**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-KSB**

 

**(Mark One)**

| **ý**                                           |   | **ANNUAL REPORT UNDER SECTION 13 OR 15(d)**            |
|------------------------------------------------------|--------|-------------------------------------------------------------|
|                                                 |   | **OF THE SECURITIES EXCHANGE ACT OF 1934**                  |
|                                                 |   |                                                        |
| **For the fiscal year ended February 29, 2004** |
|                                                 |   |                                                        |
| **o**                                                |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d)** |
|                                                 |   | **OF THE SECURITIES EXCHANGE ACT OF 1934**                  |

 

**Forthe transition period from                 to                 **

 

**Commission file number 000-23425**

 

**BURZYNSKI RESEARCH INSTITUTE, INC.**

(Name of small business issuer in its charter)

 

| **Delaware**                                                        |   | **76-0136810**                        |
|---------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)     |   | (I.R.S. Employer  Identification No.) |
|                                                                |   |                                  |
| **9432 Old Katy Road, Suite 200  Houston, Texas**                   |   | **77055**                             |
| (Address of principal executive offices)                            |   | (Zip Code)                            |
|                                                                |   |                                  |
| Issuer’s telephone number:  **(713) 335-5697**            |
|                                                                |   |                                  |
| Securities registered under Section 12(b) of the Exchange Act: |
| **None**                                                            |
|                                                                |
| Securities registered under Section 12(g) of the Exchange Act: |
| **Common Stock, $.001 par value**                                   |

 

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

 

Check if there is no disclosure of delinquent filers in response toItem 405 of Regulation S-B contained herein, and no disclosure will becontained, to the best of Registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form10-KSB or any amendment to this Form 10-KSB. ý

 

State issuer’s revenues for its most recent fiscal year:  $500.

 

As of May 4, 2004, 131,388,444 shares of the Registrant’s Common Stockwere outstanding, and the aggregate market value of the Common Stock held bynon-affiliates was approximately $2,924,910 based on the last reported salesprice on May 24, 2004.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

Documents incorporated by reference:                                    **None.**

 

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

 

 

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**BURZYNSKI RESEARCH INSTITUTE, INC.**

 

**FORM 10-KSB**

 

**FISCAL YEAR ENDED FEBRUARY 29, 2004**

 

**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 AND RELATED STOCKHOLDER  MATTERS                                                             |   |
| ITEM 6.       | MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                           |   |
| ITEM 7.       | FINANCIAL STATEMENTS                                                                                                  |   |
| ITEM 8.       | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON  ACCOUNTING AND FINANCIAL DISCLOSURE                                 |   |
| ITEM 8A.      | CONTROLS AND PROCEDURES                                                                                               |   |
|          |                                                                                                                  |   |
| **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                                                       |   |
| ITEM 12.      | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                                        |   |
| ITEM 13.      | EXHIBITS AND REPORTS ON FORM 8-K                                                                                      |   |
| ITEM 14.      | PRINCIPAL ACCOUNTANT FEES AND  SERVICES                                                                               |   |

 

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**FORWARD LOOKING STATEMENTS**

** **

This reportcontains forward-looking statements, including statements regarding futurefinancial performance and results and other statements that are not historicalfacts.  Such statements are included in“Description of Business,” “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” and elsewhere in this report.  When used in this report, words such as“may,” “will,” “should,” “could,” “anticipate,” “believe,” “expect,”“estimate,” “intend,” “plan,” “predict,” “potential,” “continue” and similarexpressions are intended to identify forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended.  Although the Company believes that theexpectations reflected in these forward-looking statements are reasonable,there can be no assurance that actual results or developments anticipated bythe Company will be realized or, even if realized, that they will have theexpected effects on its business or operations.  Actual results could differ materially from those contemplated bythe forward-looking statements as a result of certain factors beyond theCompany’s control including: the ability to develop safe and efficacious drugs,the failure to achieve positive clinical trials, the failure to successfullycommercialize our products, competition and technological change and existingand future regulations affecting our business.

 

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# **PARTI**

# ** **

## **ITEM1**.                                  DESCRIPTION OF BUSINESS

## ** **

**General**

** **

The Burzynski Research Institute, Inc. (the “Company”) was incorporatedunder the laws of the State of Delaware in 1984 in order to engage in theresearch, production, marketing, promotion and sale of certain medical chemicalcompounds composed of growth-inhibiting peptides, amino acid derivatives andorganic acids 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.  The Company currently manufactures Antineoplastonssolely for the use of Stanislaw R. Burzynski, M.D., Ph.D. (“Dr. Burzynski”) inclinical research.

 

The Company 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.Burzynski from funds generated from Dr. Burzynski’s medical practice pursuantto various 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’s Discussion and Analysis of FinancialCondition and Results of Operations*.”  The Company does not expect to generate significant operatingrevenue until such time, if any, as Antineoplastons are approved for use andsale by the FDA.  However, the Companymay seek additional funding for operations through the sale of its securities.

 

**Antineoplastons**

** **

Dr. Burzynski commenced his cancer research in 1967 focusing on theisolation of various biochemicals produced by the human body as part of thebody’s possible defense against cancer. In the course of his research, Dr. Burzynski identified certainpeptides, amino acid derivatives and organic acids in these biochemicals which appearto inhibit the growth of cancer cells. These derivatives were given the name “Antineoplastons” by Dr.Burzynski.

 

Antineoplastons are found in the bodily fluids of humans and wereinitially isolated by 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. Burzynski hasdeveloped six formulations of natural Antineoplastons and six syntheticformulations of Antineoplastons.  All ofthe Phase II clinical trials currently sponsored by the Company involve the useof four 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.

 

**PhaseII Clinical Trials**

** **

The Company began Phase II clinical studies in 1994 with fourstudies.  At that time, a number ofpatients were also receiving 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 6 cohorts of patients in the CAN-1 study, with the largest groupsuffering from primary brain tumors. New patients either were admitted to the CAN-1 study or have beenadmitted to one of the other studies sponsored by the Company, as appropriate.

 

The Company closed approximately half of its clinical trials during thepast year due to low enrollment.  TheCompany currently

 

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sponsors 36 ongoing Phase II clinical trials,which are conducted pursuant to investigational new drug applications (“INDs”)filed with the FDA and approved by an Institutional Review Board (“IRB”)designated according to federal regulations. All clinical trials except one are for the treatment of a wide varietyof cancers using only a combination of Antineoplastons A10 and AS2-1.  The one exception involves the treatment ofbreast cancer using A10 capsules in combination with the FDA-approved drugMethotrexate.  Most of the trialsinvolve the use of intravenous formulations of Antineoplastons; however, a fewtrials use oral formulations.  Dr.Burzynski acts as principal investigator for all clinical trials pursuant to aRoyalty Agreement between 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, in which 20patients will be enrolled.

 

Prior to approving a New Drug Application (“NDA”), the FDA requires thata drug’s safety and efficacy be demonstrated in “well-controlled” clinicaltrials.  Several types of controls areacceptable to the FDA.  One of these isa “Historic Control.”  If the course ofa disease is well-known, the response of patients taking a drug can be comparedto a historic group of patients with that disease who have not had medicalintervention.  For example, it is knownthat the tumors of patients suffering from primary malignant brain tumors(“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.

 

**Allof the Company’s clinical trials, except one, involve the use of HistoricControls.  Further, all trials exceptthe CAN-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 which data from patientstreated 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.**

 

The ultimate goal of any treatment for cancer is patient survival.  However, the FDA has determined thatrequiring exhaustive data showing improved patient survival mayunnecessarily delay the approval of new cancer drugs.  For that reason, the FDA may grant marketing approval for a newdrug product 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.

 

Where tumor size is used as the Milestone, each clinical trial protocoldescribes a “complete response” as a complete disappearance of all tumors withno reoccurrence of tumors for at least four weeks.  A “partial response” is described as at least a 50% reduction intotal tumor size, with such reduction lasting at least four weeks.  An “objective response” is described aseither a complete or partial response. “Stable disease” is described as less than 50% reduction in size but nomore than 50% increase in size of the tumor mass, lasting for at least twelveweeks.  “Progressive disease” isdescribed as more than 50% increase in total tumor mass or occurrence of newtumors.

 

The protocols of the Company’s clinical trials involve a two-stagedesign, wherein the first stage proceeds until the Company admits twentypatients into the trial.  After aspecified time period, if there are zero responses by the first twentypatients, the trial will be discontinued and the drug declared to have lessthan desired activity.  If there is atleast one response, the trial will be continued until forty patients have beenaccrued.  If the study continues, thefollowing conclusions according to protocols based on forty patients can bemade:  If there are three or fewerresponses, then there is less than desired activity.  If there are four or more responses, then there is sufficientevidence to conclude that the Antineoplaston regimen used shows beneficialactivity.

 

As of May 21, 2004, six of the prospective clinical trials have reached aMilestone.  These are:

 

•                                          Protocol BT-9,involving the study of Antineoplastons A10 and AS2-1 in patients with braintumors.

 

5

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

 

•                                          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.

 

•                                          ProtocolBT-18, involving a study of intravenous administration of Antineoplastons A10and AS2-1 in the treatment of “mixed glioma,” a type of PMBT.

 

•                                          ProtocolBT-23, involving a study of intravenous administration of Antineoplastons A10and A2-1 in children with visual pathway glioma.

 

There can be no assurance that the results of any of these trials can berepeated or that the other clinical trials will result in the same or similarresponses.

 

The results of Protocols BT-9, BT-11, BT-13, BT-15, BT-18 and BT-23 areset forth below (as of May 18, 2004).

 
| **Protocol  Number** |   | **Patients  Accrued** | ** ** | **Evaluable  Patients** | ** ** | **Patients  Showing  Complete  Response** |   | **%** |   | **Patients  Showing  Partial  Response** |   | **%** |   | **Patients  Showing  Stable  Disease** |   | **%** |   | **Patients  Showing  Progressive  Disease** |   | **%** |   |
|----------------------|--------|-----------------------|------------|-------------------------|------------|-------------------------------------------|--------|-------|--------|------------------------------------------|--------|-------|--------|----------------------------------------|--------|-------|--------|---------------------------------------------|--------|-------|--------|
| BT-9                 |   | 27                    |       | 19                      |       | 4                                         |   | 21.05 | %      | 6                                        |   | 31.58 | %      | 7                                      |   | 36.84 | %      | 2                                           |   | 10.53 | %      |
| BT-11                |   | 32                    |       | 23                      |       | 4                                         |   | 17.39 | %      | 4                                        |   | 17.39 | %      | 7                                      |   | 30.43 | %      | 8                                           |   | 34.78 | %      |
| BT-13                |   | 10                    |       | 8                       |       | 4                                         |   | 50.00 | %      | 2                                        |   | 25.00 | %      | 2                                      |   | 25.00 | %      | 0                                           |   | 0.00  | %      |
| BT-15                |   | 25                    |       | 18                      |       | 3                                         |   | 16.67 | %      | 2                                        |   | 11.11 | %      | 7                                      |   | 38.89 | %      | 6                                           |   | 33.33 | %      |
| BT-18                |   | 15                    |       | 10                      |       | 3                                         |   | 30.00 | %      | 1                                        |   | 10.00 | %      | 2                                      |   | 20.00 | %      | 4                                           |   | 40.00 | %      |
| BT-23                |   | 11                    |       | 6                       |       | 3                                         |   | 50.00 | %      | 1                                        |   | 16.67 | %      | 2                                      |   | 33.33 | %      | 0                                           |   | 0.00  | %      |

 

**ThePhase II Study according to Protocol CAN-1 included 35 evaluable patients.  Complete and partial responses were obtainedin patients diagnosed with glioblastoma multiforme, astrocytoma,oligodendroglioma, mixed glioma, medulloblastoma, and malignantmeningioma.  The treatment withAntineoplastons A10 and AS2-1 resulted in 48.6% cases of objective responsesand 31.4% cases of stable disease.  Mostof the surviving patients have now been alive for over eleven years since thepathology diagnoses of their tumors were established.  One patient, suffering from low grade astrocytoma, has now beenalive for over 18 years since pathology diagnosis.  The largest group of evaluable patients involved in the study hadglioblastoma multiforme.  Six of thecases were classified as complete and partial responses, four obtainedstabilization and four developed progression of the disease.  One of the glioblastoma patients is nowalive and completely free from tumor for over eleven years after her pathologydiagnosis.**

 

Notwithstandingthe response 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 is warranted.  **Inaddition, the FDA has indicated it will not accept the data generated by thePhase II Study according to Protocol CAN-1 because the trial was partiallyretrospective.**  At thepresent time the Company cannot predict when the Company will submit an NDA tothe FDA, nor can the Company estimate the number or type of additional trialsthe FDA may require.  Further, there canbe no assurance that an NDA for Antineoplastons, as a treatment for cancer,will ever be approved by the FDA.

 

No assurance can be given that any new IND for clinical tests on humanswill be approved by the FDA for human clinical trials on cancer or otherdiseases, that the results of such human clinical trials will prove that

 

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Antineoplastons are safe or effective in thetreatment of cancer or other diseases, or that the FDA would approve the saleof Antineoplastons in the United States.

 

The following table sets forth the title of each active Protocol, thesubject of the Protocol with dates submitted to the FDA and approved by theIRB, the number of persons currently enrolled in each study, and the number ofpersons who may ultimately participate in each study.

 

**ActivePhase II Clinical Trials**

** **
| **Title of  Protocol** |   | **Subject of  Protocol and Date  (as of May 17, 2004)**                                                                                                                        |   | **Number  of  Persons  Enrolled** |   | **Number of   Patients  who  may  Participate  in the Study** |
|------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------------------------------------|
| AD-02                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN PATIENTS WITH CARCINOMA OF THE ADRENAL  GLAND; Revised 7/20/96; Revised 9/28/96; Revised 4/14/97.                          |   | 4                                 |   | 40                                                            |
| BL-02                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN PATIENTS WITH CARCINOMA OF THE BLADDER;  Revised 7/20/96; Revised 9/28/96; Revised 4/14/97.                                |   | 4                                 |   | 40                                                            |
| BR-10                  |   | PROTOCOL FOR  RANDOMIZED CONTROLLED TRIAL COMPARING METHOTREXATE TREATMENT ALONE TO THE  COMBINATION OF METHOTREXATE AND ANTINEOPLASTON A10; Revised 4/12/97; Revised 7/28/97. |   | 8                                 |   | 40                                                            |
| BR-14                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 CAPSULES IN PATIENTS WITH ADVANCED BREAST  CANCER; 8/26/96; Revised 12/10/96; Revised 4/12/97.                                |   | 7                                 |   | 40                                                            |
| BT-6                   |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 INFUSIONS IN CHILDREN WITH HIGH GRADE  GLIOMA; March 1996.                                                               |   | 9                                 |   | 40                                                            |
| BT-7                   |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN PATIENTS WITH GLIOBLASTOMA MULTIFORME;  March 1996.                                                                   |   | 38                                |   | 40                                                            |
| BT-8                   |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN PATIENTS WITH ANAPLASTIC ASTROCYTOMA;  Revised 4/14/97; Revised 9/15/97.                                                   |   | 15                                |   | 40                                                            |
| BT-9                   |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN PATIENTS WITH BRAIN TUMORS; Revised  7/11/96; Revised 9/28/96; Revised 4/14/97.                                            |   | 27                                |   | 40                                                            |
| BT-10                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN CHILDREN WITH BRAIN TUMORS; Revised  7/11/96; Revised 9/28/96; Revised 4/14/97.                                            |   | 13                                |   | 40                                                            |
| BT-11                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN PATIENTS WITH BRAIN STEM GLIOMA; Revised  5/15/96; Revised 7/11/96; Revised 9/28/96; Revised 5/10/97.                      |   | 32                                |   | 40                                                            |
| BT-12                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN CHILDREN WITH PRIMITIVE NEUROECTODERMAL  TUMORS; (PNET) Revised 7/11/96; Revised 9/28/96; Revised 4/14/97.                 |   | 12                                |   | 40                                                            |
| BT-13                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN CHILDREN WITH LOW GRADE ASTROCYTOMA; Revised  7/11/96; Revised 9/28/96; Revised 4/14/97; Revised 9/5/97.                   |   | 10                                |   | 40                                                            |

 

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| **Title of  Protocol** |   | **Subject of  Protocol and Date  (as of May 17, 2004)**                                                                                                                                                                                                                              |   | **Number  of  Persons  Enrolled** |   | **Number of   Patients  who  may  Participate  in the Study** |
|------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------------------------------------|
| BT-14                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN CHILDREN WITH RHABDOID TUMOR OF THE  CENTRAL NERVOUS SYSTEM; Revised 5/17/96; Revised 7/11/96; Revised 9/28/96;  Revised 4/14/97.                                                                                                |   | 4                                 |   | 40                                                            |
| BT-15                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN ADULT PATIENTS WITH ANAPLASTIC  ASTROCYTOMA; Revised 7/26/96; Revised 10/4/96; Revised 4/14/97; Revised  9/5/97.                                                                                                                 |   | 25                                |   | 40                                                            |
| BT-17                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN ADULT PATIENTS WITH OLIGODENDROGLIOMA;  Revised 7/26/96; Revised 10/4/96; Revised 4/14/97.                                                                                                                                       |   | 12                                |   | 40                                                            |
| BT-18                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN ADULT PATIENTS WITH MIXED GLIOMA; Revised  7/26/96; Revised 10/4/96; Revised 12/9/96; Revised 4/14/97.                                                                                                                           |   | 15                                |   | 40                                                            |
| BT-21                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN ADULT PATIENTS WITH PRIMARY MALIGNANT  BRAIN TUMORS; Partially Amended, pg. 9/5/95; Revised 9/10/96; Revised  4/14/97; Revised 8/25/97.                                                                                          |   | 30                                |   | 40                                                            |
| BT-22                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN CHILDREN WITH PRIMARY MALIGNANT BRAIN  TUMORS; Partially Amended, pg. 11/5/97; Revised 4/14/97; Revised 9/10/97.                                                                                                                 |   | 6                                 |   | 40                                                            |
| BT-23                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 INFUSIONS IN CHILDREN WITH VISUAL PATHWAY  GLIOMA; 5/22/96; Revised 11/18/96; Revised 4/14/97.                                                                                                                                      |   | 11                                |   | 40                                                            |
| BT-24                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 INFUSIONS IN PATIENTS WITH EPENDYMOMA;  5/15/96; Revised 11/18/96; Revised 4/14/97.                                                                                                                                                 |   | 9                                 |   | 40                                                            |
| BT-34                  |   | PHASE II STUDY  OF 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.  Approved 12/5/2002; Revised 3/27/2003.                  |   | 5                                 |   | 20                                                            |
| BT-35                  |   | PHASE II STUDY  OF 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.  Approved 12/5/2002; Revised 1/22/2003. |   | 1                                 |   | 20                                                            |
| CO-03                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 CAPSULES IN PATIENTS WITH ADENOCARCINOMA OF  THE COLON; Revised 8/12/96; Revised 12/21/96.                                                                                                                                          |   | 9                                 |   | 40                                                            |
| ES-02                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN PATIENTS WITH ADENOCARCINOMA OF THE  ESOPHAGUS; Revised 7/9/96; Revised 9/10/96; Revised 10/30/96; Revised  4/14/97.                                                                                                             |   | 8                                 |   | 40                                                            |

 

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| **Title of  Protocol** |   | **Subject of  Protocol and Date  (as of May 17, 2004)**                                                                                                                                          |   | **Number  of  Persons  Enrolled** |   | **Number of   Patients  who  may  Participate  in the Study** |
|------------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------------------------------------|
| LA-04                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN PATIENTS WITH LARGE CELL,  UNDIFFERENTIATED CARCINOMA OF THE LUNG; Revised 7/20/96; Revised 9/28/96;  Revised 12/11/96; Revised 4/14/97.     |   | 9                                 |   | 40                                                            |
| LY-03                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN PATIENTS WITH NONHODGKIN’S LYMPHOMA;  Revised 7/11/96; Revised 9/28/96; Revised 4/14/97.                                                |   | 4                                 |   | 40                                                            |
| LY-06                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN PATIENTS WITH NONHODGKIN’S LYMPHOMA, LOW  GRADE; Revised 6/22/96; Revised 8/12/96; Revised 9/28/96; Revised 10/23/96;  Revised 5/11/97. |   | 31                                |   | 40                                                            |
| LY-09                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN PATIENTS WITH MANTLE ZONE LYMPHOMA;  Revised 6/22/96; Revised 9/10/96; Revised 4/14/97.                                                      |   | 5                                 |   | 40                                                            |
| LY-12                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN PATIENTS WITH PRIMARY CENTRAL NERVOUS  SYSTEM LYMPHOMA; Revised 9/10/96; Revised 4/14/97.                                                    |   | 0                                 |   | 40                                                            |
| MA-02                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN PATIENTS WITH MESOTHELIOMA; Revised  7/8/96; Revised 9/10/96; Revised 4/14/97.                                                               |   | 7                                 |   | 40                                                            |
| ME-02                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN PATIENTS WITH MALIGNANT MELANOMA; Revised  7/26/96; Revised 10/4/96; Revised 4/14/97.                                                        |   | 12                                |   | 40                                                            |
| MM-02                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN PATIENTS WITH MULTIPLE MYELOMA; Revised  7/26/96; Revised 10/2/96.                                                                           |   | 5                                 |   | 40                                                            |
| NE-2                   |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN PATIENTS WITH NEUROENDOCRINE TUMORS;  Revised 7/9/96; Revised 9/10/96; Revised 4/14/97.                                                      |   | 6                                 |   | 40                                                            |
| PA-02                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN PATIENTS WITH CARCINOMA OF THE PANCREAS;  Revised 7/20/96; Revised 9/28/96; Revised 4/14/97.                                                 |   | 14                                |   | 40                                                            |
| PR-06                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 CAPSULES IN COMBINATION WITH TOTAL ANDROGEN  BLOCKADE IN PATIENTS WITH ADENOCARCINOMA OF THE PROSTATE; 8/1/97; Revised  8/25/97.                |   | 2                                 |   | 40                                                            |
| UP-02                  |   | PHASE II STUDY  OF ANTINEOPLASTONS A10 AND AS2-1 IN PATIENTS WITH CARCINOMA OF AN UNKNOWN  PRIMARY; Revised 7/8/96; Revised 9/10/96; Revised 4/14/97.                                            |   | 7                                 |   | 40                                                            |

 

**GovernmentRegulation**

** **

The FDA imposes substantial requirements upon, and conditions precedentto, the introduction of therapeutic drug products through lengthy and detailedlaboratory and clinical testing procedures, sampling activities and othercostly and time consuming procedures. To obtain FDA approval for Antineoplastons, we must submit extensivepreclinical and clinical data and supporting information to the FDA toestablish the safety and efficacy of Antineoplastons.  The approval process takes many years, requires the expenditureof substantial resources and may involve ongoing requirements forpost-marketing studies.  Additionalgovernment regulation may be established that could prevent or delay regulatoryapproval of Antineoplastons.  Moreover,there can be no assurance that the

 

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Company can satisfy FDA requirements to gainapproval for Antineoplastons in the United States or that FDA approval for thesale of Antineoplastons in the United States will be obtained.  If regulatory approval is granted, theapproval may include significant limitations on the indicated uses for whichAntineoplastons may be marketed.

 

The effect of the FDA drug approval process for Antineoplastons mayimpose costly procedures upon the Company’s activities which may furnish acompetitive advantage to the other companies that compete with the Company inthe field of cancer treatment drugs. The extent of potentially adverse government regulations which mightarise from future legislation or administrative action cannot be predicted.

 

The Investigational New Drug Application Process in the United States isgoverned by regulations established by the FDA which strictly control the useand distribution 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 order to conduct a clinical trial of a new drug in humans, a sponsormust prepare and submit to the FDA a comprehensive IND.  Such application must contain aninvestigator’s brochure, a description of the composition, manufacture andcontrol of the drug substance and the drug product, sufficient information toassure the proper identification, quality, purity and strength of theinvestigational drug, a description of the drug substance, including itsphysical, chemical, and biological characteristics, the general method ofpreparation of the drug substance, a list of all components includinginteractive ingredients, adequate information about pharmacological andtoxicological studies of the drug involving laboratory animals or in vitrotests on the basis of which the sponsor has concluded that it is reasonablysafe to conduct the proposed clinical investigation and a summary of anyprevious human experience with the drug. Where there has been widespread use of the drug outside of the United Statesor otherwise, it is possible in some limited circumstances to usewell-documented clinical experience in place of some other pre-clinical work.

 

The focal point of the IND is on the general investigational plan and theprotocols for specific human studies. The plan is carried out in three phases:   Phase I includes the initial introduction of an investigationalnew drug into humans and may be conducted in patients or normal volunteersubjects.  The studies are closelymonitored to determine the metabolism and pharmacologic actions of the drug inhumans, the potential 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.

 

An IND will automatically become effective 30 days after receipt by theFDA, unless before that time the FDA raises concerns about issues such as theconduct of 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,Phase II or Phase III testing will be completed successfully by the Companywithin any specified period of time, if at all.  Furthermore, the Company or the FDA may suspend clinical trialsat any time on various grounds, including a finding that the subjects orpatients are being exposed to an unacceptable health risk.

 

Assuming successful completion of the clinical studies, the results ofthe studies, together with other detailed information, including, among otherinformation, details concerning the manufacture and composition of the drug,proposed labeling, environmental impact and the scientific rationale for thedrug, its intended use and the potential benefits of the drug product, aresubmitted to the FDA in the form of an NDA requesting approval to

 

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market the drug. If the FDA finds the NDA submission and the manufacturing process to beacceptable, the FDA will issue an approval letter.  If the FDA does not find the NDA submission or the manufacturingprocess to be sufficient, it will issue a “not approvable letter” describingthe deficiencies in the NDA and allowing the NDA applicant to either amend theNDA, withdraw the NDA or request a hearing. Even if the NDA is amended or a hearing is held, the FDA ultimately maydecide that the NDA does not satisfy the regulatory criteria for approval.  In addition, as a result of the Company’s useof Milestones to predict the benefits of Antineoplastons, the FDA may subjectany such approval to the requirement that the Company study the drug further,to verify and describe its clinical benefit (Phase IV testing).  Further, the FDA may also imposepost-marketing restrictions on Antineoplastons.  The FDA may withdraw approval of any drug if the Phase IV trialsfail to verify clinical benefit, use of the drugs demonstrates thatpost-marketing restrictions are inadequate to assure safe use of the drug, theCompany fails to adhere to the post-marketing restrictions agreed upon, thepromotional materials are false or misleading or other evidence demonstratesthat the drug is not shown to be safe or effective under its conditions of use.

 

The testing and approval process requires substantial time, effort andfinancial resources, and there can be no assurance that any approval will begranted for any product or that approval will be granted according to anyschedule.  Moreover, if regulatoryapproval of a drug is granted, the approval will be limited to specificindications.  There can be no assurancethat any of the Company’s product candidates will receive regulatory approvalsfor commercialization.

 

The FDA has implemented an accelerated review process for pharmaceuticalagents that treat serious or life-threatening disease and conditions, subjectto payment of user fees.  Approvalmay be conditioned on a requirement that, following product launch, a companycontinue to study the drug to verify and describe its clinical benefit.  Under “fast track” procedures, the FDA maywithdraw approval on an expedited basis if the company fails to show duediligence in conducting post-marketing clinical trials or if the post-approvalclinical trials fail to demonstrate that the product is safe or effective.  Whenappropriate, the Company intends to pursue opportunities for accelerated reviewof its products.  The Company cannotpredict the ultimate effect of this review process on the timing or likelihoodof FDA review of any of its products.

 

In enacting theOrphan Drug Act of 1983, Congress sought to provide incentives to promote thedevelopment of drugs for the treatment of rare diseases.  A drug may be considered for orphan drugdesignation if the drug is intended to treat a rare disease or conditionaffecting fewer than 200,000 people in the United States or, even if the drugtreats a disease affecting more than 200,000 people in the United States, thedrug is not expected to be profitable from sales in the United States.  Subject to applicable laws and regulations,the first sponsor to obtain FDA marketing approval for a drug with orphan drugdesignation for the designated disease or condition receives limited marketingexclusivity for seven years; no other sponsor may bring to market the “samedrug” for the treatment of the same disease or condition for a period of sevenyears from the date the application is approved by the FDA.  The Company plans to apply to the FDA in 2004for orphan drug designation of Antineoplastons A10 and AS2-1 for treatingpatients with brain stem gliomas.  Adrug with orphan drug designation must meet the same criteria for safety andefficacy as a drug without orphan drug designation.  Due to numerous variables and uncertainties in this area, therecan be no assurance that the Company will be able to complete an applicationfor the orphan drug designation or if completed, that the FDA will approve suchapplication.

 

Even if theregulatory approvals for the Company’s products are obtained, its products andits manufacturing 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’scurrent good manufacturing practice regulations, which are strictlyenforced.  Full technical compliancerequires manufacturers to expend funds, time and effort in the area ofproduction and quality control.  Inaddition, discovery of problems with a product after approval or failure tocomply with applicable FDA or other applicable regulatory requirements mayresult in restrictions on a product, manufacturer, or holder of an approvedNDA, including restrictions on the product, manufacturer or facility, includingwarning letters, suspension of regulatory approvals, operating restrictions,delays in obtaining new product approvals, withdrawal of the product from themarket, product recalls, fines, injunctions and criminal prosecution.  New government requirements may beestablished that could delay or prevent regulatory approval of the Company’sproducts under development.

 

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The Company’sresearch and development involves the controlled use of hazardous materials,chemicals and 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 numerous environmental, health andworkplace safety laws and regulations, including those governing laboratoryprocedures 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 $102,000 per yearon environmental compliance matters and expects to spend an additional $30,000for repairs and upgrades during the fiscal year ending February 28, 2005.**

 

**ResearchAnd Development**

** **

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

 

The cellular 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 datacollected in cell culture experiments may or may not indicate the mechanism ofaction of Antineoplastons in humans.

 

At a more molecular or sub-cellular level, cell culture experiments haveshown that 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.

 

In addition to the original family of Antineoplaston compounds (the“Parental Generation”), the Company continues its development of a secondgeneration of Antineoplastons.  In cellculture experiments the second generation Antineoplastons, which were developedby the Company, have been shown to be at least a thousand times more potentthan the Parental Generation.

 

The Company 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.

 

The Company is also involved in ongoing studies examining thepharmacokinetics (absorption, distribution, metabolism, and excretion) andpharmacodynamics (dose-response) of Antineoplastons in patients with neoplasticdisease.

 

The Company uses various scientific reagents from several differentsuppliers to conduct its research activities.

 

Total research and development costs for the fiscal years endedFebruary 29, 2004 and February 28, 2003 were approximately $4,175,000and $4,197,000, respectively.

 

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**IntellectualProperty**

** **

Since 1984, seven patents involving the formulation, preparation,manufacture, production, use, dosage and treatment of cancer withAntineoplastons (the “Patents”) have been issued to Dr. Burzynski by the UnitedStates Patent Office and the Patent Offices of 33 other countries.  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 Amended LicenseAgreement dated April 24, 1989 and a Second Amended License Agreementdated 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 andotherwise exploit all of Dr. Burzynski’s rights, title, and interests,including patent 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 ineffect until the expiration of the last Patent that was licensed under theagreement or termination pursuant to certain other provisions.  The Company and Dr. Burzynski also enteredinto a Royalty Agreement, dated March 25, 1997, and a First AmendedRoyalty Agreement, dated September 29, 1997 (collectively, the “RoyaltyAgreement”), pursuant to which Dr. Burzynski will receive a royalty interestfrom all future sales, distribution, and manufacture of Antineoplastons by theCompany. ** **The Company owns, pursuant to the License Agreement,exclusive rights to seven issued United States Patents and three issuedCanadian Patents.  The Company has nopatents in Mexico.  The Company has onepatent application pending in the United States, two patent applicationspending in Canada, and one patent application pending in Mexico.

 

The five initial United States Patents (the “Initial Patents”) relate to:(i) Determination of Antineoplastons in body tissue or fluids as a testingprocedure to aid in the diagnosis of cancer; (ii) Processes for the preparationof purified fractions of Antineoplastons from human urine; (iii) Processes forthe synthetic production of Antineoplastons and methods of treating neoplasticdisease (cancer); (iv) Administration of Antineoplastons to humans; and (v)Methods of synthesizing A-10.  TheInitial Patents expire from September 11, 2001 to January 11, 2009,however the Company does not believe the expiration of any of the InitialPatents will have a material adverse effect on the Company.

 

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

 

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

 

The three Canadian Patents (the “Canadian Patents”) relate to: (i)Processes for the preparation of purified fractions of Antineoplastons fromhuman urine, (ii) Processes for the synthetic production of Antineoplastons andmethods of treating neoplastic disease (cancer) and (iii) Liposomal Formulationof Antineoplastons.  The CanadianPatents expire 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.

 

The pending patent application in the United States relates to adivisional application to the 2001 U.S. Patent.  Should this patent be granted, of which there can be noassurance, it would expire in the year 2018.

 

The pending patent application in Canada relates to a treatment regimenfor the administration of phenylacetylglutamine.  Should this patent be granted, of which there can be noassurance, it would expire in the year 2019.

 

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The pending patent application in Mexico relates to a treatment regimenfor the administration of phenylacetylglutamine.  Should this patent be granted, of which there can be noassurance, it would expire in the year 2019.

 

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.

 

The Company also depends upon unpatented proprietary technology, and maydetermine in appropriate circumstances that its interest would be better servedby reliance upon trade secrets or confidentiality agreements rather thanpatents.

 

The Company’s success will depend in part on its ability to enforcepatent protection for its products, preserve its trade secrets, and operatewithout infringing on the proprietary rights of third parties in the UnitedStates, Canada, and Mexico.  Because ofthe substantial length of time and expense associated with bringing newproducts through development and regulatory approval to the marketplace, thepharmaceutical and biotechnology industries place considerable importance onobtaining and maintaining patent and trade secret protection for newtechnologies, products and processes. There can be no assurance that 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 degreeof protection or competitive advantage any patents issued to the Company willafford, the validity of any such patents or the Company’s ability to avoidviolating or infringing 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 otheractivities.  An adverse outcome couldsubject the Company to significant liabilities to third parties, require theCompany to obtain licenses from third parties or require the Company to ceaseany related research and development activities or sales.

 

The Company depends upon the knowledge, experience and skills (which arenot patentable) 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 canbe no assurance that these agreements will effectively prevent the unauthorizeduse or disclosure of the Company’s confidential information.

 

**Competition**

** **

There are many companies, universities, research teams and scientists,both private and government-sponsored, that are engaged in research to producecancer treatment agents and that have greater financial resources and largerresearch staffs and facilities than the Company.  In addition, there are other companies and entities, both privateand government-sponsored, that are engaged in research aimed at compoundssimilar or related to the Company’s Antineoplastons.  To the extent that the United States Government also conductsresearch or supports other companies or individuals in their research, suchcompanies or individuals may have a competitive advantage over the Company.

 

**Employees**

** **

**Asof May 26, 2004, the Company had 6 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.**

 

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## **ITEM 2**.                                  DESCRIPTION OFPROPERTY

## ** **

The Company does not own or invest in real estate, interests in realestate, real estate mortgages or securities of or interests in personsprimarily engaged in real estate activities.

 

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

 

## **ITEM 3**.                                  LEGAL PROCEEDINGS

## ** **

The Company’sactivities are subject to regulation by various governmental agencies,including the FDA, which regularly monitor the Company’s operations and oftenimpose requirements on the conduct of its clinical trials and other aspects ofthe Company’s business operations.  TheCompany’s policy is to comply with all such regulatory requirements.  From time to time, the Company is also subjectto potential claims by patients and other potential claimants commonly arisingout of the operation of a medical practice. The Company seeks to minimize its exposure to claims of this typewherever possible.

 

Currently, the Company is not a party to any material pending legalproceedings.  Moreover, the Company isnot aware of any such legal proceedings that are contemplated by governmentalauthorities with respect to the Company or any of its properties.

 

## **ITEM 4**.                                  SUBMISSION OF MATTERSTO A VOTE OF SECURITY HOLDERS

## ** **

No matter wassubmitted to a vote of security holders during the fiscal year endedFebruary 29, 2004.

 

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# ** **

# **PARTII**

# ** **

## **ITEM 5**.                                  MARKET FOR COMMONEQUITY AND RELATED STOCKHOLDER MATTERS

## ** **

After being removed from listing on the NASD Over-the-Counter BulletinBoard (“OTCBB”) on July 25, 2000, the Company’s Common Stock resumedtrading on the OTCBB on October 15, 2001. Between those dates, the Company’s Common Stock was trading in the “GreyMarket,” which involves the trading of a security that is not listed on anystock exchange or quoted on the OTCBB or the National Quotation Bureau’s PinkSheets.  Since October 15, 2001,the Company’s Common Stock has remained in good standing for trading on theOTCBB.  Nevertheless, a public tradingmarket having the characteristics of depth, liquidity and orderliness dependsupon the existence of market makers as well as the presence of willing buyersand sellers, which are circumstances over which the Company does not havecontrol.  There can be no assurance thatthe market will provide significant liquidity for the Company’s CommonStock.  As a result, an investment inthe Company’s Common Stock may be highly illiquid.  Investors may not be able to sell their shares readily or at allwhen the investor needs or desires to sell.

 

The following table sets forth closing high and low bid prices of theshares of Common Stock of the Company for the periods indicated (as reported byPink Sheets LLC).

 
|                |   | **High** |   | **Low** |   |
|---------------------|--------|----------|--------|---------|--------|
| 2002 First Quarter  |   | .06      |   | .03     |   |
| 2002 Second Quarter |   | .11      |   | .06     |   |
| 2002 Third Quarter  |   | .075     |   | .031    |   |
| 2002 Fourth Quarter |   | .07      |   | .026    |   |
| 2003 First Quarter  |   | .15      |   | .05     |   |
| 2003 Second Quarter |   | .09      |   | .06     |   |
| 2003 Third Quarter  |   | .14      |   | .06     |   |
| 2003 Fourth Quarter |   | .21      |   | .07     |   |

 

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

 

As of May 4, 2004, there were approximately 2,072 holders of record ofthe Company’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.

 

The Company has never paid cash dividends on its Common Stock and theBoard of Directors intends to retain all of its earnings, if any, to financethe development 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 OF FINANCIALCONDITION AND RESULTS OF OPERATIONS

## ** **

The following is adiscussion of the financial condition of the Company as of February 29,2004 and February 28, 2003 and the results of operations for the fiscal yearsended February 29, 2004 and February 28, 2003.  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 hasgenerated no significant revenue since its inception, and does not expect togenerate any operating revenues until such time, if any, as Antineoplastons areapproved for use and sale by the FDA. The

 

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Company’s sole source of funding is Dr. Burzynski, who funds theCompany’s operations from his medical practice pursuant to certain agreementsbetween Dr. Burzynski and the Company*.  See*“*Certain Relationships and Related Transactions*.”  Funds received by the Company from Dr.Burzynski are reported as additional paid-in capital to the Company.

 

The Company is primarily engaged as a research and development facilityof Antineoplaston drugs currently being tested for use in the treatment ofcancer, and provides consulting services. The Company is currently conducting approximately 36 FDA-approvedclinical trials.  The Company holds theexclusive right in the United States, Canada and Mexico to use, manufacture,develop, sell, distribute, sublicense and otherwise exploit all the rights,titles and interest in Antineoplaston drugs used in the treatment of cancer,once the drugs are approved for sale by the FDA*.  See*“*Certain Relationships and Related Transactions.*”

 

**ResultsOf Operations**

** **

***Fiscal Year EndedFebruary 29, 2004 Compared to Fiscal Year Ended February 28, 2003***

** **

Research anddevelopment costs were approximately $4,175,000 and $4,197,000 for the fiscalyears ended February 29, 2004 and February 28, 2003,respectively.  The decrease of $22,000or 0.5% was due to a decrease in material costs of $192,000, offset by anincrease in personnel cost of $88,000, an increase in facility and equipmentcosts of  $40,000, an increase inconsulting and quality control costs of $32,000, and an increase in otherresearch and development costs of $10,000.

 

General andadministrative expenses were approximately $196,000 and $206,000 for the fiscalyears ended February 29, 2004 and February 28, 2003,respectively.  The decrease of $10,000or 5% was due to a decrease in legal and professional fees of $14,000 offset byan increase in other general and administrative expenses of $4,000.

 

The Company hadnet losses of approximately $4,384,000 and $4,420,000 for the fiscal yearsended February 29, 2004 and February 28, 2003, respectively.  The decrease in the net loss from 2003 to2004 was primarily due to an overall decrease in research and development costof the Company described above.

 

As ofFebruary 29, 2004, the Company had a total stockholders’ deficit of$(32,626).

 

**Liquidityand Capital Resources**

** **

The Company’s operations have been funded entirely by Dr. Burzynski withfunds generated 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 to fundthe 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, including expenses toconduct the clinical trials.  Dr.Burzynski also provides the Company laboratory and research space as needed toconduct the Company’s research activities. The Research Funding Agreement also provides that Dr. Burzynski mayfulfill his funding obligations in part by providing the Company suchadministrative support as is necessary for the Company to manage itsbusiness.  Dr. Burzynski pays the fullamount of the Company’s monthly and annual budget of expenses for the operationof the Company, together with other unanticipated but necessary expenses whichthe Company incurs.  In the event theresearch results in the approval of any additional patents for the treatment ofcancer, Dr. Burzynski shall own all such patents, but shall license to theCompany the patents based on the same terms, conditions and limitations as arein the current license between Dr. Burzynski and the Company.  Dr. Burzynski has unlimited and free accessto all equipment which the Company owns, so long as such use does not conflictwith the Company’s use of such equipment, including without limitation, allequipment used in the manufacturing of Antineoplastons used in the clinicaltrials.  The amounts which Dr. Burzynskiis obligated to pay under the agreement shall be reduced dollar for dollar bythe following: (1) any income which the Company receives for services providedto other companies for research and/or development of other products, less suchidentifiable marginal or additional expenses necessary to

 

17

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produce such income, or (2) the net proceeds ofany stock offering or private placement which the Company receives during theterm of the agreement up to a maximum of $1,000,000 in a given Company fiscalyear.

 

Effective February 29, 2004, the Company and Dr. Burzynski extendedthe term of the Research Funding Agreement until February 28, 2005, withan automatic renewal for two additional one-year terms, unless one partynotifies the other party at least thirty days prior to the expiration of theterm of the agreement of its intention not to renew the agreement.

 

The Research Funding Agreement automatically terminates in the event thatDr. Burzynski owns less than fifty percent of the outstanding shares of theCompany, or is removed as President and/or Chairman of the Board of theCompany, unless Dr. Burzynski notifies the Company in writing of his intentionto continue the agreement notwithstanding this automatic termination provision.

 

The Company estimates that it will spend approximately $4,500,000 in thefiscal year ending February 28, 2005. The Company estimates that ninety-six percent (96%) of this amount willbe spent on research and development and the continuance of FDA-approved clinicaltrials.  While the Company anticipatesthat Dr. Burzynski will continue to fund the Company’s research and FDA-relatedcosts, there is no assurance that Dr. Burzynski will be able to continue tofund the Company’s operations pursuant to the Research Funding Agreement orotherwise.  However, because thenet assets available to Dr. Burzynski from his personal assets and the assetsof his medical practice currently exceed the Company’s projected twelve-monthfunding requirements, the Company believes Dr. Burzynski will be financiallyable to fund the Company’s operations at least through the fiscal year endingFebruary 28, 2005.  **In addition, Dr. Burzynski’s medical practice hassuccessfully funded the Company’s research activities over the last 21 yearsand, in 1997, his medical practice was expanded to include traditional cancertreatment options such as chemotherapy, immunotherapy and hormonal therapy inresponse to FDA requirements that cancer patients utilize more traditionalcancer treatment options in order to be eligible to participate in the Company’sAntineoplaston clinical trials.  As aresult of the expansion of Dr. Burzynski’s medical practice, the financialcondition of the medical practice has improved Dr. Burzynski’s ability to fundthe Company’s operations.**

 

The Company may be required to seek additional capital through equity ordebt financing or the sale of assets until the Company’s operating revenues aresufficient to cover operating costs and provide positive cash flow; however,there can be no assurance that the Company will be able to raise suchadditional capital on acceptable terms to the Company.  In addition, there can be no assurance thatthe Company will ever achieve positive operating cash flow.

 

## **ITEM7**.                                  FINANCIAL STATEMENTS

## ** **

The Company’s Annual Financial Statements, Notes to Financial Statementsand the report of Fitts, Roberts & Co., P.C., independent certified publicaccountants, with respect thereto, referred to in the Table of Contents to theFinancial Statements, appear elsewhere in this report beginning on **Page F-1**.

 

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

## ** **

None.

 

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

## ** **

Within the 90 daysprior to the date of this report, the Company carried out an evaluation, underthe supervision and with the participation of the Company’s management,including the Company’s principal executive and financial officer (who is thesame person), of the effectiveness of the Company’s disclosure controls andprocedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934,as amended.  Based upon that

 

18

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evaluation, the Company’s principal executive and financial officerconcluded that the Company’s disclosure controls and procedures are effectivein timely alerting him to material information required to be included inperiodic Securities and Exchange Commission filings.

 

There were nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of theevaluation above.

 

19

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# **PARTIII**

# ** **

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

## ** **

Set forth below are the names, ages and positions of the Company’sdirectors and executive officers, including the directors and executiveofficers of the Company since March 1, 1997:

 
| **Name**                            |   | **Age** |   | **Office**                                    |
|-------------------------------------|--------|---------|--------|-----------------------------------------------|
|                                |   |    |   |                                          |
| Stanislaw R. Burzynski, M.D., Ph.D. |   | 61      |   | Director, President, Secretary, and Treasurer |
| Barbara Burzynski, M.D.             |   | 63      |   | Director                                      |
| Michael H. Driscoll, J.D.           |   | 58      |   | Director                                      |
| Carlton Hazlewood, Ph.D.            |   | 68      |   | Director                                      |

 

STANISLAW R. BURZYNSKI, M.D., PH.D., has been the President and Chairmanof the Board of Directors of the Company since its inception in 1984.  He also serves as the Company’s Secretaryand Treasurer.  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.

 

Currently listed in Who’s Who In The World and a member in good standingwith both the American 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.  In1967, Dr. Burzynski graduated with distinction with an M.D. degree from theMedical Academy in Lublin, Poland, finishing first in his class of 250, and hesubsequently earned his Ph.D. in Biochemistry.

 

From 1970 to 1977, he was a researcher and Assistant Professor at BaylorCollege of Medicine in Houston.  AtBaylor, Dr. Burzynski’s research was sponsored and partially funded by theNational Cancer Institute.  Also atBaylor, he authored and co-authored sixteen publications, including fiveconcerning his research on peptides and their effect on human cancer.  Four of these publications were alsoco-authored by other doctors associated with M.D. Anderson Hospital and TumorInstitute and Baylor College of Medicine. In May 1977, Dr. Burzynski received a Certificate of Appreciation fromBaylor College of Medicine and in that same year founded the Company.

 

Dr. Burzynski is a member of the American Medical Association, AmericanAssociation for Cancer Research, Harris County Medical Society, New YorkAcademy of Sciences, Society for Neuroscience, Texas Medical Association, theSociety of Sigma Xi, and the Society of Neuro-oncology and has privileges atTwelve Oaks Medical Center at River Oaks located near the Burzynski ResearchInstitute in Houston.  He is the authorof 191 scientific publications, presenter of scientific papers at majorinternational conventions, and has been awarded 171 patents covering 39countries for his Antineoplaston treatment. Other groups are working in conjunction with him, including researchersat the University of Kurume Medical School in Japan.

 

BARBARA BURZYNSKI, M.D., a Director since 1984 and the wife of Dr.Burzynski, has been the Chairman of the Department of Pharmacy of the BurzynskiClinic since 1977.  FromJanuary 1976 to July 1977, she was a Research Assistant in theDepartment of Pediatrics at Baylor College of Medicine.  She was a physician at the Medical Academy,Lublin, Poland, from 1970 to 1975.  Dr.Barbara Burzynski graduated with an M.D. in 1966 from the Medical Academy,Lublin, Poland, and has published three articles on studies withAntineoplastons.

 

MICHAEL H. DRISCOLL, J.D. has been a Director of the Company since1984.  Mr. Driscoll was formerly a judgeand served as the County Attorney of Harris County, Texas from 1981 until heretired in 1997.

 

CARLTON HAZLEWOOD, PH.D. has been a Director of the Company since1997.  He also serves as Chairman of theIRB, an independent review board for the Company’s clinical trials designatedaccording to federal regulations.  Dr.Hazlewood currently operates his own consulting company, Research Consultant’sInternational,

 

20

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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**

** **

The Company has not established an Audit Committee.  Therefore, the Board of Directors has notdesignated any of its members as an “audit committee financial expert” as definedby the rules and regulations of the Securities and Exchange Commission.

 

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

** **

Based solely upon a review of Forms 3 and 4 and amendments theretofurnished to the Company under Rule 16a-3(e) during the fiscal year endedFebruary 29, 2004 and Form 5 and amendments thereto furnished to theCompany with respect to such period, the Company is not aware of any director,officer, or beneficial owner of more than 10% of any class of equity securitiesof the Company registered pursuant to Section 12 of the SecuritiesExchange Act of 1934 (the “Exchange Act”) that has failed to file on a timelybasis, as disclosed in the above forms, reports required by Section 16(a)of the Exchange Act during the Company’s most recent fiscal year.

 

**Code of Ethics**

** **

The Company has adopted a code of ethics that applies to our chiefexecutive officer, chief financial officer, chief accounting officer and allpersons performing similar functions. The Company hereby undertakes to provide a copy of this code of ethicsto any person, without charge upon request made in writing to: InvestorRelations, 9432 Old Katy Road, Suite 200, Houston, Texas 77055.

 

## **ITEM 10**.                           EXECUTIVE COMPENSATION

## ** **

**SUMMARY COMPENSATION TABLE**

 
|                             |   | **Annual Compensation** |   | **Long-Term Compensation** |    |
|----------------------------------|--------|-------------------------|--------|----------------------------|---------|
| **Name and Principle Position**  |   | **Fiscal  Year**        |   | **Salary**                 |    | **Bonus** |   | **Other Annual  Compensation****** |   | **Restricted  Stock  Awards** |   | **Securities Underlying  Options/SARs** |   | **LTIP  Payouts** |   | **All****Other  Compensation** |   |
|                             |   |                    |   | **($)**                    |    | **($)** |   | **($)** |   | **($)** |   | **($)** |   | **($)** |   | **($)** |   |
|                             |   |                    |   |                       |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Stanislaw R. Burzynski, M.D.,    |   | 2002                    |   | -0-                        |    | -0- |   | -0- |   | -0- |   | -0- |   | -0- |   | -0- |   |
| Ph.D., President, Secretary  and |   | 2003                    |   | -0-                        |    | -0- |   | -0- |   | -0- |   | -0- |   | -0- |   | -0- |   |
| Treasurer(1)                     |   | 2004                    |   | -0-                        |    | -0- |   | -0- |   | -0- |   | -0- |   | -0- |   | -0- |   |
|                             |   |                    |   |                       |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Robert Waldbillig,  Ph.D.,       |   | 2002                    |   | $                          | 110,512 |   | -0- |   | -0- |   | -0- |   | -0- |   | -0- |   | -0- |   |
| Vice President of Research       |   | 2003                    |   | $                          | 113,400 |   | -0- |   | -0- |   | -0- |   | -0- |   | -0- |   | -0- |   |
|                             |   | 2004                    |   | $                          | 109,337 |   | -0- |   | -0- |   | -0- |   | -0- |   | -0- |   | -0- |   |

 

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

 

**Directorsdo not receive any compensation for serving as directors; however, directorsare reimbursed for all ordinary and necessary expenses incurred in attending meetingsof 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.**

 

21

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

## ** **

The followingtable sets forth, as of May 4, 2004, the number of outstanding shares of CommonStock (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.

 
| **Title of class** |   | **Name and address of**

**beneficial owner**                                                  |   | **Amount and nature of**

**beneficial owner** |   | **Percent of  class (1)** |   |
|--------------------|--------|------------------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|---------------------------|--------|
| Common Stock       |   | Stanislaw R. Burzynski, M.D., Ph.D.

9432 Old Katy Road, Suite 200

Houston, Texas  77055 |   | 106,444,190 shares                             |   | 81.01                     | %      |
| Common Stock       |   | Barbara Burzynski, M.D.

9432 Old Katy Road, Suite 200

Houston, Texas  77055             |   | 106,444,190 shares                             |   | 81.01                     | %      |
| Common Stock       |   | Michael H. Driscoll

9432 Old Katy Road, Suite 200

Houston, Texas  77055                 |   | 570,000 shares                                 |   | 0.43                      | %      |
| Common Stock       |   | Carlton Hazlewood

9432 Old Katy Road, Suite 200

Houston, Texas  77055                   |   | 0 shares                                       |   | 0.00                      | %      |
| Common Stock       |   | All Current Directors and Executive Officers as a group                                        |   | 107,014,190                                    |   | 81.45                     | %      |

 

----

(1)                                  Percentagesshown are based upon 131,388,444 shares of Common Stock outstanding as of May4, 2004.  Certain shares are deemedbeneficially owned by more than one person listed in the table.

 

## **ITEM 12**.                           CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS

## ** **

Dr. Burzynski is the President, Secretary, Treasurer and Chairman of theBoard of the Company, as well as the beneficial owner of 81.01% of theCompany’s outstanding Common Stock. Since 1983, Dr. Burzynski has personally funded and supported theCompany’s operations out of funds generated from his medical practice pursuantto various agreements with the Company.

 

**LicenseAgreement**

** **

The Company entered into the License Agreement with Dr. Burzynski whichgives the Company the exclusive right in the Territory (composed of the UnitedStates, Canada and Mexico) to use, manufacture, develop, sell, distribute,sublicense and otherwise exploit all of his rights, title and interests inAntineoplastons in the treatment and diagnosis of cancer, including but notlimited to any patent rights which may be granted in these countries.  The License Agreement will terminate uponthe earlier of the expiration of the last patent licensed to the Company, ortermination by Dr. Burzynski, at his option, if he is removed as a director orofficer of the Company without his consent, if the Company files for bankruptcyor is the subject of any proceeding under applicable bankruptcy laws where suchproceeding is not dismissed within 90 days from the date a petition is filed,or if any 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.  Amendments to the License Agreement onApril 24, 1984 and on March 1, 1990 granted Dr. Burzynski the limitedright to manufacture, use, and exploit Antineoplastons in the Company’sexclusive territory solely for the purpose of enabling Dr. Burzynski to treatpatients in his medical practice until such date that the FDA may approve thesale of Antineoplastons for the treatment of cancer in the United States.

 

22

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**ResearchFunding Arrangements**

** **

Effective March 1, 1997, the Company entered into the ResearchFunding Agreement with Dr. Burzynski and terminated all of the prior fundingagreements between the Company and Dr. Burzynski.  Pursuant to the Research Funding Agreement:

 

•                                          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 providing suchadministrative staff as is necessary for the Company to manage its business, atno cost to the Company;

 

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

 

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

 

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

 

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

 

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

 

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

 

Effective February 29, 2004 the term of the Research FundingAgreement was extended to February 28, 2005, and is automaticallyrenewable for two additional one-year terms thereafter, unless one partynotifies the other party at least thirty days prior to the expiration of theterm 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.Burzynski owns less than fifty percent of the outstanding

 

23

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shares of the Company, or is removed as Presidentand/or Chairman of the Board of the Company, unless Dr. Burzynski notifies theCompany in writing of his intention to continue the agreement notwithstandingthis automatic termination provision. Subject to the foregoing, the term of the Research Funding Agreement iscurrently extended until February 28, 2005.

 

**RoyaltyAgreement**

** **

The Company and Dr. Burzynski entered into the Royalty Agreement,pursuant to which Dr. Burzynski agreed to act as the principal clinicalinvestigator of the clinical trials necessary for obtaining FDA approval forinterstate 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% (tenpercent) of the Company’s gross income, which royalty shall be paid on allgross receipts from all future sales, distributions and manufacture ofAntineoplastons.

 

Pursuant to the Royalty Agreement, Dr. Burzynski retains the right toeither (i) produce Antineoplaston products for use in his medical practice totreat up to 1,000 patients, at any one time, without paying any fees to theCompany or (ii) purchase from the Company Antineoplaston products to treat upto 1,000 patients, at any one time, at a price equal to cost plus 10% (tenpercent).  Dr. Burzynski has the rightto lease or purchase all the manufacturing equipment located at 12707 TrinityDrive, 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) to produce all Antineoplaston products to be sold or distributed in theUnited States, 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 officerand a director of the Company and the brother of Dr. Burzynski.**

 

## **ITEM13**.                           EXHIBITS AND REPORTS ON FORM 8-K

## ** **

| **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)).  |

 

24

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| 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 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, filed herewith.                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.7   |   | Royalty Agreement, dated March 25, 1997, by and between the  Company and Dr. Stanislaw R. Burzynski (incorporated by reference from  Exhibit 10(5) to Form 10-SB filed with the Securities and Exchange Commission  on November 25, 1997 (File No. 000-23425)).                           |
|   |   |                                                                                                                                                                                                                                                                                                |
| 10.8   |   | First Amended Royalty Agreement, dated September 29, 1997, by and  between the Company and Dr. Stanislaw R. Burzynski (incorporated by reference  from Exhibit 10(6) to Form 10-SB filed with the Securities and Exchange  Commission on November 25, 1997 (File No. 000-23425)).         |
|   |   |                                                                                                                                                                                                                                                                                                |
| 24     |   | Power of Attorney (Included with the Signature Page).                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                |
| 31     |   | Certification pursuant to Rules 13a-14 and 15d-14 of the Securities  Exchange Act of 1934, as amended, filed herewith.                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                |
| 32     |   | Certification pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed  herewith.                                                                                                                                                 |

 

There were no reports on Form 8-K filed by the Company during the lastquarter of fiscal year ended February 29, 2004.

 

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

## ** **

Description

 
| **Services  Rendered** |   | **FYE Feb.  29, 2004** |   | **FYE Feb.  28, 2003** |   |
|------------------------|--------|------------------------|--------|------------------------|--------|
|                   |   |                   |   |                   |   |
| Audit Fees             |   | $                      | 25,750 |                   | $      | 18,750 |   |
|                   |   |                   |   |                   |   |
| Audit-Related Fees     |   | $                      | 0      |                   | $      | 0 |   |
|                   |   |                   |   |                   |   |
| Tax Fees               |   | $                      | 0      |                   | $      | 0 |   |
|                   |   |                   |   |                   |   |
| All Other Fees         |   | $                      | 0      |                   | $      | 0 |   |
|                   |   |                   |   |                   |   |
| Total                  |   | $                      | 25,750 |                   | $      | 18,750 |   |

 

**Audit Fees** were forprofessional services rendered for the audit of BRI’s consolidated financialstatements and review of the interim consolidated financial statements includedin quarterly reports and services that are normally provided by Fitts, Roberts & Co., P.C. inconnection with statutory and regulatory filings or engagements.

 

25

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**Audit-Related Fees**are for assurance and related services that are reasonably related to theperformance of the audit or review of BRI’s consolidated financial statementsand are not reported under “Audit Fees.” There were no Audit-Related Fees incurred in fiscal year 2004 or fiscalyear 2003.

 

**Tax Fees** were forprofessional services for federal and state tax compliance, tax advice and taxplanning.  There were no Tax Feesincurred in fiscal year 2004 or fiscal year 2003.

 

**All Other Fees** werefor services other than the services reported above.  There were no Other Fees incurred in fiscal year 2004 or fiscalyear 2003.

 

**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.

 

26

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### **SIGNATURES**

### ** **

In accordance with Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
|                     | Burzynski Research Institute, Inc. |
|--------------------------|------------------------------------|
|                     |                               |
|                     |                               |
|                     | By:                                | /s/ Stanislaw R. Burzynski |   |
|                     |                               | Stanislaw R. Burzynski,  President, |
|                     |                               | Secretary, Treasurer (Chief  Financial |
|                     |                               | Officer) and Chairman of the |
|                     |                               | Board of Directors |
| Date:  May 28, 2004 |                               |
|                          |                                    |  |  |  |

 

27

----

 

Each person whose signature appears belowconstitutes and appoints Dr. Stanislaw R. Burzynski his/her true and lawfulattorney-in-fact and agent, with full power of substitution and resubstitution,severally, for him/her in his/her name, place and stead, in any and allcapacities, to sign any and all amendments to this report, and to file thesame, with all exhibits thereto and other documents in connection therewith,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 of the SecuritiesAct of 1934, this report has been signed below by the following persons in thecapacities and on the dates indicated.

 

 
| /s/ Stanislaw R. Burzynski                                     |                     |   |
|----------------------------------------------------------------|--------------------------|--------|
| Stanislaw R. Burzynski                                         | Date:  May 28, 2004 |
| President, Secretary, Treasurer (Chief Financial Officer), and |                     |
| Chairman of the Board of Directors                             |                     |
|                                                           |                     |
|                                                           |                     |
| /s/ Barbara Burzynski                                          |                     |   |
| Barbara Burzynski                                              | Date:  May 30, 2004 |
| Director                                                       |                     |
|                                                           |                     |
|                                                           |                     |
| /s/ Michael H. Driscoll                                        |                     |   |
| Michael H. Driscoll                                            | Date:  May 29, 2004 |
| Director                                                       |                     |
|                                                           |                     |
|                                                           |                     |
| /s/ Carlton Hazlewood                                          |                     |   |
| Carlton Hazlewood                                              | Date:  May 30, 2004 |
| Director                                                       |                     |

 

28

----

**Burzynski Research Institute, Inc.**

 

**Financial Statements**

 

**For the years ended**

**February 29, 2004 and February 28,2003**

 

----

 

CONTENTS

 
| Independent Auditor’s Report       |   |
|-----------------------------------------|--------|
|                                    |   |
| Balance  Sheets                         |   |
|                                    |   |
| Statements of Operations                |   |
|                                    |   |
| Statements of Stockholders’ Equity |   |
|                                    |   |
| Statements of Cash Flows                |   |
|                                    |   |
| Notes to Financial Statements           |   |

 

F-2

----

 

INDEPENDENTAUDITOR’S REPORT

 

 

To the Board of Directors and Stockholdersof Burzynski Research Institute, Inc.

 

We have audited the accompanying balance sheets of Burzynski ResearchInstitute, Inc. as of February 29, 2004 and February 28, 2003, andthe related statements of operations, stockholders’ equity, and cash flows forthe years then ended.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audits to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes 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, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Burzynski Research Institute, Inc. as ofFebruary 29, 2004 and February 28, 2003 and the results of theiroperations and their cash flows for the years then ended, in conformity withaccounting principles generally accepted in the United States of America.

 

 

May 24, 2004

Houston, Texas

 

F-3

----

 

**BURZYNSKI RESEARCH INSTITUTE, INC.**

**BALANCE SHEETS**

**February 29, 2004 andFebruary 28, 2003**

 
|                                                                                                     |   | **2004**    |   | **2003**    |   |
|----------------------------------------------------------------------------------------------------------|--------|-------------|--------|-------------|--------|
| ASSETS                                                                                                   |   |        |   |        |   |
|                                                                                                     |   |        |   |        |   |
| Current assets                                                                                           |   |        |   |        |   |
|                                                                                                     |   |        |   |        |   |
| Cash and cash equivalents (Note 1)                                                                       |   | $           | 18,962 |        | $      | 1,926 |   |
| Other current assets                                                                                     |   | 1,000       |   | —      |   |
|                                                                                                     |   |        |   |        |   |
| Total current assets                                                                                     |   | 19,962      |   | 1,926       |   |
|                                                                                                     |   |        |   |        |   |
| Property and equipment, net of accumulated  depreciation and amortization (Notes 1,4 and 5)              |   | 54,150      |   | 63,839      |   |
|                                                                                                     |   |        |   |        |   |
| Total assets                                                                                             |   | $           | 74,112 |        | $      | 65,765 |   |
|                                                                                                     |   |        |   |        |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                |   |        |   |        |   |
|                                                                                                     |   |        |   |        |   |
| Current liabilities                                                                                      |   |        |   |        |   |
|                                                                                                     |   |        |   |        |   |
| Accounts payable                                                                                         |   | $           | 56,114 |        | $      | 23,384 |   |
| Accrued liabilities                                                                                      |   | 50,624      |   | 47,068      |   |
|                                                                                                     |   |        |   |        |   |
| Total current liabilities                                                                                |   | 106,738     |   | 70,452      |   |
|                                                                                                     |   |        |   |        |   |
| Total liabilities                                                                                        |   | 106,738     |   | 70,452      |   |
|                                                                                                     |   |        |   |        |   |
| Commitments and contingencies (Note 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                                                                               |   | 60,898,836  |   | 56,542,945  |   |
| Discount on common stock                                                                                 |   | (100        | )      | (100        | )      |
| Retained deficit                                                                                         |   | (61,062,751 | )      | (56,678,921 | )      |
|                                                                                                     |   |        |   |        |   |
| Total stockholders’ equity (deficit)                                                                |   | (32,626     | )      | (4,687      | )      |
|                                                                                                     |   |        |   |        |   |
| Total liabilities and stockholders’ equity                                                          |   | $           | 74,112 |        | $      | 65,765 |   |

 

The accompanying notes are an integral part ofthese financial statements.

 

F-4

----

 

**BURZYNSKI RESEARCH INSTITUTE, INC.**

**STATEMENTS OF OPERATIONS**

**For the Years EndedFebruary 29, 2004 and February 28, 2003**

 
|                                       |   | **2004**   |       | **2003**   |   |
|--------------------------------------------|--------|------------|------------|------------|--------|
|                                       |   |       |       |       |   |
| Revenue                                    |   |       |       |       |   |
| Other income                               |   | $          | 500        |       | $      | — |   |
|                                       |   |       |       |       |   |
| Operating expenses                         |   |       |       |       |   |
| Research and development (Notes 1 and 2)   |   | 4,175,174  |       | 4,197,298  |   |
| General and administrative                 |   | 195,732    |       | 205,581    |   |
| Depreciation (Notes 1 and 4)               |   | 13,424     |       | 17,127     |   |
|                                       |   |       |       |       |   |
| Total operating expenses                   |   | 4,384,330  |       | 4,420,006  |   |
|                                       |   |       |       |       |   |
| Net loss before provision for taxes        |   | (4,383,830 | )          | (4,420,006 | )      |
|                                       |   |       |       |       |   |
| Provision for income tax (Notes 1 and 6)   |   | —     |       | 780        |   |
|                                       |   |       |       |       |   |
| Net loss                                   |   | $          | (4,383,830 | )          | $      | (4,420,786 | ) |
|                                       |   |       |       |       |   |
| Earnings per share information:            |   |       |       |       |   |
| Basic and diluted  (Loss) per common share |   | $          | (0.0334    | )          | $      | (0.0336 | ) |

 

The accompanying notes are an integral part ofthese financial statements.

 

F-5

----

 

**BURZYNSKI RESEARCH INSTITUTE, INC.**

**STATEMENTS OF STOCKHOLDERS’ EQUITY**

**For the Years EndedFebruary 29, 2004 and February 28, 2003**

 
|                                                                      |   | **Common  Stock** |    | **Additional  Paid-in  Capital** |   | **Discount  on  Common  Stock** |   | **Retained  Deficit** |   |
|---------------------------------------------------------------------------|--------|-------------------|---------|----------------------------------|--------|---------------------------------|--------|-----------------------|--------|
|                                                                      |   |              |    |                             |   |                            |   |                  |   |
| Balance February 28, 2002                                            |   | $                 | 131,389 |                             | $      | 52,160,847                      |   | $                     | (100   | ) | $ | (52,258,135 | ) |
|                                                                      |   |              |    |                             |   |                            |   |                  |   |
| Cash contributed by S.R. Burzynski M.D.,  Ph.D.                           |   | —            |    | 712,000                          |   | —                          |   | —                |   |
|                                                                      |   |              |    |                             |   |                            |   |                  |   |
| FDA clinical trial expenses paid directly  by S.R. Burzynski M.D., Ph. D. |   | —            |    | 3,670,098                        |   | —                          |   | —                |   |
|                                                                      |   |              |    |                             |   |                            |   |                  |   |
| Net loss                                                                  |   | —            |    | —                           |   | —                          |   | (4,420,786            | )      |
|                                                                      |   |              |    |                             |   |                            |   |                  |   |
| 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 | ) |

 

The accompanying notes are an integral part ofthese financial statements.

 

F-6

----

 

**BURZYNSKI RESEARCH INSTITUTE, INC.**

**STATEMENTS OF CASH FLOWS**

**For the Years EndedFebruary 29, 2004 and February 28, 2003**

 
|                                                                               |   | **2004**  |       | **2003**  |   |
|------------------------------------------------------------------------------------|--------|-----------|------------|-----------|--------|
|                                                                               |   |      |       |      |   |
| CASH FLOWS FROM OPERATING ACTIVITIES                                               |   |      |       |      |   |
| Net loss                                                                           |   | $         | (4,383,830 | )         | $      | (4,420,786 | ) |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |      |       |      |   |
| Depreciation                                                                       |   | 13,424    |       | 17,127    |   |
| FDA clinical trial expenses paid directly  by S.R. Burzynski M.D., Ph. D.          |   | 3,676,891 |       | 3,670,098 |   |
| (Increase) decrease in                                                             |   |      |       |      |   |
| Other current assets                                                               |   | (1,000    | )          | —    |   |
| Increase (decrease) in                                                             |   |      |       |      |   |
| Accounts payable                                                                   |   | 32,730    |       | 12,018    |   |
| Accrued liabilities                                                                |   | 3,556     |       | 598       |   |
|                                                                               |   |      |       |      |   |
| NET CASH (USED) IN OPERATING ACTIVITIES                                            |   | (658,229  | )          | (720,945  | )      |
|                                                                               |   |      |       |      |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES                                         |   |      |       |      |   |
| Purchases of property and equipment                                                |   | (3,735    | )          | (11,714   | )      |
|                                                                               |   |      |       |      |   |
| NET CASH (USED) IN INVESTING ACTIVITIES                                            |   | (3,735    | )          | (11,714   | )      |
|                                                                               |   |      |       |      |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                               |   |      |       |      |   |
| Additional paid-in capital                                                         |   | 679,000   |       | 712,000   |   |
|                                                                               |   |      |       |      |   |
| NET CASH PROVIDED BY FINANCING ACTIVITIES                                          |   | 679,000   |       | 712,000   |   |
|                                                                               |   |      |       |      |   |
| NET INCREASE (DECREASE) IN CASH                                                    |   | 17,036    |       | (20,659   | )      |
|                                                                               |   |      |       |      |   |
| CASH AT BEGINNING OF YEAR                                                          |   | 1,926     |       | 22,585    |   |
|                                                                               |   |      |       |      |   |
| CASH AT END OF YEAR                                                                |   | $         | 18,962     |      | $      | 1,926 |   |
|                                                                               |   |      |       |      |   |
| SUPPLEMENTAL CASH FLOW DISCLOSURES:                                                |   |      |       |      |   |
| Cash Paid During the Year For:                                                     |   |      |       |      |   |
| Income taxes                                                                       |   | $         | —     |      | $      | 2,830 |   |
| Interest                                                                           |   | $         | 58,023     |      | $      | 70,829 |   |

 

The accompanying notes are an integral part ofthese financial statements.

 

F-7

----

 

BURZYNSKI RESEARCH INSTITUTE, INC.

NOTES TOFINANCIAL STATEMENTS

 

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

 

# Background and Basis of Presentation

 

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

 

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

 

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

 

Economic Dependency

 

BRI has generated no significant revenues since its inception.  As of February 29, 2004, the Companyhad a working capital deficit of approximately $87,000 and accumulated deficitof approximately $61,100,000.  For theyears ended February 29, 2004 and February 28, 2003 the Companyincurred losses of approximately $4,384,000 and $4,421,000, 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 is economically dependent on its funding from Dr. Burzynski throughhis medical practice.  Managementestimates that approximately one-third of Dr. Burzynski’s patients are admittedand treated 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 topotential claims by patients and other potential claimants commonly arising outof the operation of a medical practice. The risks associated with Dr. Burzynski’s medical practice directlyaffect his ability to fund the operations of BRI.

 

It is the intention of the directors and management to seek additionalcapital through the sale of securities. The proceeds from such sales will be used to fund BRI’s operatingdeficit until it achieves positive operating cash flow.  However, there can be no assurance that theCompany will be able to raise such additional capital.

 

Significant Accounting Policies

 

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

## ** **

The Company considers all highly liquid investments purchased with anoriginal maturity of three months or less to be cash equivalents.

 

## ***Property and Equipment***

## ** **

Property and equipment are recorded at cost and depreciated using thestraight-line method over the estimated useful lives of the assets, which rangefrom 5 to 31.5 years.  Expenditures formajor renewals and betterments that extend the useful lives of property and equipmentare capitalized; maintenance and repairs are charged against earnings asincurred.  Upon disposal of assets, therelated cost and accumulated depreciation are removed from the accounts and anyresulting gain or loss is recognized currently.

 

F-9

----

 

## ***Income Taxes***

## ** **

The Company uses the liability method of accounting for income taxes,under which deferred income taxes are recognized for the tax consequences oftemporary differences by applying the enacted statutory tax rate applicable tofuture years to differences between financial statement carrying amounts andthe tax basis of existing assets and liabilities.  Valuation allowances are established when necessary to reducedeferred tax assets to the amount expected to be realized.  Income tax expense is the tax payable orrefundable for the period plus or minus the change during the period indeferred tax assets and liabilities. The costs incurred related to the conduct of FDA approved clinicaltrials incurred directly by Dr. Burzynski within his medical practice are taxeddirectly to Dr. Burzynski and are not included in the Company’s taxprovision.  The portion of the Texasfranchise tax that is based on income is treated as income taxes and includedin the income tax provision.

 

***Loss Per CommonShare***

 

Basic and diluted loss per common share information for all periods ispresented under the requirements of FASB Statement No. 128, “Earnings pershare”.  Basic loss per common share hasbeen computed using the weighted average number of common shares outstandingduring the period.  Potentially dilutivesecurities have been excluded from the computation of diluted loss per commonshare, as their inclusion would be antidilutive.

 

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

### ** **

Research and development cost are charged to operations in the yearincurred.  Equipment used in researchand development activities, which have alternative uses, are capitalized.

 

### ***Management Estimates***

### ** **

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect reported amounts of assets and liabilities at the datesof the financial statements and the reported amounts of revenues and expensesduring the reported periods.  Thesignificant estimates are the allocation of payroll and other expenses betweenthe clinical trial expenses reported with Burzynski Research Institute, Inc.expenses and Dr. Burzynski’s medical practice expenses.  Actual results could differ from thoseestimates.

 

F-10

----

 

### ***Stock****Options*

 

As permitted under generally accepted accounting principles,stock-based awards granted to employees are accounted for following APB 25, asfurther described in Note 7. Accordingly, the Company has not recognized compensation expense for itsstock-based awards to employees.  Noadditional compensation expense would be incurred during 2004 or 2003 ifcompensation costs for the Company’s stock-based compensation plans had beendetermined based on the fair value approach of SFAS 123.

 

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

 

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

 

License Agreement

 

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

 

The License Agreement grants to the Company the exclusive right, in theUnited States, Canada, and Mexico, to use, manufacture, develop, sell,distribute, sub-license and otherwise exploit all of Dr. Burzynski’s rights,title, and interests, including patent rights, in antineoplaston drugs in thetreatment and diagnosis of cancer.  TheCompany will not be able to exploit such rights until such time asantineoplastons are approved, of which there can be no assurance, by the FDAfor sale in the United States and the appropriate authority in Canada andMexico.

 

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

 

F-11

----

 

The License Agreement will terminate upon the earlier of the expirationof the last patent licensed to the Company, or termination by Dr. Burzynski, athis option, if he is removed as a director or officer of the Company withouthis consent, if the Company files for bankruptcy or if any shareholder or groupof shareholders acting in concert becomes the beneficial owner of the Company’ssecurities having voting power equal to or greater than the voting power of thesecurities Dr. Burzynski holds.

 

Under the License Agreement, the Company currently owns exclusiverights to seven (7) issued United States Patents and three (3) issued CanadianPatents.  The Company has no patents inMexico.  The Company has one (1) pendingpatent application in the United States, one (1) pending patent application inCanada and one (1) in Mexico.

 

The five initial United States Patents (the “Initial Patents”) relateto: (i) Determination of Antineoplastons in body tissue or fluids as a testingprocedure to aid in the diagnosis of cancer; (ii)  Processes for the preparation of purified fractions ofAntineoplastons from human urine; (iii) Processes for the synthetic productionof Antineoplastons and methods of treating neoplastic disease (cancer); (iv)Administration of Antineoplastons to humans; and (v) Methods of synthesizingA-10.  The Initial Patents expire fromDecember 12, 2001 to January 11, 2009; however, the Company does notbelieve the expiration of any of the Initial Patents will have a materialadverse effect on the Company.

 

The sixth United States Patent (the “2000 U.S. Patent”) coversLiposomal Antineoplaston therapies with markedly improved anti-canceractivity.  The 2000 U.S. Patent expiresMay 14, 2017.

 

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

 

The Company has previously reported the issuance of an eighth UnitedStates patent related to the synthesis of 4-Phenylbutric Acid, but hasdetermined that such patent is not applicable to the formulation, preparation,manufacture, production, use, dosage and treatment of cancer withAntineoplastons.

 

The first two Canadian Patents (the “Canadian Patents”) relate to: (i)Processes for the preparation of purified fractions of Antineoplastons fromhuman urine, and (ii) Processes for the synthetic production of Antineoplastonsand methods of treating neoplastic disease (cancer).  The Canadian Patents expire on November 14, 2006 andJune 4, 2002, respectively. However, the Company does not believe the expiration of any of theInitial Patents will have a material adverse effect on the Company.

 

The third Canadian Patent (the “2004 Canadian Patent”) covers LiposomalAntineoplaston therapies with markedly improved anti-cancer activity.  The 2004 Canadian Patent expires May 14,2017.

 

F-12

----

 

Research Funding Agreement

 

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

 

1.                                       BRI agrees toundertake all scientific research in connection with the development of new orimproved antineoplastons for the treatment of cancer.  BRI will hire such personnel as is required to fulfill itsobligations 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.                                       As FDA approvalof antineoplastons will benefit both parties, Dr. Burzynski agrees to pay theexpenses to conduct the clinical trials for BRI.

 

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.                                       In the event theresearch described in the agreement results in the approval of any additionalpatents for the treatment of cancer, Dr. Burzynski shall own all such patents,but shall license to BRI the patents based on the same terms, conditions andlimitations as is in the current license between the parties.

 

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.                                       The amounts,which Dr. Burzynski is obligated to pay under the agreement, shall be reduceddollar for dollar by the following:

 

a.                                       Any income whichBRI 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 (such as the purchase of chemicals,products or equipment solely necessary to engage in such other research and developmentactivity.

 

F-13

----

 

 

b.                                      The net proceedsof any stock offering or private placement, which BRI receives during the termof the engagement up to a maximum of $1,000,000 in a given BRI fiscal year.

 

8.                                       The initial termof the agreement expired March 1, 2001 and was extended untilMarch 1, 2004.  The agreement wasamended February 29, 2004 to extend one additional year, renewingautomatically for two successive one-year terms, unless one party notifies theother party at least thirty days prior to the expiration of the term of theagreement of its intention not to renew the agreement.

 

9.                                       The agreementshall automatically terminate in the event that Dr. Burzynski owns less thanfifty percent of the outstanding shares of BRI, or is removed as Presidentand/or Chairman of the Board of BRI, unless he notifies BRI in writing hisintention to continue the agreement notwithstanding this automatic terminationprovision.

 

Royalty Agreement

 

The Company entered into a royalty agreement with Dr. Burzynski wherebyupon receiving FDA approval for interstate marketing and distribution, theCompany agrees to pay Dr. Burzynski a royalty interest equivalent to 10% of theCompany’s gross income, which royalty interest shall include gross receiptsfrom all future sales, distributions and manufacture of antineoplastons.  Dr. Burzynski will have the right to eitherproduce antineoplaston products for use in his medical practice to treat up to1,000 patients without paying any fees to the Company, or purchase from theCompany antineoplaston products for use in his medical practice to treat up to1,000 patients at a price of the Company’s cost to produce the antineoplastonproducts plus 10%.  Dr. Burzynski willalso have the right to either lease or purchase all the manufacturing equipmentlocated at 12707 Trinity Drive, Stafford, Texas at a fair market price.  The Company will also have the right tolease from 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 and will continue until suchtime as both parties agree it is not in their mutual interest to continue.

 

F-14

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Other Related Party Transactions

 

Dr. Burzynski owns the production facility located at TrinityDrive.  There is no formal leaseagreement between Dr. Burzynski and BRI, however, the Research FundingAgreement described above provides that Dr. Burzynski will allow the Companythe use of the building.  In addition,the Royalty Agreement states that after FDA approval is granted (thoughapproval is not assured) the Company may rent the facility at competitive ratesif Dr. Burzynski does not need the facility for his use.  The actual facility costs are included inthe financial statements as set forth in note 5.  In addition, Dr. Burzynski’s medical clinic performs certainadministrative functions such as accounting, and allows BRI the use of someoffice space at no charge to the Company. Since May of 2000, Dr. Burzynski’s entire salary is paid through hismedical practice and he is not compensated by BRI for his services.

 

The Company has received allsignificant funding from Dr. Burzynski through either cash contributed to BRIor the payment of the cost to conduct FDA approved clinical trials through hismedical practice, as disclosed in Note 1. Following is a summary of the capital contributed and clinical trialcosts paid by Dr. Burzynski.

 
|                             |   | **2004** |      | **2003** |   |
|----------------------------------|--------|----------|-----------|----------|--------|
|                             |   |     |      |     |   |
| Capital contributed              |   | $        | 679,000   |     | $      | 712,000 |   |
| Clinical trial costs paid direct |   | $        | 3,676,891 |     | $      | 3,670,098 |   |

 

**3.****                                      EmployeeBenefits:**

 

The Company has a self-funded employee benefit plan providing healthcare benefits for all its employees. It also provides for them group dentalinsurance, short-term and long-term disability insurance, and lifeinsurance.  Employees pay pre-taxpremiums from $40 to $400 per month depending upon the insurance coverageselected by the employee.  Employees canselect from two coverage plans, which have either a $200 or $300 deductible,varying out-of-pocket maximums, and a maximum lifetime benefit of $1,000,000 percovered participant.  Due to stop-lossinsurance, benefits payable by the Company are limited to $25,000 per personduring the policy year.  The Companycharged to operations a provision of $181,094 for 2004 and $221,153 for 2003,which represents the sum of actual claims paid and an estimate of liabilitiesrelating to claims, both asserted and unasserted, resulting from incidents thatoccurred during the year.

 

F-15

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**4.****                                      Propertyand Equipment:**

 

Property and equipment consists of the following as of February 29th  and 28th:

 
|                                      |   | **EstimatedUseful Lives** |   | **2004**   |      | **2003**   | ** ** |
|-------------------------------------------|--------|---------------------------|--------|------------|-----------|------------|------------|
|                                      |   |                      |   |       |      |       |       |
| 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    |      | 631,020    |       |
| Equipment                                 |   | 4 - 5 years               |   | 288,943    |      | 288,943    |       |
| Total property and equipment              |   |                      |   | 5,781,530  |      | 5,777,795  |       |
|                                      |   |                      |   |       |      |       |       |
| Accumulated depreciation and amortization |   |                      |   | (5,727,380 | )         | (5,713,956 | )          |
|                                      |   |                      |   |       |      |       |       |
|                                      |   |                      |   | $          | 54,150    |       | $          | 63,839 |   |

 

Depreciation and amortization expense for the years endedFebruary 29, 2004, and February 28, 2003 was $13,424 and $17,127,respectively.

 

**5.****                                      LeaseCommitments:**

 

The Company leases certain equipment under agreements, which are classifiedas operating leases.  Rent expenseincurred under these leases was approximately $68,233 and $9,077 for the yearsended February 29, 2004, and February 28, 2003, respectively.  All lease agreements are on a month-to-monthbasis.

 

In addition, as explained in Note 2, Dr. Burzynski owns the facilityused by the Company to perform research and produce its drug products.  There is currently no lease agreement,however, the facility’s costs are included in the accompanying financialstatements.  Those costs include notonly utilities and expenses normally incurred by a tenant but also mortgageinterest, insurance, property taxes and building depreciation.  Interest, insurance, property taxes andbuilding depreciation totaled $166,679 and $182,216 for 2004 and 2003,respectively.

 

F-16

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

 

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

 

The actual income tax benefit attributable to the Company’s losses forthe years ended February 29, 2004 and February 28, 2003 differ fromthe amounts computed by applying the U.S. federal income tax rate of 34% to thepretax loss as a result of the following:

 
|                                 |   | **2004**  |       | **2003**  |   |
|--------------------------------------|--------|-----------|------------|-----------|--------|
|                                 |   |      |       |      |   |
| Expected benefit                     |   | $         | (1,490,502 | )         | $      | (1,502,802 | ) |
| Taxed directly to Dr. Burzynski      |   | 1,490,492 |       | 1,503,067 |   |
| Other adjustments                    |   | 2,639     |       | (201      | )      |
| Change in valuation allowance        |   | (2,629    | )          | (64       | )      |
| Texas franchise tax, based on income |   | —    |       | 780       |   |
|                                 |   |      |       |      |   |
| Income tax expense                   |   | $         | —     |      | $      | 780 |   |

 

The components of the Company’sdeferred income tax assets as of February 29, 2004 and February 28,2003 are as follows:

 
|                                          |   | **2004** |    | **2003** |   |
|-----------------------------------------------|--------|----------|---------|----------|--------|
|                                          |   |     |    |     |   |
| Deferred tax assets:                          |   |     |    |     |   |
|                                          |   |     |    |     |   |
| Net operating loss carryforwards              |   | $        | 376,076 |     | $      | 355,777 |   |
| Excess book depreciation                      |   | 23,408   |    | 39,348   |   |
| Accrued expenses                              |   | 5,229    |    | 6,959    |   |
| Alternative minimum tax credit  carryforwards |   | 42,603   |    | 42,603   |   |
|                                          |   |     |    |     |   |
| Total deferred tax assets                     |   | 447,316  |    | 444,687  |   |
| Less valuation allowance                      |   | (447,316 | )       | (444,687 | )      |
|                                          |   |     |    |     |   |
| Net deferred tax assets                       |   | $        | —  |     | $      | — |   |

 

F-17

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The Company’s ability toutilize net operating loss carryforwards and alternative minimum tax creditcarryforwards will depend on its ability to generate adequate future taxableincome.  The Company has no historicalearnings 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 loss carryforwards available to offsetfuture income in the amount of $1,106,108 as of February 29, 2004.  The net operating loss carryforwards expireas 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  |   |

 

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

 

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

 

Statement of Financial Accounting Standards No. 123, “Accounting forStock-based Compensation” (FAS 123) defines a fair value based method ofaccounting for employee stock options or similar equity instruments andencourages all entities to adopt that method of accounting for all of theiremployee stock compensation plans. Under the fair value based method, compensation cost is measured at thegrant date based on the value of the award and is recognized over the serviceperiod of the award, which is usually the vesting period.  However, FAS 123 also allows entities tocontinue to measure compensation costs for employee stock compensation plansusing the intrinsic value method of accounting prescribed by AccountingPrinciples Board (APB) Opinion No. 25, “Accounting for Stock Issued toEmployees” (APB 25).  The Company hasadopted FAS 123 and has elected to remain with the accounting prescribed by APB25.

 

F-18

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On September 14, 1996 the Company granted 600,000 stock options,with an exercise price of $.35 per share, to an officer of 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 from the grant date, they increasein the same percentage of any new shares of stock issued; however, noadditional shares have been issued since September 14, 1996.  None of the options have been exercised asof February 29, 2004.

 

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

 

As described in Note 2, the Company entered a Royalty Agreement withDr. Burzynski.  Under that agreement,upon FDA approval, the Company is obligated to provide Dr. Burzynski the rightto produce antineoplaston products to treat up to 1,000 patients without payingany fees to the Company or the right to purchase antineoplaston products totreat up to 1,000 patients at cost plus 10%.

 

The Company produced antineoplaston products to treat approximately 100patients during the years ended February 29, 2004 and February 28,2003.  Management estimates the currentproduction facilities have the capacity to produce product to treat approximately1,500 patients.  There is spaceavailable at the current site to expand the facility for increased capacity ifnecessary.

 

The Companyreceived approximately fifty nine percent and sixty one percent of thechemicals used in producing antineoplastons from a single supplier during theyears ended February 2004 and 2003, respectively.  The Company has established an additionalvendor to supply these chemicals.

 

F-19

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