the FDA.

 

BRI’s administrative offices are located inHouston, Texas; its research and production facilities are in Stafford, Texas.The Company operates primarily as a research and development facility ofantineoplaston drugs currently being tested for the use in the treatment ofcancer, and provides consulting services. Segment information is not presented since all of the Company’soperations are attributed to a single reportable segment.  The Company has had no significant revenuefrom external sources.  BRI is currentlyconducting clinical trials on various antineoplastons in accordance with FDAregulations, however, at this time none of the antineoplaston drugs havereceived FDA approval; further, there can be no assurance FDA approval will begranted.

 

Economic Dependency

 

BRI has generated no significant revenuessince its inception.  As of February 28,2005, the Company had a working capital deficit of approximately $70,000 andaccumulated deficit of approximately $66,000,000.  For the years ended February 28, 2005and February 29, 2004 the Company incurred losses of approximately$4,966,000 and $4,384,000, respectively.

 

F-8

----

 

Dr. Burzynski has funded the capital and operational needs of theCompany since its inception from revenues generated through his medicalpractice pursuant to various agreements as described in Note 2.

 

BRI iseconomically dependent on its funding from Dr. Burzynski through hismedical practice.  Management estimatesthat approximately one-third of Dr. Burzynski’s patients are admitted andtreated as part of the clinical trial programs which the FDA regulates.  The FDA imposes numerous regulations andrequirements regarding these patients and the Company is subject to inspectionat any time by the FDA.  Theseregulations are complex and subject to interpretation and though it ismanagement’s intention to comply fully with all such regulations, there is therisk that the Company is not in compliance and is thus subject to sanctionsimposed by the FDA.

 

In addition,as with any medical practice, Dr. Burzynski is subject to potential claimsby patients and other potential claimants commonly arising out of the operationof a medical practice.  The risksassociated with Dr. Burzynski’s medical practice directly affect hisability to fund the operations of BRI.

 

It is theintention of the directors and management to seek additional capital throughthe sale of securities.  The proceedsfrom such sales will be used to fund BRI’s operating deficit until it achieves positiveoperating cash flow.  However, there canbe no assurance that the Company will be able to raise such additional capital.

 

Significant Accounting Policies

 

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

 

The Company considers allhighly liquid investments purchased with an original maturity of three monthsor less to be cash equivalents.

 

## ***Property and Equipment***

 

Property andequipment are recorded at cost and depreciated using the straight-line methodover the estimated useful lives of the assets, which range from 5 to 31.5years.  Expenditures for major renewalsand betterments that extend the useful lives of property and equipment arecapitalized; maintenance and repairs are charged against earnings as incurred.  Upon disposal of assets, the related cost andaccumulated depreciation are removed from the accounts and any resulting gainor loss is recognized currently.

 

F-9

----

 

## ***Income Taxes***

 

The Companyuses the liability method of accounting for income taxes, under which deferredincome taxes are recognized for the tax consequences of temporary differencesby applying the enacted statutory tax rate applicable to future years todifferences between financial statement carrying amounts and the tax basis ofexisting assets and liabilities. Valuation allowances are established when necessary to reduce deferredtax assets to the amount expected to be realized.  Income tax expense is the tax payable or refundablefor the period plus or minus the change during the period in deferred taxassets and liabilities.  The costsincurred related to the conduct of FDA approved clinical trials incurreddirectly by Dr. Burzynski within his medical practice are taxed directlyto Dr. Burzynski and are not included in the Company’s tax provision.  The portion of the Texas franchise tax thatis based on income is treated as income taxes and included in the income taxprovision.

 

***LossPer Common Share***

 

Basic anddiluted loss per common share information for all periods is presented underthe requirements of FASB Statement No. 128, “Earnings per share”.  Basic loss per common share has been computedusing the weighted average number of common shares outstanding during theperiod.  Potentially dilutive securitieshave been excluded from the computation of diluted loss per common share, astheir inclusion would be antidilutive.

 

### ***Management Estimates***

###  

Thepreparation of financial statements in conformity with generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect reported amounts of assets and liabilities at the dates of thefinancial statements and the reported amounts of revenues and expenses duringthe reported periods.  The significantestimates are the allocation of payroll and other expenses between the clinicaltrial expenses reported with Burzynski Research Institute, Inc. expensesand Dr. Burzynski’s medical practice expenses.  Department managers review at least quarterlythe duties of each employee in their department and estimate the percentage oftime each employee spends between clinical trials and the medicalpractice.  Payroll costs are allocatedbetween clinical trials and the medical practice based on these percentages.  Other expenses are allocated based on thepercentage of  payroll allocated toeither clinical trials or the medical practice. Management believes that the estimates and allocations arereasonable.  Actual results could differfrom these estimates.

 

F-10

----

 

***StockOptions***

 

As permitted under generally acceptedaccounting principles, stock-based awards granted to employees are accountedfor following APB 25, as further described in Note 7.  Accordingly, the Company has not recognizedcompensation expense for its stock-based awards to employees.  No additional compensation expense would beincurred during 2005 or 2004 if compensation costs for the Company’sstock-based compensation plans had been determined based on the fair valueapproach of SFAS 123.

 

In December 2004, the Financial AccountingStandards Board (“FASB”) published FASB Statement No. 123 (revised 2004), “Share-BasedPayment” (FAS 123(R)” or the “Statement”). FAS 123 (R) requires that the compensation cost relating to share-basedpayment tranasactions, including grants of employee stock options, berecognized in financial statements.  Thatcost will be measured based on the fair value of the equity or liabilityinstruments issued.  FAS 123 (R) covers awide range of share-based compensation arrangements including stock options,restricted share plans, performance-based awards, share appreciation rights,and employee share purchase plans.  FAS123 (R) is a replacement of FASB Statement No. 123,  *Accounting for Stock-BasedCompensation*, 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 torequire entities to measure the cost of employee services received in exchangefor stock options based on the grant-date fair value of the award, and torecognize the cost over the period the employee is required to provide servicesfor 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 beginning of its first annual period that begins after December 15,2005,  which will be the year ending February 28,2007.

 

FAS 123 (R) allows two methods fordetermining the effects of the transition: the modified prospective transitionmethod and the modified retrospective 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 of the effective date, compensation costrelated to the nonvested portion of awards outstanding as of that date would bebased on the grant-date fair value of those awards as calculated under the orginalprovisions of Statement No. 123; that is, an entity would not remeasurethe grant-date fair value estimate of the unvested protion of awards grantedprior to the effective date.

 

F-11

----

 

An entity will have the further option toeither apply the Statement to only the quarters in the period of adoption andsubsequent periods, or apply the Statement to all quarters in the fiscal yearof adoption.  Under the modifiedretrospective method of transition, an entity would revise its previouslyissued financial statements to recognize employee compensation cost for priorperiods presented in accordance with the original provisions of  Statement No. 123.

 

The Company has not yet completed its studyof the transition methods or made any decisions about how it will adopt FAS 123(R).

 

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

###  

Research and development cost are charged tooperations in the period incurred. Equipment used in research and development activities, which havealternative uses, are capitalized.

 

***Fair Value of FinancialInstruments***

 

The carrying value of cash, receivables and accountspayables approximates fair value due to the short maturity of theseinstruments.  None of the financialinstruments are held for trading purposes.

 

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

 

The Company has agreements with its majorityshareholder and President Dr. Burzynski as further described below:

 

License Agreement

 

Dr. Burzynski is the owner of patentsinvolving the formulation, preparation, manufacture, production, use, dosageand treatment with antineoplastons.  TheUnited States Patent Office and Patent Offices and Patent Officers oftwenty-eight other countries have issued the patents.  The Patents for cancer treatment anddiagnosis in the United States and Canada are licensed to the Company pursuantto a License Agreement.

 

F-12

----

 

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

 

The Agreement gives Dr. Burzynski theright to distribute, use and otherwise exploit antineoplastons in connectionwith treatment of patients in his medical practice until such time as the FDAapproves them for sale.

 

The License Agreement will terminate upon theearlier of the expiration of the last patent licensed to the Company, or terminationby Dr. Burzynski, at his option, if he is removed as a director or officerof the Company without his consent, if the Company files for bankruptcy or ifany shareholder or group of shareholders acting in concert becomes thebeneficial owner of the Company’s securities having voting power equal to orgreater than the voting power of the securities Dr. Burzynski holds.

 

Under the License Agreement, the Companycurrently owns exclusive rights to seven (7) issued United States Patents,three (3) issued Canadian Patents and one (1) issued Mexican Patent.  The Company has one patent applicationpending in the United States and one patent application pending in Canada.

 

The five initial United States Patents (the “InitialPatents”) relate to: (i) Determination of Antineoplastons in body tissueor fluids as a testing procedure to aid in the diagnosis of cancer; (ii) Processes for the preparation of purified fractions of Antineoplastons fromhuman urine; (iii) Processes for the synthetic production of Antineoplastonsand methods of treating neoplastic disease (cancer); (iv) Administrationof Antineoplastons to humans; and (v) Methods of synthesizing A-10.  The Initial Patents expire from December 12,2001 to January 11, 2009; however, the Company does not believe theexpiration of any of the Initial Patents will have a material adverse effect onthe Company.

 

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

 

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

 

F-13

----

 

TheCompany has previously reported the issuance of an eighth United States patentrelated to the synthesis of 4-Phenylbutric Acid, but has determined thatsuch patent is not applicable to the formulation, preparation, manufacture,production, use, dosage and treatment of cancer with Antineoplastons.

 

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

 

The Mexican Patent relates to a treatmentregimen for the administration of phenylacetylglutamine.  This patent will expire January 14,2019.

 

The pending patent application in the United Statesrelates to a divisional application to the 2001 U.S. Patent.  This patent application has been allowed andis expected to issue in late 2005. Following grant, this patent will expire in the year 2018.

 

The pending patent application in Canada relates to atreatment regimen for the administration of phenylacetylglutamine.  Should this patent be granted, of which therecan be no assurance, it would expire in the year 2019.

 

Research Funding Agreement

 

Effective March 1, 1997, Dr. Burzynskirestructured his funding arrangement with the Company and entered into aResearch Funding Agreement.  Under thisagreement 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 hire such personnel as is requiredto fulfill its obligations under the agreement.

 

2.                                       Dr. Burzynskiagrees to fund in its entirety all basic research, which BRI undertakes inconnection with the development of other antineoplastons or refinements toexisting antineoplastons for the treatment of cancer.

 

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

 

F-14

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4.                                       Dr. Burzynskiagrees to provide BRI such laboratory and research space as BRI needs at theTrinity 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 shallown all such patents, but shall license to BRI the patents based on the sameterms, conditions and limitations as is in the current license between theparties.

 

6.                                       Dr. Burzynskishall have unlimited and free access to all equipment which BRI owns, so longas such use is not in conflict with BRI’s use of such equipment, includingwithout limitation to all equipment used in manufacturing of antineoplastonsused in the clinical trials.

 

7.                                       Theamounts, which Dr. Burzynski is obligated to pay under the agreement,shall be reduced 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, unlessone party notifies the other party at least thirty days prior to the expirationof the term of the agreement of its intention not to renew the agreement.  In addition to the foregoing terminationprovisions, the agreement automatically terminates in the event that Dr. Burzynskiowns less than fifty percent of the outstanding shares of the Company, or isremoved as President 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 theResearch Funding Agreement is currently extended until February 28, 2006.

 

F-15

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Royalty Agreement

 

The Company entered into a royalty agreementwith Dr. Burzynski whereby upon receiving FDA approval for interstatemarketing and distribution, the Company agrees to pay Dr. Burzynski aroyalty interest equivalent to 10% of the Company’s gross income, which royaltyinterest shall include gross receipts from all future sales, distributions andmanufacture of antineoplastons.  Dr. Burzynskiwill have the right to either produce antineoplaston products for use in hismedical practice to treat up to 1,000 patients without paying any fees to theCompany, or purchase from the Company antineoplaston products for use in hismedical practice to treat up to 1,000 patients at a price of the Company’s costto produce the antineoplaston products plus 10%.  Dr. Burzynski will also have the rightto either lease or purchase all the manufacturing equipment located at 12707Trinity Drive, Stafford, Texas at a fair market price.  The Company will also have the right to leasefrom Dr. Burzynski the entire premise located at 12707 Trinity Drive,Stafford, Texas at arms-length terms at rates competitive with those availablein the market at that time, provided that Dr. Burzynski does not need thefacility for his use.

 

The term of this agreement is indefinite andwill continue until such time as both parties agree it is not in their mutualinterest to continue.

 

Other Related Party Transactions

 

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

 

Dr. Burzynski owns the productionfacility located at Trinity Drive.  Thereis no formal lease agreement between Dr. Burzynski and BRI, however, theResearch Funding Agreement described above provides that Dr. Burzynskiwill allow the Company the use of the building. In addition, the Royalty Agreement states that after FDA approval isgranted (though approval is not assured) the Company may rent the facility atcompetitive rates if Dr. Burzynski does not need the facility for hisuse.  The actual facility costs areincluded in the financial statements as set forth in note 5.  In addition, Dr. Burzynski’s medicalclinic performs certain administrative functions such as accounting, and allowsBRI the use of some office space at no charge to the Company.  Since May of 2000, Dr. Burzynski’sentire salary is paid through his medical practice and he is not compensated byBRI for his services.

 

F-16

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The Companyhas received all significant funding from Dr. Burzynski through eithercash contributed to BRI or the payment of the cost to conduct FDA approvedclinical trials through his medical practice, as disclosed in Note 1.  Following is a summary of the capitalcontributed and clinical trial costs paid by Dr. Burzynski.

 
| ** **                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |
| Capital  contributed              |       | $        | 752,000    |     | $          | 679,000 |   |
| Clinical  trial costs paid direct |       | $        | 4,225,374  |     | $          | 3,676,891 |   |

 

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

 

Property and equipment consists of thefollowing as of February 28th  and29th:

 
| ** **                                 | ** ** | **Estimated**    | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------------|------------|------------|------------|------------|------------|
| ** **                                 | ** ** | **Useful Lives** | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|                                       |       |             |       |       |       |       |       |
| Production  equipment                      |       | 5 - 10 years     |       | $          | 3,314,342  |       | $          | 3,314,342 |   |
| Leasehold  improvements                    |       | 5 - 31.5  years  |       | 1,543,490  |       | 1,543,490  |       |
| Furniture  and equipment                   |       | 5 - 10 years     |       | 634,755    |       | 634,755    |       |
| Equipment                                  |       | 4 - 5 years      |       | 288,943    |       | 288,943    |       |
| Total  property and equipment              |       |             |       | 5,781,530  |       | 5,781,530  |       |
|                                       |       |             |       |       |       |       |       |
| Accumulated  depreciation and amortization |       |             |       | (5,732,660 | )          | (5,727,380 | )          |
|                                       |       |             |       |       |       |       |       |
|                                       |       |             |       | $          | 48,870     |       | $          | 54,150 |   |

 

Depreciation and amortization expense for the years ended February 28,2005, and February 29, 2004 was $5,280 and $13,424, respectively.

 

F-17

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

 

The Companyhas a self-funded employee benefit plan providing health care benefits for allits employees. It also provides for them group dental insurance, short-term andlong-term disability insurance, and life insurance.  Employees pay pre-tax premiums from $40 to$400 per month depending upon the insurance coverage selected by theemployee.  Employees can select from twocoverage plans, which have either a $200 or $300 deductible, varying out-of-pocketmaximums, and a maximum lifetime benefit of $1,000,000 per coveredparticipant.  Due to stop-loss insurance,benefits payable by the Company are limited to $25,000 per person during thepolicy year.  The Company charged tooperations a provision of $353,644 for 2005 and $181,094 for 2004, whichrepresents the sum of actual claims paid and an estimate of liabilitiesrelating to claims, both asserted and unasserted, resulting from incidents thatoccurred during the year.  These amountsinclude costs related to employees of the medical clinic that have beenallocated to the Company.

 

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

 

Dr. Burzynski leases certain equipment usedin the clinical trials under leases maturing in two to four years.  Rent expense incurred under these leases wasapproximately $69,655 and $68,233 for the years ended February 28, 2005,and February 29, 2004 respectively.  Future minimumlease payments are as follows:

 
| 2006   |   | $      | 64,984  |   |
|--------|--------|--------|---------|--------|
| 2007   |   | 64,984 |    |
| 2008   |   | 38,457 |    |
| 2009   |   | 5,802  |    |
|   |   |   |    |
|   |   | $      | 174,227 |   |

 

In addition, as explained in Note 2, Dr. Burzynskiowns the facility used by the Company to perform research and produce its drugproducts.  There is currently no leaseagreement, however, the facility’s costs are included in the accompanyingfinancial statements.  Those costsinclude not only utilities and expenses normally incurred by a tenant but alsomortgage interest, insurance, property taxes and building depreciation.  Interest, insurance, property taxes andbuilding depreciation totaled $162,629 and $166,679 for 2005 and 2004,respectively.

 

F-18

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**6.****                                      IncomeTaxes:**

 

The costs incurred related to the conduct ofFDA approved clinical trials incurred directly by Dr. Burzynski within hismedical practice are deducted by Dr. Burzynski and are not included in theCompany’s tax provision.

 

The actual income tax benefit attributable tothe Company’s losses for the years ended February 28, 2005 and February 29,2004 differ from the amounts computed by applying the U.S. federal income taxrate of 34% to the pretax loss as a result of the following:

 
| ** **                            | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|---------------------------------------|------------|-----------|------------|-----------|------------|
|                                  |       |      |       |      |       |
| Expected  benefit                     |       | $         | (1,688,283 | )         | $          | (1,490,502 | ) |
| Taxed  directly to Dr. Burzynski |       | 1,688,283 |       | 1,490,492 |       |
| Other  adjustments                    |       | 4,024     |       | 2,639     |       |
| Change in  valuation allowance        |       | (4,024    | )          | (2,629    | )          |
| Texas  franchise tax, based on income |       | —    |       | —    |       |
|                                  |       |      |       |      |       |
| Income tax  expense                   |       | $         | —     |      | $          | — |   |

 

The componentsof the Company’s deferred income tax assets as of February 28, 2005 and February 29,2004 are as follows:

 
| ** **                                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
|                                          |       |     |       |     |       |
| Deferred tax  assets:                         |       |     |       |     |       |
|                                          |       |     |       |     |       |
| Net  operating loss carryforwards             |       | $        | 382,463    |     | $          | 376,076 |   |
| Excess book  depreciation                     |       | 12,002   |       | 23,408   |       |
| Accrued  expenses                             |       | 6,225    |       | 5,229    |       |
| Alternative  minimum tax credit carryforwards |       | 42,603   |       | 42,603   |       |
|                                          |       |     |       |     |       |
| Total  deferred tax assets                    |       | 443,293  |       | 447,316  |       |
| Less  valuation allowance                     |       | (443,293 | )          | (447,316 | )          |
|                                          |       |     |       |     |       |
| Net deferred  tax assets                      |       | $        | —     |     | $          | — |   |

 

F-19

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The Company’sability to utilize net operating loss carryforwards and alternative minimum taxcredit carryforwards will depend on its ability to generate adequate futuretaxable income.  The Company has nohistorical earnings on which to base an expectation of future taxable income.  Accordingly, a valuation allowance for thetotal deferred tax assets has been provided.

 

The Company has net operating losscarryforwards available to offset future income in the amount of $1,124,889 asof February 28, 2005.  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                         |       |       | $          | 18,781 |   |

 

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

 

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

 

Statement of Financial Accounting Standards No. 123,“Accounting for Stock-based Compensation” (FAS 123) defines a fair value basedmethod of accounting for employee stock options or similar equity instrumentsand encourages all entities to adopt that method of accounting for all of theiremployee stock compensation plans.  Underthe fair value based method, compensation cost is measured at the grant datebased on the value of the award and is recognized over the service period ofthe award, which is usually the vesting period. However, FAS 123 also allows entities to continue to measurecompensation costs for employee stock compensation plans using the intrinsicvalue method of accounting prescribed by Accounting Principles Board (APB)Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25).  The Company has adopted FAS 123 and haselected to remain with the accounting prescribed by APB 25.

 

F-20

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On September 14, 1996 the Companygranted 600,000 stock options, with an exercise price of $.35 per share, to anofficer who is no longer with the Company. 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 10 years fromthe grant date, they increase in the same percentage of any new shares of stockissued; however, no additional shares have been issued since September 14,1996.  None of the options have beenexercised as of February 28, 2005.

 

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

 

As described in Note 2, the Company entered aRoyalty Agreement with Dr. Burzynski. Under that agreement, upon FDA approval, the Company is obligated toprovide Dr. Burzynski the right to produce antineoplaston products totreat up to 1,000 patients without paying any fees to the Company or the rightto purchase antineoplaston products to treat up to 1,000 patients at cost plus10%.

 

The Company produced antineoplaston productsto treat approximately 100 patients during the years ended February 28,2005 and February 29, 2004. Management estimates the current production facilities have the capacityto produce product to treat approximately 1,500 patients.  There is space available at the current siteto expand the facility for increased capacity if necessary.

 

The Company received approximately forty four percent and fifty ninepercent of the chemicals used in producing antineoplastons from a singlesupplier during the years ended February 2005 and 2004, respectively.  The Company has established an additionalvendor to supply these chemicals.

 

F-21

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