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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-KSB



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|x | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------

For the fiscal year ended December 31, 2006



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------

For the transition period from  to

COMMISSION FILE NUMBER: 000-51610



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AVICENA GROUP, INC.

(Exact Name of Small Business as Specified in its Charter)



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|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 04-3195737                          
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)

228 Hamilton Avenue, Third Floor, Palo Alto, CA 94301

(Address of Principal Executive Offices)

(415) 397-2880

(Issuers Telephone Number)



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Securities registered under
Section 12(b) of the Exchange Act: None.

Securities registered under Section 12(g) of the Exchange Act: Common Stock, par value
$0.001 per share.



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Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act: ̈

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such 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  x    NO ̈

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B, and no disclosure will be contained, to the best of
the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB: ̈

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).  YES ̈NO x

State issuers revenues for its most recent fiscal year: $374,952

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such
common equity, as of a specified date within the past 60 days. (See definition of affiliate in Rule 12b-2 of the Exchange Act): $255,530,872 based on the last price at which the shares were sold on April 2, 2007 of $5.01 per share.

As of April 2, 2007, the registrant had 51,004,166 shares of Common Stock, par value $0.001 per share, outstanding.

Documents incorporated by reference: None.

Transitional Small Business
Disclosure Format (check one):  Yes ̈No  x



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##### Table of Contents

INDEX



|           |  |                                                                                                                         |  |   
|---------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | --
|PART I     |  | 3                                                                                                                      
|           |  | Item 1.
Description of Business                                                                                         |  | 3 
|           |  | Item 2.
Description of Property                                                                                         |  | 12
|           |  | Item 3.
Legal Proceedings                                                                                               |  | 12
|           |  | Item 4.
Submission of Matters to a Vote of Security Holders                                                             |  | 12
|PART II    |  | 13                                                                                                                     
|           |  | Item 5.
Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities  |  | 13
|           |  | Item 6.
Managements Discussion and Analysis of Financial Condition and Results of Operation                            |  | 16
|           |  | Item 7.
Financial Statements                                                                                            |  | 29
|           |  | Item 8.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure                            |  | 52
|           |  | Item 8A.
Controls and Procedures                                                                                        |  | 52
|           |  | Item 8B.
Other Information                                                                                              |  | 53
|PART III   |  | 53                                                                                                                     
|           |  | Item 9.
Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act |  | 53
|           |  | Item 10.
Executive Compensation                                                                                         |  | 55
|           |  | Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                 |  | 57
|           |  | Item 12.
Certain Relationships, Related Transactions and Director Independence                                          |  | 58
|           |  | Item 13.
Exhibits                                                                                                       |  | 60
|           |  | Item 14.
Principal Accountant Fees and Services                                                                         |  | 62
|SIGNATURES |  | 63                                                                                                                     



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PART I

Avicena® and NEOtine® are registered trademarks, and PURE ENERGY, PURE ENERGY FOR HEALTHY SKIN and Nurigene, are trademarks, of the Company. All other trademarks, service marks and trade names referred to in
this Form 10-KSB are the property of their respective owners.



|Item 1. | Description of Business
|------- | -----------------------

We are a late-stage
biotechnology company which seeks to develop and commercialize distinctive drug, cosmetic and nutritional products that deliver value by improving the lives of patients by regulating critical energy processes which occur within cells. We are
currently licensing cosmeceutical products and selling a nutraceutical product. While none of our drug candidates have yet been approved for commercial sale, we have two products in Phase III trials, one product in Phase II trials and one product in
Phase I trials.

Development of Business

Our predecessor company, Amira, Inc., was formed in 1989 and was purchased by Repligen Corporation in 1991. From 1991-1994, the Amira business was operated as a division of Repligen, focusing on cancer treatments related to modulation of
energy metabolism. The Avicena Group, Inc. was formed as a Massachusetts corporation in 1993 and purchased the Amira intellectual property from Repligen. We reincorporated as Avicena Group, Inc. in Delaware on August 6, 1999.

We agreed on October 26, 2005, to merge with AVN Acquisition Corp. (AVN), a single-purpose company formed to provide financing to the
Company. Prior to the merger, the Company had received $1,000,000 in the form of notes payable directly or indirectly from AVN. On November 14, 2005, the SEC approved the Companys registration statement on Form SB-2 and shortly
thereafter, on November 23, 2005, the merger with AVN was consummated. When the merger was consummated, we received AVNs cash assets of $2,000,000 and all amounts due under the loans held by AVN were cancelled as a matter of law. Also as
part of the merger, the Companys outstanding shares of Series A and Series B Convertible Preferred Stock were converted into 2.1 shares of common stock, each outstanding share of Series C Convertible Preferred Stock was converted into 1.4
shares of common stock and the outstanding shares of common stock were split on a 1.4 to 1 basis.

As of December 31, 2006, we owned
or co-owned six issued patents in the U.S. and had twenty patent applications pending. We owned twelve issued patents in foreign countries and had fifteen patent applications pending, all of which we filed ourselves.

Our Scientific Foundation

Our research is focused on
those biochemicals that effectively influence the bodys ability to modulate cellular energy productions via the creatine kinase (CK) system and cellular energy transport via the creatine transporter (CT) system.

How the CK system works

The
bodys CK system is one of a number of unique systems responsible for providing energy to those tissues that have intermittently high and fluctuating demands for energy, such as the skeletal muscles, the heart, the brain, the retina and various
skin tissues. Comprised of creatine kinase (an enzyme) and its substrates (the chemicals upon which the enzyme acts), creatine and phosphocreatine, the CK system is responsible for storing energy within the cell and transporting energy between sites
of energy production and sites of energy consumption. Creatine is a naturally occurring compound that is produced by the liver from arginine and glycine. Inside cells, creatine is actively transported from the cytoplast into the mitochondria, which
are also referred to as the powerhouse of the cell. As creatine enters the mitochondria, the enzyme CK converts creatine into phosphocreatine (PCr), which is then stored inside the mitochondria for use at a later time. When the cell
requires energy, PCr relinquishes its phosphate group to adenosine diphosphate (ADP), which is thus transformed into adenosine triphosphate (ATP). ATP, the basic energy source of the human body, then exits the mitochondria and is used to satisfy the
immediate energy needs of the cell.

The cell releases the energy stored in ATP by breaking the bond with the third phosphate group, and
the compound returns to the mitochondria as ADP. Conversely, once PCr gives up the phosphate group to ADP it exits the mitochondria as creatine. Excess creatine is then broken down into creatinine, a waste product, which is filtered out of the blood
by the kidneys and excreted in the urine. In order to satisfy normal energy needs, the human body requires approximately 2 grams of creatine per day. However, the typical daily diet only provides the body with up to 1 gram of creatine. Accordingly,
creatine supplementation is able to increase the bodys level of creatine and phosphocreatine, which in turn increases ATP (energy) levels.



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How the CT system works

Creatine is carried by the blood stream to the brain cells, as well as to the cells that make up the skeletal muscles, the heart, the retina and various
skin tissues. In order to reach brain cells, creatine must be successfully transported across the blood-brain barrier (BBB). The BBB is a system of semi-permeable barriers in the capillaries of the brain specifically designed to maintain a constant
chemical environment in order for the brain cells (neurons and glia cells) to function. The BBB prevents toxic substances or unnecessary metabolites from entering the brains environment while permitting needed metabolites (such as blood gasses
and small nutritional molecules such as glucose) to pass through the barrier to the brain cells. The BBB is a highly sophisticated control system in charge of preserving the physiological equilibrium of the brain.

As creatine in the blood stream passes by the BBB, the creatine transporter picks up the creatine and shuttles it across the endothelium (the tissues
lining the capillaries in the brain which constitute the BBB) and into the brain tissues. From the brain tissue, creatine is then selected by the high affinity neuronal plasma membrane creatine transporter and transferred into the (neurons and glia
cell) themselves. This transfer of creatine is one directional and occurs against a significant creatine concentration inside the neurons and glia cells.

At this point, creatine is stored in the cytoplast of the neurons and glia cells, where it is readily available to be transformed by the CK system into PCr for energy consumption inside the mitochondria. To mediate
this process, the mitochondrial creatine transporter, which sits on the inner mitochondrial membrane, is called upon to transport the creatine from the cells cytoplast to the mitochondria.

In patients with defective creatine transporter genes, creatine is noticeably absent from the brain. While creatine supplementation increases the level
of creatine and phosphocreatine in the muscles and blood stream, if the creatine transporter gene is defective, the higher levels will not be able to cross the BBB and enter the brains environment. Therefore, supplementation alone cannot treat
those symptoms that result from a defective transporter. Therapies to treat defective creatine transporters must be able to deliver creatine or analogs by other means across the BBB in order to reach the brain cells.

Company Strategy

Our business strategy is to focus
on orphan drugs in our pharmaceutical division, and cosmeceuticals (therapeutic cosmetic ingredients) and nutraceuticals (medical foods and dietary supplements) in our OTC division. This strategy has three phases:

Sell cosmeceutical products currently to generate funds to support product development.

Selling cosmeceutical products allows us to partially fund the development of our orphan drug products. In 2000, we contracted with Estée Lauder
(EL) to supply them with a cosmeceutical agent, based on our patented formulation. In that contract, we granted EL an exclusive worldwide license to include creatine in its products for those uses protected by our patents. Under the agreement, EL
must purchase all creatine for uses protected by our patents exclusively from us. EL now includes the ingredient in many of its prestige anti-aging skin-care product lines. In addition to EL, another cosmetic company is currently evaluating several
of our second-generation compounds for inclusion in its anti-aging products. We are also in discussions with a distributor of specialty cosmetic ingredients to supply them with cosmeceutical agents which they would distribute to other cosmeceutical
companies. The products are protected by our use patents and will be sold under our brand names. We have also developed our own branded line of products, called Nurigene, which will include patent produced ingredients, using Avicenas
Advanced Skin Nourishment ASN technology.

Develop Orphan Drug Products.

We are focusing our current research efforts on drugs to treat orphan diseases, principally in the area of neurology, because the government offers market
protection to drugs to treat such diseases. We currently have two pharmaceutical product candidates in Phase III trials, one pharmaceutical product candidate that has completed Phase II trials and will be entering Phase III trial and one
pharmaceutical product candidate in a Phase I trial. We expect to begin benefiting from these product candidates if and when we receive FDA approval of the related New Drug Applications following completion of all necessary clinical trials.

Sell patent-protected nutraceuticals to the OTC market.

Our nutraceutical products are based on the same proprietary and protected formulations as our orphan drug products. But, because they are nutraceutical
products and not drugs, the FDA minimally regulates their development and sale. All our nutraceutical products will include compounds that modulate energy metabolism via the CK system or related systems in the cellular energy cycle. To date, we have
launched one nutraceutical product, NEOtine, which we sell through our web site.



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Research and Product Development

We focus our research and development efforts on developing a pipeline of products based on our proprietary knowledge of the processes of cellular energy modulation and cellular energy transfer. We have selected
product candidates which have demonstrated a capacity to increase, maintain or decrease the flow of cellular energy within the body as necessary. Based on our research, we have developed a portfolio of intellectual property rights and formulated and
developed several orphan drug candidates, as well as cosmeceuticals and nutraceuticals. All of our product development activities involve the application of substrates of the CK system, including creatine, creatine analogs and similar compounds,
alone or in combination with other energy-modulating molecules.

We currently have two pharmaceutical product candidates in Phase III
trials, one pharmaceutical product candidate that has completed Phase II trial and will enter Phase III trial and one pharmaceutical product candidate in a Phase I trial, and expect to begin benefiting from these product candidates if and when we
receive FDA approval. While it is impossible to know if and when these projects will produce positive trial data, receive FDA-approval and be successfully commercialized, we hope to begin generating revenue from our drug product now in Phase III
trials in 2010. However, if the FDA requires confirmatory data from a second Phase III trial, we would not expect to benefit from this drug product until 2012. Too many outstanding variables  including the availability of trial subjects, the
ability of research institutions and investigators to perform their obligations in a timely fashion, the interpretation of trial results and the receipt of orphan drug designations  prevent us from determining when we can expect to generate
revenue from our product candidates in Phase II and I trials.

Strategic Alliances

One of our key means to conserve capital and extend our scope of research is conducting research and development through strategic collaborations and
partnerships. We have developed alliances with a number of research scientists and research institutions including Carolinas Neuromuscular/ALS Center, Johns Hopkins University, Katholieke Universiteit Leuven, Massachusetts General Hospital,
Massachusetts Institute of Technology, McMaster University, MUSC Foundation for Research Development, National Institute of Neurological Disorders and Stroke, The Research Foundation of SUNY, University of Rochester, and University of Cincinnati
Childrens Hospital.

Under our standard trial agreements, Avicena and its research institution collaborator agree to study the
effectiveness of a certain compound for which use Avicena holds a patent. Funding comes from an outside agency, for example the NIH, ALS Association, Muscular Dystrophy Association. In general, the research institution provides the laboratory
facilities and personnel, the funding agency provides funding for the trial, and Avicena provides drugs and sometimes cash support. Further, while the research institutions usually own the data resulting from the study, they also allow Avicena to
use the data generated from the study for FDA submission.

We are currently participating in five trials (all of which concern
neurodegenerative or neuromuscular diseases) and have participated in fifteen prior trials in multiple locations involving over 30 institutions, in which substrates of CK are or were administered to patients with neurodegenerative diseases
(Parkinsons Disease in addition to Amyotrophic Lateral Sclerosis (ALS), Huntingtons Disease and Creatine Transporter Defect (CTD), neuromuscular diseases (Duchenne Muscular Dystrophy (DMD), Charcot-Marie-Tooth Disease (CMT),
Friedrichs Ataxia and mitochondrial disorders) and recovery from surgery or experiencing a loss of muscle strength (aging, total joint anthroplasty and post-polio syndrome). The following chart summarizes certain information about
Avicenas currently pending trials:



|                     |  |                                                                                   |  |                                                |  |                                                             |  |                                           |  |                                  
|-------------------- |  | --------------------------------------------------------------------------------- |  | ---------------------------------------------- |  | ----------------------------------------------------------- |  | ----------------------------------------- |  | ---------------------------------
|Disease              |  | Nature of Project                                                                 |  | Principal Investigator and AcademicAffiliation |  | Avicena Involvement or Contribution*                        |  | Status as of 3/1/07 and date trial stated |  | Expected date of trial completion
|                     |  |                                                                                   |  |                                                | 
|ALS                  |  | Phase II Futility Study of AL-08 with minocycline vs. AL-08 with Cox II inhibitor |  | Paul Gordon, Columbia University               |  | One-time payment of $35,000 for the trial and provide AL-08 |  | In Progress. Began July 2006              |  | Data will be available Q3 2008   
|                     |  |                                                                                   |  |                                                | 
|Huntingtons Disease |  | Open Label Study of HD-02                                                         |  | Steven Hersch, Massachusetts General Hospital  |  | Provide HD-02                                               |  | In Progress.                              |  | Data will be available Q2 2008   
|                     |  |                                                                                   |  |                                                | 
|Huntingtons Disease |  | Phase II Study involving Presymptomatic Patients                                  |  | Steven Hersch, Massachusetts General Hospital  |  | Provide HD-02 and Placebo                                   |  | Will Start March 2007                     |  | Data will be available Q2 2009   



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|                         |  |                                             |  |                                        |  |                                                                  |  |                                |  |                               
|------------------------ |  | ------------------------------------------- |  | -------------------------------------- |  | ---------------------------------------------------------------- |  | ------------------------------ |  | ------------------------------
|Bioequivalency Study     |  | Comparing CT-09, CT-02 and placebo          |  | Mark Tarnopolsky, McMaster University  |  | One time payment of $80,000 and provide CT-09, CT-02 and placebo |  | In progress. Began March 2006. |  | Q2 2007                       
|                         |  |                                             |  |                                        | 
|Parkinsons Disease      |  | Phase III study involving PD-02 vs placebo  |  | Karl Kieburtz, University of Rochester |  | Provide PD-02 and placebo                                        |  | In progress Began March 2007   |  | Data will be available 2012   
|                         |  |                                             |  |                                        | 
|Chronic Toxicology Study |  | Preclinical study involving PD-02 and HD-02 |  | Charles River Labs                     |  | Provide PD-02/Hd-02                                              |  | Started December 2006          |  | Data will be available Q2 2008

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|* | In each trial, Avicena grants the research institution a license to study the patented use.
|- | -------------------------------------------------------------------------------------------

Neurodegenerative and Neuromuscular Diseases

Our understanding of how to modulate cellular energy levels has specific applications to the treatment of several neurological diseases. The neurodegenerative and neuromuscular diseases include all of the orphan diseases we are currently
addressingCTD, ALS, Huntingtons Disease and DMD. We are collaborating with academic and clinical researchers to develop new therapies to treat these diseases. These new products are designed to prolong cell life and, in turn, slow the
diseases progress or mitigate its symptoms.

Orphan Drugs to treat ALS.In February 2002, the FDA granted us orphan drug
designation for our product AL-02 to treat ALS. We participated in a pilot trial to access the safety and effectiveness of a multi-drug combination (AV-05) to treat ALS. The first phase of the pilot trial was completed in November 2005.
Dr. Jeffrey Rosenfeld, the lead investigator of the pilot trial, is currently planning a larger-scale Phase II trial with the same AV-05 compound. In addition, in December 2005, we completed a Phase III study led by the Carolinas ALS Center in
Charlotte, NC. This study consisted of over 100 patients over ten sites. The data is being evaluated and is expected to be published in 2007. The study showed no difference in two prespecified efficacy endpoints but showed positive trend towards
decreased mortality and increased survival. The plan is to run a dose escalation study in 2007 and repeat the Phase III with a higher dose and to use survival as an end-point. We are also working with Dr. Paul Gordon of Columbia University to
conduct a Phase II combination study. The study, which utilizes combinations involving AL-08. The study started in July 2006 and is expected to end in 2008.

Orphan Drugs to treat Huntingtons Disease.In October 2005, the FDA granted us orphan drug designation for our product, HD-02, to treat Huntingtons Disease. Following two clinical
studies on treating Huntingtons Disease with HD-02, one at Cornell Medical Center and one at Katholieke Universiteit Leuven in Belgium, Dr. Steven Hersch of Massachusetts General Hospital led a larger scale, multi-center Phase II trial,
which was completed in December 2003. The study results showed that the patients tolerated the therapeutic dose well. Further, magnetic resonance imaging (MRI) showed that the brain creatine level of the patients was dramatically increased after the
study while oxidative marker, which is a measure of oxidative injury, was reduced. Following the positive results of the Phase II safety and efficacy study, Dr. Hersch did a dose-escalating study amongst 10 HD patients. The objective was to
determine the maximum tolerated dose, the most effective dose and whether there is corresponding effect on the oxidative marker. We were able to determine the most effective dose with a corresponding reduction in oxidative marker. In fact, MRI
showed reduction in cortical thinning in the frontal lobe. After this dose escalation study, we kept the same 10 patients at the most effective dose for a year in an open label study. We will continue this open label study for a second year. The
objective was to determine if there are any adverse effects and whether morphometric MRI could be used to follow disease progression by way of cortical thinning. There were no serious side-effects. In fact, HD-02 was able to reduce the rate of
disease progression, through measurement of rate of cortical thinning, by about 30% over the course of the year. In March 2006, we presented the results of the Phase II safety and tolerability, our dose escalation study and open label study to the
FDA and discussed our proposed protocol for a Phase III study. The FDA has agreed to the Phase III protocol but wanted us to start the chronic toxicology study prior to patient enrollment. We are currently conducting the chronic toxicology study. We
anticipate the Phase III Huntingtons study to commence at the end of 2007 or beginning of 2008.

PD-02 for Parkinsons
Disease.About one million individuals in the U.S. suffer from Parkinsons Disease. The average age of onset is 50+. The disease, caused by dopamine insufficiency, is characterized by progressive rigidity, bradykinesia (abnormal slowness of
movement) and tremor. It is currently treated with Levodopa, but drug resistance increases over time. In Parkinsons Disease, there is a loss of or damage to the dopamine-producing cells in a portion of the brain called the substantia nigra.
Dopamine enables smooth, coordinated function of the bodys muscles and movement. Patients also exhibit widespread increases in oxidative damage in the brain.



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A pre-clinical study suggested that AV-01, AV-02 and AV-06 might be a useful protector against
Parkinsons Disease. Following that study, Dr. Karl Kieburtz at the University of Rochester conducted a multi-center, double-blind, futility study comparing the impact of PD-02 or minocycline on the progression of Parkinsons Disease
against placebo using the Unified Parkinsons Disease Rating Scale. PD-02 had a more significant effect on UPDRS (total and motor scores) and was also better tolerated. The results were published in the March issue of the medical journal
Neurology. We discussed these results with the FDA in April 2006 and proposed Phase III protocol with the FDA. The trial to explore the efficacy of AV-02 to slow the progression of Parkinsons disease started in March 2007.

Orphan Drugs to treat CTD.We have developed a clinical program, in collaboration with the University of Cincinnati, to support the development
of orphan drugs for creatine transporter defect. This disease was discovered only recently, in a small number of patients with severe expressive and cognitive delays. These patients have a defect in a specific creatine transporter gene. If the
estimated incidence rate of around 2.1% of all X-linked mentally retarded patients is confirmed, this will be the second most common cause of X-linked mental retardation. We are participating in a Phase I trial, which started in February 2003, to
assess the ability of creatine supplementation to restore normal levels of creatine in the central nervous system and improve cognition of the affected patients. This trial is open-ended. We are also conducting a larger scale effort to screen for
the defect among mentally retarded persons and autistic children. This screening study began in the fourth quarter of 2004. We found several hits in the autism data base. We will be doing more tests on the patients. The results of the screening
study will be presented at the annual pediatrics neurology meeting in May 2007.

The female carriers (mothers and sisters of the index
patients) have partially defective transporters, allowing only partial transport of creatine into the carriers brains, as a result of which the carriers suffer lower cognitive function than normal patients, but higher than the index patients.
We started a bioequivalency study comparing CT-09 vs CT-02. This study is conducted by Mark Tarnopolsky at McMaster University. The end-points include blood, urine, brain and muscle creatine levels as well as safety and tolerability. This study is
expected to complete in March 2007. Upon completion of this bioequivalency study, we will begin a dose-escalating study for the carriers to determine the optimum doses of CT-09 or CT-02. We anticipate that the study will begin in the third quarter
of 2007. Upon completion of the dose escalation study, we intend to begin a Phase I/II study involving these carriers to evaluate the efficacy on cognitive function of supplementing with creatine and its analogs, including CT-09. If this study
generates successful results, we will apply for orphan drug designation for the product for treating the female carriers and begin to plan for a Phase III study to start in 2008.

To develop analogous therapies for the male index patients, an animal model was needed to screen new therapies. Our collaborators at the University of Cincinnati, who received funding from the U.S. National Institute
of Health, are currently developing such a model. We anticipate that this model will be completed by mid-2007.

Proprietary Rights

We believe it is important that our products receive patent protection or orphan drug status or have other factors that limit potential competition. When
available and appropriate, we will seek orphan drug status to enhance or provide proprietary protection to a product. A drug that has orphan drug designation and which is the first product to receive marketing approval for its product claim,
indication or application, receives orphan drug status and is entitled to a seven-year exclusive marketing period in the United States for that product claim and a ten-year exclusive period in Europe for that product claim, indication or
application, subject to certain limitations. Applications for orphan drug designation will be made when and where appropriate and available for any additional indications or products that may be licensed in the future.

Orphan drug protection is available in Japan and the European Union under requirements similar to those in the United States. An important distinction in
the European Union is the ten-year period of marketing exclusivity for products designated as orphan drugs, compared to seven years of exclusivity in the United States. The period of exclusivity in the European Union also begins upon marketing
approval.

Patents

At
December 31, 2006, we owned, solely or jointly, rights in six issued U.S. patents and an additional twenty pending patent applications in the United States, with twelve corresponding issued patents and fifteen corresponding patent applications
in foreign countries. In cases where we own patents or patent applications jointly with a third party, the third party co-owner has granted Avicena an exclusive worldwide, royalty-bearing license to its rights under the jointly owned patents. The
following chart summarizes our portfolio of issued U.S. Patents. Pending patent applications are excluded from the chart.



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|                        |  |                                                                                                                                |  |                        |  |                                                 
|----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------- |  | ------------------------------------------------
|Serial No. / Patent No. |  | Title                                                                                                                          |  | Filing Date Issue Date |  | Ownership                                       
|                        |  |                                                                                                                                | 
|08/736,967 5,998,457    |  | Use of Creatine Analogues and Creatine Kinase Modulators for the Prevention and Treatment of Obesity and its Related Disorders |  | 10/25/9612/07/99       |  | Avicena Group, Inc.                             
|                        |  |                                                                                                                                | 
|08/853,174 6,706,764 B2 |  | Use of Creatine or Creatine Analogues for the Treatment of Disease of the Nervous System                                       |  | 05/07/9703/16/04       |  | Avicena Group, Inc. The General Hospital
Corp.  
|                        |  |                                                                                                                                | 
|08/914,887 6,075,031    |  | Use of Creatine Analogues and Creatine Kinase Modulators for the Prevention and Treatment of Glucose Metabolic Disorders       |  | 08/19/9706/13/00       |  | Avicena Group, Inc. Dana-Farber Cancer
Institute
|                        |  |                                                                                                                                | 
|09/316,489 6,169,115 B1 |  | Use of Aminoguanidine or Aminoguanidine Analogs for the Treatment of Diseases of the Nervous System                            |  | 05/21/9901/02/01       |  | Avicena Group, Inc.                             
|                        |  |                                                                                                                                | 
|09/316,918 6,288,124 B1 |  | Methods of Inhibiting Undesirable Cell Growth Using an Aminoguanidine Compound                                                 |  | 05/21/9909/11/01       |  | Avicena Group, Inc.                             
|                        |  |                                                                                                                                | 
|09/344,427 6,242,491 B1 |  | Use of Creatine or Creatine Compounds for Skin Preservation                                                                    |  | 06/25/9906/05/01       |  | Avicena Group, Inc.                             

In the future, we may explore potential non-orphan drugs addressing oncology, glucose metabolic
disorders, obesity and certain opthamological conditions, for which we have some patent coverage.

Our international patent strategy is to
pursue patents in key developed health care markets including Canada, Europe, Japan and Australia. We evaluate the desirability of registering approved patents or other forms of protection for our products in individual foreign markets based on the
expected costs and relative benefits of attaining such protection.

Trademarks

We also protect our intellectual property rights by marketing our products under the registered trademarks NEOtine and Avicena. We have applied for
federal trademark registration for our trademarks PURE ENERGY, PURE ENERGY FOR THE HEALTHY SKIN and Nurigene.

General

We cannot guaranty or otherwise assure investors that our pending patent applications will result in issued patents, that any of our issued patents
will afford protection against a competitor, or that any patents issued or licensed to us could not be challenged, invalidated or circumvented by others. Further, the patent position of biotechnology firms generally is highly uncertain throughout
the world, involving complex legal and factual questions. Since patent applications in the United States are maintained in secrecy for a period of time after their filing, and since publication of discoveries in the scientific or patent literature
tends to lag behind actual discoveries by several months or even years, we cannot be certain that others have not filed patent applications directed toward inventions covered by our pending patent applications or that we were the first to file
patent applications on such inventions. We also cannot assure you that any application of our technologies will not infringe patents or proprietary rights of others or that, if we need licenses of proprietary rights of others, we will be able to
obtain those licenses on reasonable terms. Furthermore, it is also possible that other parties may challenge the validity or enforceability of any patent owned or licensed by us, and such challenges may be successful or we may lack financial
resources to defend against any such challenge. We do not know the extent to which Avicena or our licensees may be required to obtain licenses under other proprietary rights, or the cost and the availability of such licenses.

Patent litigation is widespread in the biotechnology industry. Third parties may bring legal actions against us for patent infringement. If we become
involved in such litigation, it could consume a substantial portion of our resources. We also may lack the financial resources to defend its patents against infringements by others.



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We believe that obtaining foreign patents may be more difficult than obtaining domestic patents because
of differences in U.S. and foreign patent laws. In addition, foreign patents, if obtained, may not provide the level of protection provided by domestic patents.

Our success depends, in large part, on our ability to obtain patents, maintain trade secrets and operate without infringing on the proprietary rights of third parties. If patents do not issue from present or future
patent applications, we will likely be subject to greater competition. We also rely upon unpatented proprietary technology, and in the future may determine in some cases that our interest would be better served by reliance on trade secrets or
confidentiality agreements rather than patents. In such circumstances, we cannot assure investors that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to such proprietary
technologies or disclose such technologies or that we will be able to meaningfully protect our rights in such unpatented proprietary technologies.

We require each of our employees, consultants, and advisors to execute a confidentiality agreement and an invention agreement upon the commencement of an employment or consulting relationship with us. The employee agreements generally
provide that all inventions conceived by the individual and all confidential or proprietary technology, including information and materials, developed or made known to the individual during the term of the relationship shall be our exclusive
property, and shall be kept confidential and not disclosed to third parties except under specified circumstances. The terms of ownership of inventions by consultants and advisors varies depending primarily upon the policies of the academic and other
institutions with which the consultants and advisors are associated.

We have entered into nondisclosure agreements that are intended to
protect our confidential information delivered to third parties for research or other purposes. However, it is possible that these agreements may not provide total protection of our confidential or proprietary technology in the case of unauthorized
use or disclosure. Even without unauthorized access to our confidential or proprietary technology, third parties may independently develop substantially equivalent proprietary technology. In addition, to the extent that strategic partners or
consultants apply technological information developed independently by them or others to our projects or apply our technology to other projects, disputes may arise as to the ownership of proprietary rights to such technology.

Current Products

Cosmeceuticals

There is strong scientific evidence that skin cells work in ways similar to neuronal cells. As in neuronal cells, when substrates of creatine kinase
(chemical components of the CK system) enter skin cells, they enhance cellular energy, prolong survival and extend viability. In dermatological applications, these substrates help skin cells resist damage from ultraviolet radiation, hold moisture,
remain supple, and increase rates of cell renewal. These processes have applications in anti-aging and wound treatment products.

We have
developed a number of cosmetic ingredients that can modulate the cellular energy metabolism of the skin. We have been supplying ingredients to EL for its prestige skin care and hair care lines since 2001. In May 2003, Bumble and Bumble, a range of
salon-based hair care products from EL, formulated our cosmeceuticals ingredient into five of its prestige hair care lines. We are currently dependent upon EL for substantially all of our current revenue.

We have developed second and third generation ingredients, using Avicenas Advanced Skin Nourishment ASN technology. We are in
discussion with several cosmetic companies and international distributors of specialty cosmetic ingredients regarding worldwide distribution of our creatine formulations for inclusion in skin care applications.

We have also developed Nurigene with a focus in therapeutic benefits. Nurigene has tested very well in the clinic and in consumer use tests.
We are actively looking for a partner to market this line. Channels could be multi-level marketing, spas and specialty stores. Commercial products are expected to be available in June 2007.

Nutraceuticals

Dietary
Supplements.

Our first dietary supplement is NEOtine. We offer this product via our website. NEOtine provides a daily dose of 5 grams
of high-purity creatine monohydrate, and is available in powdered drink sachets. Although the product is not yet advertised, it has developed a small but growing customer basis consisting largely of patients with ALS who have heard about the product
from their physicians, from associations such as the ALS Association or the Muscular Dystrophy Association, from patient websites and bulletin boards, and from our public relations efforts or from participating in our trials.



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Manufacturing

Degussa A.G., Sigma-Tau HealthScience and Finzelberg GmbH & Co. KG manufacture our current cosmeceutical and pharmaceutical raw materials for us. We repackage all cosmeceutical raw materials at our fulfillment house, Prolog
Logistics in San Diego. NEOtine and all the products involved in our clinical programs are compounded by Deseret Labs under Food or Drug Good Manufacturing Practice (GMP) conditions, depending on the application. These are then packaged by APC
Industries into single dose form under Food or Drug GMP conditions, depending on the application. The finished products, NEOtine or products for clinical use, are stored at Prolog Logistics. Under our agreement with Degussa A.G., we agree to
purchase a set amount of creatine from Degussa A.G. for a set price.

Marketing

Given our current focus on clinical research and the development and protection of intellectual property, we have conducted only modest company and
product marketing efforts in the past. However, in July 2006, we hired The Ruth Group, a public relations/ investor relations firm, to help us provide public and investor relations services. Our key marketing strategy has been to build awareness of
and positive interest in Avicena among the scientific and biotech communities, strategic alliance partners, leading hospital and university research centers, national patient and research advocacy organizations, scientific opinion leaders, and
health-involved consumers. Our secondary marketing objective has been to establish the business potential of our products, where possible, to demonstrate in-market proof of concept, such as for NEOtine and cosmeceutical ingredients, and thereby to
increase their licensing or acquisition potential. We have implemented this strategy with NEOtine.

We issue press releases as a
cost-effective means to communicate significant news and build awareness among our key constituencies. We have selectively sponsored ALS-related charity events to create positive awareness of the Company and build relationships with advocacy
organizations. We launched our website, www.avicenagroup.com, in July 2000 with a focus on our research in neurology. The website also provides company background, news, research, and an online store for NEOtine. We have supported and participated
in selected research conferences and trade shows as an additional way of creating awareness and building relationships among key audiences. Information on our website is not part of this Form 10-KSB.

Competition

We currently compete on the basis of our
patent protection, as well as our trademarks and the quality of our formulations. If we obtain orphan drug designation for any of our products, such designation will provide exclusivity as well. Competition in the pharmaceutical industry is intense.
In our efforts to discover and develop new pharmaceuticals and over-the-counter health and dietary products, we compete against a large number of companies, including large multinational pharmaceutical companies and other biotechnology companies
that are actively engaged in similar discovery and development efforts. All the large multinational pharmaceutical companies and virtually all of the other biotechnology companies have substantially greater financial and other resources, more
extensive experience in conducting clinical testing and obtaining regulatory approvals for their products, substantially larger research, development and marketing staffs and greater production capabilities than we do.

Government Regulation

Governmental authorities in
the United States and other countries extensively regulate the research, development, testing, manufacture, labeling, promotion, advertising, distribution, and marketing, among other things, of our products. In the United States, the FDA regulates
drugs under the Federal Food, Drug, and Cosmetic Act and its implementing regulations. Failure to comply with the applicable U.S. requirements may subject us to administrative or judicial sanctions, such as FDA refusal to approve pending new drug
applications, warning letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, and/or criminal prosecution. Please see Managements Discussion and Analysis of Financial Conditions and
Results of Operations - Risk Factors for additional discussion of risks related to regulatory compliance.

Drug Approval Process

No drug may be marketed in the U.S. until the drug has received FDA approval. The steps required before a drug may be marketed in the
U.S. include:



| | 1. | pre-clinical laboratory tests, animal studies, and formulation studies;
| | -- | -----------------------------------------------------------------------



| | 2. | submission to the FDA of an Investigational New Drug application (IND) for human clinical testing, which must become effective before human clinical trials may begin;
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | 3. | adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug for each indication;
| | -- | ------------------------------------------------------------------------------------------------------------------------



| | 4. | submission to the FDA of a New Drug Application (NDA);
| | -- | ------------------------------------------------------



| | 5. | satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug is produced to assess compliance with cGMP established by the FDA;
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 6. | FDA review and approval of the NDA; and
| | -- | ---------------------------------------



| | 7. | FDA review and approval of a trademark used in connection with a pharmaceutical.
| | -- | --------------------------------------------------------------------------------

Pre-clinical tests include laboratory evaluation of product chemistry, toxicity, and formulation, as well as animal studies. The results of the pre-clinical tests, together with manufacturing information and
analytical data, are submitted to the FDA as part of an IND, which must become effective before human clinical trials may begin. An IND will automatically become effective 30 days after receipt by the FDA, unless before that time the FDA raises
concerns or questions about issues such as the conduct of the trials as outlined in the IND. In such a case, the IND sponsor and the FDA must resolve any outstanding FDA concerns or questions before clinical trials can proceed. There is no certainty
that submission of an IND will result in the FDA allowing clinical trials to begin.

Clinical trials involve the administration of the
investigational drug to human subjects under the supervision of qualified investigators. Clinical trials are conducted under protocols detailing the objectives of the study, the parameters to be used in monitoring safety, and the effectiveness
criteria to be evaluated. Each protocol must be submitted to the FDA as part of the IND.

Clinical trials typically are conducted in three
sequential phases, but the phases may overlap or be combined. Each trial must be reviewed and approved by an independent Institutional Review Board before it can begin. Study subjects must sign an informed consent form before participating in a
clinical trial. Phase I usually involves the initial introduction of the investigational drug into people to evaluate its safety, dosage tolerance, pharmacodynamics, and, if possible, to gain an early indication of its effectiveness. Phase II
usually involves trials in a limited patient population to (i) evaluate dosage tolerance and appropriate dosage; (ii) identify possible adverse effects and safety risks; and (iii) evaluate preliminarily the efficacy of the drug for
specific indications. Phase III trials usually further evaluate clinical efficacy and test further for safety by using the drug in its final form in an expanded patient population. There is no assurance that these trials will be completed within a
specified period of time, if at all.

Assuming successful completion of the required clinical testing, the results of the pre-clinical
studies and of the clinical studies, together with other detailed information, including information on the manufacture and composition of the drug, are submitted to the FDA in the form of an NDA requesting approval to market the product for one or
more indications. Before approving an NDA, the FDA usually will inspect the facility or the facilities at which the drug is manufactured, and will not approve the product unless cGMP compliance is satisfactory. If the FDA evaluates the NDA and the
manufacturing facilities as acceptable, the FDA will issue an approval letter. If the FDA evaluates the NDA submission or manufacturing facilities as not acceptable, the FDA will outline the deficiencies in the submission and often will request
additional testing or information. Even if an applicant submits the requested additional information, the FDA ultimately may decide that the NDA does not satisfy the regulatory criteria for approval. The testing and approval process requires
substantial time, effort, and financial resources, and there is no assurance that any approval will be granted on a timely basis, if at all. After approval, certain changes to the approved product, such as adding new indications, manufacturing
changes, or additional labeling claims are subject to further FDA review and approval.

Post-Approval Requirements

If the FDA approves of one or more of our products, we will be required to comply with a number of post-approval requirements. For example, holders of an
approved NDA are required to report certain adverse reactions to the FDA and to comply with certain requirements concerning advertising and promotional labeling for their products. Also, quality control and manufacturing procedures must continue to
conform to cGMP after approval, and the FDA periodically inspects manufacturing facilities to assess compliance with cGMP. Accordingly, manufacturers must continue to expend time, money, and effort in the area of production and quality control to
maintain cGMP compliance. In addition, discovery of problems with a product after approval may result in restrictions on a product, manufacturer, or holder of an approved NDA, including withdrawal of the product from the market. Also, new government
requirements may be established that could delay or prevent regulatory approval of our products under development.



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FDA Orphan Drug Designation

The FDA may grant orphan drug designation to drugs intended to treat a rare disease or condition, which generally is a disease or condition that affects
fewer than 200,000 individuals in the United States. Orphan drug designation must be requested before submitting an NDA. After the FDA grants orphan drug designation, the FDA publicly discloses the identity of the therapeutic agent and its potential
orphan use. Orphan drug designation does not convey an advantage in, or shorten the duration of, the regulatory review and approval process. If a product which has an orphan drug designation subsequently receives the first FDA approval for the
indication for which it has such designation, the product is entitled to orphan exclusivity, meaning that the FDA may not approve any other applications to market the same drug for the same indication, except in certain very limited circumstances,
for a period of seven years. However, orphan drug status does not protect against another formulation or drug of materially different composition from being approved, with or without orphan drug status, for the same indication. Further, even if the
FDA approves an NDA for a drug with orphan drug designation, the FDA may still approve the same drug for a different indication, or a molecular variation of he same drug for the same indication. In addition, the FDA does not restrict doctors from
prescribing an approved drug for uses not approved by the FDA for that drug. As well, orphan drugs usually receive ten years of marketing exclusivity in the European Union.

Non-United States Regulation

Before
our products can be marketed outside of the United States, they are subject to regulatory approval similar to that required in the United States, although the requirements governing the conduct of clinical trials, product licensing, pricing and
reimbursement vary widely from country to country. No action can be taken to market any product in a country until the regulatory authorities in that country have approved an appropriate application. The current approval process varies from country
to country, and the time spent in gaining approval varies from that required for FDA approval. In certain countries, the sales price of a product must also be approved. The pricing review period often begins after market approval is granted. Even if
a regulatory authority approves a product, it is possible that satisfactory prices will not be approved for such product.

Employees

As of March 1, 2007, we had four full-time employees and two part-time employees, of whom four are involved in product development and two in
operations. None of our employees are represented by a labor union. We consider our employee relations to be good.



|Item 2. | Description of Property
|------- | -----------------------

Our executive
offices consist of 1,500 square feet of office space located in at 228 Hamilton Avenue in Palo Alto, California. We lease the space for $13,078 per month under a lease agreement that expires on March 31, 2008.



|Item 3. | Legal Proceedings
|------- | -----------------

A lawsuit was filed
against Avicena on or about December 14, 2006 in the Superior Court for the State of California, County of San Diego entitled, Mitra Rebek and Julius Rebek v. Avicena Group, Inc., Belinda Tsao-Nivaggioli and Nasser Menhall. In the
lawsuit, the plaintiffs asserted claims for conversion, unjust enrichment and breach of fiduciary duty arising from their ownership of Avicena common stock. The plaintiffs allege that Avicena, Tsao-Nivaggioli and Menhall failed to remove certain
restrictive legends from their Avicena Stock Certificates. A settlement of the matter has been reached and a dismissal of the case was filed on Tuesday May 8, 2007 by the plaintiff. The dismissal is expected to be completed by May 11,
2007.

A lawsuit was filed against Avicena by Akiva Gross, on or about January 5, 2007 in the Court of Chancery of the State of
Delaware in New Castle County entitled Akiva Gross v. Avicena Group Inc. In the lawsuit, the plaintiff asserts a claim for breach of contract arising from his ownership of Avicena common stock. The plaintiff alleges that Avicena failed
to remove certain restrictive legends from his stock certificate. A settlement of the matter has been reached and the case was dismissed on May 3, 2007.

The Company does expect any adverse financial impact from the resolution of the two lawsuits.



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

None.



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PART II



|Item 5. | Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
|------- | --------------------------------------------------------------------------------------------------------------

Market Information

The shares of common stock of Avicena Group, Inc.
commenced trading on the Over the Counter Bulletin Board (symbol AVGO) on March 24, 2006. The shares were not publicly traded during the year ended December 31, 2005. The following table sets forth the high and low bid prices for the
common stock for the periods indicated as reported on the Over the Counter Bulletin Board:



|                             |  |      |      |     |   |     
|---------------------------- |  | ---- | ---- | --- | - | ----
|Year Ended December 31, 2006 |  | High |      | Low
|First Quarter                |  | $    | 2.75 |     | $ | 2.75
|Second Quarter               |  |      | 5.26 |     |   | 2.90
|Third Quarter                |  |      | 6.05 |     |   | 5.40
|Fourth Quarter               |  |      | 6.76 |     |   | 5.65

Since Over-the-Counter market quotations are provided, the quotations reflect inter dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.

Number of Holders

As of March 20, 2007, the Companys common stock was held by 83 shareholders of record. The Company issued 900,000 shares of its Series A
Redeemable Convertible Preferred Stock in the fourth quarter of 2006 and such shares were held by three investors as of December 31, 2006. See discussion of the changes in Preferred Stock in 2006 in Note 6, Redeemable Convertible Preferred
Stock, to the Financial Statements for the period ending December 31, 2006.

Dividends

No cash dividends were paid on common shares during the years ended December 31, 2006 and 2005. We have not paid any cash dividends since our
inception and do not foresee declaring any dividend on our common stock in the foreseeable future. The Series A Preferred Stock and newly credited Series B Preferred Stock (see Note 11, Subsequent Events) to the Companys audited financial
statements in Item 7 with respect to dividend rights, rank prior to the common stock which will limit the ability of the Company to declare dividends on the common stock in the future.

Securities Authorized for Issuance Under Equity Compensation Plans

Stock Incentive Plan

The 1999 Stock Incentive Plan was adopted by our Board of Directors and
approved by our stockholders in September 1999. The purpose of the 1999 Plan is to advance the interests and enhance the value of our company by:



| |  |  | aligning the economic interests of our employees, consultants, non-employee directors and advisors with those of our stockholders;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | inducing individuals of outstanding ability and potential to join and/or remain with us; and
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | providing employees, consultants, non-employee directors and advisors with an additional incentive to contribute to our success.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------

Our 1999 Plan permits grants of incentive stock options, as defined by Section 422 of the Code, and non-qualified stock options. Our 1999 Plan also
permits grant of shares of common stock, subject to our right to repurchase all or some of the shares at their issue price or other stated or formula price in the event that conditions specified by the Board in the award are not satisfied prior to
the end of the restriction period established by the Board. As of December 31, 2006, 3,476,067 shares remain available for future grants under the 1999 Plan.

The 1999 Plan is administered by the Board or a committee designated by the Board. The Board has discretion as to which employees, consultants, non-employee directors and advisors will receive awards. The Board also
establishes the terms, conditions and limitations of each award, including the number of shares of common stock underlying each option, the exercise price and the date or dates upon which the option vests and becomes exercisable. The Board
determines the effect of a participants disability, death, retirement, authorized leave of absence or other change in the employment or other status on an award and the extent to which the participant, the participants legal
representative, conservator, guardian or designated beneficiary may exercise rights under the award. Except as otherwise determined by the committee, all awards are nontransferable. The Board also has full power to construe and interpret the 1999
Plan and the awards granted under the 1999 Plan, to establish rules and regulations necessary or advisable for its administration, and to determine the terms of and amend the award agreements evidencing the grants.

The Board may amend the 1999 Plan in any respect.



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The Board may terminate the 1999 Plan at any time. However, no termination or amendment will affect the
rights of participants under options previously granted without the participants consent. Unless previously terminated, the 1999 Plan will terminate on September 7, 2009, and no options will be granted after that date.

The following table sets forth, as of December 31, 2006, information concerning shares authorized for issuance under the 1999 Plan:



|                                                    |  |                                                                              |  |                                                                      |     |                                                                                                                      |          
|--------------------------------------------------- |  | ---------------------------------------------------------------------------- |  | -------------------------------------------------------------------- | --- | -------------------------------------------------------------------------------------------------------------------- | ---------
|                                                    |  | Number ofsecuritiesto be issueduponexercise ofoutstandingoptions andwarrants |  | Weighted- average exercise price of outstanding
options and warrants |     | Number ofsecuritiesremainingavailablefor futureissuanceunder the1999
Plan(excludingsecuritiesreflected incolumn (a))
|Equity compensation plans approved by stockholders* |  | 204,926                                                                      |  | $                                                                    | .03 |                                                                                                                      | 3,476,067



|* | Avicenas sole equity compensation plan has been approved by stockholders.
|- | --------------------------------------------------------------------------

Recent Sales of Unregistered Securities

Series C Preferred Stock Issuances

Between January 18, 2004 and February 23, 2005, we issued a total of 910,858 shares of Series C Preferred Stock to a total of six investors for
the aggregate consideration of $910,858. Of this consideration, we received $780,177 in 2004 and $130,681 during the first quarter of 2005. Three of the investors were non-U.S. investors and such issuances were exempt pursuant to Regulation S
promulgated under the Securities Act. The other investors were U.S. residents and the issuances to these individuals were exempt from registration pursuant to Section 4(2) of the Securities Act.

In connection with the offer and sale of the Series C Preferred Stock, we engaged H.K. Properties Limited (HK) to assist in the
identification of investors on a best efforts basis, pursuant to that certain Series C Financial Advisory Agreement (the Advisory Agreement) dated as of March 11, 2002, with HK. Pursuant to the terms of the Advisory
Agreement, (i) HK earned a financial advisory fee equal to 10% of the total purchase price of all shares of Series C Preferred Stock sold to investors identified by HK upon the sale of such shares, (ii) we issued to HK or persons
designated by HK warrants to purchase one share of our common stock for each share of Series C Preferred Stock sold to such investors, up to an aggregate of 5,600,000 shares of common stock, at an exercise price of $.07 per share. The Advisory
Agreement terminated on March 11, 2005, in accordance with its original terms.

Pursuant to the Advisory Agreement with HK, we issued
a total of 910,858 options and warrants to purchase common stock to the same investors who purchased Series C Preferred Stock in the issuance listed above. Such option and warrant issuances were exempt from registration on the same basis as the
related stock issuances.

On November 17, 2006, the Companys Board of Directors approved the issuance of a Private Placement
Memorandum. This financing authorized the issuance of up to 3,500,000 units. Each unit consists of one share of the Companys unregistered Redeemable Convertible Preferred Stock, par value $0.001 per share, and a warrant to purchase one half
share of the Companys unregistered Common Stock at an exercise price of $7.00 per share. The units will be offered solely to a limited number of non-U.S. citizens in compliance with Regulation S. The Preferred Stock is senior to Common Stock
in liquidation and dividend right. At any time between June 30, 2007 and December 31, 2009, a holder of Preferred Stock may demand conversion of such Preferred Stock into Common Stock at a 1:1 ratio, subject to adjustment. At any time
after December 31, 2008, the Company may require the holder of Preferred Stock to select between converting all shares of Preferred Stock into Common Stock at a 1:1 ratio, subject to adjustment, or redeeming all shares of Preferred Stock at a
price of $5.00 per share plus any accrued and unpaid dividends. Each holder of Preferred Stock is entitled to receive a stock dividend of 10% annually, payable semi-annually, for each share of Preferred Stock, based on the value of $5.00 per share
of Preferred Stock. At December 31, 2006, $59,523 was accrued for Stock Dividends due to Series A Redeemable Convertible Preferred Stock holders. To the extent funds are not legally available for such dividend, the dividend accumulates. During
the period from January 1, 2010 to December 31, 2010, all holders of Preferred Stock must select between converting all shares of Preferred Stock into Common Stock at a 1:1 ratio, subject to adjustment, or redeeming all shares of Preferred
Stock at a price of $5.00 per share plus any accrued and unpaid dividends. The Preferred Stock has customary antidilution adjustments in the case of stock splits, stock dividends or recapitalizations. Holders of Preferred Stock have one vote for
each Share and



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will vote together with the Common Stock as a single class, except to the extent that separate class voting is required by the Delaware General Corporation
Law. Holders of Preferred Stock are entitled to appoint and elect one director to the Companys Board of Directors. The Warrant may be exercised at any time until December 31, 2011. Any exercise of the Warrant must be for whole shares
only, and the full exercise of $7.00 per share paid. The Warrant may not be exercised on a cashless basis. The exercise price of the Warrant and number of shares of Common Stock issuable upon exercise of the Warrant are subject to customary
adjustment for payment of stock dividends and reclassification. The Company has reserved 1,750,000 shares of Common Stock for issuance upon exercise of the Warrants.

On November 13, 2006, the Company received $2,000,000 as the gross proceeds of the Series A financing. The Company issued 400,000 shares of unregistered Series A Preferred Stock to a foreign investor at a price
of $5.00 per share. The Company also issued a warrant to the investor to purchase 200,000 shares of the Companys unregistered common stock, par value $0.001 per share, at an exercise price of $7.00 per share. As part of the financing, the
Company is obligated to pay BMG Financial Advisors, an investment advisor, the sum of $160,000 for selling commissions related to the sale. The Company also recorded legal fee issuance costs of $ 17,081 in conjunction with this round of financing.
The net proceeds to the Company from this portion of the Series A financing are $1,822,919. The fair value of the Series A Preferred Stock and associated warrant was valued at $2,000,000. The warrant was valued at $914,278. The calculated value of
warrant was determined using the Black-Scholes option pricing model with the following assumptions: an assumed risk-free interest rate of 4.62%, a volatility of 100%, a term of 5.13 years, and a dividend yield of 0% for the year ended
December 31, 2006. The Series A Preferred Stock was recorded, less issuance costs of $177,081, at $908,641. The beneficial conversion feature associated with the Series A Preferred Stock was valued at $908,641 and recorded as a deemed
discount.

On November 28, 2006, the Company received $1,500,000 as the net proceeds of the Series A financing. The Company issued
300,000 shares of unregistered Series A Preferred Stock to a foreign investor at a price of $5.00 per share. The Company also issued a warrant to the investor to purchase 150,000 shares of the Companys unregistered common stock, par value
$0.001 per share, at an exercise price of $7.00 per share. The fair value of the Series A Preferred Stock and associated warrant was valued at $1,500,000. The warrant was valued at $649,689. The calculated value of warrant was determined using the
Black-Scholes option pricing model with the following assumptions: an assumed risk-free interest rate of 4.62%, a volatility of 100%, a term of 5.00 years, and a dividend yield of 0% for the year ended December 31, 2006. The Series A
Preferred Stock was recorded at $850,311. The beneficial conversion feature associated with the Series A Preferred Stock was valued at $693,337 and recorded as a deemed discount.

On November 29, 2006, the Company received $1,000,000 as the net proceeds of the Series A financing. The Company issued 200,000 shares of
unregistered Series A Preferred Stock to a foreign investor at a price of $5.00 per share. The Company also issued a warrant to the investors to purchase 100,000 shares of the Companys unregistered common stock, par value $0.001 per share, at
an exercise price of $7.00 per share. The fair value of the Series A Preferred Stock and associated warrant was valued at $1,000,000. The warrant was valued at $433,126. The calculated value of warrant was determined using the Black-Scholes option
pricing model with the following assumptions: an assumed risk-free interest rate of 4.62%, a volatility of 100%, a term of 5.00 years, and a dividend yield of 0% for the year ended December 31, 2006. The Series A Preferred Stock was
recorded at $566,874. The beneficial conversion feature associated with the Series A Preferred Stock was valued at $462,225 and recorded as a deemed discount.

Please refer to Note 11, Subsequent Events, to the Companys audited financial statements in Item 7, regarding the Companys agreement to sell additional unregistered Series B Redeemable Convertible
Preferred Stock (Series B Preferred Stock) on March 30, 2007 and April 11, 2007.

Compensatory Grants

On February 9, 2005, we issued 3,957,855 shares of common stock to a total of nine employees, directors, consultants and one professional services
firm in consideration of labor and services provided. The issuances of these shares of our common stock were made pursuant to Restricted Stock Agreements entered into between the Company and the grantees. Eight of these issuances qualified for
exemption under Rule 701 of the Securities Act. One (1) issuance, to the professional services firm, which is a corporate entity, was exempt from registration pursuant to Section 4(2) of the Securities Act.

Bases for Exemption

The above-referenced sales of
unregistered securities were exempt from registration under Section 4(2) of the Securities Act, Rule 701 of the Securities Act, and/or Regulation S, promulgated pursuant to the Securities Act.

For sales made pursuant to Section 4(2) of the Securities Act, each purchaser had access to sufficient information regarding the Company so as to
make an informed investment decision. Based upon representations made by the subscribers, we had a reasonable basis to believe that each purchaser was an accredited investor as defined in Regulation D of the 1933



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Act and otherwise had the requisite sophistication to make an investment in our securities. We did not engage in any advertising or general solicitation in
connection with these sales.

For sales made pursuant to Regulation S, pursuant to the subscription, option or warrant agreement executed
by the person acquiring the stock, option or warrant: (i) each securities purchaser certified that he, she or it was not a U.S. person, as defined in Rule 902(k) of the Securities Act and was not acquiring the securities for the account or
benefit of any U.S. person; (ii) such security holder acknowledged that the securities may not be resold, unless pursuant to an effective registration statement under the Securities Act, or pursuant to an available exemption from registration
under the Securities Act and agreed not to engage in hedging transactions unless in compliance with the Securities Act; and (iii) the stock certificates, or option or warrant agreements, as applicable, contained a legend restricting the sale of
such securities until the Regulation S holding period is satisfied.

For sales made pursuant to Rule 701 of the Securities Act, each
purchaser was an employee, consultant or advisor who is not one of our affiliates and who purchased shares from us in connection with a written compensatory benefit plan. Additionally, the aggregate sales price of securities sold during any 12-month
period pursuant to Rule 701 of the Securities Act was less than the one million dollar limit provided for in Rule 701 of the Securities Act.

Use of
Proceeds

Our Registration Statement on Form SB-2 (Commission file number 333-129536) was declared effective by the Commission on
November 14, 2005. Our Registration Statement relates solely to shares of our common stock that may be offered and sold from time to time by the selling stockholders. We will not receive any proceeds from the sale of the common stock in this
offering. The selling stockholders will receive all of the proceeds.

Purchases of Equity Securities by the Issuer

None

Other Stockholder Matters

On September 20, 2006, the Company sent a letter to all of its stockholders except those whose shares were registered with the Securities and
Exchange Commission pursuant to a registration statement on Form SB-2 which was declared effective by the Commission on November 14, 2005. This letter requested an extension of the contractual trading restriction to which the shares of the
letter recipients are subject. This trading restriction was scheduled to expire on November 14, 2006. The Company indicated that it was still in the early stages of discussing the terms of a contemplated investment. Certain of those prospective
investors informed the Company that, as a condition to their making the contemplated investment, those investors would require that all currently restricted shares owned by all Avicena stockholders whose shares are subject to the Merger Lock-Up (or
such lesser amount those investors would determine in their sole discretion) continue to remain subject to transfer restrictions through June 30, 2007. As a result, the Company asked the letter recipients to agree to the extended lock-up at
this time subject, however, to its possible nullification if at least a minimum $8 million amount of the contemplated investment was not received by November 10, 2006. The investment contemplated by the September 20, 2006 letter was not
consummated by November 7, 2006.

On November 7, 2006, the Company sent a letter to those stockholders who agreed to the
contractual trading restrictions requested by the Companys September 20, 2006 letter. This letter required an extension of the contractual trading restriction to which the shares of the letter recipients are subject. In the letter, the
Company stated that it had been approached by prospective investors who were contemplating a cash investment in the Company. The letter further noted that certain of the prospective investors, as condition to their investment, required that all
currently restricted shares owned by all Avicena stockholders whose shares are subject to the Merger Lock-Up (or such lesser amount those investors would determine in their sole discretion) continue to remain subject to transfer restrictions through
June 30, 2007. As a result, the Company asked the letter recipients to agree to restrictions on transferring their Avicena stock through June 30, 2007. No responses were received to this letter.

The terms of both letters have lapsed and no further letters have been issued.



|Item 6. | Managements Discussion and Analysis of Financial Condition and Results of Operation
|------- | ------------------------------------------------------------------------------------

You should read the following discussion and analysis in conjunction with (1) our financial statements, including the notes thereto, included in
this Report, and (2) the Risk Factors section of our Registration Statement on Form SB-2 filed on November 14, 2005 and this Form 10-KSB. Some of the information contained in this Report may contain forward-looking statements
within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended (the Act) and



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Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). This information may involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking
statements which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by the use of the words may, will, should, expect, anticipate,
estimate, believe, intend or project or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be
incorrect, and there can be no assurance that the projections included in these forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of
various factors. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Summary Financial Data



|                                                                 |  |                          |   |  |            |   |  |           |  
|---------------------------------------------------------------- |  | ------------------------ | - |  | ---------- | - |  | --------- | -
|                                                                 |  | Years Ended December 31, |  
|                                                                 |  | 2006                     |   |  | 2005       |   |  | 2004      |  
|Statements of Operations Data:                                   |  |                          |   |  |            |   |  |           |  
|Revenues                                                         |  | 374,952                  |   |  | 477,199    |   |  | 298,540   |  
|Gross margin                                                     |  | 324,455                  |   |  | 421,724    |   |  | 251,571   |  
|Research and development                                         |  | 1,284,046                |   |  | 479,764    |   |  | 452,739   |  
|General and administrative, selling and marketing                |  | 2,621,389                |   |  | 2,695,269  |   |  | 584,373   |  
|Loss from operations                                             |  | (3,580,980               | ) |  | (2,753,309 | ) |  | (785,541  | )
|                                                                 |  |                          |   |  |            |   |  |           |  
|Net loss                                                         |  | (5,527,998               | ) |  | (2,759,928 | ) |  | (788,755  | )
|                                                                 |  |                          |   |  |            |   |  |           |  
|Dividend and accretion of redeemable convertible preferred stock |  | (278,320                 | ) |  | 0          |   |  | 0         |  
|                                                                 |  |                          |   |  |            |   |  |           |  
|Net loss attributable to common stock                            |  | (5,806,318               | ) |  | (2,759,928 | ) |  | (788,755  | )
|                                                                 |  |                          |   |  |            |   |  |           |  
|Net loss per common sharebasic and diluted                      |  | (0.11                    | ) |  | (0.12      | ) |  | (0.19     | )
|                                                                 |  |                          |   |  |            |   |  |           |  
|Weighted average number of shares of common stock outstanding    |  | 51,082,616               |   |  | 23,017,756 |   |  | 4,175,135 |  
|                                                                 |  |                          |   |  |            |   |  |           |  



|                                  |  |                         |   |  |                         |  
|--------------------------------- |  | ----------------------- | - |  | ----------------------- | -
|                                  |  | As of December 31, 2006 |   |  | As of December 31, 2005 |  
|                                  |  | In dollars              |  
|Balance Sheet Data:               |  |                         |   |  |                         |  
|Cash and cash equivalents         |  | 1,105,899               |   |  | 619,042                 |  
|Working capital surplus (deficit) |  | 850,092                 |   |  | (74,246                 | )
|Total assets                      |  | 2,981,166               |   |  | 797,665                 |  
|Accumulated deficit               |  | (13,931,800             | ) |  | (8,403,802              | )
|Stockholders deficit             |  | (2,934,896              | ) |  | (58,782                 | )

Overview

We have incurred net losses since our inception and expect to incur substantial and increasing losses for the next several years as we expand our research and development activities and move our product candidates
into later stages of development. As of December 31, 2006, we had an accumulated deficit of $13,931,800. We have funded our losses to date through the sale of equity securities, the issuance of notes payable, and advances from stockholders.

Results of Operations  2006 compared to 2005

We currently generate revenue from the sale of proprietary cosmetic ingredient formulations to Estée Lauder (EL) and the direct sale of our branded creatine supplement product. Our revenues decreased by
$102,247 in the year ending December 31, 2006 compared to 2005, from $477,199 in 2005 to $374,952 in the corresponding 2006 period. The decrease of 21% in 2006 over the same 2005 period was due entirely to lower unit sales created by lower
demand by Estée Lauder (EL). Our cost of revenue decreased by $4,978 or 9% in the year ending December 31, 2006 compared to the similar period in 2005. As a result of our lower revenues, our gross margin of 87% for the year ending
December 31, 2006 was lower than the 88% from the comparable period in 2005.

Our research and development expenses consist of costs
incurred for drug development and clinical activities. These costs include in-kind support, such as providing drugs or placebos for trials and financial support, as well as legal expenses for patents. Research and development expenses increased by
$804,282 in the year ending in 2006 when compared to 2005, from $479,764 in 2005 to $1,284,046 in 2006. This increase was due mainly to the initiation of a Chronic Toxocity clinical trial for Parkinsons disease as well as an increase in legal
expenses related to keeping existing U.S. and foreign patents in force, and reviewing new products for patent protection.



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Selling and marketing expenses increased to $852,016 in the year periods of 2006 compared to $716,378 in
2005. The increase of $135,638 in the 2006 versus 2005 resulted mainly from increased salaries and employee benefits, as well as incremental operating costs, related to the hiring of two new marketing employees. Additional marketing costs are also
attributable to our development of a new website, engagement of a public relations firm, and the expenses related to the launching of a new product.

General and administrative expense consists mainly of salaries and benefits, consulting fees, legal and accounting fees, insurance, facilities and utilities. General and administrative expenses decreased to $1,769,373
in the year ending December 31, 2006 from $1,978,891 in 2005. This represents a decrease of $209,518 or 11% versus 2005. The major decrease in 2006 compared to 2005 was primarily due to a decrease in non-cash compensation charges of $653,321
related to our decision to grant restricted stock awards and allowing all holders of stock options the right to exercise their options for common stock in a cashless exercise exchange. This decrease was partially offset by a $245,799
increase in accounting and investment banking fees, an $86,458 increase in travel expenses to pursue additional funding, a $55,756 increase in insurance costs, an increase of $35,793 in facilities expense, and a $23,346 increase in G & A
salaries.

We did not have significant cash interest income or expense. However, during the year ended December 31, 2006, we recorded
the following non-cash interest expense charges of $1,240,387 which primarily consists of: (1) $663,342 in beneficial conversion features associated with advances on the April 2006 convertible promissory note, (2) $539,363 in amortization
of deferred financing costs associated with the warrant issued in conjunction with the April 2006 convertible promissory note, and (3) $26,222 of interest expense accrued for the convertible promissory note.

We also recorded non-cash charges of $715,470 during the year ended December 31, 2006 to reflect the change in the fair value of warrants issued in
conjunction with our convertible promissory note in April 2006, warrants associated with investment banking fees, and warrants issued in conjunction with the issuance of our Series A Redeemable Convertible Preferred Stock in November 2006.

Results of Operations  2005 compared to 2004

We currently generate revenue from the sale of proprietary cosmetic ingredient formulations to EL and the direct sale of our branded creatine supplement product. Our revenues increased by $178,659 in the year ending
December 31, 2005 compared to 2004, from $298,540 in 2004 to $477,199 in the corresponding 2005 period. An increase of 60% in 2005 over the same 2004 period was due entirely to higher unit sales created by greater demand by Estée Lauder
(EL). Our cost of revenue increased by $8,506 or only 18% in the year ending December 31, 2005 compared to the similar period in 2004. As a result of these higher revenues and continued low costs of revenue, some of which (e.g. warehousing) are
semi-fixed, our gross margin increased to 88% in the year ending December 31, 2005 from 84% versus the comparable period in 2004.

Our
research and development expenses consist of costs incurred for drug development and clinical activities. These costs include in-kind support, such as providing drugs or placebos for trials and financial support, as well as legal expenses for
patents. Research and development expenses increased by $27,025 in the year ending December 31, 2005 when compared to 2004, from $452,739 in 2004 to $479,764 in 2005. This increase was due mainly to an increase in legal expenses related to
keeping existing U.S. and foreign patents in force, filing a new Japanese patent application, and reviewing new products for patent protection.

Selling and marketing expenses increased to $716,378 in the year ending December 31, 2005 compared to $30,993 in 2004. The increase of $685,385 in the 2005 versus 2004 resulted mainly from increased salaries and employee benefits, as
well as incremental operating costs, related to the hiring of two new marketing employees. Additional marketing costs are also attributable to our development of a new website, engagement of a public relations firm, and the expenses related to the
launching of a new product.

General and administrative expenses consist mainly of salaries and benefits, consulting fees, legal and
accounting fees, insurance, facilities and utilities. General and administrative expenses increased to $1,978,891 in the year ending December 31, 2005 from $553,380 in 2004. This represents an increase of $1,425,511 or 258% versus 2004. The
major increase in 2005 compared to 2004 was primarily due to a (1) a non-cash compensation charge of approximately $470,000 related to our decision to allow all holders of stock options the right to exercise their options for common stock in a
cashless exercise exchange; (2) a non-cash compensation charge of approximately $259,000 related to the issuance of restricted stock; (3) an increase of approximately $353,000 of corporate legal fees; (4) an increase of
approximately $164,000 related to accounting and finance consultants; (5) a non-cash compensation charge of approximately $4,000 to reflect the value of stock options issued to consultants; (6) an increase in consulting fees of
approximately $25,000, and (7) an increase



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of approximately $152,300 related to increased operating expenses such as rent ($13,200), office supplies ($18,000), insurance ($20,400), payroll and payroll
taxes ($89,400), and other expenses ($11,300). We expect future general and administrative expenses, excluding non-cash compensation charges, to increase in support of expanded business activities, including costs associated with our marketing
efforts to support our commercialization strategy for our products.

We did not have significant interest income or cash interest expense.

Liquidity and Capital Resources  2006 compared to 2005

At December 31, 2006, we had available cash of $1,105,899 compared to $619,042 at December 31, 2005.

Cash used in operations was $3,761,061 for the year ended December 31, 2006, compared with $1,958,550 for the same period in 2005. This increase in negative cash flow of $1,802,511 was primarily caused by a significant increase in
operating expenses, as described above. Research and development expenses increased by $804,282 compared to 2005, selling and marketing expenses increased by $135,638 versus 2005, and general and administrative expenses decreased by $209,518 in 2006
compared to 2005. Cash provided by financing activities was $4,247,918 for the year ended December 31, 2006, compared to $2,483,836 for the same period in 2005. During the year ended December 31, 2005, the Company incurred direct cash
costs of $730,814 and $300,000 of non-cash charges in connection with raising capital through the planned merger with AVN and related issuance of securities to AVNs former stockholders; such costs were charged to additional paid-in-capital.
Financing activities in 2006 consisted of the issuance of Series A Redeemable Convertible Preferred Stock yielding $4,322,918.

Working
Capital.Working capital increased by $924,338 to $850,092 at December 31, 2006, from a deficit of $74,246 at December 31, 2005. The increase in working capital was primarily due to net proceeds from the issuance of $4,322,918 of
Series A Redeemable Convertible Preferred Stock in November 2006. We used $800,000 of these funds to pay down the advances on the Line of Credit from BioTech Ventures III, $ 75,000 to pay a note from a shareholder, and approximately $1,000,000
to pay down old accounts payable.

On April 10, 2007, the Company received the proceeds of a Series B Preferred Stock issuance. Please
refer to Note 11, Subsequent Events, for a more detailed description of this development.

The Company continues to search for additional
sources of capital. There can be no assurance that this funding will be successfully obtained. Even if it is obtained, there is no assurance that it will not be secured on terms that are highly dilutive to existing shareholders.

Debt. On April 21, 2006, the Company entered into a convertible promissory note in the amount of up to two million dollars and a registration
rights agreement with The Biotechnology Ventures (III) Capital Trust, an accredited investor (the Investor). The Company received proceeds of $800,000 during 2006. However, the advances were repaid to the lender at the Companys
discretion during December 2006. There is no balance due on the note other than the accrued interest of $26,222 due as of December 31, 2006. This convertible promissory note is more fully described in Note 5.

On March 20, 2007, the Company entered into an agreement to amend this convertible promissory note and replace it with another one from the same
lender. Please refer to Note 11, Subsequent Events, to the Companys audited financial statements in Item 7, for a more detailed description of this development.

Our actual cash needs might vary materially from those now planned because of a number of factors, including:



| |  |  | The scope, rate of progress and costs of our product development activities;
| | - |  | ----------------------------------------------------------------------------



| |  |  | Changes in our research and development plans;
| | - |  | ----------------------------------------------



| |  |  | Future clinical trial results;
| | - |  | ------------------------------



| |  |  | The terms and timing of any collaborative, licensing and other arrangements that we have or may establish;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | The cost and timing of regulatory approvals;
| | - |  | --------------------------------------------



| |  |  | The costs of commercializing any of our other product candidates;
| | - |  | -----------------------------------------------------------------



| |  |  | Costs to license-in or otherwise acquire any technology; and
| | - |  | ------------------------------------------------------------



| |  |  | The cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.
| | - |  | ------------------------------------------------------------------------------------------------------------------

In any event, we are currently seeking to raise substantial additional capital to fund our research and development and operations. We expect to finance
our future cash needs through the sale of equity securities and possibly strategic collaborations or debt financing or through other sources that may be dilutive to existing stockholders or require us to relinquish rights to some of our
technologies, product candidates or products under development that we would otherwise seek to develop or commercialize ourselves.



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When we seek to raise additional money to fund our operations, funding may not be available to us on
acceptable terms, or at all. If we are unable to raise additional funds when needed, we may not be able to market our products as planned or continue development and regulatory approval of our products, or we could be required to delay, scale back
or eliminate some or all of our research and development programs. If we raise additional funds through equity sales, these sales may be highly dilutive to existing investors.

Critical accounting policies and significant judgments and estimates

Our financial statements have
been prepared in accordance with accounting principles generally accepted in the United States and reflect the application of certain significant accounting policies as described in Note 2 to our December 31, 2006 audited financial statements
and critical accounting policies as described below. A critical accounting policy is one which is both important to the portrayal of the Companys financial condition and results and requires managements most difficult,
subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Use of
Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from those estimates.

Revenue Recognition and Accounts Receivable

We recognize revenue from product sales when there is persuasive evidence of an arrangement, all significant risks of ownership have been transferred, the
selling price is fixed or determinable and collectibility is reasonably assured. Under the terms of our agreement with Estée Lauder (EL), title and all significant risks of ownership pass to EL when the product leaves our premises.
Consequently, we recognize revenue when product is shipped. Accounts receivable are stated at the amount management expects to collect from outstanding balances.

We have primarily sold our creatine products for the past six years to EL. ELs supply agreement with us grants it an exclusive right and license to use our know-how and patent rights in order to make, use, and
sell certain licensed products identified in the agreement, but does not give it the right or license to make creatine. Under the terms of the agreement, all deliveries to and payments by EL are based on F.O.B. shipping from Avicena. During this six
year period of sales to EL, the Company has never experienced any sales returns, warranty claims, or any other post-delivery obligations in its business nor does it anticipate a requirement for them. Consequently, we do not provide any allowance for
sales returns or warranties in our financial statements.

Stock-Based Compensation

We have a stock-based employee compensation plan, which is more fully described in Note 8 to our December 31, 2006 audited financial statements.
Effective January 1, 2006, the Company adopted the modified prospective application of FAS 123(R). The modified prospective application transition method requires the application of this standard to:



| |  |  | All new awards issued after the effective date;
| | - |  | -----------------------------------------------



| |  |  | All modifications, repurchased or cancellations of existing awards after the effective date; and
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | Unvested awards at the effective date.
| | - |  | --------------------------------------

We had adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (SFAS No. 123), Accounting for Stock-Based Compensation.Had compensation cost been determined for the options
granted under the 1999 plan and outside the 1999 Plan based on the fair value at the grant date for awards in 2005 and 2004, the Companys net loss and net loss per share would have been increased. See Note 2 to our December 31, 2006
audited financial statements for more detail.

Net Loss Per Share

Consistent with Statement of Financial Accounting Standards No. 128, Earnings Per Share, basic loss per share amounts are based on the weighted average number of shares of common stock outstanding during
the period. Diluted loss per share amounts are based on the weighted average number of shares of common stock and potential dilutive common



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stock outstanding during the period. However, when the inclusion of potentially dilutive common stock outstanding during the period causes the basic loss per
share amounts to decrease, they are excluded from the calculation of diluted weighted average share amounts as their inclusion would have been anti-dilutive. Therefore, in 2006, 2005 and 2004, the potentially dilutive common stock outstanding during
both periods was excluded. See Note 2 to our December 31, 2006 audited financial statements for more detail.

Research and Development Expenditures

Research and development expenditures (including patent-related costs) are charged to operations as incurred.

Concentration of Credit Risk

In 2006 and 2005, the
Company primarily sold its products to one company, EL. Sales to this customer equaled 92% and 96% of total sales for each of the years ended December 31, 2006, and 2005, respectively; accounts receivable from this customer equaled 100% of
total accounts receivable at both December 31, 2006, and 2005. Historically, the Company has not experienced any losses related to its accounts receivable.

Fair Value of Financial Instruments

The estimated fair value of the Companys financial instruments, which include
cash and cash equivalents, accounts receivable, accounts payable and related party accounts, approximates their carrying values.

Material Off-Balance
Sheet Arrangements

We have no material commitments for capital expenditures and no off-balance sheet arrangements.

Risk Factors

Risks Related to Our Financial Results and Need for
Additional Financing

Our auditors reports contain a statement that our net loss and limited working capital raise substantial doubt about our
ability to continue as a going concern.

Our independent registered public accountants have stated in their report, included in
Item 7. Financial Statements, that our significant operating losses and working capital deficit raise substantial doubt about our ability to continue as a going concern. We had net losses of $788,755, $2,759,928 and $5,527,998 in the
years ended December 31, 2004, 2005 and 2006, respectively. Our accumulated deficit was $13,931,800 as of December 31, 2006. We will be required to raise substantial capital to fund our capital expenditures, working capital, and other cash
requirements since the cash assets of $4,322,918 received when the Series A Redeemable Convertible Preferred Stock is expected to last only through May 31, 2007. Please refer to Note 11, Subsequent Events, for a more detailed description of the
Series B Redeemable Convertible Preferred Stock issued by the Company. The proceeds of this issuance are still in escrow pending completion of additional paperwork as of the date of the filing of this report. There can be no assurance that this
funding will be successfully completed. The Company continues to search for other sources of additional funding. The successful outcome of future financing activities cannot be determined at this time and there are no assurances that, if achieved,
we will have sufficient funds to execute our intended business plan or generate positive operational results.

We will likely need additional capital to
achieve our current business strategy and our inability to obtain additional financing will inhibit our ability to expand or even maintain our research, development and commercialization efforts and administrative operations.

In addition to our current accumulated deficit, we expect to incur additional losses during the foreseeable future. Until one or more of our drug products
have obtained approval from the United States Food and Drug Administration (FDA), we are unlikely to be profitable. Consequently, we will require substantial additional capital to develop new product candidates, conduct clinical tests, obtain
regulatory FDA approval, and commercialize our products, as well as provide working capital for 2007. We are in the process of seeking additional capital in 2007 either through private placements or public offerings of our equity securities. There
is no assurance that we will be able to obtain additional financing through private placements and/or public offerings necessary to support our working capital requirements. To the extent that funds generated from any private placements and/or
public offerings are insufficient, we will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on acceptable terms.

If we are unable to secure adequate sources of funds, we may be forced to delay or postpone development and research expenditures and as a result, we
might be required to diminish or suspend our development strategy. These delays in development would have an adverse effect on our ability to produce timely and competitive products and could require us



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possibly to cease our operations. In addition, such inability to obtain financing on reasonable terms could have a negative effect on our business, operating
results or financial condition to such extent that we are forced to restructure, file for bankruptcy protection, sell assets or cease operations, any of which could put your investment dollars at significant risk.

Risks Related to Regulatory Approval of Our Product Candidates

Our operations are subject to extensive government regulation, including regulation by the United States Food and Drug Administration, which can entail significant costs or delay revenues.

The research, development, formulation, production, packaging, labeling, marketing, advertising and distribution of our products are subject to regulation
by numerous governmental authorities in the United States including the FDA and the Federal Trade Commission (FTC). To the extent that we may be engaged in activities outside of the United States, we may be subject to similar regulation in other
countries. In the United States, drugs are subject to rigorous review of safety and effectiveness by the FDA.

Conducting the research
programs sufficient to prove a pharmaceutical products safety and effectiveness to the satisfaction of the FDA is very expensive and time consuming and subject to unanticipated delay. There can be no assurance that we will obtain any future
clearances on a timely basis, or at all. Noncompliance with applicable requirements can result in criminal prosecution and fines, recall or seizure of products, total or partial suspension of production, refusal of the government to approve product
license applications or refusal to allow us to enter into supply contracts. The FDA also has the authority to revoke product licenses and establishment licenses that it has previously granted.

Both before and after approval is obtained, a product and its manufacturer are subject to comprehensive regulatory oversight. Violations of regulatory
requirements at any stage, including the pre-clinical and clinical testing process, the approval process or thereafter (including after approval) may result in adverse consequences, including the FDAs or foreign regulators delay in
approving or refusal to approve a product, withdrawal of an approved product from the market and/or the imposition of criminal penalties against the manufacturer. In addition, later discovery of previously unknown problems relating to a marketed
product may result in restrictions on such product or manufacturer including withdrawal of the product from the market. Also, new government requirements may be established that could delay or prevent regulatory approval of our products under
development.

We may also be subject, from time to time, to additional laws or regulations administered by the FDA or other federal, state
or foreign regulatory authorities, or to revised interpretations of current laws or regulations. We are unable to predict the nature of such future laws, regulations, interpretations or their application to us, nor can we predict what effect
additional governmental regulations or administrative orders, when and if promulgated, would have on our business in the future. However, recent pharmaceutical product recalls and the FDAs formation of a new Drug Safety Oversight Board, raise
the possibility that the FDA will increase the quantity and quality of clinical results necessary to obtain approval of new drugs or will increase the scrutiny applied to the safety of previously approved drugs. Any change to the laws or regulations
administered by the FDA or other federal, state or foreign regulatory authorities could, by way of illustration and without limitation, require us to, reformulate certain products to meet new standards, recall or discontinue certain products not
able to be reformulated, expand documentation of the properties of certain products, expand or provide different labeling and scientific substantiation or impose additional record keeping requirements.

Outside the United States, our ability to market a product is contingent upon receiving clearances from the appropriate regulatory authorities in the
various foreign jurisdictions. These foreign regulatory approval processes each include all of the risks associated with FDA clearance described above.

If the FDA does not approve our investigational new drug applications, our clinical development programs could be delayed or eliminated, which could delay or diminish our revenues.

Prior to commencing clinical trials in the U.S., we must submit an investigational new drug application (IND) for the product candidate we want to
evaluate. An IND automatically becomes effective 30 days after receipt by the FDA of an application, unless before that time the FDA raises concerns or questions. If the FDA notifies us that the IND requires additional information or is not
acceptable, our potential development program may be significantly delayed or terminated. We cannot assure you that IND applications submitted by us to the FDA in the future will proceed without FDA objection. If the FDA identifies issues in
response to an IND application, the potential product development program may be delayed or terminated, which could delay or diminish revenues.



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The FDA and foreign regulatory authorities must approve any new products or a new indication for an existing product
before it can be commercially sold, which can entail significant costs and delay revenues.

Government regulation in the United States
and abroad is a significant factor in the testing, production and marketing of our current and future products. Each product must undergo an extensive regulatory review process conducted by the FDA and by comparable agencies in other countries.
Appropriate approvals must be obtained before we are able to market or promote a product. We must also receive regulatory approval for each new indication for a product prior to marketing for that indication. We cannot market any medicine we may
develop or license as a prescription product in any jurisdiction, including foreign countries, in which the product does not receive regulatory approval. The approval process can take many years and requires the expenditure of additional resources.

Changes in FDA policy for drug approval during the period of development and in the requirements for regulatory review of each submitted
NDA could result in additional delays or outright rejection. We cannot assure you that the FDA or any foreign regulatory authority will approve a regulatory marketing application with respect to any products we develop in a timely manner, if at all.
Moreover, even if the FDA approves a product, it may place commercially unacceptable limitations on the uses, or indications, for which a product may be marketed. This would result in additional cost and delay to the extent that further
studies are required to provide additional data on safety or effectiveness.

We may encounter delays or difficulties in the clinical trials that our
research partners or we conduct, which may delay or preclude regulatory approval of our product, increase product development costs and delay revenues.

In order to commercialize our products, we must obtain regulatory approvals for their indicated uses. To obtain regulatory approvals, we must, among other requirements, complete clinical trials demonstrating that our
products are safe and effective for a particular disease treatment.

Clinical trials that we may conduct may not begin on time or may need
to be restructured after they have begun. Clinical trials can be delayed for a variety of reasons, including delays related to:



| |  |  | obtaining an investigational new drug exemption, or IND, or other regulatory approval to commence a clinical trial;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | negotiating acceptable clinical trial agreement terms with prospective investigators or trial sites;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | obtaining institutional review board, or equivalent, approval to conduct the clinical trial at a prospective site;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | recruiting subjects to participate in the clinical trial;
| | - |  | ---------------------------------------------------------



| |  |  | competition in recruiting clinical investigators;
| | - |  | -------------------------------------------------



| |  |  | the placement of a clinical hold on a study;
| | - |  | --------------------------------------------



| |  |  | the failure of third-parties conducting and overseeing the operations of our clinical trials to perform their contractual or regulatory obligations in a timely
fashion; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | exposure of clinical trial subjects to unexpected and unacceptable health risks or noncompliance with regulatory requirements, which may result in suspension of the
trial.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If we experience delays in or termination of clinical trials, our financial results and the commercial prospects
for our product candidates will be adversely impacted. In addition, any such delays or termination would substantially increase our product development costs and would delay and impair our ability to generate additional revenue from new products.

Data obtained from our clinical trials are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval and delay
revenues.

Existing or future data that we obtain from clinical trials do not necessarily predict the results that will be obtained from
later clinical trials. Moreover, pre-clinical and clinical data are susceptible to varying interpretations, which could delay, limit or prevent regulatory approval. A number of companies in the pharmaceutical industry have suffered significant
setbacks in advanced clinical trials, even after positive results in earlier trials. The failure to adequately demonstrate the safety and effectiveness of an intended product under development could delay or prevent regulatory clearance of the
potential drug, resulting in delays to commercialization, and could adversely affect our business or financial condition. Our clinical trials may not demonstrate sufficient levels of safety and efficacy necessary to obtain the requisite regulatory
approvals for our drugs, and thus our proposed drugs may not be approved for marketing.

Even if the FDA approves our drug products, there is a risk we
may not be financially successful.

Even if our products obtain FDA approval, we cannot assure you that any of them will be commercially
successful or achieve the expected financial results as a result of limited markets for our products as discussed in the risk factor entitled, There is a limited market for our orphan drug products, which may limit financial success. We
may encounter



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unanticipated problems relating to the development, manufacturing, distribution and marketing of our products. Some of these problems may be beyond our
financial and technical capacity to solve. The failure to adequately address any such problems could have a material adverse effect on our business and our prospects. In addition, the efforts of government entities and third party payers to contain
or reduce the costs of health care may adversely affect our sales and limit the commercial success of our products.

We cannot completely
insulate our drug development portfolio from the possibility of clinical or commercial failures or generic competition. Some products that we have selected for development may not produce the results expected during clinical trials or receive FDA
approval. Drugs approved by the FDA may not generate product sales of an acceptable level.

Our products will be subject to significant government
regulation even after they are approved for sale.

After a reviewing division of the FDA approves a drug, the FDAs Division of
Drug Marketing, Advertising and Communication must accept the drugs marketing claims, which are the basis for the drugs labeling, advertising and promotion. We cannot be sure that the Division of Drug Marketing, Advertising and
Communication will accept marketing claims we propose to the agency. The failure of the Division of Drug Marketing, Advertising and Communication to accept our proposed marketing claims could have a material adverse effect on our ability to market
our drug products.

The FDA can require that a manufacturer conduct post-marketing adverse event surveillance programs to
monitor any side effects that occur after the drug is approved for marketing. If the surveillance program indicates unsafe side effects, the FDA may recall the product, and suspend or terminate a companys authorization to market the product.
The FDA also regulates the manufacturing process for an approved drug. The FDA may impose restrictions or sanctions upon the subsequent discovery of previously unknown problems with a product or manufacturer. One possible sanction is requiring the
recall of such product from the market. The FDA must approve any change in manufacturer as well as most changes in the manufacturing process prior to implementation. Obtaining the FDAs approval for a change in manufacturing procedures or
change in manufacturers is a lengthy process and could cause production delays and loss of sales.

Certain foreign countries regulate the
sales price of a product after marketing approval is granted. We cannot be sure that we can sell our products at satisfactory prices in foreign markets even if foreign regulatory authorities grant marketing approval.

Risks Related to The Sale of Our Products

Our current revenues
are substantially dependent on a single customer.

While we currently sell cosmeceutical ingredients to generate revenue to partially
fund the development of our pharmaceutical products, in the future, we expect to generate the majority of our revenue from the sale of our pharmaceutical products. To date, we have derived virtually all of our revenue from sales of cosmeceutical
ingredients to Estée Lauder (EL), which sales accounted for 94%, 96% and 92 % of our total sales in 2004, 2005, and 2006 respectively. We expect that sales to EL will continue to account for a significant percentage of our revenues for
the immediate future; however, we have no long-term agreement to ensure a continued stream of revenue from EL. The loss of, or any substantial reduction in, orders from EL would materially and adversely affect our revenue and operating results.

Our product candidates may not be successfully commercialized.

Even if our product candidates are successful in clinical trials, they may not be successfully commercialized. Potential products may be found ineffective or cause harmful side effects during pre-clinical testing or
clinical trials, fail to receive necessary regulatory approvals, prove difficult to manufacture on a large scale, be uneconomical to produce, or fail to achieve market acceptance.

There is a limited market for our orphan drug products, which may limit financial success.

Most
orphan drugs have a potential United States market of less than $25 million annually and many address annual markets of less than $1 million. We cannot assure you that sales of our products will be adequate to make us profitable even if the products
are granted orphan drug designation, approved for sale by the FDA, accepted by medical specialists and used by patients.

Our technology or products
could give rise to product liability claims, which could entail substantial expense for defense, settlements or verdicts.

Our business
exposes us to the risk of product liability claims that arise as a part of human testing, manufacturing and sale of pharmaceutical and over-the-counter health, dietary and cosmetic products. Although we maintain product liability insurance coverage,
product liability or other judgments against us, as well as the cost of defending such claims in excess of insurance limits, could materially affect our financial condition.



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We face intense competition in our efforts to develop commercially successful products, which may make it more
difficult to achieve financial success.

Competition in the pharmaceutical, cosmeceutical and nutraceutical industries is intense. In
our efforts to discover and develop new pharmaceuticals and over-the-counter health and dietary products, we compete against a large number of companies, including large multinational pharmaceutical companies and other biotechnology companies that
are actively engaged in similar discovery and development efforts. All the large multinational pharmaceutical companies and virtually all of the other biotechnology companies have substantially greater financial and other resources, more extensive
experience in conducting clinical testing and obtaining regulatory approvals for their products, substantially larger research, development and marketing staffs and greater production capabilities than we do. We seek to limit potential sources of
competition by developing products that are eligible for orphan drug status upon NDA approval or other forms of protection. We cannot assure you, however, that our competitors will not succeed in developing similar technologies and products more
rapidly than we can. Similarly, we cannot assure you that these competing technologies and products will not be more effective than any of those that we have developed or are currently developing.

New Lines of Business or New Products May Subject the Company to Additional Risks

The Company may implement new lines of business or offer new products within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the
markets are not fully developed. In developing and marketing new lines of business and/or new products, the Company may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or
new products may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful
implementation of a new line of business or a new product. Failure to successfully manage these risks in the development and implementation of new lines of business or new products could have a material adverse effect on the Companys business,
results of operations and financial condition.

Risks Related to Intellectual Property

Our patents might not protect our technology from competitors, which could cause demand for, and the prices of, our products to decrease.

Certain aspects of our technology are covered by six issued U.S. patents and twenty pending patent applications in the United States, with twelve
corresponding issued patents and fifteen corresponding patent applications in foreign countries. There is no assurance that the applications still pending or which may be filed in the future will result in the issuance of any patents. Also, any
patents issued or licensed to us may be challenged, invalidated or circumvented. The failure to obtain, or the subsequent loss of, patent protection for our products could adversely impact our ability to commercialize our products. Although we are
continually seeking to expand our patent portfolio, we may not succeed in obtaining rights to additional patents. Furthermore, third parties may independently develop products similar to our products or design around the patented aspects of our
products. Disputes may arise between others and us as to the scope, validity and ownership rights of these or other patents. Any defense of the patents could prove costly and time consuming, and there can be no assurance that we will be in a
position, or will deem it advisable, to carry on such a defense. Accordingly, any patents owned by, or licensed to, us may not provide us with competitive advantages, even if the patents are not challenged or invalidated. Also, to the extent we rely
upon unpatented proprietary technology, others may be able to acquire or independently develop the same or similar technology. Finally, due to differences in U.S. and foreign patent laws, foreign patents may be more difficult to obtain than U.S.
patents, and foreign patents, even if obtained, may not provide the level of protection provided by U.S. patents. Our U.S. patent portfolio primarily consists of patents directed to methods for using creatine compounds or creatine analogues for the
treatment of various diseases or conditions. Method patents, like product or device patents, give the patentee the right to exclude others from making, using, selling, and offering for sale methods and processes that infringe the claims of the
issued patents.

Our products could infringe the intellectual property rights of others, which could give rise to expensive claims and require us to
enter into disadvantageous license or royalty arrangements.

We cannot assure investors that products based on our intellectual property
will not be challenged by a third party claiming infringement of its proprietary rights. If we were not able to successfully defend our patent or licensed right, we may have to pay substantial damages, possibly including treble damages, for past
infringement.



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We expect rapid technological and other change to be constant in our industry, which could result in our product
candidates becoming obsolete.

The pharmaceutical industry has experienced rapid and significant technological change as well as
structural changes, such as those brought about by changes in heath care delivery or in product distribution. We expect that pharmaceutical technology will continue to develop and change rapidly, and our future success will depend, in large part, on
our ability to develop and maintain a competitive position. Technological development by others may result in our products becoming obsolete before they are marketed or before we recover a significant portion of the development and commercialization
expenses incurred with respect to such products. In addition, alternative therapies, new medical treatments, or changes in the manner in which health care is delivered or products provided could alter existing treatment regimes or health care
practices, and thereby reduce the need for one or more of our products.

Risks Related to Our Dependence on Third-Party Manufacturers and Collaborators

Due to our collaboration with research hospitals and other third parties to assist us in conducting clinical trials, we are unable to directly
control all aspects of our clinical trials.

We collaborate with research hospitals and academic researchers to conduct clinical trials
of our product candidates. As a result, we have had and will continue to have less control over the conduct of the clinical trials, the timing and completion of the trials and the management of data developed through the trial than would be the case
if we were relying entirely upon our own staff.

We will continue to depend on third parties to manufacture our products, which could delay our trials
or commercialization efforts.

We do not have, and do not now intend to develop, facilities for the manufacture of any of our products
for commercial production. The manufacture of pharmaceutical and over-the-counter health products can be an expensive, time-consuming, and complex process. Manufacturers often encounter difficulties in scaling-up production of new products,
including problems involving the transfer of manufacturing technology, production yields, quality control and assurance and shortages of personnel. Delays in formulation and production of trial quantities could result in additional expense and
delays in our clinical trials and regulatory submissions. In addition, delays in formulation and production of commercial quantities could result in additional expense and delays in commercialization. Problems with any manufacturing processes could
result in product defects, which could require us to delay shipment of products or recall products previously shipped. In addition, any prolonged interruption in the operations of our or a third partys manufacturing facilities could result in
the cancellation of shipments. A number of factors could cause interruptions, including equipment malfunctions or failures, or damage to a facility due to natural disasters or otherwise.

Our third-party manufacturers are subject to regulatory oversight, which may delay or disrupt our commercialization efforts.

Third-party manufacturers of our products or product candidates must ensure that all of the processes, methods and equipment are compliant with the current Good Manufacturing Practices, or cGMP, and conduct extensive
audits of vendors, contract laboratories and suppliers. The cGMP requirements govern quality control of the manufacturing process and documentation policies and procedures. Compliance by third-party manufacturers with cGMP requires record keeping
and quality control to assure that the product meets applicable specifications and other requirements. Manufacturing facilities are subject to inspection by regulatory agencies at any time. If an inspection by regulatory authorities indicates that
there are deficiencies, third-party manufacturers could be required to take remedial actions, stop production or close the facility, which would disrupt the manufacturing processes. If they fail to comply with these requirements, we also may be
required to curtail the clinical trials of our product candidates, which are also supplied by these manufacturers, and may not be permitted to sell our products or may be limited in the jurisdictions in which we are permitted to sell them.

Risks Related To Our Limited Personnel

If we are
unable to establish sales, marketing and distribution capabilities or to enter into agreements with third parties to do so, we may be unable to successfully market and sell any products.

We have historically operated with a very small number of employees. We have limited manufacturing, marketing, sales and distribution resources.
Specifically, we have limited experience in manufacturing or procuring products in commercial quantities, conducting later-stage phases of the clinical research and regulatory approval process, selling pharmaceutical and over-the-counter health
products, or negotiating, establishing and maintaining strategic relationships (other than as to research). Any growth of our company will require us to expand our capabilities in these areas, to increase our executive management and to improve our
operations and financial systems and controls. We cannot assure investors that we will be able to hire, in a timely manner, the qualified manufacturing, sales, marketing, and managerial personnel we need,



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if at all. If we do not obtain substantially greater capabilities in any one or more of these areas, either by developing our own management and staff or by
entering into agreements with capable third parties, we may be unable to successfully market and sell any of the products we seek to commercialize, and our ability to generate revenues and profits will be harmed. Further, if we do grow rapidly, such
growth may strain our operational, managerial and financial resources.

If we are unable to retain and hire key personnel, then we may not be able to
implement our business plan.

We depend on the services of our senior management and key technical personnel. In particular, our success
depends on the continued efforts of our Chief Executive Officer, Belinda Tsao Nivaggioli, to manage our business operations. The loss of the services of Ms. Nivaggioli could have a negative effect on our business, financial condition and
results of operations. In addition, our success in expanding our business operations is largely dependent on our ability to hire highly qualified personnel. In addition, we may lose employees or consultants that we hire due to higher salaries and
fees being offered by competitors or other businesses in the industry.

Some of the requirements of Sarbanes-Oxley affect us as a small company
disproportionately and we may not be able to comply in a timely manner despite substantial effort and expense.

The Sarbanes-Oxley Act
of 2002 imposed many new requirements on public companies, the most significant of which involves the documentation, testing and reporting of the effectiveness of our internal control over financial reporting. Although we are not required to be in
compliance with Section 404 of Sarbanes-Oxley relating to internal control over financial reporting until our annual report for the year ended December 2007, we will begin documenting and testing our internal controls in a way that we have
never before been required to do. We expect this effort will involve substantial time and expense. Because we have limited resources we can devote to this effort we cannot be sure that we will be able to complete the task in a timely manner or that
our internal controls will meet the standards that are currently required. We have various material weakness and significant control deficiencies identified by our registered public accounting firm. These deficiencies include, among other things,
inadequate staffing in our finance area and related internal controls surrounding our accounting and financial reporting functions. Although we are not yet required to report on our assessment of the effectiveness of our internal control over
financial reporting until at least the end of the next fiscal year (or provide auditor attestation until the end of fiscal 2007), there is a reasonable likelihood that our registered public accounting firm will inform us of one or more material
weaknesses before we complete our compliance and remediation efforts. We are working to address the issues raised by these control deficiencies, but we may not be successful in resolving them within the required time frame.

Risks Related to an Investment in our Common Stock

You may not be
able to liquidate your investment since there is a limited public market for our common stock.

Our shares are quoted on the
Over-the-Counter Bulletin Board (OTCBB). Our shares are thinly traded. As a result, an investor may find it difficult to dispose of or to obtain accurate quotations as to the market value of our stock. We cannot assure you that a regular and active
trading market for our shares will develop in the future or that if developed, will be sustained.

Our stock price is likely to be volatile.

There is generally significant volatility in the market prices and limited liquidity of securities of small companies, and particularly
of small pharmaceutical companies. Contributing to this volatility are various factors and events that can affect our stock price in a positive or negative manner. These factors and events include, but are not limited to:



| |  |  | results of our clinical trials;
| | - |  | -------------------------------



| |  |  | governmental approvals, refusals to approve, regulations or actions;
| | - |  | --------------------------------------------------------------------



| |  |  | market acceptance and sales growth of creatine and creatine derivatives;
| | - |  | ------------------------------------------------------------------------



| |  |  | failure of any of our product candidates, if approved, to achieve commercial success;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | litigation involving our company or our general industry or both;
| | - |  | -----------------------------------------------------------------



| |  |  | developments or disputes concerning our patents or other proprietary rights;
| | - |  | ----------------------------------------------------------------------------



| |  |  | changes in the structure of healthcare payment systems, including developments in price control legislation;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | departure of key personnel;
| | - |  | ---------------------------



| |  |  | future sales of our common stock;
| | - |  | ---------------------------------



| |  |  | period-to-period fluctuations in our financial results or those of companies that are perceived to be similar to us;
| | - |  | --------------------------------------------------------------------------------------------------------------------



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| |  |  | changes in estimates of our financial results or recommendations by securities analysts;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | investors general perception of us; and
| | - |  | ----------------------------------------



| |  |  | general economic, industry and market conditions.
| | - |  | -------------------------------------------------

If any of these risks occurs, it could cause our stock price to fall and may expose us to class action lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.

Our stock has been and may in the future become subject to Penny Stock rules, which may diminish liquidity.

Even if a robust trading market develops, trades of our common stock could be subject to Rule 15g-9 adopted by the Securities and Exchange Commission,
which rule imposes certain requirements on broker-dealers who sell securities subject to the rule to persons other than established customers and accredited investors. For transactions covered by the rule, brokers/dealers must make a special
suitability determination for purchasers of the securities and receive the purchasers written agreement to the transaction prior to sale. The Securities and Exchange Commission also has rules that regulate broker-dealer practices in connection
with transactions in penny stocks. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that
current price and volume information with respect to transactions in that security is provided by the exchange or system). The penny stock rules require a broker/dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure document prepared by the Commission that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customers account. The bid and
offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customers
confirmation. In addition, broker-dealers who sell these securities to persons other than established customers and accredited investors must make a special written determination that the penny stock is a suitable investment for the
purchaser and receive the purchasers written agreement to the transaction. In any event, the broker-dealer cannot execute a penny stock transaction until at least two business days after the broker-dealer sends the disclosure documents. These
disclosure requirements have the effect of reducing the level of trading activity in the secondary market for our common stock. As a result of these rules, investors may find it difficult to sell their shares. While our common stock has consistently
traded above $5.00 for several months, there can no assurance that the stock will not trade below $5.00.

We incur increased costs as a result of being
a public company.

As a public company, we incur significant legal, accounting and other expenses that we did not incur as a
private company. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the Securities and Exchange Commission, have required changes in corporate governance practices of public companies. These new rules and
regulations have increased our legal and financial compliance costs and have made some activities more time-consuming and costly. For example, as a result of becoming a public company, we have created additional board committees and have adopted
policies regarding internal controls and disclosure controls and procedures. In addition, we have incurred additional costs associated with our public company reporting requirements. In addition, these new rules and regulations have made it more
difficult and more expensive for us to obtain director and officer liability insurance. As a result of the new rules, it may become more difficult for us to attract and retain qualified persons to serve on our Board of Directors or as executive
officers. We cannot predict or estimate the amount of additional costs we may incur as a result of being a public company or the timing of such costs.

Future sales by stockholders may depress the price of our common stock.

As of December 31, 2006, we had 51,082,616
shares of common stock issued and outstanding. 21,000,000 of these shares became eligible for trading when an application for quotation on the OTCBB was approved in March 2006. Certain additional shares of common stock became eligible for sale under
Rule 144 beginning in November 2006, upon the expiration of lock-up arrangements included in the Merger Agreement with AVN. As of December 31, 2006, 1,329,413 shares of our common stock are subject to future issuance pursuant to outstanding
options, stock subscriptions and warrants. Also, 900,000 shares of Series A Preferred Stock and, upon closing as discussed in Note 11, Subsequent Events, additional shares of Series B Preferred Stock may be converted into our common stock. As any or
all of these additional shares of our common stock become available for resale in the public market, the price of our common stock may decrease due to the additional shares in the market. Any decline in the price of our common stock may encourage
short sales, which could place further downward pressure on the price of our common stock and may impair our ability to raise additional capital through the sale of equity securities.



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|Item 7. | Financial Statements
|------- | --------------------

REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Avicena Group, Inc.

We have audited the accompanying
balance sheets of Avicena Group, Inc. (a Delaware corporation) as of December 31, 2006 and 2005, and the related statements of operations, changes in stockholders deficit and redeemable convertible preferred stock and cash flows for each of the
years in the three-year period ended December 31, 2006. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Avicena Group, Inc. as
of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of
America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed
in Note 1 to the financial statements, the Companys significant operating losses and accumulated deficit raise substantial doubt about its ability to continue as a going concern. Managements plans in regard to these matters are also
described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As
discussed in Note 2 to the financials statements, effective January 1, 2006 the Company adopted the provisions of Statement of Financial Accounting Standard No. 123(R) Share-Based Payment.

/S/ VITALE, CATURANO & COMPANY, LTD.

Boston, Massachusetts

May 9, 2007



|                                                                                          |  |   
|----------------------------------------------------------------------------------------- |  | --
|Financial Statements Table of Contents:                                                   |  |   
|Balance Sheets                                                                            |  | 30
|Statements of Operations                                                                  |  | 31
|Statements of Changes in Stockholders Deficit and Redeemable Convertible Preferred Stock |  | 32
|Statements of Cash Flows                                                                  |  | 33
|Notes to Financial Statements                                                             |  | 34

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



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AVICENA GROUP, INC.

Balance Sheets



|                                                                                                                                                           |  |                  |             |   |                  |   |            |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----------- | - | ---------------- | - | ---------- | -
|                                                                                                                                                           |  | December 31,2006 |             |   | December 31,2005 |  
|ASSETS                                                                                                                                                     |  |                  |             |   |                  |   |            |  
|Current assets:                                                                                                                                            |  |                  |             |   |                  |   |            |  
|Cash and cash equivalents                                                                                                                                  |  | $                | 1,105,899   |   |                  | $ | 619,042    |  
|Accounts receivable                                                                                                                                        |  |                  | 19,600      |   |                  |   | 59,036     |  
|Inventory                                                                                                                                                  |  |                  | 2,167       |   |                  |   | 2,766      |  
|Prepaid expenses                                                                                                                                           |  |                  | 94,557      |   |                  |   | 101,357    |  
|                                                                                                                                                           |  |                  |             |   |                  |   |            |  
|Total current assets                                                                                                                                       |  |                  | 1,222,223   |   |                  |   | 782,201    |  
|Equipment, net                                                                                                                                             |  |                  | 3,130       |   |                  |   | 6,129      |  
|Deferred financing costs, net                                                                                                                              |  |                  | 1,743,373   |   |                  |   |           |  
|Deposits                                                                                                                                                   |  |                  | 12,440      |   |                  |   | 9,335      |  
|                                                                                                                                                           |  |                  |             |   |                  |   |            |  
|Total assets                                                                                                                                               |  | $                | 2,981,166   |   |                  | $ | 797,665    |  
|                                                                                                                                                           |  |                  |             |   |                  |   |            |  
|LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS DEFICIT                                                                              |  |                  |             |   |                  |   |            |  
|Current liabilities:                                                                                                                                       |  |                  |             |   |                  |   |            |  
|Accounts payable                                                                                                                                           |  | $                | 291,296     |   |                  | $ | 619,948    |  
|Accrued expenses                                                                                                                                           |  |                  | 80,835      |   |                  |   | 161,499    |  
|Note payable to a shareholder                                                                                                                              |  |                  |            |   |                  |   | 75,000     |  
|                                                                                                                                                           |  |                  |             |   |                  |   |            |  
|Total current liabilities                                                                                                                                  |  |                  | 372,131     |   |                  |   | 856,447    |  
|                                                                                                                                                           |  |                  |             |   |                  |   |            |  
|Long term liabilities:                                                                                                                                     |  |                  |             |   |                  |   |            |  
|Warrants                                                                                                                                                   |  |                  | 5,003,989   |   |                  |   |           |  
|                                                                                                                                                           |  |                  |             |   |                  |   |            |  
|Total long term liabilities                                                                                                                                |  |                  | 5,003,989   |   |                  |   |           |  
|                                                                                                                                                           |  |                  |             |   |                  |   |            |  
|Total liabilities                                                                                                                                          |  |                  | 5,376,120   |   |                  |   | 856,447    |  
|                                                                                                                                                           |  |                  |             |   |                  |   |            |  
|Commitments and contingencies (Note 8)                                                                                                                     |  |                  |             |   |                  |   |            |  
|Redeemable convertible preferred stock:                                                                                                                    |  |                  |             |   |                  |   |            |  
|Series A Redeemable convertible preferred stock; $0.001 par value, 5,000,000 shares authorized, 900,000 shares issued and outstanding at
December 31, 2006 |  |                  | 539,942     |   |                  |   |           |  
|                                                                                                                                                           |  |                  |             |   |                  |   |            |  
|Stockholders deficit:                                                                                                                                     |  |                  |             |   |                  |   |            |  
|Common stock; $0.001 par value, 100,000,000 shares authorized; 51,082,616 shares issued and outstanding at December 31, 2006 and
December 31, 2005         |  |                  | 51,083      |   |                  |   | 51,083     |  
|Additional paid-in capital                                                                                                                                 |  |                  | 10,907,971  |   |                  |   | 8,435,559  |  
|Stock subscription                                                                                                                                         |  |                  | 37,850      |   |                  |   |           |  
|Deferred compensation                                                                                                                                      |  |                  |            |   |                  |   | (141,622   | )
|Accumulated deficit                                                                                                                                        |  |                  | (13,931,800 | ) |                  |   | (8,403,802 | )
|                                                                                                                                                           |  |                  |             |   |                  |   |            |  
|Total stockholders deficit                                                                                                                                |  |                  | (2,934,896  | ) |                  |   | (58,782    | )
|                                                                                                                                                           |  |                  |             |   |                  |   |            |  
|Total liabilities, redeemable preferred stock and stockholders deficit                                                                                    |  | $                | 2,981,166   |   |                  | $ | 797,665    |  
|                                                                                                                                                           |  |                  |             |   |                  |   |            |  

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



30



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AVICENA GROUP, INC.

Statements of Operations

Years ended December 31, 2006, 2005 and 2004



|                                                                          |  |      |            |   |      |   |            |      |  |   |           |  
|------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | --------- | -
|                                                                          |  | 2006 |            |   | 2005 |   |            | 2004 | 
|Revenue                                                                   |  | $    | 374,952    |   |      | $ | 477,199    |      |  | $ | 298,540   |  
|Cost of revenue                                                           |  |      | 50,497     |   |      |   | 55,475     |      |  |   | 46,969    |  
|                                                                          |  |      |            |   |      |   |            |      |  |   |           |  
|Gross margin                                                              |  |      | 324,455    |   |      |   | 421,724    |      |  |   | 251,571   |  
|Research and development                                                  |  |      | 1,284,046  |   |      |   | 479,764    |      |  |   | 452,739   |  
|Selling and marketing expenses                                            |  |      | 852,016    |   |      |   | 716,378    |      |  |   | 30,993    |  
|General and administrative expenses                                       |  |      | 1,769,373  |   |      |   | 1,978,891  |      |  |   | 553,380   |  
|                                                                          |  |      |            |   |      |   |            |      |  |   |           |  
|                                                                          |  |      | 3,905,435  |   |      |   | 3,175,033  |      |  |   | 1,037,112 |  
|                                                                          |  |      |            |   |      |   |            |      |  |   |           |  
|Loss from operations                                                      |  |      | (3,580,980 | ) |      |   | (2,753,309 | )    |  |   | (785,541  | )
|Loss on change in fair value of warrants                                  |  |      | (715,470   | ) |      |   |           |      |  |   |          |  
|Interest income                                                           |  |      | 8,839      |   |      |   | 3,386      |      |  |   | 100       |  
|Interest expense                                                          |  |      | (1,240,387 | ) |      |   | (10,005    | )    |  |   | (3,314    | )
|                                                                          |  |      |            |   |      |   |            |      |  |   |           |  
|Net loss                                                                  |  | $    | (5,527,998 | ) |      | $ | (2,759,928 | )    |  | $ | (788,755  | )
|Preferred stock dividend-Series A redeemable convertible preferred stock  |  |      | 59,523     |   |      |   |           |      |  |   |          |  
|Preferred stock accretion-Series A redeemable convertible preferred stock |  |      | 218,797    |   |      |   |           |      |  |   |          |  
|                                                                          |  |      |            |   |      |   |            |      |  |   |           |  
|Net loss applicable to common stock                                       |  | $    | (5,806,318 | ) |      | $ | (2,759,928 | )    |  | $ | (788,755  | )
|Net loss per common share-basic and diluted                               |  | $    | (0.11      | ) |      | $ | (0.12      | )    |  | $ | (0.19     | )
|                                                                          |  |      |            |   |      |   |            |      |  |   |           |  
|Weighted average common shares outstanding - basic and diluted            |  |      | 51,082,616 |   |      |   | 23,017,756 |      |  |   | 4,175,135 |  
|                                                                          |  |      |            |   |      |   |            |      |  |   |           |  



31



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AVICENA GROUP, INC.

Statement of Changes in Stockholders Deficit and Redeemable Convertible Preferred Stock

Years Ended December 31, 2006 and 2005



|                                                                                               |  |                                 |  |        |                      |   |        |            |   |                            |   |         |                    |  |                       |  |   |                     |  |   |                             |   |  |   |        |  |   |          |   |  |   |             |   |  |   |            |  
|---------------------------------------------------------------------------------------------- |  | ------------------------------- |  | ------ | -------------------- | - | ------ | ---------- | - | -------------------------- | - | ------- | ------------------ |  | --------------------- |  | - | ------------------- |  | - | --------------------------- | - |  | - | ------ |  | - | -------- | - |  | - | ----------- | - |  | - | ---------- | -
|                                                                                               |  | Redeemable ConvertiblePreferred |  |        | ConvertiblePreferred |   |        | Common     |   | Additional Paid In Capital |   |         | Stock Subscription |  | Deferred Compensation |  |   | Accumulated Deficit |  |   | Total Stockholders' Deficit |  
|                                                                                               |  |                                 |  |        |                      |   |        |           
|                                                                                               |  | Shares                          |  | Amount |                      |   | Shares |            |   | Amount                     |   |         | Shares             |  | Amount                |  |   |                     |  |  
|Balance at December 31, 2003                                                                   |  |                                |  | $      |                     |   |        | 4,646,456  |   |                            | $ | 46,465  |                    |  | 4,106,224             |  | $ | 4,106               |  | $ | 4,360,867                   |   |  | $ |       |  | $ |         |   |  | $ | (4,855,119  | ) |  | $ | (443,681   | )
|Issuance of Series C preferred stock, net of issuance costs of $14,096                         |  |                                |  |        |                     |   |        | 780,177    |   |                            |   | 7,801   |                    |  |                      |  |   |                    |  |   | 758,280                     |   |  |   |       |  |   |         |   |  |   |            |   |  |   | 766,081    |  
|Issuance of Common Stock upon exercise of options                                              |  |                                |  |        |                     |   |        |           |   |                            |   |        |                    |  | 352,689               |  |   | 353                 |  |   | 24,839                      |   |  |   |       |  |   |         |   |  |   |            |   |  |   | 25,192     |  
|Compensation expense associated with stock options granted to nonemployees                     |  |                                |  |        |                     |   |        |           |   |                            |   |        |                    |  |                      |  |   |                    |  |   | 531                         |   |  |   |       |  |   |         |   |  |   |            |   |  |   | 531        |  
|Net Loss                                                                                       |  |                                |  |        |                     |   |        |           |   |                            |   |        |                    |  |                      |  |   |                    |  |   |                            |   |  |   |       |  |   |         |   |  |   | (788,755    | ) |  |   | (788,755   | )
|                                                                                               |  |                                 |  |        |                      |   |        |            |   |                            |   |         |                    |  |                       |  |   |                     |  |   |                             |   |  |   |        |  |   |          |   |  |   |             |   |  |   |            |  
|Balance at December 31, 2004                                                                   |  |                                |  |        |                     |   |        | 5,426,633  |   |                            |   | 54,266  |                    |  | 4,458,913             |  |   | 4,459               |  |   | 5,144,517                   |   |  |   |       |  |   |         |   |  |   | (5,643,874  | ) |  |   | (440,632   | )
|                                                                                               |  |                                 |  |        |                      |   |        |            |   |                            |   |         |                    |  |                       |  |   |                     |  |   |                             |   |  |   |        |  |   |          |   |  |   |             |   |  |   |            |  
|Issuance of common stock to financial advisor                                                  |  |                                |  |        |                     |   |        |           |   |                            |   |        |                    |  | 3,000,000             |  |   | 3,000               |  |   | 297,000                     |   |  |   |       |  |   |         |   |  |   |            |   |  |   | 300,000    |  
|Issuance of restricted common stock                                                            |  |                                |  |        |                     |   |        |           |   |                            |   |        |                    |  | 3,957,855             |  |   | 3,958               |  |   | 396,827                     |   |  |   |       |  |   | (400,785 | ) |  |   |            |   |  |   |           |  
|Compensation expense associated with vesting of restricted stock                               |  |                                |  |        |                     |   |        |           |   |                            |   |        |                    |  |                      |  |   |                    |  |   |                            |   |  |   |       |  |   | 259,163  |   |  |   |            |   |  |   | 259,163    |  
|Issuance of common stock upon exercise of options                                              |  |                                |  |        |                     |   |        |           |   |                            |   |        |                    |  | 9,757,565             |  |   | 9,758               |  |   | 8,310                       |   |  |   |       |  |   |         |   |  |   |            |   |  |   | 18,068     |  
|Issuance of Series C preferred stock, net of issuance costs of $ 9,099                         |  |                                |  |        |                     |   |        | 130,681    |   |                            |   | 1,307   |                    |  |                      |  |   |                    |  |   | 120,275                     |   |  |   |       |  |   |         |   |  |   |            |   |  |   | 121,582    |  
|Compensation expense associated with stock options granted to nonemployees                     |  |                                |  |        |                     |   |        |           |   |                            |   |        |                    |  |                      |  |   |                    |  |   | 4,338                       |   |  |   |       |  |   |         |   |  |   |            |   |  |   | 4,338      |  
|Compensation expense related to modification of stock options                                  |  |                                |  |        |                     |   |        |           |   |                            |   |        |                    |  |                      |  |   |                    |  |   | 469,441                     |   |  |   |       |  |   |         |   |  |   |            |   |  |   | 469,441    |  
|Issuance of common stock pursuant to a merger with AAC, net of issuance costs of $ 1,030,814   |  |                                |  |        |                     |   |        |           |   |                            |   |        |                    |  | 21,000,000            |  |   | 21,000              |  |   | 1,948,186                   |   |  |   |       |  |   |         |   |  |   |            |   |  |   | 1,969,186  |  
|Conversion of outstanding preferred stock to common stock                                      |  |                                |  |        |                     |   |        | (5,557,314 | ) |                            |   | (55,573 | )                  |  | 8,908,283             |  |   | 8,908               |  |   | 46,665                      |   |  |   |       |  |   |         |   |  |   |            |   |  |   |           |  
|Net Loss                                                                                       |  |                                |  |        |                     |   |        |           |   |                            |   |        |                    |  |                       |  |   |                     |  |   |                             |   |  |   |       |  |   |         |   |  |   | (2,759,928  | ) |  |   | (2,759,928 | )
|                                                                                               |  |                                 |  |        |                      |   |        |            |   |                            |   |         |                    |  |                       |  |   |                     |  |   |                             |   |  |   |        |  |   |          |   |  |   |             |   |  |   |            |  
|Balance at December 31, 2005                                                                   |  |                                |  |        |                     |   |        |           |   |                            |   |        |                    |  | 51,082,616            |  |   | 51,083              |  |   | 8,435,559                   |   |  |   |       |  |   | (141,622 | ) |  |   | (8,403,802  | ) |  |   | (58,782    | )
|                                                                                               |  |                                 |  |        |                      |   |        |            |   |                            |   |         |                    |  |                       |  |   |                     |  |   |                             |   |  |   |        |  |   |          |   |  |   |             |   |  |   |            |  
|Compensation expense associated with vesting of restricted stock and stock options             |  |                                |  |        |                     |   |        |           |   |                            |   |        |                    |  |                      |  |   |                    |  |   | 104,540                     |   |  |   |       |  |   |         |   |  |   |            |   |  |   | 104,540    |  
|Reclassification of deferred compensation upon adoption of FAS 123(R)                          |  |                                |  |        |                     |   |        |           |   |                            |   |        |                    |  |                      |  |   |                    |  |   | (141,622                    | ) |  |   |       |  |   | 141,622  |   |  |   |            |   |  |   |           |  
|Beneficial conversion feature of convertible note payable                                      |  |                                |  |        |                     |   |        |           |   |                            |   |        |                    |  |                      |  |   |                    |  |   | 663,342                     |   |  |   |       |  |   |         |   |  |   |            |   |  |   | 663,342    |  
|Stock issued to investment banker                                                              |  |                                |  |        |                     |   |        |           |   |                            |   |        |                    |  |                      |  |   |                    |  |   |                            |   |  |   | 37,850 |  |   |         |   |  |   |            |   |  |   | 37,850     |  
|Issuance of Series A redeemable convertible preferred stock, net of issuance costs of $177,081 |  | 900,000                         |  |        | 2,325,826            |   |        |           |   |                            |   |        |                    |  |                      |  |   |                    |  |   |                            |   |  |   |       |  |   |         |   |  |   |            |   |  |   |           |  
|Series A redeemable convertible preferred stock beneficial conversion feature                  |  |                                |  |        | (2,064,204           | ) |        |           |   |                            |   |        |                    |  |                      |  |   |                    |  |   | 2,064,204                   |   |  |   |       |  |   |         |   |  |   |            |   |  |   | 2,064,204  |  
|Accretion of Series A redeemable convertible preferred stock                                   |  |                                |  |        | 218,797              |   |        |           |   |                            |   |        |                    |  |                      |  |   |                    |  |   | (218,797                    | ) |  |   |       |  |   |         |   |  |   |            |   |  |   | (218,797   | )
|Series A redeemable convertible preferred stock dividends accrued                              |  |                                |  |        | 59,523               |   |        |           |   |                            |   |        |                    |  |                      |  |   |                    |  |   | (59,523                     | ) |  |   |       |  |   |         |   |  |   |            |   |  |   | (59,523    | )
|Impact of settlement on additional paid in capital (Note 7 to financial statements)            |  |                                |  |        |                     |   |        |           |   |                            |   |        |                    |  |                      |  |   |                    |  |   | 60,268                      |   |  |   |       |  |   |         |   |  |   |            |   |  |   | 60,268     |  
|Net Loss                                                                                       |  |                                |  |        |                     |   |        |           |   |                            |   |        |                    |  |                      |  |   |                    |  |   |                            |   |  |   |       |  |   |         |   |  |   | (5,527,998  | ) |  |   | (5,527,998 | )
|                                                                                               |  |                                 |  |        |                      |   |        |            |   |                            |   |         |                    |  |                       |  |   |                     |  |   |                             |   |  |   |        |  |   |          |   |  |   |             |   |  |   |            |  
|                                                                                               |  |                                 |  |        |                      |   |        |            |   |                            |   |         |                    |  |                       |  |   |                     |  |   |                            |   |  |   |        |  |   |          |   |  |   |             |   |  |   |           |  
|Balance at December 31, 2006                                                                   |  | 900,000                         |  | $      | 539,942              |   |        |           |   |                            | $ |        |                    |  | 51,082,616            |  | $ | 51,083              |  | $ | 10,907,971                  |   |  | $ | 37,850 |  | $ |         |   |  | $ | (13,931,800 | ) |  | $ | (2,934,896 | )
|                                                                                               |  |                                 |  |        |                      |   |        |            |   |                            |   |         |                    |  |                       |  |   |                     |  |   |                             |   |  |   |        |  |   |          |   |  |   |             |   |  |   |            |  

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



32



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##### Table of Contents

AVICENA GROUP INC.

Statements of Cash Flows

Years Ended December 31, 2006, 2005 and 2004



|                                                                                                  |  |      |            |   |      |   |            |      |  |   |          |  
|------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | -------- | -
|                                                                                                  |  | 2006 |            |   | 2005 |   |            | 2004 | 
|Cash flows from operating activities:                                                             |  |      |            |   |      |   |            |      |  |   |          |  
|Net loss                                                                                          |  | $    | (5,527,998 | ) |      | $ | (2,759,928 | )    |  | $ | (788,755 | )
|Adjustments to reconcile net loss to net cash used in operating activities:                       |  |      |            |   |      |   |            |      |  |   |          |  
|Depreciation expense                                                                              |  |      | 2,999      |   |      |   | 3,816      |      |  |   | 1,901    |  
|Stock based compensation expense                                                                  |  |      | 104,540    |   |      |   | 732,942    |      |  |   | 531      |  
|Other non-cash compensation expense                                                               |  |      |           |   |      |   |           |      |  |   | 10,000   |  
|Amortization of deferred financing cost                                                           |  |      | 539,363    |   |      |   |           |      |  |   |         |  
|Loss on change in fair value of warrants                                                          |  |      | 715,470    |   |      |   |           |      |  |   |         |  
|Amortization of beneficial conversion feature on note payable                                     |  |      | 663,342    |   |      |   |           |      |  |   |         |  
|Investment banking fee to be paid in stock                                                        |  |      | 37,850     |   |      |   |           |      |  |   |         |  
|Investment banking fee to be paid in warrants                                                     |  |      | 8,691      |   |      |   |           |      |  |   |         |  
|Impact of settlement on additional paid in capital                                                |  |      | 60,268     |   |      |   |           |      |  |   |         |  
|Changes in assets and liabilities                                                                 |  |      |            |   |      |   |            |      |  |   |          |  
|Accounts receivable                                                                               |  |      | 39,436     |   |      |   | (39,411    | )    |  |   | 30,277   |  
|Inventory                                                                                         |  |      | 599        |   |      |   | 832        |      |  |   | 291      |  
|Prepaid expenses                                                                                  |  |      | 6,800      |   |      |   | (88,985    | )    |  |   | (545     | )
|Deposits                                                                                          |  |      | (3,105     | ) |      |   | (4,000     | )    |  |   | (2,800   | )
|Other current assets                                                                              |  |      |           |   |      |   |           |      |  |   |         |  
|Accounts payable                                                                                  |  |      | (328,652   | ) |      |   | 119,235    |      |  |   | 236,327  |  
|Accrued expenses                                                                                  |  |      | (80,664    | ) |      |   | 76,949     |      |  |   | 33,954   |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |          |  
|Net cash used in operating activities                                                             |  |      | (3,761,061 | ) |      |   | (1,958,550 | )    |  |   | (478,819 | )
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |          |  
|Cash flows from investing activities                                                              |  |      |            |   |      |   |            |      |  |   |          |  
|Purchases of equipment                                                                            |  |      |           |   |      |   | (8,667     | )    |  |   |         |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |          |  
|Net cash used in investing activities                                                             |  |      |           |   |      |   | (8,667     | )    |  |   |         |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |          |  
|Cash flows from financing activities                                                              |  |      |            |   |      |   |            |      |  |   |          |  
|Proceeds from issuances of Series A redeemable convertible preferred stock, net of issuance costs |  |      | 4,322,918  |   |      |   | 121,582    |      |  |   | 579,273  |  
|Proceeds from AVN merger, net of issuance costs                                                   |  |      |           |   |      |   | 2,269,186  |      |  |   |         |  
|Exercise of stock options                                                                         |  |      |           |   |      |   | 18,068     |      |  |   |         |  
|Repayment of advances from stockholder                                                            |  |      | (75,000    | ) |      |   |           |      |  |   |         |  
|Advances from stockholder                                                                         |  |      |           |   |      |   | 75,000     |      |  |   |         |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |          |  
|Net cash provided by financing activities                                                         |  |      | 4,247,918  |   |      |   | 2,483,836  |      |  |   | 579,273  |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |          |  
|Net increase in cash and cash equivalents                                                         |  |      | 486,857    |   |      |   | 516,619    |      |  |   | 100,454  |  
|Cash and cash equivalents, beginning of year                                                      |  |      | 619,042    |   |      |   | 102,423    |      |  |   | 1,969    |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |          |  
|Cash and cash equivalents, end of year                                                            |  | $    | 1,105,899  |   |      | $ | 619,042    |      |  | $ | 102,423  |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |          |  
|Supplemental disclosure of cash flow information                                                  |  |      |            |   |      |   |            |      |  |   |          |  
|Cash paid during the period for:                                                                  |  |      |            |   |      |   |            |      |  |   |          |  
|Interest                                                                                          |  | $    | 11,462     |   |      | $ | 7,432      |      |  | $ | 2,811    |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |          |  
|Income Taxes                                                                                      |  | $    |           |   |      | $ |           |      |  | $ |         |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |          |  
|Cash received during the period for:                                                              |  |      |            |   |      |   |            |      |  |   |          |  
|Interest                                                                                          |  | $    | 8,839      |   |      | $ | 3,386      |      |  | $ | 100      |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |          |  
|Supplemental disclosure of noncash financing activities                                           |  |      |            |   |      |   |            |      |  |   |          |  
|Issuance of Common Stock for financial advisor fees                                               |  | $    |           |   |      | $ | 300,000    |      |  | $ |         |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |          |  
|Commitment fee paid with warrants                                                                 |  | $    | 2,282,735  |   |      | $ |           |      |  | $ |         |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |          |  
|Conversion of amounts owed to stockholders to preferred stock                                     |  | $    |           |   |      | $ |           |      |  | $ | 102,000  |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |          |  
|Conversion of accrued liabilities to preferred stock                                              |  | $    |           |   |      | $ |           |      |  | $ | 100,000  |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |          |  
|Warrants issued with convertible preferred stock                                                  |  | $    | 1,997,093  |   |      | $ |           |      |  | $ |         |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |          |  
|Accretion of beneficial conversion feature of preferred stock                                     |  | $    | 218,797    |   |      | $ |           |      |  | $ |         |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |          |  
|Stock dividend for preferred stock                                                                |  | $    | 59,523     |   |      | $ |           |      |  | $ |         |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |          |  
|Beneficial conversion feature associated with convertible note                                    |  | $    | 663,342    |   |      | $ |           |      |  | $ |         |  
|                                                                                                  |  |      |            |   |      |   |            |      |  |   |          |  



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AVICENA GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

1. GENERAL

Organization and Operations

The predecessor to Avicena Group, Inc., (the Company), Amira, Inc., was formed in 1989 and was purchased by Repligen Corporation in 1991. From
1991 to 1994, the Amira business was operated as a division of Repligen, focusing on cancer treatments related to modulation of energy metabolism. The Avicena Group, Inc. was formed as a Massachusetts corporation in 1993 and purchased the Amira
intellectual property from Repligen. The Company was reincorporated as Avicena Group, Inc. in Delaware on August 6, 1999.

On October 26, 2005, the Company entered into an agreement to merge with AVN Acquisition Corp. (AVN), a single-purpose shell company formed to provide financing to the Company. Prior to the merger, the Company had received $1,000,000
in the form of notes payable directly or indirectly from AVN. On November 14, 2005, the SEC approved the Companys registration statement on Form SB-2 and shortly thereafter, on November 23, 2005, the merger of the Company and AVN was
executed. When the merger was completed, the Company received AVNs cash assets of $2,000,000 and all amounts due under the loans held by AVN were cancelled as a matter of law. Also pursuant to a merger agreement, the Companys outstanding
shares of Series A and Series B Convertible Preferred Stock were converted into 2.1 shares of common stock, each outstanding share of Series C Convertible Preferred Stock was converted into 1.4 shares of common stock and the outstanding shares of
common stock were split on a 1.4 to 1 basis. The equity of Avicena has been adjusted to reflect a financing transaction with the proceeds equal to the net asset value of AVN immediately prior to the Merger. The historical stockholders equity
has been retroactively restated to adjust for the exchange of shares pursuant to the merger agreement. All shares and per share information included in the accompanying financial statements and notes give effect to the stock split.

The Company develops products based on the regulation of cellular energy. Its business development activities are concentrated in pharmaceuticals and
over-the-counter (OTC) health products. In pharmaceuticals, the Company focuses on developing orphan drug products for neurological diseases, such as ALS, Huntingtons and Creatine Transporter Defect. In the OTC area, the Company develops
cosmeceuticals and nutraceutical products that enhance cellular energy modulations.

Most of the Companys technology is based on its
proprietary understanding of the utilization of certain biochemicals to modulate cellular energy processes. The creatine kinase/phosphocreatine system (Cr/PCr) is key to maintaining cellular energy. Creatine Kinase (CK) is an enzyme providing the
energy transport and buffering system present in tissues with intermittently high and fluctuating energy demands, including the brain, retina, heart and skeletal muscles. CK is a critical component in the generation of adenosine triphosphate (ATP),
the basic source of energy for the body. Numerous compounds which are substrates of the creatine kinase system modulate cellular energy, prolong cellular life, and protect against cell injury and death.

As part of its research and development activities, the Company has developed an intellectual property portfolio which consisted of six issued U.S.
patents and twenty pending patent applications with twelve corresponding issued patents and approximately fifteen corresponding patent applications in foreign countries as of December 31, 2006. All these patents address the modulation of
cellular energy to mitigate the disease process, either by providing additional energy to extend cell life, as in combating neurodegenerative diseases, or by decreasing energy to precipitate apoptosis or programmed cell death, as in cancer
treatment. The Companys strategy is to file patent applications to support both near-term and upstream product or licensing opportunities in both of its business development areas and to obtain patents in the key developed healthcare markets
in North America, Europe, and Asia.

Risk and Liquidity

The Company is subject to risks common to companies in the biotechnology industry including, but not limited to, development by its competitors of new technological innovations, protection of proprietary technology,
dependence on key personnel, product liability, and compliance with government regulations.

The Company has operated at a loss since
inception and has incurred accumulated losses of $13,931,800 at December 31, 2006. The Company anticipates that losses will continue for the foreseeable future. As a result of these significant losses from operations and accumulated deficit,
there is substantial doubt about the Companys ability to continue as a going concern.

The Company has funded those accumulated
losses primarily through the issuance of equity securities, issuance of notes payable, and advances from related parties. The Companys ability to continue operations after its current cash



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resources are exhausted depends on its ability to obtain additional financing and achieve profitable operations, as to which no assurances can be given. Cash
requirements may also vary materially from those now planned because of changes in the focus and direction of our research and development programs, competitive and technical advances, patent developments or other developments. Additionally, there
can be no assurance that financing will be obtained on terms satisfactory to the Company. Nevertheless, the accompanying financial statements have been prepared as if the Company will continue as a going concern and, as such, do not include any
adjustments that may result from the outcome of these uncertainties.

Subsequent to year end, in March 2007, the Company entered into
funding negotiations for an issuance of Series B Convertible Redeemable Preferred Stock. The funding negotiations were successful. The Company received net proceeds of $1,974,978 on April 10, 2007 from this issuance. Please refer to Note 11,
Subsequent Events, for additional details of this funding arrangement.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States and reflect the application
of certain significant accounting policies as described in this note and elsewhere in the accompanying financial statements and notes.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses
during the reporting periods. Actual results could differ from those estimates.

Revenue Recognition and Accounts Receivable

Product sales are recognized in accordance with SEC Staff Accounting Bulletin (SAB) 104, Revenue Recognition, when there is persuasive evidence of an
arrangement, all significant risks of ownership have been transferred, the selling price is fixed or determinable and collectibility is reasonably assured. In most cases, these criteria are met when the product is shipped. Consequently, revenue is
generally recognized when a product is shipped. Accounts receivable are stated at the amount management expects to collect from outstanding balances.

An allowance for doubtful accounts is provided for those accounts receivable considered to be uncollectible based upon historical experiences and managements evaluation of outstanding accounts receivable at the
end of the year. Bad debts are written off against the allowance when identified. At December 31, 2006 and 2005, the allowance for doubtful accounts was $0.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or
less to be cash equivalents. The Company had $1,005,765 and $592,591 in cash equivalents at December 31, 2006 and 2005, respectively.

The Company maintains its cash and cash equivalents in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any
significant credit risk on cash and cash equivalents.

Stock-Based Compensation

The Company has a stock-based employee compensation plan which is more fully described in Note 8.

In February 2005, the Companys Board of Directors approved a resolution offering all holders of the Companys 10,750,908 outstanding stock
options at December 31, 2004, plus holders of 309,653 options issued in January 2005, the opportunity to exercise their options on a cashless basis (that is, without the payment of the previously applicable exercise price), with 0.9 fully paid
shares of common stock to be issued for each share subject to the outstanding options. Holders of 10,560,682 of the stock options chose to exercise their options on a cashless basis in the twelve month period ended December 31, 2005. As a
result of the modification made to the options, the Company began using variable plan accounting and, accordingly, recorded a non-cash charge of approximately $313,400 related to the employee options and a non-cash charge of $156,100 related to
non-employee options during the twelve months ended December 31, 2005.

The Company adopted the provisions of Statement of Financial
Accounting Standard No. 123(R) Share Based Paymenton January 1, 2006. Prior to the Companys adoption of FAS 123(R), the Company accounted for equity based compensation under the provisions and related
interpretations of APB Opinion No. 25. The Company adopted the Modified



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Prospective Application (MPA) method of FAS 123(R), without restatement of prior interim periods, on January 1, 2006. Under the MPA
method without restatement approach, the Company recognizes compensation cost for (1) awards that were granted or modified after the fiscal year beginning after December 15, 1996, (2) any portion of awards that have not vested by
January 1, 2006, and (3) any outstanding liability awards.

As a result of adopting FAS 123(R), the Company recorded stock based
compensation of $1,513 for the year ended December 31, 2006 for stock based option awards to employees and directors. This represents an incremental charge of $0.00 per basic and diluted share for the year December 31, 2006 as compared to
the Companys previous method of accounting under APB 25. The calculated value of employee and director stock options was determined using the Black-Scholes option pricing model with the following assumptions: an assumed risk-free interest rate
of 4  4.23% and 3.76  4.11%; a volatility of 50%, an expected life of 5  10 years and 7 years, and a dividend yield of 0% for the option awards granted during 2005 and 2004 respectively. The Companys stock was approved for
quotation on the Over-the-Counter Bulletin Board and began trading on March 24, 2006. Based on this short trading history, the Company determined the expected volatility based on public small company capitalization stocks with significant risk
(scientific or otherwise), which tend to have a relatively high volatility. The Company will re-evaluate this method as additional historical price data is obtained. No cash dividends have been declared on the Companys common stock since the
Companys inception and the Company does not anticipate paying cash dividends over the expected term of the option. The expected term represents the weighted average period the option is expect to be outstanding. The risk-free interest rate is
based on the implied yield currently available on U.S. Treasury zero-coupon issues with maturity dates equivalent to the expected term of the option. The weighted average fair value of options granted during 2005and 2004 was $0.07 and $0.02 per
share, respectively.

No options were granted during 2006. All options outstanding at December 31, 2006 are fully vested.

The adoption of FAS 123(R) had no effect upon cash flow from operations.

Had compensation cost for the Companys equity-based compensation plans been determined based on the fair value at the grant dates for awards under
those plans in accordance with the provisions of FAS 123, the Companys net loss and net loss per share would have been increased to the pro forma amounts indicated below:



|                                                                                                   |  |      |            |   |      |   |          |  
|-------------------------------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | -------- | -
|                                                                                                   |  | 2005 |            |   | 2004 |  
|Net loss as reported                                                                               |  | $    | (2,759,928 | ) |      | $ | (788,755 | )
|Stock-based compensation expense included in reported loss                                         |  |      | 732,942    |   |      |   | 531      |  
|Total stock-based compensation expense determined under the fair value based method for all awards |  |      | (598,290   | ) |      |   | (12,613  | )
|                                                                                                   |  |      |            |   |      |   |          |  
|Pro forma net loss                                                                                 |  | $    | (2,625,276 | ) |      | $ | (800,837 | )
|                                                                                                   |  |      |            |   |      |   |          |  
|Net loss per share:                                                                                |  |      |            |   |      |   |          |  
|As reported - basic and diluted                                                                    |  | $    | (0.12      | ) |      | $ | (0.19    | )
|                                                                                                   |  |      |            |   |      |   |          |  
|Pro forma - basic and diluted                                                                      |  | $    | (0.11      | ) |      | $ | (0.19    | )
|                                                                                                   |  |      |            |   |      |   |          |  

On November 10, 2005, the Financial Accounting Standards Board (FASB) issued FASB
Staff Position SFAS 123R-3 Transition Election Relative to Accounting for Tax Effects of Share-Based Payment Awards. The Company has elected to adopt the alternative transition method provided the FASB Staff Position for calculating the
tax effects (if any) of stock-based compensation expense pursuant to FAS 123(R). The alternative transition method includes simplified methods to establish the beginning balance of additional paid-in capital pool related to the tax effects of
employee stock-based compensation, and to determine the subsequent impact to the additional paid in capital pool and the consolidated statements of operation and cash flows of the tax effects of employee stock-based compensation awards that are
outstanding upon adoption of FAS 123(R).

FAS 123(R) also requires that the benefits associated with the tax deductions in excess of
recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods
after the effective date. These future amounts cannot be estimated because they depend on when the employees exercise stock options, among other things.

Net Loss Per Share

The computation of basic and diluted loss per common share is based upon weighted average number of
common shares outstanding and potentially dilutive securities. Potentially dilutive securities include stock options, convertible debt and warrants.



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Common stock equivalents (which during the year ended December 31, 2006 consisted of options to
purchase 204,926 common shares, redeemable convertible preferred stock to purchase 900,000 common shares, a stock subscription for 8,340 shares of common stock and warrants to purchase 1,121,487 common shares) were not considered in the computation
of dilutive net loss per share because inclusion of such shares would have an anti-dilutive effect on net loss per share. Similarly the impact of options to purchase 246,926 and 10,750,908 shares of common stock have been excluded from the
calculation of diluted weighted average share amounts as their inclusion would have been anti-dilutive for 2005 and 2004, respectively.

Research and
Development Expenditures

Research and development expenditures (including patent-related costs) are charged to operations as incurred.

Inventory

Inventory consists
primarily of finished goods and is stated at the lower of cost (determined on the first-in, first-out basis) or market.

Equipment

Equipment is stated at cost and consists of computer equipment. Depreciation is computed on a straight-line basis over the estimated useful lives of the
related assets. The estimated useful life of computer equipment is three years.

Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under SFAS No. 109, the Company recognizes
deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the Companys financial statements or tax returns. Deferred tax assets and liabilities are determined based upon the difference
between the financial reporting basis and the tax basis of existing assets and liabilities using enacted tax rates expected to be in effect in the year(s) in which differences are expected to reverse. A valuation allowance is provided against
deferred tax assets if it is more likely than not that such assets will not be realized.

Concentration of Credit Risk

In 2004 through 2006, the Company primarily sold its products to one company, a major cosmetics company. Sales to this customer equaled 92%, 96%, and 94%
of total sales for each of the years ended December 31, 2006, 2005, and 2004, respectively. The Companys accounts receivable from this customer equaled 100% of total accounts receivable at December 31st for all three years.
Historically, the Company has not experienced any losses related to its accounts receivable.

Fair Value of Financial Instruments

The estimated fair value of the Companys financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable,
related party accounts, and notes payable approximates their carrying values because of their short-term nature.

Recent Accounting Pronouncements

In July 2006, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 48, Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement No. 109 , or FIN 48, which clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FAS 109 and
prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective beginning with the first annual period after December 15, 2006. The Company does not expect the adoption of FIN 48
to significantly affect its financial condition or results of operations.

In September 2006, the FASB issued Statement No. 157,
Fair Value Measurement, or FAS 157, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FAS 157 is effective
for financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect FAS 157 will have on our consolidated financial position and results of operations.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an
amendment of SFAS 115 , or FAS 159, which permits companies to choose to measure many



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financial instruments and certain other items at fair value. FAS 159 is effective for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. The Company is currently evaluating the effect FAS 159 will have on our consolidated financial position and results of operations.

In September 2006, the Securities and Exchange Commission released Staff Accounting Bulletin No. 108, or SAB 108, to address diversity in practice regarding consideration of the effects of prior year errors
when quantifying misstatements in current year financial statements. The staff of the Securities and Exchange Commission concluded that registrants should quantify financial statement errors using both a balance sheet approach and an income
statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. SAB 108 states that if correcting an error in the current
year materially affects the current years income statement, the prior period financial statements must be restated. SAB 108 is effective for fiscal years ending after November 15, 2006. The adoption of SAB 108 did not
significantly affect the Companys financial condition or results of operations.

3. EQUIPMENT

Equipment consisted of the following at December 31:



|                                |  |      |         |   |      |   |        |  
|------------------------------- |  | ---- | ------- | - | ---- | - | ------ | -
|                                |  | 2006 |         |   | 2005 |  
|Computer equipment              |  | $    | 14,369  |   |      | $ | 14,369 |  
|Less - accumulated depreciation |  |      | (11,239 | ) |      |   | (8,240 | )
|                                |  |      |         |   |      |   |        |  
|Property and equipment, net     |  | $    | 3,130   |   |      | $ | 6,129  |  
|                                |  |      |         |   |      |   |        |  

Depreciation expense amounted to $2,999, $3,816, and $1,901 in 2006, 2005, and 2004, respectively.

4. NOTES PAYABLE TO A SHAREHOLDER AND OTHER RELATED PARTY TRANSACTIONS AND RELATIONSHIPS

Notes Payable to a Shareholder

As discussed in Note
1, Risk and Liquidity, the Company has funded its accumulated losses primarily through the issuance of equity securities, issuance of notes payable, and advances from related parties. In November 2006, the Company repaid a related party
short-term note payable of $75,000 to Wael El Bahey. Mr. El Bahey is the majority stockholder of H.K. Properties Limited, an investment advisory firm not located in the U.S. and not registered with the U.S. Securities and Exchange Commission,
of which our director Nasser Menhall is a director and minority stockholder. The loan was non-interest bearing and was due the earlier of May 23, 2007, or the date of an earlier private placement of $1,500,000 or more closed.

Other Related Party Transactions and Relationships

There are several other related party transactions and relationships which directly or indirectly impacted the financial statements of the Company at December 31, 2006 and 2005, or the results of its operations and its cash flows for
each of the years in the three year period ended December 31, 2006, including:

In March 2002, the Company entered into a Series C
Financial Advisory Agreement with H.K. Properties Limited, an investment advisory firm not located in the U.S. and not registered with the U.S. Securities and Exchange Commission, of which our director Nasser Menhall is a director and minority
stockholder. Pursuant to the agreement, H.K. earned a 10% commission on shares of Series C Preferred Stock Avicena sold to investors identified by H.K. and the Company issued to H.K. or persons designated by it a warrant to purchase one share of our
common stock for each share sold, up to a limit of 5,600,000 shares of common stock, at an exercise price of $0.07 per share. H.K. earned $33,333 for its financial advisory services in 2003 and $10,000 in 2004. H.K. subsequently applied these
amounts to the purchase of stock and the exercise of other warrants. In 2004, the Company issued warrants to purchase 240,800 shares of our common stock to H.K. and its designees. The agreement terminated per its terms on March 11, 2005.

During 2004, 2005 and the first three months of 2006, D. Wayne Peters served as the Companys Acting Chief Financial Officer under a
service agreement with ERG. The Companys total payments to ERG for the services of Mr. Peters totaled $30,000, $95,000 and $32,000 in 2006, 2005 and 2004, respectively. Mr. Peters informed the Company of his decision to leave and
work full time as the Chief Executive Officer of another company in March 2006.

In August 2004, the Company sold the Companys
Chairman Nasser Menhall 142,800 shares of Series C Preferred Stock and warrants to purchase 142,800 shares of common stock (exercisable for $0.01) for a total purchase price of $102,000.



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In February 2005, the Company issued Kevin Waltzer 3,000,000 shares of common stock in compensation for
services he provided in the structuring of the AVN Merger, as a result of which Mr. Waltzer became the owner of more than 5% of the Companys common stock.

In February and March 2005, the Company borrowed a total of $500,000 from AVN to fund the Companys operations and the costs associated with the transactions with AVN, including the preparation of the
Companys prospectus. Interest accrued on the principal amount of the loan at a rate of eight percent per annum. All amounts of principal and interest due under this loan were canceled as a matter of law when the Company completed the AVN
Merger.

In March 2005, the Company entered into a Consulting Agreement with Leslie Fang to govern Dr. Fangs services as the
Companys Chief Scientific Officer and Chairman of the Companys Scientific Advisory Board. The Agreement provides for a one-time grant of 500,000 restricted shares of common stock, vesting over three years.

In March and April 2005, the Company paid Corsair Advisors, Inc., a strategic consulting firm of which the Companys former director Joseph P. Galda
is President, a total of $25,000 in compensation for financial advisory services provided in the structuring of the AVN Merger.

In July
2005, the Company borrowed $150,000 from 401 Capital Partners Inc., one of the selling stockholders. Interest accrued on the principal amount of the loan at a rate of six percent per annum. The loan was due and payable upon demand. In October 2005,
401 Capital Partners Inc. contributed the note representing the loan to AVN. The principal amount of this note was canceled as a matter of law when the Company completed the AVN Merger.

In September 2005, the Company borrowed $50,000 from the Companys Chairman Nasser Menhall. The loan became due and was repaid when the AVN Merger
closed. The loan was non-interest bearing.

In October 2005, in connection with the AVN Merger, the Company entered into an escrow
agreement with LaSalle Bank National Association, which served as escrow agent for the merger. Under the agreement, AVNs cash assets of $2,000,000 were placed in escrow and later distributed to us upon the closing of the AVN Merger. The
Company paid the $2,000 escrow administration fee of LaSalle Bank National Association.

In November 2005, the Company borrowed $350,000
from AVN to fund the Companys operations and the costs associated with the transactions with AVN. Interest accrued on the principal amount of the loan at a rate of eight percent per annum. All amounts of principal and interest due under this
loan were canceled as a matter of law when the Company completed the AVN Merger.

In September 2006, the Company borrowed $20,000 from the
Companys Chairman, Nasser Menhall. The loan was repaid in September 2006. The loan was non-interest bearing.

5. CONVERTIBLE PROMISSORY NOTE

On April 21, 2006, the Company entered into a convertible promissory note in the amount of up to two million dollars and a
registration rights agreement with The Biotechnology Ventures (III) Capital Trust, an accredited investor (the Investor). The Company received proceeds of $800,000 during 2006. The advances were repaid to the lender at the Companys
discretion during December 2006. There is no balance due on the note other than the accrued interest of $26,222 due as of December 31, 2006.

As long as no default has occurred, the Company, upon providing the Investor seventy two hours notice, can draw down funds in multiples of $200,000 dollars. Draw downs may only be made if the Companys cash balance is less than
$300,000. However, the Investor also has the right to advance the full remaining available balance of the facility at any time, upon its sole discretion.

The note bears interest at 8% and matures on March 31, 2009. The Investor may, at its option, elect to convert all or any portion of outstanding principal balance into shares of common stock of the Company at a
conversion rate of $3.00 per share, subject to adjustment in case of stock dividend, stock split, any recapitalization, reorganization, reclassification, consolidation or merger. Interest on the note which is due and payable quarterly, commencing on
July 1, 2006, is also convertible into common stock at the election of the Investor. The lender has agreed to waive repayment of accrued interest until the Company has received additional external funding in excess of $5,000,000.

Pursuant to the note, on the date of the first advance under the note, the Company issued a warrant to the Investor to purchase up to 666,667 shares of
common stock at an exercise price of $3.00 per share (the Warrant), subject to adjustment as described below, at any time prior to the close of business on April 20, 2009. The exercise price and/or the number of shares of common
stock issuable upon the exercise of the Warrant is subject to adjustments in case of a stock dividend, stock



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split, any recapitalization, reorganization, reclassification, consolidation or merger, to which the Company is a party, or sale of all or substantially all
of the Companys assets to another person or other transaction that is effected in such a way that holders of common stock are entitled to receive stock, securities or assets with respect to or in exchange for common stock. The Company may at
any time during the term of the Warrant reduce the then current exercise price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company.

Under the registration rights agreement, within 120 days after Investors conversion of an aggregate of at least $1,500,000 in unpaid accrued
interest and principal pursuant to the note, the Company is obligated to file with the SEC a shelf registration statement covering the resale of the common stock and common stock issued upon exercise of the Warrant. The Company will use its
commercially reasonable efforts to cause the registration statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event not later than the earlier of (a) the 180th calendar day
following the closing date and (b) the fifth trading day following the date on which the Company is notified by the SEC that the registration statement will not be reviewed or is no longer subject to further review and comments. The Company is
also obligated to use its commercially reasonable efforts to keep such registration statement continuously effective under the Securities Act of 1933, as amended, until the date which is two years after the closing date or such later date when all
registrable securities covered by the registration statement have been sold pursuant to the registration statement or an exemption from the registration requirements of the Securities Act or may be sold pursuant to Rule 144(k) under the Securities
Act

The Company accounted for the convertible notes in accordance with the provisions of Emerging Issues Task Force Issue
(EITF) 98-5 Accounting for Convertible Securities with Beneficial Conversion Features, (EITF 98-5) and EITF 00-27 Application of EITF 98-5 to Certain Convertible Instruments, Accordingly, the Company
recorded, as a discount to convertible notes, the intrinsic value of such conversion options based upon the differences between the fair value of the underlying common stock at the commitment date and the effective conversion price embedded in the
note, equal to $663,340. The Company recorded an interest charge of $663,340 during the year ended December 31, 2006.

The Company
accounted for the features of the Warrant under EITF 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock. Because the registration rights agreement does not specify a
settlement alternative if the Company is unable to register the underlying shares, the Company classified the Warrant as a liability. The Warrant was initially valued, using the Black-Scholes model, at $2,282,735. The calculated value of warrant was
determined using the Black-Scholes option pricing model with the following assumptions: an assumed risk-free interest rate of 4.50%, a volatility of 100%, a term of 3.00 years, and a dividend yield of 0% for the year ended December 31,
2006. In accordance with EITF 00-19, the Warrant has been marked-to-market each reporting report. This mark-to-market resulted in recognition of unrealized loss of $646,988 during the year ended December 31, 2006.

The Warrant was issued to the Investor to secure a firm commitment to advance proceeds under the note. As a result, the fees paid were recorded as a
commitment fee and are being amortized over the life of the note. The company recorded additional interest expense of $539,362 during the year ended December 31, 2006 to amortize the commitment fee.

On July 6, 2006, upon direction of the Investor, The Biotechnology Ventures (III) Capital Trust, the Company cancelled the warrant it issued to the
Investor and reissued a warrant containing the same terms to the Investors designee, Doane, Phillips, Young LLP (in trust).

On
March 20, 2007, the Company entered into an agreement with the lender to amend this convertible promissory note and replace it with another facility. Please refer to Note 11, Subsequent Events, for a more detailed description of this
development.

6. REDEEMABLE CONVERTIBLE PREFERRED STOCK

On November 17, 2006, the Companys Board of Directors approved the issuance of a Private Placement Memorandum. This financing authorized the issuance of up to 3,500,000 units. Each unit consists of one
share of the Companys unregistered Series A Convertible Preferred Stock, par value $0.001 per share, and a warrant to purchase one half share of the Companys unregistered Common Stock at an exercise price of $7.00 per share. The units
were offered solely to a limited number of non-U.S. citizens in compliance with Regulation S. The Preferred Stock is senior to Common Stock in liquidation and dividend right. At any time between June 30, 2007 and December 31, 2009, a
holder of Preferred Stock may demand conversion of such Preferred Stock into Common Stock at a 1:1 ratio, subject to adjustment. At any time after December 31, 2008, the Company may require the holder of Preferred Stock to select between
converting all shares of Preferred Stock into Common Stock at a 1:1 ratio, subject to adjustment, or redeeming all shares of Preferred Stock at a price of $5.00 per share plus any accrued and unpaid dividends. Each holder of Preferred Stock is
entitled to receive a stock dividend of 10% annually, payable semi-annually, for each share of Preferred Stock, based on the value of $5.00 per share of



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Preferred Stock. To the extent funds are not legally available for such dividend, the dividend accumulates. During the period from January 1, 2010 to
December 31, 2010, all holders of Preferred Stock must select between converting all shares of Preferred Stock into Common Stock at a 1:1 ratio, subject to adjustment, or redeeming all shares of Preferred Stock at a price of $5.00 per share
plus any accrued and unpaid dividends. The Preferred Stock has customary antidilution adjustments in the case of stock splits, stock dividends or recapitalizations. Holders of Preferred Stock have one vote for each Share and will vote together with
the Common Stock as a single class, except to the extent that separate class voting is required by the Delaware General Corporation Law. Holders of Preferred Stock are entitled to appoint and elect one director to the Companys Board of
Directors. The Warrant may be exercised at any time until December 31, 2011. Any exercise of the Warrant must be for whole shares only, and the full exercise of $7.00 per share paid. The Warrant may not be exercised on a cashless basis. The
exercise price of the Warrant and number of shares of Common Stock issuable upon exercise of the Warrant are subject to customary adjustment for payment of stock dividends and reclassification. As of December 31, 2006, the Company had reserved
1,750,000 shares of Common Stock for issuance upon exercise of the Warrants.

The Redeemable Convertible Preferred Stock included the following
Registration Rights: The Company shall:

(a) subject to receipt of the Registration Statement Questionnaire from the Investor, use
commercially reasonable efforts to prepare and file with the SEC, within twelve months of December 31, 2006, a registration statement (the Registration Statement ) to enable the resale of the Registrable Shares by Investor.
Registrable Shares means Underlying Common Stock and Warrant Shares held by the Investor. Underlying Common Stock shall mean the Common Stock into which the Shares may be converted. Shares and Warrant Shares shall cease to be
Registrable Securities on the date on which such Common Stock ceases to be outstanding (whether as a result of redemption, repurchase and cancellation, expiration of the Warrants or otherwise);

(b) use commercially reasonable efforts, subject to receipt of necessary information from the Investor, including the Registration Statement
Questionnaire, to cause the Registration Statement to become effective;

(c) use commercially reasonable efforts to prepare and file with
the SEC such amendments and supplements to the Registration Statement used in connection therewith and take all such other actions as may be necessary to keep the Registration Statement current and effective for a period (the Registration
Period ) not exceeding, with respect to the Investors Registrable Shares, the earliest of (i) December 31, 2008 and (ii) the date on which all Registrable Shares then held by the Investor may be sold or transferred in
compliance with Rule 144 under the Securities Act or may be sold or transferred by a person who is not an affiliate of the Company pursuant to Rule 144 of the Securities Act (or any other similar provisions then in force) without any volume or
manner of sale restrictions thereunder, and (iii) such time as all Registrable Shares held by the Investor have been sold (A) pursuant to a registration statement, (B) to or through a broker or dealer or underwriter in a public
distribution or a public securities transaction, or (C) in a transaction exempt from the registration and prospectus delivery requirements of the Securities Act under Section 4(1) thereof so that all transfer restrictions and restrictive
legends with respect thereto, if any, are removed upon the consummation of such sale;

(d) during the Registration Period, promptly furnish
to the Investor with respect to the Registrable Shares registered under the Registration Statement such reasonable number of copies of the Registration Statement and Prospectus, including any supplements to or amendments of the Prospectus or
Registration Statement, in order to facilitate the public sale or other disposition of all or any of the Registrable Shares by the Investor;

(e) during the Registration Period, promptly take such action as may be necessary to qualify, or obtain, an exemption for the Registrable Shares under such of the state securities laws of United States jurisdictions as shall be necessary to
qualify, or obtain an exemption for, the sale of the Registrable Shares in states specified in writing by the Investor; provided, however , that the Company shall not be required to qualify to do business or consent to service of process in
any jurisdiction in which it is not now so qualified or has not so consented.

During November 2006, the Company received $4,500,000
in gross proceeds from the Series A financing. The Company issued 900,000 shares of unregistered Series A Convertible Preferred Stock to three overseas investors at a price of $5.00 per share. The Company also issued warrants to the investors to
purchase 450,000 shares of the Companys unregistered common stock, par value $0.001 per share, at an exercise price of $7.00 per share. As part of the financing, the Company paid BMG Financial Advisors, an investment advisor, $160,000 for
selling commissions related to the sale. After deducting other issuance costs of $17,082 related to the offering, the net proceeds to the Company from the round of financing are $4,322,918.

The Company accounted for the issuance of the Series A financing as Redeemable Convertible Preferred Stock (Mezzanine). The Redeemable Convertible
Preferred Stock, net of Issuance costs, was initially recorded at fair value of $2,325,826. A discount of $2,064,202 was recorded to reflect the beneficial conversion feature associated with the financing. The warrants were recorded at fair value of
$1,997,093. The calculated value of warrants was determined using the Black-



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Scholes option pricing model with the following assumptions: an assumed risk-free interest rate of 4.62%, a volatility of 100%, a term of 5.00 to 5.13 years,
and a dividend yield of 0% for the year ended December 31, 2006. The Company accounted for the features of the Warrant under EITF 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Companys Own Stock. The warrants were classified as a liability. At year end, a stock dividend of $59,523 and preferred stock accretion of $218,796 were recorded. Also, a loss of $67,453 was recorded when the warrants were marked to
market.

7. STOCKHOLDERS EQUITY

Conversion of
Series A, B, and C Pre-Merger Convertible Preferred to Common and Authorization of new Post-Merger Preferred Stock

As a result of the
Companys merger with AVN, on November 23, 2005, the Companys outstanding shares of Series A and Series B Convertible Preferred Stock were converted into 2.1 shares of Common Stock, each outstanding share of Series C Convertible
Preferred Stock was converted into 1.4 shares of Common Stock. Pursuant to the Companys Amended and Restated Certificate of Incorporation, filed in the state of Delaware on November 23, 2005, the Company is authorized to issue 5,000,000
shares of Preferred Stock, par value $.001.

Pre-Merger Convertible Preferred Stock at December 31:



|                                                                                                                                                                                    |  |      |        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -------
|                                                                                                                                                                                    |  | 2004
|Series A Convertible Preferred Stock; $0.01 par value; 658,157 shares authorized; 658,157 issued at December 31, 2004; liquidation
preference $329,079 at December 31, 2004.        |  | $    | 6,582  
|Series B Convertible Preferred Stock; $0.01 par value; 1,500,000 shares authorized; 953,333 issued at December 31, 2004; liquidation
preference $1,430,000 at December 31, 2004.    |  |      | 9,533  
|Series C Convertible Preferred Stock; $0.01 par value; 4,000,000 shares authorized; 3,815,143 issued at December 31, 2004,; liquidation
preference $3,815,143 at December 31, 2004. |  | $    | 38,151 
|                                                                                                                                                                                    |  |      |        
|Total                                                                                                                                                                               |  | $    | 54,266 
|                                                                                                                                                                                    | 
|Post-Merger Preferred Stock at December 31, 2005:                                                                                                                                   |  |      |        
|                                                                                                                                                                                    | 
|                                                                                                                                                                                    |  | 2005
|Preferred Stock; $0.001 par value; 5,000,000 shares authorized; 0 issued at December 31, 2005. .                                                                                    |  | $    | 0      
|                                                                                                                                                                                    | 
|Redeemable Convertible Preferred Stock at December 31, 2006:                                                                                                                        |  |      |        
|                                                                                                                                                                                    | 
|                                                                                                                                                                                    |  | 2006
|Series A Redeemable Convertible Preferred Stock; $0.001 par value; 5,000,000 shares authorized; 900,000 issued at December 31, 2006.
..                                             |  | $    | 539,942

Rights and Preferences of Pre-Merger Convertible Preferred Stock

The Companys Pre-Merger Convertible Preferred Stock was exchanged for Common Stock as part of the merger with AVN Merger Company on
November 14, 2005. As a result, the Pre-Merger Convertible Stock has been extinguished and did not hold any further rights as of December 31, 2005 or December 31, 2006.

Issuance of Post-Merger Series A Redeemable Convertible Preferred Stock

On November 17, 2006,
the Companys Board of Directors approved a Private Placement Memorandum authorizing the issuance of up to 3,500,000 units of Series A Redeemable Convertible Preferred Stock. Please refer to Note 6 above, Redeemable Convertible Preferred Stock
for additional details concerning this offering.

Rights and Preferences of Redeemable Convertible Preferred Stock

The Series A Redeemable Convertible Preferred Stock is senior to the Companys Common Stock in liquidation preference and dividend rights. The number
of authorized shares of Preferred Stock may be increased or decreased (but not below the number of Preferred Stock then outstanding) by the affirmative vote of the holders of a majority of the Companys Common Stock, without a vote of the
holders of Preferred Stock, unless such a vote is required pursuant to the certificate establishing the Preferred Stock.



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Dividends

Each holder of Preferred Stock is entitled to receive a stock dividend of 10% annually, payable semi-annually, for each share of Preferred Stock, based on the value of $5.00 per share of Preferred Stock.

Liquidation Preference

In the event of any voluntary
or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the holders of Series A Preferred then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its
stockholders an amount in cash equal to $5.00 for each share outstanding, plus an amount in cash equal to all accrued but unpaid dividends thereon to the date fixed for liquidation, before any payment shall be made or any assets distributed to the
holders of any of the Junior Securities. If the assets of the Corporation are not sufficient to pay in full the liquidation payments payable to the holders of Series A Preferred and any outstanding shares of any other series of the Preferred Stock
having liquidation rights on parity with the shares of the Series A Preferred, then the holders of all such shares shall share ratably in such distribution of assets in accordance with the amount which would be payable on such distribution if the
amounts to which the holders of outstanding shares of the Series A Preferred and the holders of outstanding shares of such other series of the Preferred Stock are entitled were paid in full. The consolidation or merger of the Corporation with
another Person shall not be deemed a voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation.

Voting

Holders of Preferred Stock have one vote for each Share and will vote together with the Common Stock as a single class, except to the
extent that separate class voting is required by the Delaware General Corporation Law. Holders of Preferred Stock generally vote together with common stockholders as one class of stock.

Series A Directorship

Holders of Preferred Stock are entitled to appoint and elect one director to
the Companys Board of Directors.

Right of Participation

The holders of Series A Preferred shall be notified of and invited to participate in, but shall have no right to purchase a minimum amount or percentage of, all equity financings of the Corporation.

Senior Debt

The Corporation shall not incur, assume
or guarantee indebtedness to a financial institution senior to the Series A Preferred without prior approval of the holders of a majority of the outstanding shares of Series A Preferred.

Conversion Rights

At any time between June 30, 2007 and December 31, 2009, a holder of
Preferred Stock may demand conversion of such Preferred Stock into Common Stock at a 1:1 ratio, subject to adjustment. At any time after December 31, 2008, the Company may require the holder of Preferred Stock to select between converting all
shares of Preferred Stock into Common Stock at a 1:1 ratio, subject to adjustment, or redeeming all shares of Preferred Stock at a price of $5.00 per share plus any accrued and unpaid dividends. Each holder of Preferred Stock is entitled to receive
a stock dividend of 10% annually, payable semi-annually, for each share of Preferred Stock, based on the value of $5.00 per share of Preferred Stock. To the extent funds are not legally available for such dividend, the dividend accumulates. During
the period from January 1, 2010 to December 31, 2010, all holders of Preferred Stock must select between converting all shares of Preferred Stock into Common Stock at a 1:1 ratio, subject to adjustment, or redeeming all shares of Preferred
Stock at a price of $5.00 per share plus any accrued and unpaid dividends.

Anti-Dilution

The Preferred Stock has customary antidilution adjustments in the case of stock splits, stock dividends or recapitalizations.

Common Stock

As a result of the Companys
merger with AVN, on November 23, 2005, the Companys outstanding shares of Series A and Series B Convertible Preferred Stock were converted into 2.1 shares of Common Stock, each outstanding share of Series C Convertible Preferred Stock was
converted into 1.4 shares of Common Stock and the outstanding shares of common stock were split on a 1.4 to 1 basis. Pursuant to the Companys Amended and Restated Certificate of Incorporation, filed in the state of Delaware on
November 23, 2005, the Company is authorized to issue 100,000,000 shares of Common Stock, par value $0.001.



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As of December 31, 2006 and 2005, the Company had 100,000,000 shares of common stock authorized and
51,082,616 shares of common stock issued and outstanding, respectively.

Warrants

During the year ended December 31, 2006, the Company issued warrants to purchase 1,121,487 shares of it common stock. On April 21, 2006, the
Company issued a warrant to secure a firm commitment to advance proceeds under the Companys convertible promissory note. The warrant enables the lender to purchase up to 666,667 shares of common stock at an exercise price of $ 3.00 per
share. The warrant has a three year term. In May and June 2006, the Company agreed to issue warrants for 4,820 common shares at an exercise price of $10.00 per share with a two year term for services provided by an investment bank. In November 2006,
as part of the Series A Redeemable Convertible Stock, the Company agreed to issue warrants enabling the holders of its Preferred Stock to receive 450,000 shares of its common stock at an exercise price of $7.00 per share. These warrants expire on
December 31, 2011.

The following is a summary of the warrants outstanding at December 31, 2006:



|                                                   |  |                                         |  |                 |       |                            |                  
|-------------------------------------------------- |  | --------------------------------------- |  | --------------- | ----- | -------------------------- | -----------------
|Date of Issuance                                   |  | Warrant toPurchaseShares ofCommon Stock |  | ExercisePrice $ |       | Date of Warrant Expiration
|April 21, 2006                                     |  | 666,667                                 |  | $               | 3.00  |                            | June 30, 2009    
|May 15, 2006                                       |  | 2,783                                   |  | $               | 10.00 |                            | May 15, 2008     
|June 5, 2006                                       |  | 2,037                                   |  | $               | 10.00 |                            | June 5, 2008     
|November 13, 2006                                  |  | 200,000                                 |  | $               | 7.00  |                            | December 31, 2011
|November 28,2006                                   |  | 150,000                                 |  | $               | 7.00  |                            | December 31, 2011
|November 29,2006                                   |  | 100,000                                 |  | $               | 7.00  |                            | December 31, 2011
|Total warrants outstanding as of December 31, 2006 |  | 1,121,487                               |  |                 |       |                            |                  

Stock Subscription

During the year ended December 31, 2006, the Company granted a financial advisor 3,000 unregistered shares of Avicena common stock at an exercise price of $5.95 per share, total value of $17,850, as a retainer.
The stock was not issued as of December 31, 2006. The stock contains piggy back rights when the Company files a Registration Statement with the SEC. The Company also granted another financial advisor 5,340 unregistered shares of Avicena common
stock at an exercise price of $3.745 per share, total value of $20,000, as payment for investment banking services. The stock was not issued as of December 31, 2006.

Impact of Settlement upon Additional Paid In Capital

As a result of a settlement in the course of
normal business operations with a major service provider during the year ended December 31, 2006, the Company recorded a reduction in the amount owed to the vendor. As part of the settlement, it was determined that $60,268 of that reduction
should be allocated to Additional Paid in Capital. The impact of this settlement was to increase Paid In Capital to offset the stock issuance costs which had been capitalized during the year ended December 31, 2005. These costs were effectively
forgiven by the vendor as part of the settlement.



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8. STOCK OPTIONS AND RESTRICTED STOCK

1999 Stock Incentive Plan

In 1999,
the Companys Board of Directors adopted a Stock Incentive Plan (the 1999 Plan). The 1999 Plan permits the grant of qualified and non-qualified stock options and restricted stock. To date, 9,054,384 shares of Common Stock have been reserved for
awards under the 1999 Plan. The Board of Directors, or a committee designated by the Board of Directors, administers the 1999 Plan and establishes the terms, conditions and limitation of each award, including the number of shares of Common Stock
underlying each option, the exercise price and the date or dates upon which the option vests and becomes exercisable. Most options granted by the Company vest over a period of time, generally one to three years. Additionally, the Company also issues
Restricted Stock as authorized by the Board of Directors.

Stock Incentive Plan

The 1999 Stock Incentive Plan was adopted by the Companys Board of Directors and approved by the Company in September 1999. The purpose of the 1999
Plan is to advance the interests of our stockholders and enhance the value of the Company by:



| |  |  | aligning the economic interests of the Companys employees, consultants, non-employee directors and advisors with those of the Companys stockholders;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | inducing individuals of outstanding ability and potential to join and/or remain with the Company; and
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | providing employees, consultants, non-employee directors and advisors with an additional incentive to contribute to the Companys success.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------

The Companys 1999 Plan permits grants of incentive stock options, as defined by Section 422 of the Code, and
non-qualified stock options. The Companys 1999 Plan also permits grant of shares of common stock, subject to the Companys right to repurchase all or some of the shares at their issue price or other stated or formula price in the event
that conditions specified by the Board in the award are not satisfied prior to the end of the restriction period established by the Board. As of December 31, 2006, 3,476,067 shares remain available for future grants under the 1999 Plan.

The 1999 Plan is administered by the Board or a committee designated by the Board. The Board has created a compensation committee to
administer, on behalf of the Board, the 1999 Plan. Either the Board or a committee acting on behalf of the Board can take action with respect to the administration of the 1999 plan. The committee has discretion as to which employees, consultants,
non-employee directors and advisors will receive awards. The committee also establishes the terms, conditions and limitations of each award, including the number of shares of common stock underlying each option, the exercise price and the date or
dates upon which the option vests and becomes exercisable. The committee determines the effect of a participants disability, death, retirement, authorized leave of absence or other change in the employment or other status on an award and the
extent to which the participant, the participants legal representative, conservator, guardian or designated beneficiary may exercise rights under the award. Except as otherwise determined by the Board or the committee acting on behalf of the
Board, all awards are nontransferable. The Board or the committee acting on behalf of the board, also has full power to construe and interpret the 1999 Plan and the awards granted under the 1999 Plan, to establish rules and regulations necessary or
advisable for its administration, and to determine the terms of and amend the award agreements evidencing the grants.

The Board may amend
the 1999 Plan in any respect. The Board may terminate the 1999 Plan at any time. However, no termination or amendment will affect the rights of participants under options previously granted without the participants consent. Unless previously
terminated, the 1999 Plan will terminate on September 7, 2009 and no options will be granted after that date.

In February 2005, the
Companys Board of Directors approved a resolution offering all holders of the Companys 10,750,908 outstanding stock options at December 31, 2004, plus holders of 309,653 options issued in January 2005, the opportunity to exercise
their options on a cashless basis (that is, without the payment of the previously applicable exercise price), with 0.9 fully paid shares of common stock to be issued for each share subject to the outstanding options. Holders of 10,560,682 of the
stock options chose to exercise their options on a cashless basis in the year ended December 31, 2005. As a result of the modification made to the options, the Company began using variable plan accounting and, accordingly, recorded a non-cash
charge of approximately $313,400 related to the employee options and a non-cash charge of $156,100 related to non-employee options during the year ended December 31, 2005.

The Company issued 3,957,855 shares of restricted common stock to employees, directors, and consultants of the Company in 2005 as an incentive to retain
certain key personnel and vendors directly associated with the Company at this critical juncture in the Companys history. In conjunction with the issuance of this restricted common stock, the Company



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incurred a total non-cash deferred compensation expense of approximately $400,800. Since the restricted common stock was issued on two different dates and at
two different values during the year ended December 31, 2005 and for vesting periods of either one or three years, the Company is amortizing the related deferred compensation expense over these two periods.

No options were issued during the year ending December 31, 2006.

Options and Restricted Stock Issued Under the 1999 Plan

A summary of options and restricted stock
under the 1999 Plan at December 31, 2006 is as follows:



|                                                   |  |                   |  
|-------------------------------------------------- |  | ----------------- | -
|                                                   |  | Number of Options |  
|Authorized (includes options and restricted stock) |  | 9,054,384         |  
|Options for Common Stock Awarded and exercised     |  | 4,391,994         |  
|Options for Common Stock Awarded and outstanding   |  | 220,326           |  
|Options for Common Stock cancelled                 |  | (42,000           | )
|Restricted Stock Awarded                           |  | 1,007,997         |  
|                                                   |  |                   |  
|Total awarded                                      |  | 5,578,317         |  
|                                                   |  |                   |  
|Available for Grant                                |  | 3,476,067         |  
|                                                   |  |                   |  
|Vested                                             |  | 178,326           |  
|                                                   |  |                   |  

Options and Restricted Stock Issued Outside of the 1999 Plan

In addition, the Companys Board of Directors also authorized options to be issued outside the 1999 Plan. At December 31, 2004, the Company had
outstanding options outside the 1999 Plan to purchase a total of 5,891,277 shares of common stock. In 2005 options to purchase 112,953 shares were granted in connection with the issuance of Series C Convertible Preferred Stock, options to purchase
252,953 shares were exercised for cash and options to purchase 5,724,677 shares were exercised cashlessly. At December 31, 2006, the Company had options to purchase 26,600 shares of Common Stock outstanding outside the 1999 Plan. These are
fully vested and exercisable at $.07 per share through 2012. The Company also awarded 3,047,858 shares of restricted stock in 2005 outside of the 1999 Plan. See the Restricted Stock table below for a reconciliation of all restricted
stock issued both in and out of the 1999 Plan prior to and during 2006.

Summary of Options Issued both Under and Outside the 1999 Plan

At December 31, 2006, the Company had outstanding options to purchase 204,926 shares of Common Stock that were issued both inside
and outside the 1999 Plan. At December 31, 2006, 204,926 of those options were exercisable.

A summary of the changes in stock options
outstanding under the Companys equity-based compensation plans during the year ended December 31, 2006 is presented below:



|                                         |  |                 |   |  |                              |     |                                             |      |                         |   |          
|---------------------------------------- |  | --------------- | - |  | ---------------------------- | --- | ------------------------------------------- | ---- | ----------------------- | - | ---------
|                                         |  | NumberofOptions |   |  | WeightedAverageExercisePrice |     | WeightedAverageRemainingContractTerm(Years) |      | AggregateIntrinsicValue
|Options outstanding at December 31, 2005 |  | 246,926         |   |  | $                            | .03 |                                             | 4.75 |                         | $ | 8,283    
|Granted                                  |  | 0               |   |  |                              |     |                                             |      |                         |   |          
|Exercised                                |  | 0               |   |  |                              |     |                                             |      |                         |   |          
|Forfeited/cancelled                      |  | (42,000         | ) |  | $                            | .07 |                                             | 8.38 |                         | $ | 248,640  
|                                         |  |                 |   |  |                              |     |                                             |      |                         |   |          
|Options outstanding at December 31, 2006 |  | 204,926         |   |  | $                            | .03 |                                             | 2.75 |                         | $ | 1,248,694
|                                         |  |                 |   |  |                              |     |                                             |      |                         |   |          
|Options exercisable at December 31, 2006 |  | 204,926         |   |  | $                            | .03 |                                             | 2.75 |                         | $ | 1,248,694

There is no unrecognized compensation cost related to non-vested options, as all outstanding
options have vested as of December 31, 2006.



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Restricted Stock

In 2005, the Companys Board of Directors authorized 3,957,855 additional shares of restricted stock to be issued. These shares were issued both inside and outside the 1999 Plan. The shares were valued between
$.10 and $.14 per share.



|                                                |  |                  |  |                                     |     
|----------------------------------------------- |  | ---------------- |  | ----------------------------------- | ----
|                                                |  | Number of Shares |  | Weightedaverage grantdate fairvalue
|Restricted stock nonvested at December 31, 2005 |  | 3,957,855        |  | $                                   | 0.14
|Granted                                         |  | 0                |  | $                                   |    
|Vested                                          |  | 2,041,427        |  | $                                   | 0.14
|Cancelled                                       |  | 0                |  | $                                   |    
|                                                |  |                  |  |                                     |     
|Restricted stock nonvested at December 31, 2006 |  | 1,916,428        |  | $                                   | 0.14
|                                                |  |                  |  |                                     |     
|Restricted stock vested at December 31, 2006    |  | 2,139,427        |  | $                                   | 0.14

The amount of stock compensation expense related to restricted stock amortized during the year
ended December 31, 2006 was $103,027. The unamortized portion, $38,595, that is, the difference between the original deferred expense of $400,785 and the amortized portion recorded as an expense is now reflected on the equity section of the
balance sheet as a reduction to additional paid-in capital. It is no longer classified as unearned compensation as a result of the adoption of FAS 123(R).

On February 9, 2005, the Company entered into restricted stock agreements with Belinda Tsao Nivaggioli for her services as Chief Executive Officer and Nasser Menhall for his services as Chairman of our Board of
Directors. The restricted stock agreement with Ms. Nivaggioli grants her 2,200,000 shares of restricted stock. Fifty percent of those shares vested on February 9, 2006, and an additional twenty-five percent of the shares become vested on
each of February 9, 2007 and February 9, 2008, so long as the Company continues to employ Ms. Nivaggioli on each such date. The restricted stock agreement with Mr. Menhall grants him 722,856 shares of restricted stock. Fifty
percent of those shares became vested on February 9, 2006, and an additional twenty-five percent of the shares become vested on each of February 9, 2007 and February 9, 2008, so long as Mr. Menhall continues to provide the
Company services on each such date.

In March 2005, the Company entered into restricted stock agreements with Belinda Tsao Nivaggioli for
her services as Chief Executive Officer and Nasser Menhall for his services as Chairman of the Companys Board of Directors. The restricted stock agreement with Ms. Nivaggioli grants her 50,000 shares of restricted stock. One hundred
percent of those shares become vested in July 2008, so long as the Company continues to employ Ms. Nivaggioli at such time. The restricted stock agreement with Mr. Menhall grants him 75,000 shares of restricted stock. One hundred percent
of those shares become vested in July 2008, so long as Mr. Menhall continues to provide the Company services at such time. (See Item 10, Executive Compensation).

During the year ended December 31, 2006, the Company did not issue any additional shares of restricted stock to employees, directors or consultants
of the Company.

9. INCOME TAXES

The
Company accounts for income taxes using the provisions of SFAS No. 109, Accounting for Income Taxes, whereby income taxes are provided for the tax effects of transactions reported in the financial statements. The provision for income taxes
consists of income taxes currently due plus deferred income taxes related to differences between the basis of certain assets and liabilities for financial and income tax reporting. Deferred taxes represent the future tax return consequences of those
differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. A valuation allowance is provided against deferred income tax assets in circumstances where management believes recoverability of a
portion of the assets is not reasonably assured.

Significant components of the Companys deferred tax assets, deferred tax
liabilities, and deferred tax assets valuation allowances at December 31, 2006 and 2005 are as follows:



|                                 |  |      |            |   |      |   |            |  
|-------------------------------- |  | ---- | ---------- | - | ---- | - | ---------- | -
|                                 |  | 2006 |            |   | 2005 |  
|Deferred tax assets:             |  |      |            |   |      |   |            |  
|Net operating loss carryforwards |  | $    | 12,606,674 |   |      | $ | 7,476,430  |  
|Other carryforwards              |  |      | 1,800      |   |      |   | 1,800      |  
|                                 |  |      |            |   |      |   |            |  
|Total deferred tax assets        |  |      | 12,608,474 |   |      |   | 7,478,230  |  
|Total deferred tax liability     |  |      | (2,688,224 | ) |      |   | (2,620,859 | )
|Less-valuation allowance         |  |      | (9,920,250 | ) |      |   | (4,857,371 | )
|                                 |  |      |            |   |      |   |            |  
|Net deferred tax assets          |  | $    |           |   |      | $ |           |  
|                                 |  |      |            |   |      |   |            |  



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The deferred tax asset has been fully offset by a valuation allowance since management believes the
recoverability of the asset is not reasonably assured.

The Companys effective income tax provision (benefit) differed from the U.S.
federal statutory income tax provision (benefit) at December 31, 2006 and 2005 as follows:



|                                                          |  |      |            |   |      |   |           |      |  |   |          |  
|--------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | --------- | ---- |  | - | -------- | -
|                                                          |  | 2006 |            |   | 2005 |   |           | 2004 | 
|Federal income tax benefit computed at the statutory rate |  | $    | (1,744,283 | ) |      | $ | (915,105  | )    |  | $ | (246,609 | )
|State income tax benefit, net of federal benefit          |  |      | (299,212   | ) |      |   | (157,100  | )    |  |   | (42,256  | )
|Other                                                     |  |      | 204,340    |   |      |   | 26,834    |      |  |   | 25,076   |  
|Change in valuation allowances                            |  |      | 1,839,155  |   |      |   | 1,045,371 |      |  |   | 263,789  |  
|                                                          |  |      |            |   |      |   |           |      |  |   |          |  
|Income tax provision (benefit)                            |  | $    |           |   |      | $ |          |      |  | $ |         |  
|                                                          |  |      |            |   |      |   |           |      |  |   |          |  

The Company has net operating loss carryforwards for federal income tax purposes of $12,606,674,
expiring through the year 2026, and also for two states of approximately $10,739,973 expiring through the years 2011 and 2016, respectively. The operating loss carryforward may be used as an offset against future federal taxable income. The
Companys ability to utilize its net operating loss carryforwards may be limited in the future if the Company experiences an ownership change as a result of future transactions.

Additionally, no provision for income taxes has been recorded since the Company has incurred losses for each year since inception.

10. COMMITMENTS AND CONTINGENCIES

The Company had no
capital or operating lease commitments in excess of one year at the end of 2006.

A lawsuit was filed against Avicena on or about
December 14, 2006 in the Superior Court for the State of California, County of San Diego entitled, Mitra Rebek and Julius Rebek v. Avicena Group, Inc., Belinda Tsao-Nivaggioli and Nasser Menhall. In the lawsuit, the plaintiffs
asserted claims for conversion, unjust enrichment and breach of fiduciary duty arising from their ownership of Avicena common stock. The plaintiffs allege that Avicena, Tsao-Nivaggioli and Menhall failed to remove certain restrictive legends from
their Avicena Stock Certificates. A settlement of the matter has been reached and a dismissal of the case was filed by the plaintiff on Tuesday May 8, 2007. The dismissal is expected to be completed by May 11, 2007.

A lawsuit was filed against Avicena by Akiva Gross, on or about January 5, 2007 in the Court of Chancery of the State of Delaware in New Castle
County entitled Akiva Gross v. Avicena Group Inc. (Case No. 2651-N). In the lawsuit, the plaintiff asserts a claim for breach of contract arising from his ownership of Avicena common stock. The plaintiff alleges that Avicena failed
to remove certain restrictive legends from his stock certificate. A settlement of the matter has been reached and the case was dismissed on May 3, 2007.

The Company does not expect any adverse financial impact from the resolution of the two lawsuits.

The
Company received a written notice from the NASD informing it that unless its Form 10-K was filed by May 18, 2007, the Companys common stock would be de-listed from the OTCBB. This matter was resolved when the Company filed its annual
report on Form 10-K for the fiscal year ended December 31, 2006 on May 10, 2007, past the extended due date.

Because we did not
file this Report of Form 10-K SB by the applicable deadline, we may have violated our contractual obligation, under the Series B Stock Purchase Agreement, to timely file all of our required periodic SEC reports. This round of financing was not
issued until after December 31, 2006. See Note 11, Subsequent Events, for additional details regarding our sale of Series B Redeemable Convertible Preferred Stock during April 2007. The foregoing breach in turn may constitute, or the holder of
the Series B Stock may argue that it constitutes, either an Event of Default or an Event of Failure under the Certificate of Designations which sets the terms and conditions of the Series B Stock. If it is determined that we
have committed an Event of Default and that such Default is continuing, then Bridgepointe Master Fund Ltd, the sole current holder of the Series B Preferred Stock (Bridgepointe), may elect to require us to redeem its shares of Series B
Preferred Stock at a price equal to 125% multiplied by the sum of (A) $2,000,000 (the Stated Value of such Holders Series B Preferred Stock) plus (B) any accrued and unpaid Failure Payments (as described below).

If it is determined that we have committed an Event of Failure, then we will be required to pay Bridgepointe specified Failure Payments equal
to 18% per annum multiplied by the Stated Value of such Holders Series B Preferred Stock ($2,000,000) times the total number of days between the dates on which the Event of Failure occurred and was cured. We estimate that the amount of
Failure Payments would not exceed approximately $24,000 here.



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In addition, if our failure to file this Report on time is deemed to constitute an Event of
Default under the Series B Certificate of Designations, then such event will also constitute an Event of Default under the Warrant to purchase 200,000 shares of our Common Stock we issued to Bridgepointe. If an Event of Default has occurred
and is continuing under the Warrant, then Bridgepointe may also elect to require us redeem the outstanding amount of the Warrant by paying them an amount equal to the value (determined using the Black-Scholes formula) of the unexercised
portion of the Warrant, calculated on either the day that Bridgepointe delivers its notice or the day before the redemption takes place, whichever is higher. We have not received any notice of redemption or notice of default from Bridgepointe.

Our failure to file this Report by the deadline also may have constituted a breach of our covenant under our $3.5 million Convertible Note
dated March 20, 2007, and issued to Biotechnology Ventures (III) Capital Trust (the 2007 Note), to comply with all applicable legal requirements of any governmental authority. If such breach were to remain uncured for thirty days following
written notice from the noteholder, then it would be an Event of Default under the 2007 Note, in which case the holder could accelerate the 2007 Note and pursue and enforce any of its other remedies under the 2007 Note. However, we have
received no notice of default from the holder of the 2007 Note nor have any advances been received under the 2007 Note. As of December 31, 2006, no amounts were outstanding under the Convertible Promissory Note issued by Biotechnology Ventures
III on April 21, 2006.

Lapse in Business Insurance:As a result of a processing error by the Companys insurance agency,
the Companys commercial policy was inadvertently cancelled. There were no claims during the period. None of the other insurance policies were impacted. Once the Company learned of the error, it immediately restored the policy.

11. SUBSEQUENT EVENTS

Convertible Promissory
Note: To obtain increased funding for its ongoing operations, on March 20, 2007, Avicena Group, Inc. (the Company) entered into a Convertible Promissory Note in the amount of up to Three Million Five Hundred Thousand Dollars
($3,500,000) (the Note) and, on March 22, 2007, a Registration Rights Agreement (the Registration Rights Agreement), with The Biotechnology Ventures (III) Capital Trust, an accredited investor (the Investor).
It amends an earlier convertible promissory note dated April 21, 2006 in the amount of up to Two Million Dollars ($2,000,000). No advances have been taken as of April 18, 2007.

The Note bears interest at 8% and matures on March 31, 2009 or March 31, 2010, which maturity date will be selected at the discretion of the
Investor in writing prior to the first advance on the Note. The Investor may, at its option, elect to convert all or any portion of outstanding principal balance into shares of common stock of the Company (the Common Stock) at a
conversion rate of $5.00 per share, subject to adjustment in case of stock dividend, stock split, any recapitalization, reorganization, reclassification, consolidation or merger. The conversion rate also adjusts when the Company issues Common Stock
at a price below the then conversion rate. Interest on the Note which is due and payable quarterly, commencing on July 1, 2007, is also convertible into Common Stock at the election of the Investor.

Under the Registration Rights Agreement, within 120 days after Investors conversion of an aggregate of at least $1,500,000 in unpaid accrued
interest and principal pursuant to the Note, the Company is obligated to file with the Securities and Exchange Commission (the SEC) a shelf registration statement covering the resale of the Common Stock. The Company will use its
commercially reasonable efforts to cause the registration statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event not later than the earlier of (a) the 180th calendar day
following the closing date and (b) the fifth trading day following the date on which the Company is notified by the SEC that the registration statement will not be reviewed or is no longer subject to further review and comments. The Company is
also obligated to use its commercially reasonable efforts to keep such registration statement continuously effective under the Securities Act of 1933, as amended, until the date which is two years after the closing date or such later date when all
registrable securities covered by the registration statement have been sold pursuant to the registration statement or an exemption from the registration requirements of the Securities Act or may be sold pursuant to Rule 144(k) under the Securities
Act.

Series B Redeemable Convertible Preferred Stock: On March 30, 2007, the Company entered into a Securities Purchase Agreement
(the March 30 Securities Purchase Agreement), whereby it agreed to issue and sell in a private offering 400,000 shares of Series B Preferred Stock and a warrant (Warrant) to purchase 200,000 shares of Common Stock at an
initial exercise price of $7.00 per share for an aggregate purchase price of $2,000,000. The purchase price was paid into escrow on



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April 2, 2007, and was to be released to the Company upon the closing of the issuance. On April 10, 2007, the closing of the issuance occurred, and
the purchase price was released from escrow and distributed to the Company. A cash fee of $25,000 was withheld from the proceeds paid into escrow as reimbursement for legal services rendered by the investors attorneys and as reimbursement for
its due diligence expenses. No underwriting discounts or commissions were paid with respect to the sale under the March 30 Securities Purchase Agreement.

On April 11, 2007, the Company entered into a Securities Purchase Agreement with Blackwater Capital Group, Inc. (Blackwater) with terms substantially identical to the terms of the March 30
Securities Purchase Agreement (the April 11 Securities Purchase Agreement and, together with the March 30 Securities Purchase Agreement, the Securities Purchase Agreements). Pursuant to the April 11 Securities
Purchase Agreement, the Company agrees to issue and sell in a private offering 1,600,000 shares of Series B Preferred Stock and a Warrant to purchase 800,000 shares of Common Stock at an initial exercise price of $7.00 per share for an aggregate
purchase price of $8,000,000. The Company may, at its sole discretion, reduce the amount purchased by Blackwater to no less than 400,000 shares of Series B Convertible Preferred Stock and warrants to purchase 200,000 shares of Common Stock by the
settlement date. The Series B Preferred Stock and the Warrant (collectively, the Securities) will be issued, and the purchase price paid to the Company, upon the closing of the issuance. Closing is expected to take place on May 21,
2007, or such earlier time as the Investor may elect, but is subject to a variety of customary closing conditions set forth in the April 11 Securities Purchase Agreement.

Among other conditions, the Company will not be required to issue the Securities unless and until the following conditions have been satisfied by the
Investor or waived by the Company in its sole discretion:



| |  |  | The representations and warranties made by Blackwater in the April 11 Securities Purchase Agreement are true and correct in all material respects as of the
Closing Date;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Blackwater has performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by the April 11 Securities
Purchase Agreement; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | No litigation, statute, ruling or injunction has been enacted or entered by or in any court or governmental authority or competent jurisdiction which prohibits the
consummation of any of the transactions contemplated by the April 11 Securities Purchase Agreement.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Among other
conditions, the Investor will not be required to purchase the Securities unless and until the following conditions have been satisfied by the Company or waived by Blackwater in its sole discretion:



| |  |  | The representations and warranties made by the Company in the April 11 Securities Purchase Agreement are true and correct in all material respects as of the
Closing Date;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company has performed, satisfied and complied in all material respects with the covenants, agreements and conditions required by the April 11 Securities
Purchase Agreement;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | No litigation, statute, ruling or injunction has been enacted or entered by or in any court or governmental authority or competent jurisdiction which prohibits the
consummation of any of the transactions contemplated by the April 11 Securities Purchase Agreement;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Trading in the Common Stock on the OTC Bulletin Board has not been suspended and, if required, the Company has made application to the OTC Bulletin Board to have
the shares of Common Stock issuable upon conversion or exercise of the Securities authorized for quotation; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | No material adverse change to the Company or its business has occurred since April 11, 2007.
| | - |  | --------------------------------------------------------------------------------------------

There is no guarantee that the above mentioned Securities Purchase Agreement dated April 11, 2007, will be successfully completed by May 21,
2007 or possibly at all.

The Series B Preferred Stock ranks pari passu with the Companys Series A Preferred Stock and senior to the
shares of Common Stock with respect to the distribution of assets upon liquidation, dissolution or winding up of the Company whether voluntary or involuntary. Each holder of Series B Preferred Stock is entitled to receive cumulative dividends of
10% per annum payable semi-annually in arrears, on each April 1 and October 1, beginning October 1, 2007 and on each redemption and conversion date. The shares of Series B Preferred have no voting rights except as provided in the
Certificate of Designation of Rights and Preferences of Series B Preferred Stock (Certificate of Designation) and as otherwise required by law. However, as long as Series B Preferred Stock having a stated value of at least $1,000,000
remains outstanding, the buyers of the Series B Preferred Stock have the ability under the Securities Purchase Agreement to recommend nominees to the Companys Board of Directors in the event of various uncured Events of Default (as defined in
the Certificate of Designation) and could potentially control a majority of directors on the Board of Directors if the particular Event of Default continues uncured for a sufficient period of time, as described in the Securities Purchase Agreement.
At such time as the



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outstanding amount of Series B Preferred Stock has a stated value of less than $1,000,000, the buyers agree to cause their nominee(s) to resign from the
Board of Directors. The Series B Preferred Stock has the right to convert into Common Stock at an initial conversion price of $5.00 per share, subject to adjustment for subsequent stock splits, stock dividends and similar events and subject to
anti-dilution adjustments as set forth in the Certificate of Designation. The conversion price is also subject to adjustment in the event the Company does not meet certain milestone events as set forth in the Certificate of Designation. The Series B
Preferred Stock will automatically be redeemed three years after the date of the issue, and the holders of Series B Preferred Stock have the right to have the Series B Preferred Stock redeemed upon the occurrence or non-occurrence of various events.
The Company also has the right to redeem the Series B Preferred Stock under certain circumstances, as set forth in the Certificate of Designation.

The Warrant has a term of five years from the date of issuance and has an initial exercise price of $7.00, subject to adjustment for recapitalizations, reclassifications or similar transactions and subject to anti-dilution adjustments. The
exercise price is also subject to adjustment in the event the Company does not meet certain milestone events as set forth in the Warrant. If certain enumerated Events of Default (as defined in the Warrant) occur, the Warrant will be redeemed by the
Company unless such triggering event is waived by the holder of the Warrant. The redemption price is based on the BlackScholes value as of certain dates. The Warrant can be exercised in cash or in a cashless exercise transaction.

As part of the Securities Purchase Agreement, the Company has agreed to file a registration statement with the Securities and Exchange Commission
covering the shares of Common Stock underlying the Series B Preferred Stock and the Warrants. The filing deadline is June 23, 2007 and the deadline to have underlying shares registered is the earlier of 90 days after the registration statement
is filed or 90 days after June 23, 2007. Failure to timely file or go effective which failure continues for a set period of time are among the Events of Default which give the holders of the Series B Preferred Stock and the Warrant the right to
have their Series B Preferred Stock and Warrant redeemed by the Company.

As part of the Series B financing, the executive officers and
directors have agreed not to sell their shares of Common Stock for a period of three years except under certain circumstances as set forth in a Limited Standstill Agreement. However, each is allowed to sell, during any three month period, up to the
number of shares of Common Stock actually owned on March 30, 2007 or acquired in transactions qualifying as Exempt Issuances as defined in the Securities Purchase Agreement which the person would be allowed to sell under the volume limitations
of Rule 144 as long as no more than one-third of this amount is sold in any 30 day period.

The Company has given the holders of Series A
Preferred Stock the option to convert their shares of Series A Preferred Stock and the warrants issued as part of the Series A Preferred Stock issuance into shares of Series B Preferred Stock and Warrants on a one-for-one basis. The option must be
exercised on or prior to April 30, 2007.

The Units are being offered to a limited number of persons as exempt transactions under
Section 4(2) of the Securities Act of 1933, as amended, and in compliance with Regulation D promulgated thereunder. The Company is relying upon the representations, warranties and covenants of the investors contained in the Securities Purchase
Agreement signed by them. The Company did not engage in any advertising or general solicitation in connection with these sales.

Entry
into a Material Definitive Agreement: On April 10, 2007, Avicena Group, Inc. (the Company) entered into an Investment Banking and Financial Advisory Agreement (the Investment Banking Agreement) with Blackwater,
whereby Blackwater, in conjunction with its affiliates and associates, is engaged as an Investment Banker/Financial Advisor to the Company on a non-exclusive basis and agrees to provide the Company with such regular and customary investment banking
and financial advisory services as are reasonably requested by the Company. In consideration of such services, the Company agrees to pay Blackwater an initial engagement fee of $40,000 in cash. In addition, Blackwater will participate in an
incentive plan, whereby each month Blackwater will be issued a warrant to purchase up to a maximum of 16,667 shares of Common Stock at $7.00 per share. The actual number of shares of Common Stock for which each warrant is exercisable will be based
upon the Companys evaluation of Blackwaters performance for the month such warrant was issued. Pursuant to the terms of the Investment Banking Agreement, Blackwater also committed to sign definitive documents relating to the purchase of
1,600,000 shares of Series B Convertible Preferred Stock and warrants to purchase 800,000 shares of Common Stock for an aggregate price of eight million dollars ($8,000,000 USD). Settlement of the purchase is expected to take place on May 21,
2007, or such earlier time as Blackwater may elect, in each case subject to certain closing conditions contained in the definitive documents.



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|Item 8. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------

None.



|Item 8A. | Controls and Procedures
|-------- | -----------------------

Evaluation of Disclosure
Controls and Procedures

Company management, including our chief executive officer and chief financial officer, have evaluated our
disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this Form 10-KSB. Based on that evaluation, our
chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are effective, except as discussed below, to ensure that the information we are required to disclose in reports we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time period specified in Securities and Exchange Commission rules and forms. There are inherent limitations to the effectiveness of any system of disclosure controls and
procedures, including cost limitations, the possibility of human error, judgments and assumptions regarding the likelihood of future events, and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure
controls and procedures can only provide reasonable assurance of achieving their control objectives.

Our independent registered public
accounting firm, Vitale, Caturano & Company, Ltd., advised us in connection with the completion of their audit for the year ended December 31, 2006 that they had identified certain matters involving the operation of our internal
controls that they consider to be a material weakness. A material weakness is a reportable condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk
that misstatements caused by errors in amounts that would be material in relation to the consolidated financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their
assigned functions.

Vitale, Caturano & Companys conclusion that we need to reassess our existing finance organization
resource requirements and re-evaluate the design and operating effectiveness of certain controls surrounding the financial statement close process was based on several adjustments that were made in the course of the audit process, some of which
occurred late in the audit process, and issues relating to the timely communication of information and documentation necessary to yield proper accounting consideration and recording. Among the issues identified or addressed late in the audit
process were accounting for issuances of redeemable convertible preferred stock with warrants, accounting for beneficial conversion features, accounting for loss contingencies, preparation of complete financial statements and related financial
statement disclosures.

The matters identified by Vitale, Caturano & Company have been reviewed with management and with the
Audit Committee. Management believes that the material weakness identified by Vitale, Caturano & Company is attributable in significant part to the early development stage of the Company, capital constraints resulting from insufficient
financing, and a lack of full-time internal and centralized accounting and finance personnel during the year ended December 31, 2006.

We are in the process of implementing changes to respond to these matters on an immediate and a longer-term basis. The immediate responsive actions being taken include obtaining additional finance resources to enable our finance staff to
meet the demands of a newly public company and to document our internal controls for the Section 404 Sarbanes Oxley compliance which will be required by December 31, 2007.

Changes in Internal Controls over Financial Reporting

There have been no changes in our internal
control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 promulgated under the Exchange Act that occurred during the last fiscal quarter of the fiscal year ended
December 31, 2006, except as disclosed in the above Evaluation of Disclosure Controls and Procedures that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Management is aware
that there is a lack of segregation of duties at our company due to the limited number of employees dealing with general administrative and financial matters. At this time management believes that, given the individuals involved and the control
procedures in place, the risks associated with such lack of segregation are insignificant, and that the potential benefits of adding additional employees to segregate duties more clearly do not justify the associated added expense. Management will
continue to evaluate this segregation of duties. In addition, management is aware that many of our currently existing internal controls are undocumented. Our management will be working to document such internal controls over the coming year.



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|Item 8B. | Other Information.
|-------- | ------------------

None.

PART III



|Item 9. | Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act
|------- | ---------------------------------------------------------------------------------------------------------------

Directors, Executive Officers and Key Employees

The
following table sets forth certain information regarding our directors, executive officers and key employees as of April 2, 2007:



|                        |  |     |  |                                                                                 
|----------------------- |  | --- |  | --------------------------------------------------------------------------------
|Name                    |  | Age |  | Position(s)                                                                     
|Belinda Tsao Nivaggioli |  | 39  |  | Chief Executive Officer and Director                                            
|                        |  |    
|Michael J. Sullivan     |  | 53  |  | Acting Chief Financial Officer, Vice President of Finance                       
|                        |  |    
|Nasser Menhall          |  | 50  |  | Chairman of the Board of Directors                                              
|                        |  |    
|Leslie S. T. Fang       |  | 61  |  | Director, Chairman of our Scientific Advisory Board and Chief Scientific Officer
|                        |  |    
|Andrew Gertler          |  | 46  |  | Director                                                                        
|                        |  |    
|Uri Sagman              |  | 53  |  | Director                                                                        
|                        |  |    
|Paul Schimmel           |  | 66  |  | Director                                                                        
|                        |  |    
|Bolko zu Stolberg       |  | 48  |  | Vice President of Marketing & Business Strategy                                 
|                        |  |    
|Maisie Wong-Paredes     |  | 43  |  | Director of Marketing & Business Development                                    

Directors and Executive Officers

Belinda Tsao Nivaggioli became our Chief Executive Officer in January 2005. Dr. Nivaggioli had served as our Chief Operating Officer
commencing January 2002 and as our Vice President of Operations from November 1999. Dr. Nivaggioli was a non-voting member of our Board of Directors from 1999 to 2004, and has been a voting member since 2005. Dr. Nivaggioli holds an A.B.,
with honors, in chemistry from Oberlin College, M.Sc. and Ph.D. degrees in bioorganic chemistry from the University of Toronto, and completed post-doctoral work at MIT.

Michael Sullivan became our Acting Chief Financial Officer (CFO) in March 2006. Mr. Sullivan serves us on a part-time basis, averaging fifteen to twenty hours per week on Avicena matters, except as
otherwise needed. Since March of 2005, Mr. Sullivan has also served on a full-time basis as Chief Financial Officer of WorldCare Limited, a company affiliated with Nasser Menhall, the Chairman of our Board of Directors. From April 2001 to June
2004, Mr. Sullivan served as Chief Financial Officer of Systems Engineering, Inc., a leading international financial services and government software and networking firm and was a self-employed consultant between his employments with Systems
Engineering, Inc. and WorldCare Limited. Mr. Sullivan holds a B.A. degree in Economics from Yale College, and passed the entire uniform C.P.A. examination on the first sitting.

Nasser Menhall has been the Chairman of our Board of Directors since 1998, and served as our Chief Executive Officer from January 2000 until
December 2004. For over ten years, Mr. Menhall has also served as the Chief Executive of WorldCare Limited. Mr. Menhall holds a B.A. in economics from the University of Chicago and a M.B.A. from Harvard Business School.

Leslie S. T. Fang has been a director since October 2001, has been the chairman of our Scientific Advisory Board since February 2004 and has
served as our Chief Scientific Officer since January 2005. Dr. Fang advises us on a part-time basis, generally spending less than five hours per week on Avicena matters, except as otherwise needed at our request. Since July 1987, Dr. Fang,
who is board certified in internal medicine and nephrology, has operated a private practice in internal medicine and nephrology out of Massachusetts General Hospital. Dr. Fang works full time for his private medical practice. Dr. Fang
received a Ph.D. in physiology and biophysics from the University of Illinois and a M.D. from Harvard Medical School.

Andrew
Gertler was appointed as director in February 2005. Mr. Gertler is Vice-Chairman of Neutron Enterprises, a developer of web-based, interactive consumer entertainment and business simulation products, which he joined in August 2004. From
April 2001 until April 2004, Mr. Gertler served as the Managing Director of Gestion Jean-Paul Auclair Inc., a private equity firm. Prior to joining Gestion JPA, Mr. Gertler served as the Senior Vice President of Hudson Advisors Canada, an
asset management firm, which he joined in April 1997. Since August 2004, Mr. Gertler has also served as director of ProMetic Life Science, Inc., a biopharmaceutical company. Mr. Gertler holds a B.A. in communications from McGill University
and a M.B.A. from the University of Western Ontario.



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Uri Sagmanhas been a Director since February 2007. Dr. Sagman has co-founded several
companies including C Sixty, Inc., a Canadian nanomedicine company focused on the development of fullerene antioxidants for the treatment of Parkinsons disease, Alzheimers disease as well certain skin conditions related to aging and UV
exposure. Dr. Sagman is also founder and chairman of GRN Capital Inc., a financial services corporation with merchant banking and investment banking operations based in Toronto. Separately, Dr. Sagman serves as Chairman of GRN Health
International Inc., a globally-based academic research organization dedicated to medical research. Dr. Sagman is also co-founder and Executive Director of the Canadian NanoBusiness Alliance, a business association dedicated to the promotion of
Canadian nanotechnology overseas. In addition to his role with the Canadian NanoBusiness Alliance, Dr. Sagman is also involved in the strategic development of the National Nanotechnology Initiative Program. Dr. Sagman studied at the McGill
University, The University of Calgary, The University of Toronto and Oxford University. Dr. Sagman has received numerous awards and citations including the Young Investigator awards of the American Society of Clinical Oncology (ASCO) and the
American Association for Cancer Research (AACR). Dr. Sagman is trained as a medical oncologist and is a fellow of the Royal College of Physicians and Surgeons of Canada. He is a fellowship recipient of the Medical Research Council of Canada.

Paul Schimmel has been a director since August 1999. Dr. Schimmel is the Ernest and Jean Hahn Professor at the Skaggs
Institute for Chemical Biology at The Scripps Research Institute, which he joined in 1997. From 1967 to 1997, Dr. Schimmel was professor of biochemistry and biophysics at Massachusetts Institute of Technology, most recently holding the John D.
and Catherine T. MacArthur chair. Dr. Schimmel received his Ph.D. from MIT and completed post-doctoral work at Stanford University.

Term of Office of Directors

Our directors are appointed for a one-year term to hold office until the next annual
general meeting of our stockholders or until removed from office in accordance with our bylaws. Our officers are appointed by our Board of Directors and hold office until the officer dies or resigns or the Board elects a successor or removes the
officer.

Key Employees

Bolko zu Stolberg became our Vice President of Marketing and Business Strategy in November 2004. Prior to joining Avicena, he worked as a self-employed marketing and strategy consultant from December 2001. From June 2001 until
November 2001, Mr. zu Stolberg served as the Vice President of Marketing for My TradeIn. com, an online retailer, before which he had served as a Group Business Manager for the consumer products manufacturer and retailer, The Gillette Company
for approximately ten years. Mr. zu Stolberg holds a B.A. in communications and an M.B.A., with honors, both from San Jose State University.

Maisie Wong-Paredes became our Director of Marketing and Business Development in January 2005. From November 2003 to January 2005, through Wong-Paredes Consulting, a sole proprietorship, Ms. Wong-Paredes provided marketing
consulting to pharmaceutical companies in the Bay Area. From August 2002 until November 2003, Ms. Wong-Paredes served as the Director of Marketing and Program Management of pharmaceutical company Oculex Pharmaceuticals, Inc. From June 2000 to
August 2002, Ms. Wong-Paredes was a product development and marketing consultant. From October 1998 until May 2000, Ms. Wong-Paredes served as the Director of Product Development of oral health company Oral-B Laboratories.
Ms. Wong-Paredes holds a B.S. in consumer food science from the University of California-Davis and a M.B.A. from Pepperdine University.

Family
Relationships

None.

Involvement in
Certain Legal Proceedings

None.

Audit
Committee Financial Expert

No determination has been made as to whether any member of the audit committee qualified as an audit
committee financial expert as defined in Item 401 of Regulation S-B.



54



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Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Companys directors and executive officers, and persons who
beneficially own more than 10% of a registered class of the Companys equity securities, to file reports of beneficial ownership and changes in the beneficial ownership of the Companys securities with the SEC of Forms 3 (Initial Statement
of Beneficial Ownership), 4 (Statement of Changes of Beneficial Ownership of Securities) and 5 (Annual Statement of Beneficial Ownership of Securities). Directors, executive officers and beneficial owners of more than 10% of the Companys
Common Stock are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms that they file. Based on a review of the SECs website, the Company believes that, with respect to its most recent fiscal year, all
directors, executive officers and greater than 10% beneficial owners complied with all Section 16(a) filing requirements applicable to them, except that a former Director, Joseph Galda, did not file a Form 4 disclosing the sale of 50,000 shares
of common stock in September of 2006.

Code of Ethics

We have adopted a Code of Ethics that applies to our officers, directors and employees. A copy of the code of ethics has been posted on our website.



|Item 10. | Executive Compensation
|-------- | ----------------------

Summary Compensation Table

The Company has three executive officers, Nasser Menhall serves as our Chairman. He does not draw a salary. Belinda Tsao Nivaggioli
serves as our Chief Executive Officer and Michael Sullivan serves as our Acting Chief Financial Officer. The following summary compensation table sets forth information concerning compensation for services rendered in all capacities during 2006
awarded to, earned by or paid to our executive officers.

EXHIBIT A, SUMMARY COMPENSATION TABLE



|                                                    |  |          |  |                |         |               |   |                      |   |                       |   |                                               |   |                                                                              |   |                                |   |               |   |        
|--------------------------------------------------- |  | -------- |  | -------------- | ------- | ------------- | - | -------------------- | - | --------------------- | - | --------------------------------------------- | - | ---------------------------------------------------------------------------- | - | ------------------------------ | - | ------------- | - | -------
|Name andPrincipalPosition(a)                        |  | Year (b) |  | Salary ($) (c) |         | Bonus ($) (d) |   | Stock Awards ($) (e) |   | Option Awards ($) (f) |   | Non-Equity Incentive PlanCompensation ($) (g) |   | Change inPension Value andNonqualified DeferredCompensation Earnings ($) (h) |   | All Other Compensation ($) (i) |   | Total ($) (j)
|Belinda Tsao Nivaggioli, Chief Executive Officer    |  | 2006     |  | $              | 250,000 |               | 0 |                      | 0 |                       | 0 |                                               | 0 |                                                                              | 0 |                                | 0 |               | $ | 250,000
|Belinda Tsao Nivaggioli, Chief Executive Officer    |  | 2005     |  | $              | 237,333 |               | 0 |                      |   |                       |   |                                               | 0 |                                                                              | 0 |                                | 0 |               | $ | 237,333
|Michael J. Sullivan, Acting Chief Financial Officer |  | 2006     |  | $              | 67,500  |               | 0 |                      | 0 |                       | 0 |                                               | 0 |                                                                              | 0 |                                | 0 |               | $ | 67,500 
|D. Wayne Peters, Acting Chief Financial Officer     |  | 2005     |  | $              | 111,057 |               | 0 |                      | 0 |                       | 0 |                                               | 0 |                                                                              | 0 |                                | 0 |               | $ | 111,057
|Nasser Menhall. Chairman                            |  | 2006     |  | $              | 0       |               | 0 |                      | 0 |                       | 0 |                                               | 0 |                                                                              | 0 |                                | 0 |               | $ | 0      
|Nasser Menhall. Chairman                            |  | 2005     |  | $              | 0       |               | 0 |                      | 0 |                       | 0 |                                               | 0 |                                                                              | 0 |                                | 0 |               | $ | 0      



55



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EXHIBIT B, OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE



|                        |  |                                                                           |  |                                                                             |  |                                                                                                  |  |                               |  |                            |  |                                                                 |  |                                                                     |           |                                                                                                    |   |                                                                                                                    |  
|----------------------- |  | ------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------ |  | ----------------------------- |  | -------------------------- |  | --------------------------------------------------------------- |  | ------------------------------------------------------------------- | --------- | -------------------------------------------------------------------------------------------------- | - | ------------------------------------------------------------------------------------------------------------------ | -
|                        |  | Option Awards                                                             |  | Stock Awards                                                               
|Name (a)                |  | Number of Securities Underlying Unexercised Options (#) (Exercisable) (b) |  | Number of Securities Underlying Unexercised Options (#) (Unexercisable) (c) |  | EquityIncentive PlanAwards: Number
of Securities Underlying Unexercised Unearned Options (#) (d) |  | Option Exercise Price ($) (e) |  | Option Expiration Date (f) |  | Number of Shares or Units of Stock That Have Not Vested (#) (g) |  | Market Value ofShares orUnits of
Stock That Have Not Vested ($) (h) |           | EquityIncentive PlanAwards: NumberofUnearnedShares,Units or OtherRights ThatHave NotVested (#) (i) |   | EquityIncentive PlanAwards: Marketor
Payout Value ofUnearned Shares,Units or OtherRightsThatHave NotVested ($) (j)
|Belinda Tsao Nivaggioli |  | 0                                                                         |  | 0                                                                           |  | 0                                                                                                |  | 0                             |  | N/A                        |  | 1,150,000                                                       |  | $                                                                   | 7,038,000 |                                                                                                    | 0 |                                                                                                                    | 0
|Michael J. Sullivan     |  | 0                                                                         |  | 0                                                                           |  | 0                                                                                                |  | 0                             |  | N/A                        |  | 0                                                               |  |                                                                     | 0         |                                                                                                    | 0 |                                                                                                                    | 0
|Nasser Menhall          |  | 0                                                                         |  | 0                                                                           |  | 0                                                                                                |  | 0                             |  | N/A                        |  | 436,427                                                         |  | $                                                                   | 2,670,933 |                                                                                                    | 0 |                                                                                                                    | 0

EXHIBIT C, DIRECTOR COMPENSATION TABLE



|                        |  |                                 |  |                     |  |                      |  |                                             |  |                                                                           |  |                               |  |               |  
|----------------------- |  | ------------------------------- |  | ------------------- |  | -------------------- |  | ------------------------------------------- |  | ------------------------------------------------------------------------- |  | ----------------------------- |  | ------------- | -
|Name (a)                |  | FeesEarnedor PaidinCash ($) (b) |  | StockAwards ($) (c) |  | Option Awards($) (d) |  | Non-EquityIncentive PlanCompensation($) (e) |  | Change inPension
ValueandNonqualifiedDeferredCompensationEarnings ($) (f) |  | All OtherCompensation ($) (g) |  | Total ($) (h)
|Belinda Tsao Nivaggioli |  | 0                               |  | 0                   |  | 0                    |  | 0                                           |  | 0                                                                         |  | 0                             |  | $             | 0
|Nasser Menhall          |  | 0                               |  | 0                   |  | 0                    |  | 0                                           |  | 0                                                                         |  | 0                             |  | $             | 0
|Paul Schimmel           |  | 0                               |  | 0                   |  | 0                    |  | 0                                           |  | 0                                                                         |  | 0                             |  | $             | 0
|Andrew Gertler          |  | 0                               |  | 0                   |  | 0                    |  | 0                                           |  | 0                                                                         |  | 0                             |  | $             | 0
|Dr. Leslie Fang         |  | 0                               |  | 0                   |  | 0                    |  | 0                                           |  | 0                                                                         |  | 0                             |  | $             | 0



56



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##### Table of Contents

Option Grants in 2006

No options were granted during 2006.

Aggregated Option Exercises in 2006 and 2006 Year-End Option Values

No options were exercised by our Officers or Directors during 2006.

Stock Incentive Plan  Awards in 2006

During 2006, no shares, options or other rights were
granted to any of our employees or Officers under our 1999 Plan.

Director Compensation

No options were granted or payments made in compensation for services rendered to any Avicena directors, with the exception of a $4,553 payment to
Mr. Joseph Galda, a former director, who was paid for his assistance in reviewing the terms of the Companys Convertible Promissory Note obtained in April 2006.

In March 2005, we entered into a Consulting Agreement with Leslie Fang to govern Dr. Fangs services as our Chief Scientific Officer and Chairman of our Scientific Advisory Board. The Agreement provides for
a one-time grant of 500,000 restricted shares of common stock, vesting over three years.

Employment Agreements

In March 2005, we entered into an Employment Agreement with Belinda Tsao Nivaggioli to cover her services as Chief Executive Officer. The Agreement with
Ms. Nivaggioli provides for an annual salary of $250,000 and a one-time grant of 2,200,000 shares of restricted common stock.

In
March 2006, we entered into an Offer of Employment Letter with Michael J. Sullivan as Vice President of Finance and Acting Chief Financial Officer. The letter with Mr. Sullivan provides for an annual base salary of $90,000.

Restricted Stock Agreements

On February 9,
2005, we entered into restricted stock agreements with Belinda Tsao Nivaggioli for her services as Chief Executive Officer and Nasser Menhall for his services as Chairman of our Board of Directors. The restricted stock agreement with
Ms. Nivaggioli grants her 2,200,000 shares of restricted stock. Fifty percent of those shares become vested on February 9, 2006, and an additional twenty-five percent of the shares become vested on each of February 9, 2007 and
February 9, 2008, so long as we continue to employ Ms. Nivaggioli on each such date. The restricted stock agreement with Mr. Menhall grants him 722,856 shares of restricted stock. Fifty percent of those shares become vested on
February 9, 2006, and an additional twenty-five percent of the shares become vested on each of February 9, 2007 and February 9, 2008, so long as Mr. Menhall continues to provide us services on each such date.

On March 9, 2005, we entered into restricted stock agreements with Belinda Tsao Nivaggioli for her services as Chief Executive Officer and Nasser
Menhall for his services as Chairman of our Board of Directors. The restricted stock agreement with Ms. Nivaggioli grants her 50,000 shares of restricted stock. One hundred percent of those shares become vested on July 31, 2008, so long as
we continue to employ Ms. Nivaggioli on such date. The restricted stock agreement with Mr. Menhall grants him 75,000 shares of restricted stock. One hundred percent of those shares become vested on July 31, 2008, so long as
Mr. Menhall continues to provide us services on such date.

Report on Repricing of Options

None.



|Item 11. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------

Securities Authorized for Issuance Under Equity Compensation Plans

See Securities Authorized for Issuance Under Equity Compensation Plans for information in Item 5 above for information about securities authorized for issuance under the 1999 Plan.



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##### Table of Contents

Security Ownership of Certain Beneficial Owners and Management

The following table provides certain information regarding the ownership of our common stock, as of December 31, 2005, by:



| |  |  | each of our executive officers;
| | - |  | -------------------------------



| |  |  | each director;
| | - |  | --------------



| |  |  | each person known to us to own more than 5% of our outstanding common stock; and
| | - |  | --------------------------------------------------------------------------------



| |  |  | all of our executive officers and directors and as a group.
| | - |  | -----------------------------------------------------------

As of December 31, 2006, we had 51,082,616 shares of common stock outstanding. Ms. Georgiou, who holds approximately 9.6% of our shares, may be able to exert control over the Company and its management.
Except as indicated in footnotes to this table, the persons named in this table have sole voting and investment power with respect to all shares of common stock indicated below. Except where noted, the address of all listed beneficial owners is in
care of our office at 228 Hamilton Avenue, Third Floor, Palo Alto, CA 94301.



|                                                            |  |                                     |  |           
|----------------------------------------------------------- |  | ----------------------------------- |  | ----------
|Name of Beneficial Owner                                    |  | Number of Shares Beneficially Owned |  | Percent(%)
|Belinda Tsao Nivaggioli                                     |  | 3,000,961                           |  | 5.9       
|Michael J. Sullivan                                         |  | 0                                   |  | 0         
|Nasser Menhall(1)                                           |  | 1,279,809                           |  | 2.5       
|Leslie S. T. Fang                                           |  | 689,000                             |  | 1.3       
|Karen Georgiou (2)                                          |  | 4,900,000                           |  | 9.6       
|Andrew M. Gertler                                           |  | 50,000                              |  | *         
|Paul Schimmel                                               |  | 1,020,242                           |  | 2.0       
|All directors and executive officers as a group (6 persons) |  | 6,040,012                           |  | 11.8      

---

|* | Indicates less than 1.0%
|- | ------------------------



|(1) | Does not include 2,476,071 shares beneficially owned by H.K. Properties, as to which Mr. Menhall disclaims beneficial ownership.
|--- | --------------------------------------------------------------------------------------------------------------------------------



|(2) | In January 2005, Karen Georgiou lent $250,000 to AVN Acquisition Corp. to enable AVN Acquisition Corp. to make a bridge loan to us. Under the promissory note manifesting the loan,
AVN Acquisition Corp. was to pay Karen Georgiou the principal sum of $250,000 on or before May 31, 2006, with interest at a rate of eight percent per year. This note was repaid in cash prior to March 31, 2005, from a portion of the
proceeds which AVN Acquisition Corp. received from subscribers for its common stock. Other than her beneficial ownership of our common stock, Ms. Georgiou has no affiliation with us.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Changes in Control

None.



|Item 12. | Certain Relationships, Related Transactions and Director Independence
|-------- | ---------------------------------------------------------------------

In March 2002, we entered into a Series C Financial Advisory Agreement with H.K. Properties Limited, an investment advisory firm not located in the U.S. and not registered with the U.S. Securities and Exchange
Commission, of which our director Nasser Menhall is a director and minority stockholder. Pursuant to the agreement, H.K. earned a 10% commission on shares of Series C Preferred Stock Avicena sold to investors identified by H.K. and we issued to H.K.
or persons designated by it a warrant to purchase one share of our common stock for each share sold, up to a limit of 5,600,000 shares of common stock, at an exercise price of $0.07 per share. H.K. earned $33,333 for its financial advisory services
in 2003 and $10,000 in 2004. H.K. subsequently applied these amounts to the purchase of stock and the exercise of other warrants. In 2004, we issued warrants to purchase 240,800 shares of our common stock to H.K. and its designees. The agreement
terminated per its terms on March 11, 2005.

In August 2004, we sold our Chairman Nasser Menhall 142,800 shares of Series C Preferred
Stock and warrants to purchase 142,800 shares of common stock (exercisable for $0.01) for a total purchase price of $102,000.

In February
2005, we entered into restricted stock agreements with Belinda Tsao Nivaggioli for her services as Chief Executive Officer and Nasser Menhall for his services as Chairman of our Board of Directors. The restricted stock agreement with
Ms. Nivaggioli grants her 2,200,000 shares of restricted stock. Fifty percent of those shares become vested in February 2006, and an additional twenty-five percent of the shares become vested in each of February 2007, and February 2008, so long
as we continue to employ Ms. Nivaggioli at such time. The restricted stock agreement with Mr. Menhall grants him 722,856 shares of restricted stock. Fifty percent of those shares become vested in February 2006, and an additional
twenty-five percent of the shares become vested in each of February 2007, and February 2008, so long as we continue to employ Mr. Menhall at such time.



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##### Table of Contents

In February 2005, we issued Kevin Waltzer 3,000,000 shares of common stock in compensation for services
he provided in the structuring of the AVN Merger, as a result of which Mr. Waltzer became the owner of more than 5% of our common stock.

In February and March 2005, we borrowed a total of $500,000 from AVN to fund our operations and the costs associated with the transactions with AVN, including the preparation of our prospectus. Interest accrued on the principal amount of
the loan at a rate of eight percent per annum. All amounts of principal and interest due under this loan were canceled as a matter of law when we completed the AVN Merger.

In March 2005, we entered into an Employment Agreement with Belinda Tsao Nivaggioli to cover her services as Chief Executive Officer. The Agreement with
Ms. Nivaggioli provides for an annual salary of $250,000 and a one-time grant of 2,200,000 shares of restricted common stock.

In
March 2005, we entered into restricted stock agreements with Belinda Tsao Nivaggioli for her services as Chief Executive Officer and Nasser Menhall for his services as Chairman of our Board of Directors. The restricted stock agreement with
Ms. Nivaggioli grants her 50,000 shares of restricted stock. One hundred percent of those shares become vested in July 2006, so long as we continue to employ Ms. Nivaggioli at such time. The restricted stock agreement with Mr. Menhall
grants him 75,000 shares of restricted stock. One hundred percent of those shares become vested in July 2006, so long as Mr. Menhall continues to provide us services at such time.

In March 2005, we entered into a Consulting Agreement with Leslie Fang to govern Dr. Fangs services as our Chief Scientific Officer and
Chairman of our Scientific Advisory Board. The Agreement provides for a one-time grant of 500,000 restricted shares of common stock, vesting over three years.

In July 2005, we borrowed $150,000 from 401 Capital Partners Inc., one of the selling stockholders. Interest accrued on the principal amount of the loan at a rate of six percent per annum. The loan was due and payable
upon demand. In October 2005, 401 Capital Partners Inc. contributed the note representing the loan to AVN. The principal amount of this note was canceled as a matter of law when we completed the AVN Merger.

In August 2005, we borrowed $75,000 from Wael El Bahey. Mr. El Bahey is the majority stockholder of H.K. Properties Limited, an investment advisory
firm not located in the U.S. and not registered with the U.S. Securities and Exchange Commission, of which our director Nasser Menhall is a director and minority stockholder. The loan is non-interest bearing and is due the earlier of May 23,
2007, or the date an earlier private placement of $1,500,000 or more closes.

In September 2005, we borrowed $50,000 from our Chairman
Nasser Menhall. The loan became due and was repaid when the AVN Merger closed. The loan was non-interest bearing.

In October 2005, in
connection with the AVN Merger, we entered into an escrow agreement with LaSalle Bank National Association, which served as escrow agent for the merger. Under the agreement, AVNs cash assets of $2,000,000 were placed in escrow and later
distributed to us upon the closing of the AVN Merger. We paid the $2,000 escrow administration fee of LaSalle Bank National Association.

In November 2005, we borrowed $350,000 from AVN to fund our operations and the costs associated with the transactions with AVN. Interest accrued on the principal amount of the loan at a rate of eight percent per annum. All amounts of
principal and interest due under this loan were canceled as a matter of law when we completed the AVN Merger.

In September 2006, the
Company borrowed $20,000 from the Companys Chairman Nasser Menhall. The loan was repaid in September 2006. The loan was non-interest bearing.

In November 2006, we repaid $75,000 borrowed from Wael El Bahey. Mr. El Bahey is the majority stockholder of H.K. Properties Limited, an investment advisory firm not located in the U.S. and not registered with the U.S. Securities and
Exchange Commission, of which our director Nasser Menhall is a director and minority stockholder. The loan was non-interest bearing and was due the earlier of May 23, 2007, or the date an earlier private placement of $1,500,000 or more closed.

Director Independence

The OTC
Bulletin Board does not have a requirement that a majority of our Board of Directors be independent. However, with respect to the definition of independence utilized by NASDAQ, Andrew Gertler, Uri Sagman and Paul Schimmel would be deemed to be
independent while Belinda Tsao Nivaggioli, Nasser Menhall and Leslie Fang would not. A former director, Joseph Galda, who resigned in 2006, would also have been deemed independent under NASDAQs definition.



59



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The Compensation Committee is comprised of Messrs. Fang, Gertler and Schimmel while its Audit Committee
is comprised of Messrs. Gertler and Menhall. NASDAQ requires at least three members on the Audit Committee, each of whom must be independent. NASDAQ also requires that, if its Chief Executive Officers compensation is determined by its
Compensation Committee, the Compensation Committee must be comprised solely of independent directors. The Company currently does not meet either of these requirements.

The NASDAQ rules have both objective tests and a subjective test for determining who is an independent director. The objective tests state, for example, that a director is not considered independent if he
or she is an employee of the Company or is a partner, executive officer or controlling stockholder of an entity to which the Company made, or from which the Company received, payments in the current or any of the past three fiscal years that exceed
the greater of $200,000 or 5% of the recipients consolidated gross revenue for that year or a family member serves in the current fiscal year or has served at any time during the last three fiscal years as an executive officer of the Company.
The subjective test states that an independent director must be a person who lacks a relationship that, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.



|Item 13. | Exhibits
|-------- | --------

The following are being filed as
part of this Annual Report on Form 10-KSB:



|          |  |                                                                                                                                                                                       
|--------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit # |  | Description                                                                                                                                                                           
|2.1       |  | Agreement and Plan of Merger, dated October 25, 2005, by and between Registrant and AVN Acquisition Corp. (1)                                                                         
|          | 
|2.2       |  | Escrow Agreement, dated October 26, 2005, by and between Registrant, AVN Acquisition Corp. and LaSalle Bank National Association. (1)                                                 
|          | 
|3.1       |  | Amended and Restated Certificate of Incorporation. (1)                                                                                                                                
|          | 
|3.2       |  | Amended and Restated By-Laws. (2)                                                                                                                                                     
|          | 
|3.3       |  | Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock. (12)                                                                                     
|          | 
|3.4       |  | Form of Certificate of Amendment to Certificate of Designations, Preferences and Rights of Series A Convertible Preferred Stock to be filed with the Delaware Secretary of State.
(15)
|          | 
|3.5       |  | Form of Certificate of Designation of Rights and Preferences of the Series B Preferred Stock to be filed with the Delaware Secretary of State. (15)                                   
|          | 
|4.1       |  | Warrant. (15)                                                                                                                                                                         
|          | 
|10.1      |  | 1999 Stock Incentive Plan, as amended. (2)                                                                                                                                            
|          | 
|10.2      |  | Second Amendment to the 1999 Stock Incentive Plan. (5)                                                                                                                                
|          | 
|10.3      |  | Form of Demand Note, dated July 13, 2005, by Registrant in favor of 401 Capital Partners Inc. (6)                                                                                     
|          | 
|10.4      |  | Form of Promissory Note, dated August 23, 2005, by Registrant in favor of Wael El Bahey. (1)                                                                                          
|          | 
|10.5      |  | Form of Promissory Note, dated October 3, 2005, by Registrant in favor of Nasser Menhall. (1)                                                                                         
|          | 
|10.6      |  | Form of Promissory Note, dated November 4, 2005, by Registrant in favor of AVN Acquisition Corp. (1)                                                                                  
|          | 
|10.7      |  | Series C Financial Advisory Agreement, dated March 11, 2002 by and between Registrant and H.K. Properties Limited. (2)                                                                
|          | 
|10.8      |  | Subscription Agreement, dated August 15, 2004, by and between Registrant and Nasser Menhall. (4)                                                                                      
|          | 
|10.9      |  | Restricted Stock Purchase Agreement, dated February 9, 2005, by and between Registrant and Belinda Tsao Nivaggioli. (2)                                                               
|          | 
|10.10     |  | Restricted Stock Purchase Agreement, dated February 9, 2005, by and between Registrant and Nasser Menhall. (2)                                                                        
|          | 
|10.11     |  | Restricted Stock Purchase Agreement, dated February 9, 2005, by and between Registrant and Leslie Fang. (4)                                                                           
|          | 
|10.12     |  | Subscription Agreement, dated February 24, 2005, by and between Registrant and Kevin Waltzer. (4)                                                                                     



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|      |  |                                                                                                                                                                 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.13 |  | Restricted Stock Purchase Agreement, dated March 9, 2005, by and between Registrant and Nasser Menhall. (4)                                                     
|      | 
|10.14 |  | Restricted Stock Purchase Agreement, dated March 9, 2005, by and between Registrant and Belinda Tsao Nivaggioli. (4)                                            
|      | 
|10.15 |  | Consulting Agreement, dated February 25, 2005, by and between Registrant and Leslie Fang. (4)                                                                   
|      | 
|10.16 |  | Employment Agreement, dated March 3, 2005, by and between Registrant and Belinda Tsao Nivaggioli. (2)                                                           
|      | 
|10.17 |  | Services Agreement, dated March 16, 2005, by and between Registrant and ERG. (2)                                                                                
|      | 
|10.18 |  | Supply, License and Development Agreement, dated August 17, 2000, by and between Registrant and Esteé Lauder, Inc. (3) #                                        
|      | 
|10.19 |  | Agreement For Purchase and Sale of GM Creatine Monohydate, dated May 30, 2003, by and between Registrant and DeGussa AG. (2)                                    
|      | 
|10.20 |  | Regus Business Centre Service Agreement, dated August 15, 2005, by and between Registrant and Regus Business Centres Corp. (1)                                  
|      | 
|10.21 |  | Offer of Employment Letter to Michael Sullivan. (8)                                                                                                             
|      | 
|10.22 |  | Convertible Promissory Note, dated as of April 21, 2006 by Registrant in favor of The Biotechnology Ventures (III) Capital Trust (includes Form of Warrant). (9)
|      | 
|10.23 |  | Registration Rights Agreement by and between Registrant and The Biotechnology Ventures (III) Capital Trust dated as of April 21, 2006. (9)                      
|      | 
|10.24 |  | Form of Securities Purchase Agreement regarding Series A Convertible Preferred Stock. (12)                                                                      
|      | 
|10.25 |  | Form of Warrant with respect to Securities Purchase Agreement. (13)                                                                                             
|      | 
|10.26 |  | Convertible Promissory Note, dated as of March 20, 2007, by Registrant in favor of the Biotechnology Ventures (III) Capital Trust. (14)                         
|      | 
|10.27 |  | Registration Rights Agreement by and between Registrant and The Biotechnology Ventures (III) Capital Trust dated as of March 22, 2007. (14)                     
|      | 
|10.28 |  | Securities Purchase Agreement. (15)                                                                                                                             
|      | 
|10.29 |  | Registration Rights Agreement. (15)                                                                                                                             
|      | 
|10.30 |  | Form of Limited Standstill Agreement. (15)                                                                                                                      
|      | 
|10.31 |  | Form of Series A Preferred Stock Option Letter. (15)                                                                                                            
|      | 
|10.32 |  | Investment Banking and Financial Advisory Agreement dated April 10, 2007 by and between Registrant and Blackwater Capital Group, Inc. (16)                      
|      | 
|14    |  | Code of Ethics. (7)                                                                                                                                             
|      | 
|20.1  |  | Letter of Transmittal to Avicena Stockholders. (7)                                                                                                              
|      | 
|20.2  |  | Letter from Registrant to stockholders. (10)                                                                                                                    
|      | 
|20.3  |  | Letter from Registrant to stockholders. (11)                                                                                                                    
|      | 
|31.1  |  | Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (17)                                                                            
|      | 
|31.2  |  | Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (17)                                                                            
|      | 
|32.1  |  | Certification of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (17)                                                                    

---

|(1) | Incorporated by reference from Registrants Registration Statement on Form SB-2 filed with the Commission on November 7, 2005 (Reg. No. 333-129536).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Incorporated by reference from Registrants Registration Statement on Form SB-2 filed with the Commission on March 22, 2005 (Reg. No. 333-123476).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(3) | Incorporated by reference from Registrants Amendment No. 1 to the Registration Statement on Form SB-2 filed with the Commission on November 14, 2005 (Reg.
No. 333-123476).
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Incorporated by reference from Registrants Amendment No. 3 to the Registration Statement on Form SB-2 filed with the Commission on August 10, 2005 (Reg.
No. 333-123476).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | Incorporated by reference from Registrants Amendment No. 2 to the Registration Statement on Form SB-2 filed with the Commission on July 8, 2005 (Reg.
No. 333-123476).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(6) | Incorporated by reference from Registrants Amendment No. 4 to the Registration Statement on Form SB-2 filed with the Commission on August 24, 2005 (Reg.
No. 333-123476).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) | Incorporated by reference from the Registrants Annual Report on Form 10-KSB for the annual period ended December 31, 2005 and filed with the commission on March 31,
2006.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(8) | Incorporated by reference from the Registrant s Current Report on Form 8-K filed with the Commission on April 6, 2006.
|--- | -----------------------------------------------------------------------------------------------------------------------



|(9) | Incorporated by reference from the Registrants Current Report on Form 8-K filed with the Commission on April 26, 2006.
|--- | -----------------------------------------------------------------------------------------------------------------------



|(10) | Incorporated by reference from the Registrants Current Report on Form 8-K filed with the Commission on September 20, 2006.
|---- | ---------------------------------------------------------------------------------------------------------------------------



|(11) | Incorporated by reference from the Registrants Current Report on Form 8-K filed with the Commission on November 13, 2006.
|---- | --------------------------------------------------------------------------------------------------------------------------



|(12) | Incorporated by reference from the Registrants Quarterly Report on Form 10-QSB for the quarterly period ended September 30, 2006 and filed with the Commission on
November 20, 2006.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(13) | Incorporated by reference from the Registrants Current Report on Form 8-K filed with the Commission on December 1, 2006.
|---- | -------------------------------------------------------------------------------------------------------------------------



|(14) | Incorporated by reference from the Registrants Current Report on Form 8-K filed with the Commission on March 26, 2007.
|---- | -----------------------------------------------------------------------------------------------------------------------



|(15) | Incorporated by reference from the Registrants Current Report on Form 8-K filed with the Commission on April 5, 2007.
|---- | ----------------------------------------------------------------------------------------------------------------------



|(16) | Incorporated by reference from the Registrants Current Report on Form 8-K filed with the Commission on April 16, 2007.
|---- | -----------------------------------------------------------------------------------------------------------------------



|(17) | Filed herewith.
|---- | ---------------



|# | Certain information in this exhibit has been omitted pursuant to a confidential treatment request, which the Commission approved on November 7, 2005.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------



|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------

Audit Fees

The audit fees of Vitale, Caturano & Company, Ltd. for the years ending December 31, 2006 and 2005 were approximately
$32,500 and $21,214, respectively.

Audit-Related Fees

The fees of Vitale, Caturano & Company, Ltd. for providing audit-related services such as reviewing our quarterly reports on Form 10-QSB for the year ending December 31, 2006 was approximately $48,603.
The fees of Vitale, Caturano & Company, Ltd. for providing audit-related services such as reviewing our Registration Statement and quarterly reports on Form 10-QSB during the year ending December 31, 2005 was approximately $62,700.

Tax Fees

Vitale, Caturano &
Company, Ltd. does not provide us with tax compliance, tax advice or tax planning services.

All Other Fees

None.



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the
registrant has duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized.



AVICENA GROUP, INC.By:

/s/ Belinda Tsao NivaggioliBelinda Tsao NivaggioliChief Executive Officer


Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                                                    |  |                                                                             |  |             
|--------------------------------------------------- |  | --------------------------------------------------------------------------- |  | ------------
|Signature                                           |  | Title                                                                       |  | Date        
|                                                    |  |                                                                            
|/s/ Belinda Tsao Nivaggioli Belinda
Tsao Nivaggioli |  | Chief Executive Officer (Principal Executive Officer)
and Director          |  | May 10, 2007
|                                                    |  |                                                                            
|/s/Michael J. Sullivan Michael J.
Sullivan          |  | Acting Chief Financial Officer (Principal Accounting and
Financial Officer) |  | May 10, 2007
|                                                    |  |                                                                            
|/s/ Leslie S. T. Fang Leslie S.T.
Fang              |  | Director                                                                    |  | May 10, 2007
|                                                    |  |                                                                            
|/s/ Andrew Gertler Andrew
Gertler                   |  | Director                                                                    |  | May 10, 2007
|                                                    |  |                                                                            
|/s/ Nasser Menhall Nasser
Menhall                   |  | Director                                                                    |  | May 10, 2007
|                                                    |  |                                                                            
|/s/ Uri Sagman Uri
Sagman                           |  | Director                                                                    |  | May 10, 2007



63