**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**Form
      10-KSB**




(Mark
      one)


**x**
                **Annual
                    Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
                    of 1934**




For
      the
      Fiscal Year Ended December 31, 2006




or




** ̈**
                **Transition
                    Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
                    1934**





For
      the
      transition period from  to  .




**Commission
      File Number 001-12465**




**CLEVELAND
      BIOLABS, INC.**


**(Exact
      name of small business issuer as specified in its
      charter)**




**DELAWARE**
            
            **20-0077155****(State
                or other jurisdiction of incorporation or organization)**
            
            **(I.R.S.
                Employer Identification No.)**




**11000
      Cedar Ave., Suite 290**


**CLEVELAND,
      OHIO 44106**


(Address
      of principal executive offices and zip code)





**(216) 229-2251**


(Issuer’s
      telephone number)





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





**Common
      Stock, $0.005 par value per share - Nasdaq Capital Market, Boston Stock
      Exchange**








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





**None**




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 contained in this form, 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





Issuer
      had
      revenues for its most recent fiscal year of $1,708,214.




The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates of the registrant was approximately $62,164,237.73 based on
      the
      closing stock price of $11.23 for the registrant’s Common Stock as reported by
      the Nasdaq Capital Market on March 14, 2007. For purposes of this calculation,
      the registrant’s directors, executive officers and holders of more than 10% of
      the registrant’s common shares have been assumed to be affiliates.




As
      of
      March 14, 2007 there were 11,889,099 shares outstanding of registrant’s Common
      Stock, $0.005 par value.




DOCUMENTS
      INCORPORATED BY REFERENCE:





**None**





Transitional
      Small Business Disclosure Format (Check One):  YES  ̈NOx








CLEVELAND
                BIOLABS, INC.FORM
                10-KSB03/29/07




**Cleveland
      BioLabs, Inc.**





**Form
      10-KSB**




**For
      the Fiscal Year Ended December 31, 2006**





**INDEX**


**Page**PART
                IItem
                  1
              
              Description
                  of Business
              
              2Item
                  2
              
              Description
                  of Property
              
              26Item
                  3
              
              Legal
                  Proceedings
              
              27Item
                  4
              
              Submission
                  of Matters to a Vote of Security Holders
              
              27PART
                  IIItem
                  5
              
              Market
                  for Common Equity, Related Stockholder Matters and Small Business
                  Issuer
                  Purchases of Equity Securities
              
              27Item
                  6
              
              Management’s
                  Discussion and Analysis
              
              28Item
                  7
              
              Financial
                  Statements
              
              39Item
                  8
              
              Changes
                  In and Disagreements With Accountants on Accounting and Financial
                  Disclosure
              
              40Item
                  8A
              
              Controls
                  and Procedures
              
              40Item
                  8B
              
              Other
                  Information
              
              41PART
                  IIIItem
                  9
              
              Directors,
                  Executive Officers, Promoters, Control Persons and Corporate Governance;
                  Compliance with Section 16(a) of the Exchange Act
              
              42Item
                  10
              
              Executive
                  Compensation
              
              43Item
                  11
              
              Security
                  Ownership of Certain Beneficial Owners and Management and Related
                  Stockholder Matters
              
              46Item
                  12
              
              Certain
                  Relationships and Related Transactions and Director
                  Independence
              
              50Item
                  13
              
              Exhibits
              
              52Item
                  14
              
              Principal
                  Accountant Fees and Services
              
              55SIGNATURES
              
              57










**FORWARD-LOOKING
      STATEMENTS**





*This
      Annual Report on Form 10-KSB contains forward-looking statements that involve
      risks and uncertainties. In particular, statements about our expectations,
      beliefs, plans, objectives, assumptions or future events or performance are
      contained or incorporated by reference in this report. We have based these
      forward-looking statements on our current expectations about future events.
      While we believe these expectations are reasonable, such forward-looking
      statements are inherently subject to risks and uncertainties, many of which
      are
      beyond our control. The actual future results for Cleveland BioLabs, Inc. may
      differ materially from those discussed here for various reasons. Given these
      risks and uncertainties, you are cautioned not to place undue reliance on such
      forward-looking statements. The forward-looking statements included in this
      report are made only as of the date hereof. We do not undertake and specifically
      decline any obligation to update any such statements or to publicly announce
      the
      results of any revisions to any of such statements to reflect future events
      or
      developments. When used in the report, unless otherwise indicated, “CBL,” “we,”
“our” and “us” refers to Cleveland BioLabs, Inc.*




**** **PART
      I**




**Item 1.****Description
                of Business**




**GENERAL**  **OVERVIEW**





CBL
      commenced business operations in June 2003 as a development-stage company,
      with
      a very specific and targeted focus on radiation drug discovery. We have devoted
      substantially all of our resources to the identification, development and
      commercialization of new types of drugs for protection of normal tissues from
      exposure to radiation and other stresses, such as toxic chemicals and cancer
      treatments. Our initial target, and most promising opportunity, is to develop
      a
      drug to protect humans from the effects of exposure to radiation, whether as
      a
      result of military or terrorist acts or as a result of a nuclear accident.
      Recent acts of terrorism and the proliferation of nuclear weapons programs
      in
      rogue states have created a more immediate demand for further research and
      development, or R&D, in this area. Other potential applications of our drug
      candidates include reducing the side effects of cancer treatment, destroying
      tumor cells, and generating adult stem cells.





On
      July
      20, 2006, we sold 1,700,000 shares of common stock in our initial public
      offering at a per share price of $6.00. Since the date of our initial public
      offering, our common stock has been listed on the Nasdaq Capital Market under
      the symbol “CBLI” and on the Boston Stock Exchange as “CFB.”




**TECHNOLOGY**





Our
      development efforts are based on discoveries made in connection with the
      investigation of the cell-level process known as apoptosis. Apoptosis is a
      highly specific and tightly regulated form of cell death that can occur in
      response to external events such as exposure to radiation, toxic chemicals
      or
      internal stresses. Apoptosis is a major determinant of tissue damage caused
      by a
      variety of medical conditions including cerebral stroke, heart attack and acute
      renal failure. Conversely, apoptosis is also an important protective mechanism
      that allows the body to shed itself of defective cells, which otherwise can
      cause cancerous growth.




2





Research
      has demonstrated that apoptosis is sometimes suppressed naturally. For example,
      most cancer cells develop resistance to apoptotic death caused by drugs or
      natural defenses of the human body. Our research is geared towards identifying
      the means by which apoptosis can be affected and manipulated depending on the
      need.





If
      the
      need is to protect healthy tissues against an external event such as exposure
      to
      nuclear radiation, we focus our research efforts on attempting to temporarily
      and reversibly suppress apoptosis in those healthy tissues, thereby imitating
      the apoptotic-resistant tendencies displayed by cancer cells. A drug with this
      effect would also be useful in ameliorating the often severe side effects of
      anticancer drugs and radiation that cause collateral damage to healthy tissues
      during cancer treatment. Because the severe side effects of anticancer drugs
      and
      radiation often limit their dosage in cancer patients, an apoptosis suppressant
      drug may enable a more aggressive treatment regimen using anticancer drugs
      and
      radiation and thereby increase their effectiveness.





On
      the
      other hand, if the need is to destroy cancerous cells, we focus our research
      efforts on restoring apoptotic mechanisms that are suppressed in tumors, so
      that
      those cancerous cells will once again become vulnerable to apoptotic death.
      In
      this regard, we believe that our drug candidates could have significant
      potential for improving, and becoming vital to, the treatment of cancer
      patients.




**PRODUCTS
      IN DEVELOPMENT**




**Protectans**





Protectans
      are modified proteins of microbes that protect cells from apoptosis, and have
      a
      broad spectrum of potential applications. These potential applications include
      non-medical applications such as protection from exposure to radiation, whether
      as a result of military or terrorist action or as a result of a nuclear
      accident, as well as medical applications such as reducing cancer treatment
      side
      effects.




*Protectan
      CBLB502*





Protectan
      CBLB502 is our leading radioprotectant molecule in the protectans series.
      Protectan CBLB502 represents a rationally designed derivative of the microbial
      protein, flagellin. Flagellin is secreted by *Salmonella
      typhimurium* and
      acts
      as a natural activator of NF-kB. Protectan CBLB502 is administered through
      intramuscular injection.




3





**Biodefense
      Applications**





In
      collaboration with the Cleveland Clinic, our scientists have demonstrated that
      injecting Protectan CBLB502 into mice protects them from lethal doses of total
      body gamma radiation. An important advantage of Protectan CBLB502, above any
      other radioprotectant known to us, is the ability to effectively protect not
      only the hematopoietic system, but also the gastrointestinal, or GI, tract,
      which are among the most sensitive areas of the human body to radiation. High
      levels of radiation, among other effects, induce moderate to severe bone marrow
      damage. The immune and blood stem cells are also depleted and death is caused
      by
      anemia, infection, bleeding and poor wound healing. Protectan CBLB502’s ability
      to effectively protect the hematopoietic system and GI tract may make Protectan
      CBLB502 uniquely useful as a radioprotective antidote. Protectan CBLB502 was
      shown to be safe at
      its
      therapeutic doses in rodents and non-human primates. In
      addition, Protectan CBLB502 has proved to be a stable compound for storage
      purposes. It can be stored at temperatures close to freezing, room temperature
      or extreme heat. Manufacture of Protectan CBLB502 is relatively inexpensive,
      due
      to its high yield bacterial producing strain and simple purification
      process.




Our
      research has also demonstrated that a single injection of less than 1% of the
      maximum tolerable dose of Protectan CBLB502 protected greater than 80% of NIH
      Swiss mice from exposure to as high as 13 Gy of total body irradiation. No
      other
      known compounds in development show this degree of protective effect from this
      level of radiation exposure.




Protectan
      CBLB502 also showed strong radioprotective efficacy as a single therapy in
      non-human primates, enabling the survival of 70% of the animals that received
      whole-body radiation, versus the control group, in which 75% of the animals
      died. Of the non-human primates in the control group that survived, none were
      without significant abnormalities. In contrast, the surviving non-human primates
      treated with CBLB502 possessed no significant structural abnormalities in their
      bone marrow, immune system organs, or small intestines after 40 days. This
      is
      consistent with data previously obtained from trials on mice. Irradiated mice
      treated with CBLB502 survived to their normal life span without developing
      any
      significant abnormalities and while preserving the normal formation of blood
      cells (hematopoiesis). This data suggests that CBLB502 may offer true protection
      from gamma-irradiation induced Acute Radiation Syndrome, including the lethal
      effects on both the GI and hematopoietic systems.




*Regulatory
      Status*





Extraordinary
      radioprotective properties, an excellent toxicity profile, outstanding stability
      and inexpensive production of Protectan CBLB502 make it a primary candidate
      for
      entering formal preclinical and clinical studies. Initially, Protectan CBLB502
      will be developed for non-medical purposes — as a radioprotectant antidote for
      the protection of people from severe doses of ionizing radiation. Our drug
      development strategy complies with the recently adopted Food and Drug
      Administration, or FDA, rules for investigational drugs that address situations
      such as radiation injury, where it would be unethical to conduct efficacy
      studies in humans. While Phase II and Phase III human clinical trials are
      normally required for the marketing approval of an investigational new drug,
      under the new FDA rules, Protectan CBLB502 would be considered for approval
      for
      this indication based on Phase I safety studies in humans and efficacy studies
      in two animal species (rodents and non-human primates). Based upon this
      expedited approval process, Protectan CBLB502 could be approved for non-medical
      applications within 24 to 36 months. Because Phase II and Phase III testing
      involves applying a drug candidate to a large numbers of participants who suffer
      from the targeted disease and condition, and can last for a total of anywhere
      from three to six or more years, bypassing these phases represents a significant
      time and cost savings in receiving FDA approval.




4





As
      part
      of this expedited approval process, the FDA has indicated that it intends to
      engage in a highly interactive review of Investigational New Drug, or IND,
      applications and New Drug Applications, or NDAs, and to provide for accelerated
      review or approval of certain medical products for counterterrorism
      applications, including granting eligible applications “Fast Track” approval
      status. The Fast
      Track designation ordinarily allows a product to be considered for accelerated
      approval through the use of surrogate endpoints to demonstrate effectiveness.
      As
      a result of these provisions, the FDA has broader authority to consider evidence
      of partial tumor shrinkage or other surrogate endpoints of clinical benefit
      in
      deciding on approval. This new policy is intended to facilitate the study of
      cancer therapies and shorten the total time required for marketing
      approvals.





In
      cases
      where priority review is given to Fast Track applications, the applicant is
      permitted to submit applications on a rolling basis. We plan to apply for Fast
      Track approval upon the filing of our IND application for Protectan CBLB502.
      If
      Protectan CBLB502 is approved for Fast Track status, we intend to market it
      outside of the U.S., to the extent permitted by U.S. and foreign government
      authorities.





In
      order
      for us to receive final FDA approval for Protectan CBLB502 for non-medical
      applications, we need to:





·
            Manufacture
                our drug candidate according to current Good Manufacturing Practices,
                or
                cGMP, guidelines;





·
            Repeat
                our animal studies with the GMP manufactured drug
                candidate;





·
            File
                an IND and receive a response from the
                FDA;





·
            Perform
                a Phase I Human Study (which does not require GMP-manufactured material
                and can be done concurrently with the rest of the steps); and





·
            File
                a Biologic License Application, or
                BLA.





In
      our
      most optimistic business scenario, all of these steps could be accomplished
      by
      mid-to-late 2008. In a more conservative business scenario, it may take up
      to 30
      months or more to complete the development and file the BLA for the approval
      of
      Protectan CBLB502 for non-medical applications. We are currently engaged in
      the
      process of completing the cGMP-compliant manufacturing, and we plan to hold
      the
      pre-IND meeting with the FDA in April 2007 to finalize our developmental
      program.




5





The
      Project BioShield Act of 2004, which further expedites the approval of drug
      candidates for certain uses, is intended to bolster our nation’s ability to
      provide protections and countermeasures against biological, chemical,
      radiological or nuclear agents that may be used in a military, terrorist or
      nuclear attack. The principal provisions of this law are to:





·
            Facilitate
                R&D efforts of biomedical countermeasures by the National Institutes
                of Health, or NIH;





·
            Provide
                for the procurement of needed countermeasures through a special reserve
                fund of $5.6 billion over ten years; and





·
            Authorize,
                under limited circumstances, the emergency use of medical products
                that
                have not been approved by the FDA.





This
      law
      also allows for the use of expedited peer review when assessing the merit of
      grants and contracts of up to $1,500,000 for countermeasure research. We have
      been awarded a $1,500,000 research grant pursuant to this law.





*Market
      Opportunities*





Protectan
      CBLB502 is a candidate for procurement by the U.S. Department of Defense, or
      DoD. In general, the procurement process is conducted on the basis of full
      and
      open competition that cannot be limited, unless the DoD determines that the
      public requesting policy would otherwise seriously jeopardize national
      security.





Prior
      to
      determining the best treatment, the DoD issues a Request for Information, or
      RFI, for treatments available or in development for a specific condition
      resulting from an identified threat. The RFI provides an incentive for companies
      to research and develop countermeasures that are superior to those selected
      for
      stockpiling. Through the RFI, companies may compete for future contracts that
      will revise and update stockpile content for emerging threats, advanced
technologies and new countermeasures.





Following
      its review of the responses it receives, the DoD issues a Request for Proposal,
      or RFP. The RFP solicits proposals for the manufacturing of specified treatments
      for a defined number of doses to be delivered within a specified timeframe
      (a
      maximum of eight years).





If
      the
      product or the use indicated in the RFP of an approved product is not approved,
      licensed, or cleared for commercial distribution at completion of the review,
      the DoD has the authority to procure the required amount if it has:





·
            Determined
                that sufficient and satisfactory clinical experience or research
                data
                (including data, if available, from pre-clinical and clinical trials)
                support a reasonable conclusion that the countermeasure will qualify
                for
                approval or licensing within eight years after the date of a
                determination; and




6


·
              Determined
                  that the product is authorized for emergency use.




The
      DoD,
      through the U.S. Army Space and Missile Defense Command, recently issued a
      RFP
      for the Advanced Development of Medical Radiation Countermeasures, or MRC.
      According to the RFP, the objective of the MRC project is to develop a
      post-exposure MRC through a Phase I clinical trial and, pending successful
      completion of the Phase I clinical trial, develop the MRC product through
      approval/licensure with the FDA and procure quantities of the MRC sufficient
      to
      achieve Initial Operational Capability, or IOC. A range of 50,000 to 500,000
      doses has been specified to achieve IOC. The RFP stated that MRC must be safe,
      efficacious, quick acting, free from performance-decrementing side effects,
      relatively non-invasive, approved by the FDA, compatible with current military
      countermeasures, and usable on the battle field. The MRC should not require
      refrigeration, nor have other significant logistical burdens, and should have
      a
      relatively long shelf life.




The
      solicitation specifically seeks a drug/biologic intended for use after exposure
      to ionized radiation, or IR, has occurred. It is anticipated that the
      countermeasure, when administered following exposure to IR, will prolong
      survival by treating the GI syndrome of Acute Radiation Syndrome. Specifically,
      when administered following exposure to IR, the countermeasure should either
      prevent/reduce the extent of incipient radiation injury or promote repair of
      manifest radiation injury to allow the preservation/restoration of the anatomic
      integrity and normal physiologic functioning of the GI tract. Responses to
      this
      RFP are due in April 2007, with an anticipated contract award on or around
      July
      20, 2007.




We
      believe Protectan CBLB502's unique ability to protect against and mitigate
      the
      damaging effects of gamma irradiation on the GI system, combined with its
      safety, stability and method of administration, will make it a very strong
      candidate for this contract. Moreover, we are actively engaged in the process
      of
      completing current cGMP-compliant manufacturing, and we plan to submit an IND
      application for human safety testing by September 2007.




In
      summary, we believe that Protectan CBLB502 represents a very promising solution
      as both a radioprotectant and mitigator of radiation exposure. CBLB502 has
      shown
      very encouraging results in non-human primates and rodents for being effective
      as a radioprotectant when administered as little as 15 minutes prior to
      exposure, and as a mitigator, if administered up to eight hours after exposure.
      In addition, CBLB502 is stable in solution and powder form, so it can be quickly
      dissolved and injected using self-injectable devices, which are the preferred
      delivery system. Moreover, the compound does not display toxicity at therapeutic
      doses.




The
      initial development of Protectan CBLB502 was
      supported by grants from the Department of Health and Human Services through
      the
      Project BioShield Act of 2004 and NASA.




7




**Anticancer
      Applications**




In
      addition to its military or other non-medical applications, we have found that
      Protectan CBLB502, on a preliminary research basis, has been observed to
      dramatically increase the efficacy of radiotherapy of experimental tumors in
      mice. Protectan CBLB502 appears to increase the tolerance of mice to radiation
      while having no effect on the radiosensitivity of tumors, thus opening the
      possibility of combining radiotherapy with Protectan CBLB502 treatment to
      improve the overall anticancer efficacy of radiotherapy. Our animal efficacy
      studies have demonstrated that up to 100% of mice treated with Protectan CBLB502
      prior to being exposed to radiation survived, without any associated signs
      of
      toxicity. This compares to a 100% mortality rate in the animal group that
      received a placebo drug.





The
      use
      of Protectan CBLB502 to ameliorate the side effects of radiation treatment
      and
      anticancer drugs will be subject to the full FDA approval process.




*Protectan
      CBLB612*





Our
      Protectans 600 series are modified factors of Mycoplasmas. Much of our initial
      research in this series has been in the area of radiation protection. Our lead
      candidate in this series, Protectan CBLB612, has been shown to provide
      protection in a mouse model from lethal hematopoietic-induced radiation sickness
      when administered between 48 hours prior or up to eight hours after radiation
      exposure. Protectan CBLB612 does not display
      any significant toxicity at its therapeutic doses in rodents and non-human
      primates.





Moreover,
      through our research in the area of radiation protection, we have discovered
      a
      unique property of the Protectans 600 series, which has led to a breakthrough
      in
      the stem cell arena.




A
      single
      administration of CBLB612 resulted in a three-fold increase in the number of
      progenitor stem cells in mouse bone marrow within 24 hours after administration.
      Furthermore, the number of these stem cells in peripheral blood was increased
      ten-fold within four days of administration. Our research indicates that CBLB612
      and the other compounds in the 600 series are not only potent stimulators of
      bone marrow stem cells, but also cause their mobilization and proliferation
      throughout the blood. This discovery opens a new and innovative way for us
      to
      address a broad spectrum of human diseases, some of which currently lack
      effective treatment.




Although
      it is still very early in our research efforts, we believe that we may have
      discovered a novel method of producing adult stem cells, which can be used
      without permanent immuno-suppression. The potential applications for this
      technology are numerous.




8




A
      report
      published by the NIH division of the Department of Health and Human Services
      entitled "Regenerative Medicine 2006," notes that hematopoietic stem cells
      have
      been used clinically since 1959 and are used routinely for transplantations,
      albeit almost exclusively in a non-pure form. More than 40,000 transplants
      were
      performed annually worldwide by 1995. Currently, the main indications for bone
      marrow transplantation are either hematopoietic cancers (leukemias and
      lymphomas), or the use of high-dose chemotherapy for nonhematopoietic
      malignancies (cancers in other organs). Other indications include diseases
      that
      involve genetic or acquired bone marrow failure, such as aplastic anemia,
      thalassemia sickle cell anemia, and increasingly, autoimmune diseases. Producing
      a ready supply of hematopoietic stem cells for an individual, without painful
      procedures, risk of contamination, or side effects, would be tantamount to
      enabling the body to repair itself from any damage to its blood-forming
      system.




The
      development of our Protectans 600 series has been supported by a grant from
      the
      Defense Advanced Research Projects Agency of the Department of
      Defense.




**Curaxins**




Curaxins
      are small molecules that destroy tumor cells by simultaneously targeting two
      regulators of apoptosis. Our initial test results indicate that Curaxins can
      be
      effective against a number of malignancies, including hormone refractory
      prostate cancer, renal cell carcinoma, or RCC, (a highly fatal form of kidney
      cancer), and soft-tissue sarcoma.





The
      original focus of our drug development program was to develop drugs to treat
      one
      of the most treatment-resistant types of cancer, RCC. Unlike many cancer types
      that frequently mutate or delete p53, one of the major tumor suppressor genes,
      RCC belongs to a rare category of cancers that typically maintain a wild type
      form of this protein. Nevertheless, RCC cells are resistant to apoptosis,
      suggesting that in spite of its normal structure, p53 is functionally disabled.
      The work of our founders has shown that p53 function is indeed inhibited in
      RCC
      by an unknown dominant factor. We have established a drug discovery program
      to
      identify small molecules that selectively destroy tumor cells by restoring
      the
      normal function to functionally impaired p53 in RCC. This program yielded a
      series of chemicals with the desirable properties named curaxins (CBLC100
      series). We have isolated three chemical classes of curaxins. One of them
      includes relatives of 9-aminoacridine, the compound that is the core structure
      of many existing drugs. Pre-existing information about this compound has allowed
      us to bypass the preclinical development and Phase I studies and bring one
      of
      our drug candidates into Phase IIa clinical trials, saving years of R&D
      efforts and improving the probability of success.





One
      of
      the most important outcomes of this drug discovery program was the
      identification of the mechanism by which curaxins deactivate NF-kB. This
      mechanism of action makes curaxins potent inhibitors of the production and
      the
      activity of NF-kB not only in its stimulated form, but also in its basal form.
      The level of active NF-kB is usually also increased in cancer cells. Moreover,
      due to curaxin-dependent functional conversion of NF-kB DNA complexes, the
      cells
      with the highest basal or induced NF-kB activity are supposed to be the most
      significantly affected by curaxins. Clearly, this paradoxical activity makes
      deactivation of NF-kB by curaxins more advantageous compared to conventional
      strategies targeting NF-kB activators.




9





The
      discovery of the mechanism of action of curaxins allowed us to predict and
      later
      experimentally verify that curaxins could be used for treatment of multiple
      forms of cancers, including hormone refractory prostate cancer, hepatocellular
      carcinoma, multiple myeloma, acute lymphocytic leukemia, acute myeloid leukemia,
      soft-tissue sarcomas and several others.




*Curaxin
      CBLC102*





One
      of
      the curaxins from the 9-aminoacridine group is a long-known anti-infective
      compound known as quinacrine, which we refer to as Curaxin CBLC102. It has
      been
      used for over 40 years to treat malaria, osteoarthritis and autoimmune
      disorders. However, we have discovered new mechanisms of action for quinacrine
      in the area of apoptosis. Through assay testing performed at Dr. Andrei Gudkov’s
      laboratories at the Cleveland Clinic beginning in 2002, which included testing
      in a variety of human tumor-derived cell lines representing cancers of different
      tissue origin (including RCC sarcomas, prostate, breast and colon carcinomas),
      we have observed that Curaxin CBLC102 behaves as a potent NF-kB suppressor
      and
      activator of p53 in these types of cancer cells. It has favorable
      pharmacological and toxicological profiles and demonstrates the anticancer
      effect in transplants of human cancer cells into primates. These features make
      Curaxin CBLC102 our prime IND drug candidate among other curaxins. The drug
      candidate is currently in Phase II clinical trials for treatment of hormone
      refractory prostate cancer.  We also intend to conduct additional Phase II
      clinical trials with Curaxin CBLC102 for RCC and multiple myeloma.





We
      intend
      to seek orphan drug status with respect to Curaxin CBLC102. The orphan drug
      provisions of the Federal Food, Drug, and Cosmetic Act provide incentives to
      drug and biologic manufacturers to develop and manufacture drugs for the
      treatment of rare diseases, currently defined as diseases that exist in fewer
      than 200,000 individuals in the U.S. We believe that Curaxin CBLC102 may qualify
      as an orphan drug for purposes of treatment of hormone refractory prostate
      cancer, RCC, and multiple
      myeloma .
      Under
      these provisions, a manufacturer of a designated orphan drug can seek tax
      benefits, and the holder of the first designated orphan drug approved by the
      FDA
      will be granted a seven-year period of marketing exclusivity for that drug.
      There is no assurance that we will receive orphan drug status for Curaxin
      CBLC102. Even if we do receive orphan drug status, while the marketing
      exclusivity of an orphan drug would prevent other sponsors from obtaining
      approval of the same compound for the same indication, it would not prevent
      other types of drugs from being approved for the same indication and therefore
      may not provide sufficient protection against competitive products.




10





We
      have
      an agreement with Regis Technologies, Inc., a GMP manufacturer, to produce
      sufficient quantities of Curaxin CBLC102 according to the process previously
      used for the production of this drug when it was in common use. On May 26,
      2006,
      we filed our IND application with the FDA to begin clinical trials in patients
      with androgen-independent prostate cancer. On June 26, 2006, the FDA advised
      us
      that we may initiate clinical Phase II studies after making additional minor
      modifications to the protocol.





Clinical
      trials with Curaxin CBLC102 began in January 2007 at the University of Chicago,
      Cleveland Clinic and the Case Western Reserve University Hospital in advanced
      hormone-refractory (androgen-independent) prostate cancer. We apply our therapy
      to patients who have failed to respond satisfactorily after undergoing
      established cancer treatments and will use the suppression of tumor growth
      and
      prolonged patient survival as major endpoints. An additional endpoint,
      prostate-specific antigen, or PSA, level reduction, will be used in the prostate
      trials. Elevated PSA levels are indicative of the progression of prostate
      cancer.





We
      have
      applied for a patent covering the use of Curaxin CBLC102 as an anticancer agent
      based on a newly-discovered mechanism of action.





*Other
      Curaxins*





As
      mentioned above, screening of the chemical library for compounds capable of
      restoring normal function to wild type p53 in the context of RCC yielded three
      chemical classes of compounds. Generation of focused chemical libraries around
      the hits from one of these classes and their structure-activity optimization
      brought about a new generation of curaxins. These molecules have a chemical
      structure different from 9-aminoacridine (Curaxin CBLC102) and are more active
      and appear to be more selective of tumor cells than the representatives of
      the
      first generation of curaxins (e.g., Curaxin CBLC102).





Following
      additional optimization, we are planning to embark upon the formal development
      of two to three additional second generation curaxins.




**COLLABORATIVE
      RESEARCH AGREEMENTS**




**Cleveland
      Clinic Foundation**





We
      have a
      unique opportunity to accelerate our development by utilizing intellectual
      property, drug leads, new research technologies, technical know-how and original
      scientific concepts derived from 25 years of research achievements relevant
      to
      cancer by Dr. Gudkov and his research team. Pursuant to an Exclusive License
      Agreement we entered into with the Cleveland Clinic effective as of July 1,
      2004, we were granted an exclusive license to the Cleveland Clinic’s research
      base underlying our therapeutic platform (the CBLC100, CBLB100 and CBLB500
      series). In consideration for obtaining this exclusive license, we agreed to:





·
            Issue
                to the Cleveland Clinic 1,341,000 shares of common stock;






11




·
            Make
                certain milestone payments (ranging from $50,000 to $4,000,000, depending
                on the type of drug and the stage of such drug’s
                development);


·
            Make
                royalty payments (calculated as a percentage of the net sales of
                the drugs
                ranging from 1-2%); and


·
            Make
                sublicense royalty payments (calculated as a percentage of the royalties
                received from the sublicenses ranging from 5-35%).





The
      schedule of milestone payments is as follows:




File
                IND application for Protectan CBLB502
            
            $
            50,000Complete
                Phase I studies for Protectan CBLB502
            
            $
            100,000File
                NDA application for Protectan CBLB502
            
            $
            350,000Receive
                regulatory approval to sell Protectan CBLB502
            
            $
            1,000,000File
                IND application for Curaxin CBLC102 (completed May 2006)
            
            $
            50,000Commence
                Phase II clinical trials for Curaxin CBLC102 (completed January
                2007)
            
            $
            250,000Commence
                Phase III clinical trials for Curaxin CBLC102
            
            $
            700,000File
                NDA application for Curaxin CBLC102
            
            $
            1,500,000Receive
                regulatory approval to sell Curaxin CBLC102
            
            $
            4,000,000




Under
      this license agreement, we may exclusively license additional technologies
      discovered by Dr. Gudkov in this field by providing the Cleveland Clinic with
      notice within 60 days after receiving an invention disclosure report from the
      Cleveland Clinic relating to any such additional technologies. We believe that
      this relationship will prove valuable, not only for the purposes of developing
      the discoveries of Dr. Gudkov and his colleagues, but also as a source of
      additional new technologies. We also expect that the Cleveland Clinic will
      play
      a critical role in validating therapeutic concepts and in conducting trials.
      The
      Cleveland Clinic may terminate the license upon a material breach by us, as
      specified in the agreement. However, we may avoid such termination if we cure
      the breach within 90 days of receipt of a termination notice.





In
      August
      2004, we entered into a cooperative research and development agreement, or
      CRADA, with (i) the Uniformed Services University of the Health Sciences, which
      includes the Armed Forces Radiobiology Research Institute, (ii) the Henry M.
      Jackson Foundation for the Advancement of Military Medicine, Inc., and (iii)
      the
      Cleveland Clinic, to evaluate one of our radioprotective drug candidates and
      its
      effects on intracellular and extracellular signaling pathways. As a collaborator
      under this agreement, we are able to use the laboratories of the Armed Forces
      Radiobiology Research Institute to evaluate Protectan CBLB502 and its effects
      on
      intracellular and extracellular signaling pathways in order to improve
      countermeasures to lethal doses of radiation. Under the terms of the agreement,
      all parties are financially responsible for their own expenses related to the
      agreement. The agreement has a five-year term, but may be unilaterally
      terminated by any party upon 30 days prior written notice with or without
      cause.




12





**Roswell
      Park Cancer Institute**




In
      January 2007, we entered into a strategic research partnership with Roswell
      Park
      Cancer Institute (RPCI) to develop our cancer and radioprotectant drug
      candidates.




RPCI,
      founded in 1898, is a world-renowned cancer research hospital and the nation's
      first cancer research, treatment and education center. RPCI is a member of
      the
      prestigious National Comprehensive Cancer Network, an alliance of the nation's
      leading cancer centers, and is one of only ten free-standing cancer centers
      in
      the nation.




RPCI
      and
      various agencies of the state of New York will provide us with up to $5 million
      of grant and other funding. We will establish a major research/clinical facility
      at the RPCI campus in Buffalo, New York, which will become the foundation for
      several of our advanced research and clinical trials. Andrei Gudkov, our Chief
      Scientific Officer, has agreed to become Senior Vice President of Research
      Programming and Development for RPCI effective April 2007.




Our
      partnership with RPCI will enhance the speed and efficiency of our clinical
      research, and will provide us with access to state-of-the-art clinical
      development facilities in partnership with a globally recognized cancer research
      center. We believe that our proprietary technology, combined with the assistance
      of RPCI, and our continuing strong relationship with the Cleveland Clinic,
      will
      position us to become a leading oncology company. A key element of our long-term
      business strategy is to partner with world-class institutions to aid us in
      accelerating our drug development timeline. We believe that our firm alliances
      with both RPCI and the Cleveland Clinic provide us with a significant
      competitive advantage.




**ChemBridge
      Corporation**





Another
      vital component of our drug development capabilities is our strategic
      partnership with ChemBridge Corporation, an established leader in combinatorial
      chemistry and in manufacturing diverse chemical libraries.





On
      April
      27, 2004, we entered into a library access agreement with ChemBridge that,
      in
      exchange for shares of our common stock and warrants, provides us with continual
      access to a chemical library of 214,000 compounds. Under the library access
      agreement, we have also agreed to collaborate with ChemBridge in the future
      on
      two optimization projects, wherein ChemBridge will have the responsibility
      of
      providing the chemistry compounds for the project and we will have the
      responsibility of providing the pharmacological/biological compounds. Upon
      providing ChemBridge with our data after at least two positive repeat screening
      assays, which have been confirmed in at least one additional functional assay,
      ChemBridge will have the option to select such compound as one of the two
      optimization projects. ChemBridge will retain a 50% ownership interest in two
      lead compounds selected by ChemBridge and all derivative compounds thereof.
      The
      parties will jointly manage the development and commercialization of any
      compounds arising from an optimization project. The parties are discussing
      the
      possibility of entering into an additional project arising from the optimization
      project. There can be no assurance the parties will agree to proceed with such
      project on favorable terms, or at all. The library access agreement does not
      have a specified term or any termination provisions.




13





We
      have a
      strong working relationship with ChemBridge. This relationship has already
      resulted in the isolation of bioactive small molecules with clinical potential
      that helped to establish either new therapeutic concepts (p53 inhibitors) or
      identify molecules for important indications acting through previously unknown
      mechanisms ( novel
      class of inhibitors of multidrug transporters ).
      Both
      lines of study have resulted in high visibility publications and are slated
      for
      further exploration by us.




**PATENTS**




As
      a
      result of the license agreement with the Cleveland Clinic, we have filed, on
      the
      Cleveland Clinic’s behalf, thirteen patent applications covering new classes of
      anticancer and radiation-protecting compounds, their utility and mode of action.





Our
      intellectual property platform is based primarily on these thirteen patent
      applications exclusively licensed to us by the Cleveland Clinic and three patent
      applications, which we have filed and own.





The
      aforementioned thirteen patent
      applications licensed from the Cleveland Clinic are as follows:




·
            Methods
                of Inhibiting Apoptosis Using Latent
                TFGß;




·
            Methods
                of Identifying Modulators of Apoptosis From Parasites and Uses
                Thereof;




·
            Methods
                of Inhibiting Apoptosis Using Inducers of
                NF-kB;




·
            Methods
                of Protecting Against Radiation Using Inducers of
                NF-kB;




·
            Methods
                of Protecting Against Radiation Using
                Flagellin;




·
            Small
                Molecules Inhibitors of MRP1 and Other Multidrug
                Transporters;




·
            Flagellin
                Related Polypeptides and Uses
                Thereof;




·
            Modulation
                of Apoptosis Using Aminoacridines;




·
            Modulation
                of Immune Responses;




14




·
            Activation
                of p53 and Inhibition of NF-kB for Cancer
                Treatment;




·
            Methods
                of Protecting Against Apoptosis Using
                Lipopeptides;




·
            Modulation
                of Cell Growth; and




·
            Mitochondrial
                Cytochrome B.




The
      aforementioned three patent applications, which we filed, are as
      follows:




·
            Quinacrine
                Isomers;




·
            Modulation
                of Androgen Receptor for Treatment of Prostate Cancer;
                and




·
            Method
                of Increasing Hematopoietic Stem Cells (filed in January 2007)




**MANUFACTURING**




We
      do not
      intend to establish or operate facilities to manufacture our drug candidates,
      and therefore will be dependent upon third parties to do so. As we develop
      new
      products or increase sales of any existing product, we must establish and
      maintain relationships with manufacturers to produce and package sufficient
      supplies of our finished pharmaceutical products. We have
      established a relationship with SynCo Bio Partners B.V., a leading
      biopharmaceutical manufacturer, to produce Protectan CBLB502 under cGMP
      specifications, and have signed an agreement to produce sufficient amounts
      for
      clinical trials and the commercial market. For CBLC102, we have contracted
      Regis
      Technologies, Inc. and Aptuit, LLC to manufacture sufficient amounts for
      clinical trials.




Reliance
      on third party manufacturing presents several risks, including the
      following:





·
            Delays
                in the delivery of quantities needed for multiple clinical trials
                or
                failure to manufacture such quantities to our specifications, either
                of
                which could cause delays in clinical trials, regulatory submissions
                or
                commercialization of our drug
                candidates;





·
              Inability
                  to fulfill our commercial needs in the event market demand for
                  our drug
                  candidates suddenly increases, which may require us to seek new
                  manufacturing arrangements, which, in turn, could be expensive
                  and time
                  consuming; and





·
            Ongoing
                inspections by the FDA and other regulatory authorities for compliance
                with rules, regulations and standards, the failure to comply with
                which
                may subject us to, among other things, product seizures, recalls,
                fines,
                injunctions, suspensions or revocations of marketing licenses, operating
                restrictions and criminal
                prosecution.





15




**COMPETITION**





**Biodefense
      Applications**





In
      the
      area of radiation-protective antidotes, the most visible market participant
      is
      Hollis-Eden Pharmaceuticals, Inc., a biopharmaceutical company that is working
      on the development of a new class of investigational drugs known as Immune
      Regulating Hormones (IRH). Hollis-Eden’s major developmental focus is on HE2100
      (also known as NEUMUNETM and 5-Adrostenediol), which is licensed from Virginia
      Commonwealth University. In 2002, Hollis-Eden entered into a CRADA with the
      DoD
      to jointly develop HE2100 as a radioprotectant. The compound is currently in
      Phase I clinical trials.





**Anticancer
      Applications**





The
      arsenal of medical radiation-protectors is limited to ETHYOLTM (amifostine), sold
      by MedImmune. This radiation-protector is limited because of the serious side
      effects of the drug. Other radiation-protectors may enter the market.





Biomedical
      research for anticancer therapies is a large industry, with many companies,
      universities, research institutions and foreign government-sponsored companies
      competing for market share. The top ten public U.S.-based companies involved
      in
      cancer therapy have a combined market capitalization exceeding $1 trillion.
      In
      addition, there are several hundred biotech companies who have as their mission
      anticancer drug development. These companies account for the approximately
      150
      anticancer compounds currently in drug trials. However, despite the numerous
      companies in this field, there is still a clear, unmet need in the anticancer
      drug development market.





Each
      of
      the approximately 200 types of cancer recognized by the NCI has dozens of
      subtypes, both etiological and on a treatment basis. Due to this market
      segmentation, the paradigm of a one-size-fits-all, super-blockbuster approach
      to
      drug treatments does not work well in cancer therapy. Currently, even the most
      advanced therapeutics on the market do not provide substantial health
      benefits.





This
      suggests that innovative anticancer therapies are driven by the modest success
      of current therapeutics, the need for an improved understanding of the
      underlying science, and a shift in the treatment paradigm towards more
      personalized medicine. Our technology addresses this need for an improved
      understanding of the underlying science and implements a fundamental shift
      in
      the approach to developing anticancer therapies.





**Stem
      Cell Mobilization**





G-CSF
      (filgrastim, Amgen) is the current standard against which all other mobilization
      agents for stem cells are measured. This is because it has been shown to both
      mobilize more CD34+ stem cells and have less toxicity than any other single
      agent against which it has been tested to date. Use of G-CSF caused deaths
      attributed to thrombosis (acute myocardial infarction and stroke) in sibling
      donors. Other side effects include pain, nausea, vomiting, diarrhea, insomnia,
      chills, fevers, and night sweats.




16





Sargramostim
      (Berlex, Richmond, CA) as a single agent is used less often today for
      mobilization than G-CSF, because it mobilizes somewhat less well than G-CSF
      and
      because of a relatively higher incidence of both mild and severe side effects.
      Erythropoietin, now commonly used among cancer patients undergoing chemotherapy
      to maintain hemoglobin in the near normal range, also has some ability to
      mobilize CD34+ cells.





**Other
      Sources of Competition**





In
      addition to the direct competition outlined above, there is potential for
      adverse market effects from other outside developments. For example, producing
      a
      new drug with fewer side effects reduces the need for anti-side effects
      therapies. Because of this, we must monitor a broad area of anticancer R&D
      and be ready to fine-tune our development as needed.





The
      biotechnology and biopharmaceutical industries are characterized by rapid
      technological developments and intense competition. This competition comes
      both
      from biotech firms and from major pharmaceutical and chemical companies. Many
      of
      these companies have substantially greater financial, marketing and human
      resources than we do (including, in some cases, substantially greater experience
      in clinical testing, manufacturing and marketing of pharmaceutical products).
      Our drug candidates’ competitive position among other biotech and
      biopharmaceutical companies may be based on, among other things, patent
      position, product efficacy, safety, reliability, availability, patient
      convenience/delivery devices and price, as well as the development and marketing
      of new competitive products.





We
      also
      experience competition in the development of our drug candidates from
      universities and other research institutions and compete with others in
      acquiring technology from such universities and institutions. In addition,
      certain of our drug candidates may be subject to competition from products
      developed using other technologies, some of which have completed numerous
      clinical trials. As a result, our actual or proposed drug candidates could
      become obsolete before we recoup any portion of our related R&D and
      commercialization expenses. However, we believe our competitive position is
      enhanced by our commitment to research leading to the discovery and development
      of new products and manufacturing methods.





Some
      of
      our competitors are actively engaged in R&D in areas where we also are
      developing drug candidates. The competitive marketplace for our drug candidates
      is significantly dependent upon the timing of entry into the market. Early
      entrants may have important advantages in gaining product acceptance and market
      share contributing to the product’s eventual success and profitability.
      Accordingly, in some cases, the relative speed with which we can develop
      products, complete the testing, receive approval from regulatory agencies,
      and
      supply commercial quantities of the product to the market is vital towards
      establishing a strong competitive position.




17





Our
      ability to sell to the government also can be influenced by indirect competition
      from other providers of products and services. For instance, a major
      breakthrough in an unrelated area of biodefense could cause a major reallocation
      of government funds from radiation protection. Likewise, an outbreak or
      threatened outbreak of some other form of disease or condition may also cause
      a
      reallocation of funds away from the condition that Protectan CBLB502 is intended
      to address.




**GOVERNMENT
      REGULATION**





The
      R&D, manufacturing and marketing of drug candidates are subject to
      regulation, primarily by the FDA in the U.S. and by comparable authorities
      in
      other countries. These national agencies and other federal, state, local and
      foreign entities regulate, among other things, R&D activities (including
      testing in primates and in humans) and the testing, manufacturing, handling,
      labeling, storage, record keeping, approval, advertising and promotion of the
      products that we are developing. Noncompliance with applicable requirements
      can
      result in various adverse consequences, including approval delays or refusals
      to
      approve drug licenses or other applications, suspension or termination of
      clinical investigations, revocation of regulatory approvals previously granted,
      fines, criminal prosecution, recalls or seizures of products, injunctions
      against shipping drugs, and total or partial suspension of production and/or
      refusal to allow a company to enter into governmental supply
      contracts.





The
      process of obtaining FDA approval for a new drug may take many years and
      generally involves the expenditure of substantial resources. The steps required
      before a new drug can be produced and marketed for human use include clinical
      trials and the approval of an NDA.





**Preclinical
      Testing**





In
      the
      preclinical phase of development, the promising compound is subjected to
      extensive laboratory and animal testing to determine if the compound is
      biologically active and safe.





**Investigational
      New Drug (IND)**





Before
      human tests can start, the drug sponsor must file an IND application with the
      FDA, showing how the drug is made and the results of animal testing. IND status
      allows initiation of clinical investigation within 30 days of filing if the
      FDA
      does not respond with questions during the 30-day period.




18





**Human
      Clinical Testing**





The
      human
      clinical testing program usually involves three phases that generally are
      conducted sequentially, but which, particularly in the case of anti-cancer
      and
      other life-saving drugs, may overlap or be combined. Clinical trials are
      conducted in accordance with protocols that detail the objectives of the study,
      the parameters to be used to monitor safety and the efficacy criteria to be
      evaluated. Each protocol is submitted to the FDA as part of the IND filing.
      Each
      clinical study is conducted under the direction of an independent Institutional
      Review Board, or IRB, for each institution at which the study will be conducted.
      The IRB will consider, among other things, all existing pharmacology and
      toxicology information on the product, ethical factors, the risk to human
      subjects and the potential benefits of therapy relative to risk.





In
      Phase
      I clinical trials, studies usually are conducted on healthy volunteers or,
      in
      the case of certain terminal illnesses such as advanced prostate cancer,
      patients with the disease that has failed to respond to other treatment, to
      determine the maximum tolerated dose, side effects and pharmacokinetics of
      a
      product. Phase II studies are conducted on a small number of patients having
      a
      specific disease to determine initial efficacy in humans for that specific
      disease, the most effective doses and schedules of administration, and possible
      adverse effects and safety risks. Phase II/III trials differ from Phase II
      in
      that the trials involved may include more patients and, at the sole discretion
      of the FDA, be considered the “pivotal” trials, or trials that will form the
      basis for FDA approval. Phase III trials normally involve the pivotal trials
      of
      a drug, consisting of wide-scale studies on patients with the same disease,
      in
      order to evaluate the overall benefits and risks of the drug for the treated
      disease compared with other available therapies. The FDA continually reviews
      the
      clinical trial plans and results, and may suggest design changes or may
      discontinue the trials at any time if significant safety or other issues
      arise.





As
      described above, for several of the product opportunities we are pursuing,
      we
      may apply for approval based upon a rule adopted by the FDA in 2002, titled
      “Approval of New Drugs When Human Efficacy Studies Are Not Ethical or Feasible”
(Part 314, Subpart I), which is also referred to as the two animal rule.
      Pursuant to this new rule, in situations where it would be unethical to conduct
      traditional Phase II and Phase III efficacy studies in humans, as is the case
      with countermeasures to a number of weapons of mass destruction, the FDA will
      review new drugs for approval on the basis of safety in humans and efficacy
      in
      relevant animal models.





**New
      Drug Application (NDA)**





Upon
      successful completion of Phase III clinical trials, the drug sponsor files
      an
      NDA with the FDA for approval, containing all information that has been
      gathered. The NDA must include the chemical composition of the drug, scientific
      rationale, purpose, animal and laboratory studies, results of human tests,
      formation and production details, and proposed labeling.





Following
      any initial regulatory approval of any drugs we may develop, we will also be
      subject to continuing regulatory review, including the review of adverse
      experiences and clinical results that are reported after our drug candidates
      are
      made commercially available. This will include results from any post-marketing
      tests or vigilance required as a condition of approval. The manufacturer and
      manufacturing facilities we use to make any of our drug candidates will also
      be
      subject to periodic review and inspection by the FDA. The discovery of any
      previously unknown problems with the drug, manufacturer or facility may result
      in restrictions on the drug, manufacturer or facility, including withdrawal
      of
      the drug from the market. We do not have, and currently do not intend to
      develop, the ability to manufacture material for our clinical trials or on
      a
      commercial scale. Reliance on third-party manufacturers entails risks to which
      we would not be subject if we manufactured drugs ourselves, including reliance
      on the third-party manufacturer for regulatory compliance. Our drug promotion
      and advertising is also subject to regulatory requirements and continuing FDA
      review.




19





The
      testing and approval process is likely to require substantial time and effort,
      and there can be no assurance that any FDA approval will be granted on a timely
      basis, if at all. The approval process is affected by a number of factors,
      primarily the side effects of the drug (safety) and its therapeutic benefits
      (efficacy). Additional preclinical or clinical trials may be required during
      the
      FDA review period and may delay marketing approval. The FDA may also deny an
      NDA
      if applicable regulatory criteria are not met.





The
      FDA
      reviews the results of the clinical trials and may order the temporary or
      permanent discontinuation of clinical trials at any time if it believes the
      drug
      candidate exposes clinical subjects to an unacceptable health risk.
      Investigational drugs used in clinical studies must be produced in compliance
      with current GMP rules pursuant to FDA regulations.





Sales
      outside the U.S. of products that we develop will also be subject to regulatory
      requirements governing human clinical trials and marketing for drugs and
      biological products and devices. The requirements vary widely from country
      to
      country, but typically the registration and approval process takes several
      years
      and requires significant resources. In most cases, even if the FDA has not
      approved a product for sale in the U.S., the product may be exported to any
      country if it complies with the laws of that country and has valid marketing
      authorization by the appropriate authority. There are specific FDA regulations
      that govern this process.





We
      also
      are subject to the following risks and obligations, among others:





·
            The
                FDA or foreign regulators may interpret data from pre-clinical testing
                and
                clinical trials differently than we interpret
                them;





·
            If
                regulatory approval of a product is granted, the approval may be
                limited
                to specific indications or limited with respect to its distribution.
                In
                addition, many foreign countries control pricing and coverage under
                their
                respective national social security
                systems;





·
            The
                FDA or foreign regulators may not approve our manufacturing processes
                or
                manufacturing facilities;





·
            The
                FDA or foreign regulators may change their approval policies or adopt
                new
                regulations;




20




·
            Even
                if regulatory approval for any product is obtained, the marketing
                license
                will be subject to continual review, and newly discovered or developed
                safety or effectiveness data may result in suspension or revocation
                of the
                marketing license;





·
            If
                regulatory approval of the product candidate is granted, the marketing
                of
                that product would be subject to adverse event reporting requirements
                and
                a general prohibition against promoting products for unapproved or
                “off-label” uses;





·
            In
                some foreign countries, we may be subject to official release requirements
                that require each batch of the product we produce to be officially
                released by regulatory authorities prior to its distribution by us;
                and





·
            We
                will be subject to continual regulatory review and periodic inspection
                and
                approval of manufacturing modifications, including compliance with
                current
                GMP regulations.





The
      manufacturing and marketing of our proposed products and our R&D activities
      are and will continue to be subject to regulation by federal, state and local
      governmental authorities in the U.S. and other countries. In the U.S.,
      pharmaceuticals are subject to rigorous regulation by the FDA, which reviews
      and
      approves the marketing of drugs. The Federal Food, Drug and Cosmetic Act, the
      regulations promulgated thereunder, and other federal and state statutes and
      regulations govern, among other things, the testing, manufacturing, labeling,
      storage, record keeping, advertising and promotion of our potential
      products.




**DIRECTORS
      AND EXECUTIVE OFFICERS**





Our
      directors and executive officers and their ages as of March 1, 2007 are as
      follows:




**Name**
            
            **Age**
            
            **Position**Bernard
                L. Kasten (1)(2)(3)
            
            60
            
            Director,
                Chairman of the BoardJames
                J. Antal (1)(2)(3)
            
            56
            
            DirectorPaul
                DiCorleto (1)(3)
            
            55
            
            DirectorMichael
                Fonstein, Ph.D. (1)
            
            47
            
            Director,
                President and Chief Executive OfficerAndrei
                Gudkov, Ph.D. (1)
            
            50
            
            Director,
                Chief Scientific OfficerYakov
                Kogan, Ph.D. (1)
            
            33
            
            Director,
                Executive Vice President, Business DevelopmentH.
                Daniel Perez(1)(2)(3)
            
            57
            
            DirectorJohn
                A. Marhofer, Jr., CMA, CFM
            
            44
            
            Chief
                Financial Officer




(1)
            Each
                of the directors has been appointed to hold office until the next
                annualmeeting
                of stockholders or until their successor is duly elected or appointed,unless
                their office is earlier vacated.




21




(2)
                Member
                    of the Audit Committee, Nominating and Corporate Governance Committee
                    and
                    Compensation Committee.




(3)
            Determined
                to be independent, in accordance with the rules of the Nasdaq Capital
                Market.




***Bernard
      L. Kasten, M.D*** **.** Dr.
      Kasten became a member of our board on July 20, 2006 and was appointed Chairman
      of the Board on August 30, 2006. From 1995 to 2004, Dr. Kasten served at Quest
      Diagnostics Incorporated where he was Chief Laboratory Officer and most recently
      Vice President of Medical Affairs of the MedPlus Inc. Subsidiary. Dr.
      Kasten served as a director of SIGA Technologies from May 2003 to December,
      2006, and as SIGA’s Chief Executive Officer from July 2004 through April 2006.
      Dr. Kasten is also a director of several privately held companies. Dr. Kasten
      is
      a graduate of the Ohio State University College of Medicine. His residency
      was
      served at the University of Miami, Florida and he was awarded fellowships at
      the
      National Institutes of Health Clinical Center and NCI, Bethesda, Maryland.
      He is
      a diplomat of the American Board of Pathology with certification in anatomic
      and
      clinical pathology with sub-specialty certification in Medical
      Microbiology.





***James
      J. Antal*** Mr.
      Antal became a member of our board on July 20, 2006. Mr. Antal served as Chief
      Financial Officer of Experian from 1996 to 2001 and as Chief Investment Officer
      of Experian from 2001 to 2002. Experian is a leading global provider of consumer
      and business credit information, direct marketing information services, and
      integrated customer relationship management processes. He also served on the
      Board of Directors of First American Real Estate Solutions; an Experian joint
      venture with First American Financial Corp. Mr. Antal earned a Bachelor of
      Science degree in Business Administration with an Accounting major from The
      Ohio
      State University in 1973. He became a Certified Public Accountant (Ohio) in
      1975. Starting in 2002, Mr. Antal served as an advisor to the board of directors
      for Plexus Vaccine, Inc., a biotech company, until it was acquired by SIGA
      Technologies in 2004. In December 2004, he joined the SIGA board of directors,
      and also currently serves on its audit and corporate governance committees.
      From May 2004 to August 2005, he was engaged as the Chief Financial Advisor
      to
      the Black Mountain Gold Coffee Co. In July 2005, he joined Pathway Data Inc,
      a
      privately held company engaged in consumer credit notification and identity
      theft assistance services, as its part-time Chief Financial
      Officer.





***Paul
      E. DiCorleto, Ph.D.*** ** Dr.
      DiCorleto has served as one of our directors since 2004. He is the Chairman
      of
      the Lerner Research Institute of the Cleveland Clinic and Chairman of the
      Department of Molecular Medicine at the Case School of Medicine. Dr. DiCorleto
      received his undergraduate training in chemistry at Rensselaer Polytechnic
      Institute and his doctorate in biochemistry from Cornell University. Dr.
      DiCorleto’s research focuses on the molecular and cellular basis of
      atherosclerosis. He has been with the Cleveland Clinic since 1981, having served
      previously as Chairman of the Department of Cell Biology, as an Associate Chief
      of Staff, and as a member of the Clinic’s Board of Governors and Board of
      Trustees. Dr. DiCorleto is currently serving, as the most recent past president,
      on the Executive Committee of the North American Vascular Biology Organization,
      as chair of the Vascular Biology study section of the national American Heart
      Association, and as a member of the Association of American Medical Colleges’
Advisory Panel on Research.




22





***Michael
      Fonstein, Ph.D*** **.** Dr.
      Fonstein has served as our Chief Executive Officer and President since our
      inception in June 2003. He served as Director of the DNA Sequencing Center
      at
      the University of Chicago from its creation in 1994 to 1998, when he left to
      found Integrated Genomics, Inc. located in Chicago, Illinois. He served as
      CEO
      and President of Integrated Genomics from 1997 to 2003. Dr. Fonstein has won
      several business awards, including the Incubator of the Year Award from the
      Association of University Related Research Parks. He was also the winner of
      a
      coveted KPMG Illinois High Tech Award.





***Andrei
      Gudkov, Ph.D., D. Sci.*** Dr.
      Gudkov has served as one of our directors and as our Chief Scientific Officer
      since our inception in June 2003. Prior to 1990, he worked at The National
      Cancer Research Center in Moscow, where he led a broad research program focused
      on virology and cancer drug resistance. In 1990, he reestablished his lab at
      the
      University of Illinois at Chicago where he became a tenured faculty member
      in
      the Department of Molecular Genetics. His lab concentrated on the development
      of
      new functional gene discovery methodologies and the identification of new
      candidate cancer treatment targets. In 1999, he defined p53 as a major
      determinant of cancer treatment side effects and suggested this protein as
      a
      target for therapeutic suppression. In 2001, Dr. Gudkov moved his laboratory
      to
      the Lerner Research Institute at the Cleveland Clinic where he became Chairman
      of the Department of Molecular Biology and Professor of Biochemistry at Case
      Western Reserve University. Dr. Gudkov has agreed to become Senior Vice
      President of Research Programming and Development for Roswell Park Cancer
      Institute effective April 2007. He will also become an employee of CBL at that
      time.





***Yakov
      Kogan, Ph.D.*** Dr.
      Kogan has served as one of our directors and as our Executive Vice President
      of
      Business Development since our inception in June 2003 and as Secretary since
      March 2006. From 2001 to 2004, as Director for Business Development at
      Integrated Genomics, he was responsible for commercial sales and expansion
      of
      the company’s capital base. Prior to his tenure in business development, Dr.
      Kogan worked as a Group Leader/Senior Scientist at Integrated Genomics and
      ThermoGen, Inc. and as Research Associate at the University of Chicago. Dr.
      Kogan holds a Ph.D. degree in Molecular Biology from VNII Genetica, as well
      as
      an M.S. degree in Biology from Moscow State University.





***H.
      Daniel Perez, M.D*** *.* Dr.
      Perez
      became a member of our board on July 20, 2006. Dr. Perez is currently a Venture
      Partner at Bay City Capital, LLC, a venture firm located in San Francisco.
      From
      2001 until 2006, Dr. Perez was the President and CEO of Berlex Biosciences.
      He
      joined Berlex Biosciences in 1993. Berlex Biosciences combined biotechnology
      and
      pharmaceutical discovery and development technologies to deliver innovative
      treatments for cardiovascular, cancer and immuno-based disorders. He earned
      his
      undergraduate degree at Mariano Moreno School, Argentina and graduated from
      Buenos Aires University Medical School. After completing an internship and
      residency in internal medicine at Beth Israel Medical Center in New York, Dr.
      Perez was a Fellow in Rheumatology at New York University-Bellevue Medical
      Center. He served on the NYU faculty until he was recruited by the University
      of
      California at San Francisco (UCSF) Medical School to start the Rosalind Russell
      Arthritis Center at San Francisco General Hospital under the direction of Dr.
      Ira Goldstein. Dr. Perez is currently a Professor of Medicine at
      UCSF.




23





***John
      (Jack) A. Marhofer, Jr., CMA, CFM*** ** Mr.
      Marhofer joined us as Controller and General Manager in February 2005 and was
      subsequently appointed to be our Chief Financial Officer in August 2005. He
      was
      Corporate Controller of Litehouse Products, Inc. from June 2001 to February
      2005. Mr. Marhofer earned his Bachelor of Science in Accounting and Marketing
      from Miami University in Ohio in 1984, and his Masters in Business
      Administration in Finance from Akron University in Ohio in 1997, where he was
      named to the National Honor Society of the Financial Management Association.





**EMPLOYEES**





As
      of
      December 31, 2006, we had 35 employees.





**RECENT
      DEVELOPMENTS**





On
      March
      16, 2007, we consummated a transaction with various accredited investors
      pursuant to which we agreed to sell to the investors, in a private placement,
      an
      aggregate of approximately 4,288,712 shares of Series B Convertible Preferred
      Stock, par value $0.005 per share, or Series B Preferred, and Series B Warrants
      to purchase approximately 2,144,356 shares of our common stock pursuant to
      a
      Securities Purchase Agreement of the same date. The aggregate purchase price
      paid by the investors for the Series B Preferred and Series B Warrants was
      approximately $30,000,000. After related fees and expenses, we received net
      proceeds of approximately $29,000,000. We intend to use the proceeds for general
      corporate and working capital purposes, including, without limitation, preparing
      our response to the RFP recently issued by the DoD described above.





Sunrise
      Securities Corp., or SSC, Reedland Capital Partners, an Institutional Division
      of Financial West Group, and Basic Investors, Inc., served as placement agents
      for the transaction. In consideration for their services, each agent (and or
      its
      designees) received compensation as follows: SSC received an aggregate of
      290,298 shares of Series B Preferred, Series B Warrants to purchase an aggregate
      of 145,149 shares of common stock, and Series C Warrants, bearing an exercise
      price of $11.00 per share, to purchase 267,074 shares of common stock; Reedland
      received Series B Warrants to purchase an aggregate of 63,543 shares of common
      stock and cash compensation (in lieu of shares of Series B Preferred and
      additional Series B Warrants) of $444,800; Basic Investors received Series
      B
      Warrants to purchase an aggregate of 12,480 shares of Common Stock and cash
      compensation (in lieu of shares of Series B Preferred and additional Series
      B
      Warrants) of $87,360.




24





In
      the
      aggregate, the Series B Preferred and the Series B Warrants issued in the
      transaction are convertible for and exercisable into, as of the date hereof,
      a
      maximum of approximately 6,944,538 shares of common stock (subject to
      adjustments for stock splits, anti-dilution, etc.). Nasdaq Marketplace Rule
      4350(i)(1)(D)(ii) requires that, for the sale, issuance or potential issuance
      by
      us of common stock (or securities convertible into or exercisable for common
      stock) equal to 20% or more of the common stock outstanding before the issuance,
      for less than the greater of book or market value of the common stock, we must
      obtain stockholder approval for the issuance. Accordingly, the conversion of
      the
      Series B Preferred and the exercise of the warrants into common stock by their
      respective holders are each limited by and subject to obtaining stockholder
      approval. Our Board of Directors has resolved to seek this approval at our
      2007
      annual stockholders meeting, and to recommend to our stockholders that such
      approval be given. In connection therewith, we have scheduled our 2007 annual
      meeting to be held on June 12, 2007 for stockholders of record as of April
      17,
      2007





Notwithstanding
      the conversion rights of the Series B Preferred holders and us, and the exercise
      rights of the holders of Series B Warrants and us, we may not issue any shares
      of common stock in conversion of the Series B Preferred or in exercise of any
      Series B Warrant if the conversion or exercise would either (1) cause the
      applicable holder to beneficially own a number of shares of common stock that
      exceeds 9.99% of the number of shares of common stock outstanding after giving
      effect to the conversion or exercise, or (2) cause us to issue a number of
      shares of common stock that would exceed the number of shares of common stock
      that we can issue under the rules and regulations of the exchange on which
      those
      shares are traded (which currently, under the rules of the Nasdaq Capital
      Market, is 20% of our outstanding shares of common stock) until such time as
      we
      receive the approval of our stockholders for the issuances in accordance with
      the rules of the Nasdaq Capital Market described above. The holders of Series
      C
      Warrants may exercise at any time after September 16, 2007 until expiration,
      provided, however, that the holders of the Series C Warrants may not exercise
      until stockholder approval, as required by the Nasdaq Capital Market, is
      obtained.





In
      connection with obtaining stockholder approval of the foregoing issuances,
      on
      March 16, 2007 we entered into a Voting Agreement with Michael Fonstein, Andrei
      Gudkov, Yakov Kogan, the Cleveland Clinic, ChemBridge, Sunrise Equity Partners
      L.P., or SEP, and SSC, each of whom agreed to vote in favor of authorizing
      the
      issuance of the shares of common stock underlying all of the Series B Preferred
      and the warrants. In the aggregate, these parties to the Voting Agreement hold
      approximately 59% of our outstanding common stock.





In
      connection with the Securities Purchase Agreement, we also entered into a
      Registration Rights Agreement with the Buyers, dated as of March 16, 2007.
      Under
      the Registration Rights Agreement, we granted the Buyers certain registration
      rights with respect to common stock issuable upon conversion of the Series
      B
      Preferred or exercise of the warrants. On or prior to June 14, 2007, we are
      required to prepare and file with the SEC a registration statement on Form
      S-3,
      or on another appropriate form, covering the resale of all of the shares of
      common stock issuable upon conversion of the Series B Preferred and upon
      exercise of the warrants, subject to any limitations imposed by the
      SEC.




25





SEP,
      one
      of the investors, together with its affiliates is a holder of more than 10%
      of
      our outstanding common stock. In the transactions, SEP purchased 600,000 shares
      of Series B Preferred and received Series B Warrants to purchase 300,000 shares
      of common stock. As mentioned above, we also issued 290,298 shares of Series
      B
      Preferred, Series B Warrants to purchase an aggregate of 145,149 shares of
      Common Stock, and Series C Warrants to purchase 267,074 shares of common stock
      to SSC, an affiliate of SEP, in consideration for its services as lead placement
      agent. We also engaged SSC as our exclusive management agent regarding all
      exercises of the warrants, for which we will pay SSC a fee equal to 3.5% of
      the
      aggregate exercise price of each warrant, payable in cash if the exercise is
      in
      cash or in shares of common stock if the exercise is cashless.





**AVAILABLE
      INFORMATION**





The
      following information can be found on our website at
      www.cbiolabs.com:




·All SEC filings including our annual report on Form 10-KSB, quarterly
        reports on Form 10-QSB, current reports on Form 8-K, and all amendments and
        exhibits to those reports as soon as reasonably practicable after such material
        is electronically filed with the SEC;




·
        Our policies related to corporate governance, including our Corporate Governance
        Guidelines, Code of Ethics for Senior Executives and Code of Conduct for
        all
        employees; and




·The
        charters of the Audit, Compensation, and Nominating and Corporate Governance
        Committees of our Board of Directors.


**Item 2.
        **Description
        of Property****


Our
      corporate headquarters is currently located at 11000 Cedar Ave., Suite 290,
      Cleveland, Ohio 44106, where we have leased approximately 10,000 square feet
      of
      laboratory and office space through April 2007. In addition, we have leased
      approximately 1,300 square feet of office space located at 9450 W. Bryn Mawr
      Rd., Rosemont, Illinois, 60018 through June 2007.





On
      January 12, 2007, we entered into a
      strategic research partnership with RPCI to develop our cancer and
      radio-protectant drug candidates. As part of the sponsored research agreement,
      we have agreed to move our corporate headquarters and a majority of our research
      staff and efforts to 73 High St., Buffalo, New York 14203 on the site of RPCI.
      We plan to lease a 28,000 square foot building for five years from July
      2007, the expected month of our move. Our present lease in Cleveland, Ohio
      will
      continue on a month-to-month basis on substantially similar terms.




26




**Item 3. **Legal
        Proceedings****





As
      of
      December 31, 2006, we were not a party to any litigation or other legal
      proceeding.





**Item 4.
        **Submission
        of Matters to a Vote of Security
        Holders****




Not
      applicable.




**PART
      II**





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




Our
      common stock is traded on the Nasdaq Capital Market under the symbol CBLI and
      on
      the Boston Stock Exchange under the symbol CFB.





The
      following table sets forth the quarterly high and low selling prices for our
      common stock from July 21, 2006 (our first day of trading) through December
      31, 2006.





Common
                Stock2006High
            
            Low4th
                Quarter
            
            $
            5.87
            
            $
            4.253rd
                Quarter (from July 21, 2006)
            
            $
            6.00
            
            $
            4.17





On
      March
      23, 2007, the closing price of our common stock as reported by the Nasdaq
      Capital Market was $8.59 per share. There were approximately 137 stockholders
      of
      record of our common stock as of such date. We have not paid cash dividends
      on
      our common stock and do not intend to do so in the foreseeable
      future.





The
      SEC
      declared our Registration Statement on Form SB-2 (File No. 333-131918) relating
      to our initial public offering effective on July 20, 2006. Our initial public
      offering was consummated on July 26, 2006. In the initial public offering,
      we
      sold 1,700,000 shares of our common stock at an offering price of $6.00 per
      share. Our underwriters were Sunrise Securities Corp. and Roth Capital Partners
      LLC. The sale of our common stock generated gross proceeds to us, after
      underwriting discounts and expenses, but before other expenses, of $9,180,000
      and net proceeds of approximately $8,300,000. We have been using the proceeds
      to
      further the development of Protectan CBLB502 and Curaxin CBLC102, to continue
      research and development related to new generations of drugs, and for working
      capital and general corporate purposes.




27





On
      November 16, 2006, 50,000 warrants were issued to an outside consultant in
      connection with assistance in capital raising activities that led to the March
      16, 2007 private placement. These warrants were exercisable upon issuance at
      an
      exercise price of $6.00. The warrants expire on November 16, 2011.





We
      made
      no repurchases of our securities during the year ended December 31,
      2006.





**Item 6.
        **Management’s
        Discussion and Analysis****




*This
      management’s discussion and analysis of financial condition and results of
      operations and other portions of this filing contain forward-looking information
      that involves risks and uncertainties. Our actual results could differ
      materially from those anticipated by the forward-looking information. Factors
      that may cause such differences include, but are not limited to, availability
      and cost of financial resources, results of our R&D efforts and clinical
      trials, product demand, market acceptance and other factors discussed in the
      Company’s other SEC filings under the heading “Risk Factors.” This management’s
      discussion and analysis of financial condition and results of operations should
      be read in conjunction with our financial statements and the related notes
      included elsewhere in this filing.*




**Overview**




We
      commenced business operations in June 2003.  We secured a $6,000,000
      investment via a private placement of Series A Preferred Stock in March
      2005.  On July 20, 2006, we sold 1,700,000 shares of common stock in our
      initial public offering at $6.00 per share. The net proceeds from this offering
      were approximately $8,300,000. Beginning July 21, 2006, our common stock was
      listed on the Nasdaq Capital Market and on the Boston Stock Exchange under
      the
      symbols “CBLI” and “CFB” respectively. In connection with the initial public
      offering, we issued warrants to purchase 170,000 shares of common stock to
      the
      underwriters and their designees. The warrants have an exercise price of $8.70
      per share.




On
      July
      20, 2006, the effective date of our initial public offering, we issued 92,407
      shares of common stock as accumulated dividends to the Series A preferred
      stockholders. On the same date, all of our Series A Preferred shares
      automatically converted on a one-for-one basis into 3,351,219 shares of common
      stock, and notes of ours in the principal amount of $283,500 plus accrued
      interest of $29,503 automatically converted into 124,206 shares of common stock.
      In connection with their appointment to the Board, we issued to each of our
      three new independent directors options to purchase 15,000 shares of common
      stock with an exercise price of $6.00 per share .




28




On
      September 21, 2006, the SEC declared effective a registration statement of
      ours
      registering up to 4,453,601 shares of common stock for resale from time to
      time
      by the selling stockholders named in the prospectus contained in the
      registration statement. We will not receive any proceeds from the sale of the
      underlying shares of common stock, although to the extent the selling
      stockholders exercise warrants for the underlying shares of common stock, we
      will receive the exercise price of those warrants, unless exercised pursuant
      to
      the cashless exercise provisions. The registration statement was filed to
      satisfy registration rights that we had previously granted in connection
      with our Series A Preferred transaction.




**Recent
      Developments**





On
      March
      16, 2007, we consummated a transaction with various accredited investors
      pursuant to which we agreed to sell to the investors, in a
      private placement, an aggregate of approximately 4,288,712 shares of
      Series B Convertible Preferred Stock, par value $0.005 per share, and Series
      B
      Warrants to purchase approximately 2,144,356 shares
      of our common stock pursuant to a Securities Purchase Agreement
      of the same date. The aggregate purchase price paid by the investors for
      the Series B Preferred and Series B Warrants was approximately $30,000,000.
      After **** related
      fees and expenses, we received net proceeds of approximately
      $29,000,000. We intend to use the proceeds for general corporate and
      working capital purposes, including, without limitation, preparing our response
      to the RFP recently issued by the DoD and described above. In the aggregate,
      the
      Series B Preferred and the Series B Warrants issued in the transaction are
      convertible for and exercisable into, as of the date hereof, a maximum of
      approximately **** 6,944,538
      shares of common stock (subject to adjustments for stock splits,
      anti-dilution, etc.).





Proceeds
      from these transactions, together with grants we have received, have supported
      our R&D activities to date. We are seeking new grants and co-development
      contacts with premier pharmaceutical partners to support further development
      of
      other promising leads resulting from our R&D program.




**Critical
      Accounting Policies**




Our
      management’s discussion and analysis of our financial condition and results of
      operations is based upon our financial statements, which have been prepared
      in
      accordance with generally accepted accounting principles in the U.S., or GAAP.
      The preparation of these financial statements requires us to make estimates
      and
      judgments that affect the reported amounts of our assets, liabilities, revenues,
      expenses and other reported disclosures. We base our estimates on historical
      experience and on various other assumptions that we believe are reasonable
      under
      the circumstances.




29




Note
      2 to
      our financial statements include disclosure of our significant accounting
      policies. While all decisions regarding accounting policies are important,
      we
      believe that our policies regarding revenue recognition, R&D expenses,
      intellectual property related costs and stock-based compensation expense could
      be considered critical.




***Revenue
      Recognition***





We
      recognize revenue in accordance with Staff Accounting Bulletin No. 104, “Revenue
      Recognition.” Our revenue sources consist of government grants, government
      contracts and a commercial development contract.





Grant
      revenue is recognized using two different methods depending on the type of
      grant. Cost reimbursement grants require us to submit proof of costs incurred
      that are invoiced by us to the government agency, which then pays the invoice.
      In this case, grant revenue is recognized at the time of submitting the invoice
      to the government agency.





Fixed-cost
      grants require no proof of costs and are paid as a request for payment is
      submitted for expenses. The grant revenue under these fixed cost grants is
      recognized using a percentage-of-completion method, which uses assumptions
      and
      estimates. These assumptions and estimates are developed in coordination with
      the principal investigator performing the work under the government fixed-cost
      grants to determine key milestones, expenses incurred, and deliverables to
      perform a percentage-of-completion analysis to ensure that revenue is
      appropriately recognized. Critical estimates involved in this process include
      total costs incurred and anticipated to be incurred during the remaining life
      of
      the grant.





Government
      contract revenue is recognized periodically upon delivery of an invoice for
      allowable R&D expenses according to the terms of the contract. Commercial
      development revenues are recognized when the service or development is
      delivered.




***R&D
      Expenses***





R&D
      costs are expensed as incurred. These expenses consist primarily of our
      proprietary R&D efforts, including salaries and related expenses for
      personnel, costs of materials used in our R&D, costs of facilities and costs
      incurred in connection with our third-party collaboration efforts. Pre-approved
      milestone payments made by us to third parties under contracted R&D
      arrangements are expensed when the specific milestone has been achieved. As
      of
      December 31, 2006, no milestone payments have been made, although $50,000 had
      been accrued for milestone payments relating to the filing of an IND with the
      FDA for Curaxin CBLC102. Once a drug receives regulatory approval, we will
      record any subsequent milestone payments in identifiable intangible assets,
      less
      accumulated amortization, and amortize them evenly over the remaining agreement
      term or the expected drug life cycle, whichever is shorter. We expect our
      R&D expenses to increase as we continue to develop our drug
      candidates.




30


***Intellectual
        Property Related Costs***


We
      capitalize costs associated with the preparation, filing and maintenance of
      our
      intellectual property rights. Capitalized intellectual property is reviewed
      annually for impairment. If a patent application is approved, costs paid by
      us
      associated with the preparation, filing and maintenance of the patent will
      be
      amortized on a straight line basis over the shorter of 17 years or the
      anticipated useful life of the patent. If the patent application is not
      approved, costs paid by us associated with the preparation, filing and
      maintenance of the patent will be expensed as part of general and administrative
      expenses at that time.





Through
      December 31, 2005, we had capitalized $76,357 in expenditures associated with
      the preparation, filing and maintenance of certain of our patents. For the
      year
      ending December 31, 2006, we capitalized an additional $176,621 relating to
      these costs, totaling $252,978. For the periods ending December 31, 2004
      and December 31, 2003, these costs were expensed as general and
      administrative costs and were $49,275 and $21,690, respectively.




***Stock-based
      Compensation***




The
      Financial Accounting Standards Board (FASB) issued SFAS No. 123(R) requiring
      all
      share-based payments to employees, including grants of employee stock options,
      be recognized in the statement of operations based at their fair values. The
      Company values employee stock based compensation under the provisions of SFAS
      123(R) and related interpretations.




The
      fair
      value of each stock option granted is estimated on the grant date using the
      Black-Scholes option valuation model. The assumptions used to calculate the
      fair
      value of options granted are evaluated and revised, as necessary, to reflect
      our
      experience. We use a risk-free rate based on published rates from the St. Louis
      Federal Reserve at the time of the option grant; assume a forfeiture rate of
      zero; assume an expected dividend yield rate of zero based on our intent not
      to
      issue a dividend in the foreseeable future; use an expected life based on the
      best judgment of the Company; and compute an expected volatility based on
      similar high-growth, publicly-traded, biotechnology companies. Compensation
      expense is recognized using the straight-line amortization method for all
      stock-based awards.





On
      March
      1, 2006, we granted 116,750 options pursuant to stock award agreements to
      certain employees and key consultants. On July 20, 2006, we granted a total
      of
      45,000 fully-vested, stock options to our new independent board members pursuant
      to stock award agreements.




The
      Black-Scholes option valuation model was developed for use in estimating the
      fair value of traded options that have no vesting restrictions and are fully
      transferable. In addition, the Black-Scholes valuations model requires the
      input
      of highly subjective assumptions including the expected stock price volatility.
      Because the Company’s employee stock options have characteristics significantly
      different from those of traded options, and because changes in subjective input
      assumptions can materially affect the fair value estimate, in management’s
      opinion, the existing models do not necessarily provide a reliable single
      measure of the fair value of our options.




31





We
      recognized a total of $506,077, $318,111, and $0 in expense for options for
      the
      year-ended December 31, 2006, 2005, and 2004 respectively.





The
      weighted average, estimated fair values of stock options granted during the
      years ended December 31, 2006 and 2005 were $3.18 and $1.65,
      respectively.





**Impact
      of Recently Issued Accounting Pronouncements**





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Correction - a
      Replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS
      154 changes the requirements for the accounting for, and the reporting of,
      a
      change in accounting principle. SFAS 154 requires that a voluntary change in
      accounting principle be applied retroactively with all prior period financial
      statements presented under the new accounting principle. SFAS 154 is effective
      for accounting changes and corrections of errors in fiscal years beginning
      after
      December 15, 2005. We have determined that the adoption of the requirements
      required under SFAS 154 will not have a material impact on the financial
      statements of the company.





On
      July
      15, 2006 the FASB issued FIN48, *Accounting
      for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109.* We
      do not
      expect that the adoption of the recognition and measurement requirements
      required under FIN48 to have a material impact on the financial statements
      of
      the company.





In
      December 2004, SFAS No. 123(R), “Share-Based Payment,” which addresses
      the accounting for employee stock options, was issued. SFAS 123(R) revises
      the
      disclosure provisions of SFAS 123 and supersedes APB Opinion No. 25. SFAS
      123(R) requires that the cost of all employee stock options, as well as other
      equity-based compensation arrangements, be reflected in the financial statements
      based on the estimated fair value of the awards. This statement is effective
      for
      all public entities as of the beginning of the first interim or annual reporting
      period that begins after December 15, 2005. We expect the adoption of SFAS
      123R to increase our reported net loss per share.





In
      December 2004, the FASB issued SFAS 153, Exchanges of Nonmonetary Assets,
      an amendment of APB Opinion No. 29 (SFAS 153). The guidance in APB
      Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the
      principle that exchanges of nonmonetary assets should be measured based on
      the
      fair value of the assets exchanged. The guidance in APB Opinion
      No. 29, however, included certain exceptions to that principle. SFAS 153
      amends APB Opinion No. 29 to eliminate the exception for nonmonetary
      exchanges of similar productive assets and replaces it with a general exception
      for exchanges of nonmonetary assets that do not have commercial substance.
      A
      nonmonetary exchange has commercial substance if the future cash flows of the
      entity are expected to change significantly as a result of the
      exchange. SFAS 153 is effective for nonmonetary asset exchanges in fiscal
      periods beginning after June 15, 2005. We do not believe that the
      adoption of SFAS 153 will have a material impact on our results of operations
      or
      financial position.




32




**Results
      of Operations**




Our
      operating results for the past three fiscal years have been nominal. The
      following table sets forth our statement of operations data for the year ended
      December 31, 2006, December 31, 2005, and December 31, 2004, and should be
      read
      in conjunction with our financial statements and the related notes appearing
      elsewhere in this filing





**Year
                Ended December 31,**
              **2006**
            
            **Year
                Ended**
              **December 31,**
              **2005**
            
            **Year
                Ended**
              **December 31,**
              **2004**Revenues
            
            $
            1,708,214
            
            $
            1,138,831
            
            $
            636,341Operating
                expenses
            
            
            9,126,315
            
            
            3,626,664
            
            
            3,155,784Net
                interest expense (income)
            
            
            (195,457
            )
            
            (101,378
            )
            
            3,699Net
                income (loss)
            
            $
            (7,222,644
            )
            $
            (2,386,455
            )
            $
            (2,523,142
            )




**Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005**




***Revenue***





Revenue
      increased from $1,138,831 for the year ended December 31, 2005 to $1,708,214
      for
      the year ended December 31, 2006, representing an increase of $569,383 or 50%,
      resulting primarily from an increase in proceeds from the $1,500,000 BioShield
      grant. The proceeds from the BioShield grant were $1,100,293 for the year ended
      December 31, 2006 as compared to $999,556 for all grant proceeds for the year
      ended December 31, 2005. Also, we realized $205,000 for the year ended December
      31, 2006 through a commercial contract with Peprotech Inc. to develop chemical
      compounds compared to $139,275 for the year ended December 31,
      2005.




33




See
      the
      table below for further details regarding the sources of our grant and
      government contract revenue:





**Agency**
            
            **Program**
            
            **Amount**
            
            **Period
                of**
              **Performance**
            
            **Revenue**
              **2006**
            
            **Revenue**
              **2005****NIH**
            
            Phase
                I NIH SBIR program
            
            $
            100,000
            
            08/2004-04/2005
            
            
            —
            
            $
            49,998**DARPA**
            
            DARPA,
                program BAA04-12
            
            $
            475,000
            
            11/2004-08/2005
            
            
            —
            
            $
            283,185**NIH**
            
            Phase
                I NIH SBIR program
            
            $
            100,000
            
            06/2005-01/2006
            
            
            —
            
            $
            100,000**NIH**
            
            BioShield
                program (NIAID)
            
            $
            1,500,000
            
            07/2005-01/2007
            
            $
            1,100,293
            
            $
            399,707**NIH**
            
            Phase
                I NIH SBIR program
            
            $
            100,000
            
            08/2005-01/2006
            
            $
            33,334
            
            $
            66,666**NIH**
            
            Phase
                I NIH SBIR program
            
            $
            100,000
            
            09/2005-02/2006
            
            
            —
            
            $
            100,000**NASA**
            
            Phase
                I NASA STTR program
            
            $
            100,000
            
            01/2006-01/2007
            
            $
            66,393
            
            $
            —**NIH**
            
            Phase
                II NIH SBIR program
            
            $
            750,000
            
            07/2006-06/2008
            
            $
            212,713
            
            $
            —**NIH**
            
            NCI
                Contract
            
            $
            750,000
            
            09/2006-08/2008
            
            $
            90,481Totals
            
            $
            1,503,214
            
            $
            999,556





We
      anticipate our revenue over the next year to be derived mainly from government
      grants and contracts. In addition, it is common in our industry for companies
      to
      enter into licensing agreements with large pharmaceutical companies. To the
      extent we enter into such licensing arrangements, we will receive additional
      revenue from licensing fees.





***Operating
      Expenses***





Operating
      expenses have historically consisted of costs relating to R&D and general
      and administrative expenses, which include fees and expenses associated with
      patent applications. R&D expenses have consisted mainly of supporting our
      R&D teams, process development, sponsored research at the Cleveland Clinic,
      clinical trials and consulting fees. General and administrative expenses include
      all corporate and administrative functions that serve to support our current
      and
      future operations while also providing an infrastructure to support future
      growth. Major items in this category include management and staff salaries,
      rent/leases, professional services and travel-related expenses. We expect these
      expenses to increase as a result of increased legal and accounting fees
      anticipated in connection with our compliance with ongoing reporting and
      accounting requirements of the SEC and expansion of our business.




34





Operating
      expenses increased from $3,626,664 for the year ended December 31, 2005 to
      $9,126,315 for the year ended December 31, 2006. This represents an increase
      of
      $5,499,651 or 152%. This increase resulted primarily from an increase in R&D
      expenses from $2,640,240 for the year ended December 31, 2005 to $6,989,804
      for
      the year ended December 31, 2006, an increase of $4,346,564 or 165%, as we
      increased the number of research scientists and related projects and started
      a
      number of clinical trials. In addition, general and administrative expenses
      increased from $986,424 for the year ended December 31, 2005 to $2,136,511,
      for
      the year ended December 31, 2006. This represents an increase of $1,150,087
      or
      117%. These higher general and administrative expenses were incurred as a result
      of creating and improving the infrastructure of the company and the costs
      associated with being a publicly traded company.





Until
      we
      introduce a product to the market, expenses in the categories mentioned above
      will be the largest component of our income statement.





**Year
      Ended December 31, 2005 Compared to Year Ended December 31,
      2004**





***Revenue***





Revenue
      increased from $636,341 for the year ended December 31, 2004 to $1,138,831
      for the year ended December 31, 2005, representing an increase of $502,490
      or 79.0%. This increase is primarily due to the increase from grants and
      contracts received through various government agencies including DARPA (Army)
      and NIH during 2005. Grant and contract revenue increased from $531,341 for
      the
      year ended December 31, 2004 to $999,556 for the year ended
      December 31, 2005, representing an increase of $468,216 or 88.1%.





Revenue
      from other sources for the years ended December 31, 2005 and 2004 was
      $139,275 and $105,000 respectively. Other revenue in 2005 was earned through
      our
      commercial agreement with Peprotech, Inc. Other revenue in 2004 was earned
      from
      high throughput screening services for the Cleveland Clinic.





***Operating
      Expenses***





Operating
      expenses increased from $3,155,784 for the year ended December 31, 2004 to
      $3,626,664 for the year ended December 31, 2005. This represents an
      increase of $470,880 or 14.9%. Of the $3,155,784 in operating expenses for
      the
      year ended December 31, 2004, $2,250,000 represents a non-cash expense
      regarding the valuation of 2,250 pre-stock split shares issued to the Cleveland
      Clinic in exchange for use of their licenses and technologies. Excluding this
      one-time, non-cash transaction, operating expenses increased from $905,784
      for
      the year ended December 31, 2004 to $3,626,664 for the year ended
      December 31, 2005. This represents an increase of $2,720,880 or 300.4%.
      This increase resulted primarily from an increase in R&D expenses from
      $642,967 for the year ended December 31, 2004 (excluding the $2,250,000
      one-time, non cash transaction) to $2,640,240 for the year ended
      December 31, 2005 incurred to service the above referenced operating
      revenue as well as for R&D expenses for internal projects. Research
      expenditures increased over time in 2004 reflecting our growth from two
      scientists at the beginning of the year to six scientists by year-end as
      compared to 2005 when there were 16 scientists at year-end. Research costs
      totaled $1,782,155 for 2005 and $471,195 in 2004 excluding the one-time,
      non-cash transaction with the Cleveland Clinic. Development activities did
      not
      begin until July 2005 and totaled $546,252 in 2005. In addition, general
      and administrative expenses of $851,319 were incurred in 2005 versus $434,450
      in
      2004 as a result of creating and improving our infrastructure as we moved into
      larger lab facilities in May 2005. Accounting and auditing fees also
      increased to $70,667 in 2005 from $2,246 in 2004 as we raised equity capital
      in
      March 2005 and began plans for our initial public offering.




35





**Liquidity
      and Capital Resources**





We
      have
      incurred annual operating losses since our inception, and, as of December 31,
      2006, we had an accumulated deficit of $12,775,910. Our principal sources of
      liquidity have been cash provided by government grants and sales of our
      securities. Our principal uses of cash have been R&D and working capital. We
      expect our future sources of liquidity to be primarily government grants,
      licensing fees and milestone payments in the event we enter into licensing
      agreements with third parties, and research collaboration fees in the event
      we
      enter into research collaborations with third parties. We anticipate that the
      proceeds from our initial public offering, together with the proceeds of our
      recently completed private placement, should be sufficient to fully develop
      Protectan CBLB502 for non-medical applications.





Net
      cash
      used in operating activities totaled $6,653,602 for the year ended December
      31,
      2006, compared to $1,730,513 used in operating activities for the same period
      in
      2005. Net cash used in operating activities totaled $1,730,513 for the year
      ended December 31, 2005, compared to $207,911 used in operating activities
      for the same period in 2004. For all periods, the increase in cash used was
      primarily attributable to increased R&D activities and creating and
      maintaining the infrastructure necessary to support these R&D activities.





Net
      cash
      used in investing activities was $14,281 for the year ended December 31, 2006
      and $2,805,113 used for the same period in 2005. The decrease in cash used
      for
      investing activities resulted primarily from the maturing of short-term
      investments that converted to cash. Net cash used in investing activities was
      $2,805,113 for the year ended December 31, 2005 and $27,991 for the same
      period in 2004. The increase resulted from investments in long-term certificates
      of deposit and by purchases of lab equipment.




36





Net
      cash
      provided by financing activities totaled $8,523,414 for the year ended December
      31, 2006, compared to $5,647,347 provided by financing activities for the same
      period in 2005. The increase in cash provided by financing activities was
      attributed to the proceeds from the issuance of common stock as a consequence
      of
      the initial public offering. Net cash provided by financing activities totaled
      $5,647,347 for the year ended December 31, 2005, compared to $320,517 for
      the same period in 2004. The funds provided for the year ended December 31,
      2005
      were attributable primarily to the net proceeds from our private placement
      of
      Series A Preferred Stock in March 2005.





Under
      our
      exclusive license agreement with the Cleveland Clinic, we may be responsible
      for
      making milestone payments to the Cleveland Clinic in amounts ranging from
      $50,000 to $4,000,000. The milestones and corresponding payments for Protectan
      CBLB502 and Curaxin CBLC102 are set forth below:





File
                IND application for Protectan CBLB502
            
            $
            50,000Complete
                Phase I studies for Protectan CBLB502
            
            $
            100,000File
                NDA application for Protectan CBLB502
            
            $
            350,000Receive
                regulatory approval to sell Protectan CBLB502
            
            $
            1,000,000File
                IND application for Curaxin CBLC102 (completed May 2006)
            
            $
            50,000Commence
                Phase II clinical trials for Curaxin CBLC102 (completed January
                2007)
            
            $
            250,000Commence
                Phase III clinical trials for Curaxin CBLC102
            
            $
            700,000File
                NDA application for Curaxin CBLC102
            
            $
            1,500,000Receive
                regulatory approval to sell Curaxin CBLC102
            
            $
            4,000,000





As
      of
      December 31, 2006, we had accrued $50,000 for the milestone payment relating
      to
      the filing of the IND application for Curaxin CBLC102. In January 2007, we
      started a Phase II hormone-refractory, prostate cancer clinical trial and
      accrued an additional $250,000.





Our
      agreement with CCF also provides for payment by us to the CCF of royalty
      payments calculated as a percentage of the net sales of the drug candidates
      ranging from 1-2%, and sublicense royalty payments calculated as a percentage
      of
      the royalties received from the sublicenses ranging from 5-35%. However, any
      royalty payments and sublicense royalty payments assume that we will be able
      to
      commercialize our drug candidates, which are subject to numerous risks and
      uncertainties, including those associated with the regulatory approval process,
      our R&D process and other factors. Accrued milestone payments, royalty
      payments and sublicense royalty payments are payable upon achievement of the
      milestone.





37


To
      more
      effectively match short-term investment maturities with cash flow requirements,
      we have obtained a working capital line of credit, which is fully secured by
      our
      short-term investments. This fully-secured, working capital line of credit
      has
      an interest rate of prime minus 1%, a borrowing limit of $500,000 and expires
      on
      July 1, 2007. At December 31, 2006, there were no outstanding borrowings under
      this credit facility.





We
      also
      obtained an additional line of credit to use as a margin account to purchase
      forward contracts of foreign currency to hedge against foreign exchange risk.
      This line of credit is fully secured by our short-term investments, has an
      interest rate of prime minus 1%, a borrowing limit of $500,000 and expires
      on
      October 25, 2007. At December 31, 2006, there were no outstanding borrowings
      under this credit facility.





Although
      we believe that existing cash resources will be sufficient to finance our
      currently planned operations for the near-term (12-24 months), such amounts
      will
      not be sufficient to meet our longer-term cash requirements, including our
      cash
      requirements for the commercialization of certain of our drug candidates
      currently in development. We may be required to issue equity or debt securities
      or enter into other financial arrangements, including relationships with
      corporate and other partners, in order to raise additional capital. Depending
      upon market conditions, we may not be successful in raising sufficient
      additional capital for our long-term requirements. In such event, our business,
      prospects, financial condition and results of operations could be materially
      adversely affected.





The
      following factors, among others, could cause actual results to differ from
      those
      indicated in the above forward-looking statements: the results of our R&D
      efforts, the timing and success of preclinical testing, the timing and success
      of any clinical trials we may commence in the future, the timing of and
      responses to regulatory submissions, the amount of cash generated by our
      operations, the amount of competition we face and how successful we are in
      obtaining any required licenses and entering into collaboration arrangements.





***Impact
      of Inflation***





We
      believe that our results of operations are not dependent upon moderate changes
      in inflation rates.





***Off-Balance
      Sheet Arrangements***





We
      have
      not entered into any off-balance sheet arrangements.




38


**Item 7.
        **Financial
        Statements****





**TABLE
      OF CONTENTS**


PageReport
                  of Independent Registered Public Accounting Firm
              
              F-1Financial
                  Statements:Balance
                  Sheets
              
              F-2Statement
                  of Operations
              
              F-4Statements
                  of Stockholders' Equity and Comprehensive Loss
              
              F-5Statement
                  of Cash Flows
              
              F-8Notes
                  to Financial Statements
              
              F-9




39




meaden 
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  Board
        of
        Directors and Stockholders of
 Cleveland
        BioLabs, Inc.
  We
        have
        audited the accompanying balance sheets of CLEVELAND BIOLABS, INC. as of
        December 31, 2006 and 2005, and the related statements of operations,
        stockholders' equity, 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 audit 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 Cleveland BioLabs, 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.
  MEADEN
        & MOORE, LTD.
 Certified
        Public Accountants
  Cleveland,
        Ohio
 March
        5,
        2007


F-1
 CLEVELAND
          BIOLABS, INC.
  BALANCE
          SHEETS
  December
          31, 2006 and 2005
 2006
                
                2005ASSETSCURRENT
                    ASSETSCash
                    and equivalents
                
                $
                3,061,993
                
                $
                1,206,462Short-term
                    investments
                
                
                1,995,836
                
                
                2,382,190Accounts
                    receivable:Trade
                
                
                159,750
                
                
                -Interest
                
                
                42,479
                
                
                37,035Notes
                    Receivable - Orbit Brands
                
                
                50,171
                
                
                -Prepaid
                    expenses - IPO
                
                
                -
                
                
                210,987Other
                    prepaid expenses
                
                
                434,675
                
                
                12,249Deferred
                    compensation
                
                
                -
                
                
                5,134Total
                    current assets
                
                
                5,744,904
                
                
                3,854,057EQUIPMENTComputer
                    equipment
                
                
                132,572
                
                
                91,788Lab
                    equipment
                
                
                347,944
                
                
                225,997Furniture
                
                
                65,087
                
                
                40,158545,603
                
                
                357,943Less
                    accumulated depreciation
                
                
                142,011
                
                
                47,080403,592
                
                
                310,863OTHER
                    ASSETSDeferred
                    compensation
                
                
                -
                
                
                752Intellectual
                    Property
                
                
                252,978
                
                
                76,357Deposits
                
                
                15,055
                
                
                11,304268,033
                
                
                88,413TOTAL
                    ASSETS
                
                $
                6,416,529
                
                $
                4,253,333
  F-2
 CLEVELAND
          BIOLABS, INC.
  BALANCE
          SHEETS
  December
          31, 2006 and 2005
 
 2006
                
                2005LIABILITIES
                    AND STOCKHOLDERS' EQUITYCURRENT
                    LIABILITIESAccounts
                    payable:Trade
                
                $
                644,806
                
                $
                264,783Deferred
                    revenue
                
                
                -
                
                
                100,293Accrued
                    expenses
                
                
                128,569
                
                
                28,579Total
                    current liabilities
                
                
                773,375
                
                
                393,655LONG-TERM
                    LIABILITIESConvertible
                    notes payable
                
                
                -
                
                
                303,074Milestone
                    payables
                
                
                50,000
                
                
                -Total
                    long-term liabilities
                
                
                50,000
                
                
                303,074STOCKHOLDERS'
                    EQUITYSeries
                    A convertible preferred stock, $.005 par valueAuthorized
                    - 10,000,000 and 4,000,000 shares at December 31, 2006 and December
                    31,
                    2005, respectively
                
                
                -
                
                
                15,256Issued
                    and outstanding 0 and 3,051,219 shares
                    at December 31, 2006 and December 31, 2005,
                    respectivelyAdditional
                    paid-in capital
                
                
                -
                
                
                4,932,885Unissued
                    shares - preferred stock
                
                
                -
                
                
                360,000Common
                    stock, $.005 par valueAuthorized
                    - 40,000,000 and 12,000,000 shares at December 31, 2006 and
                    December 31, 2005, respectivelyIssued
                      and outstanding 11,826,389 and 6,396,801 shares at December
                      31, 2006 and
                      December 31, 2005, respectively
                
                
                59,132
                
                
                31,984Additional
                    paid-in capital
                
                
                18,314,097
                
                
                3,338,020Unissued
                    shares - common stock
                
                
                -
                
                
                81,125Accumulated
                    other comprehensive income (loss)
                
                
                (4,165
                )
                
                (17,810
                )Accumulated
                    deficit
                
                
                (12,775,910
                )
                
                (5,184,856
                )Total
                    stockholders' equity
                
                
                5,593,154
                
                
                3,556,604TOTAL
                    LIABILITIES AND STOCKHOLDERS' EQUITY
                
                $
                6,416,529
                
                $
                4,253,333
 F-3
  CLEVELAND
        BIOLABS, INC.
  STATEMENT
        OF OPERATIONS
  Years
        Ended December 31, 2006, 2005 and 2004
  2006
                
                2005
                
                2004REVENUESGrant
                
                $
                1,503,214
                
                $
                999,556
                
                $
                531,341Service
                
                
                205,000
                
                
                139,275
                
                
                105,0001,708,214
                
                
                1,138,831
                
                
                636,341OPERATING
                    EXPENSESResearch
                    and Development
                
                
                6,989,804
                
                
                2,640,240
                
                
                2,892,967General
                    and administrative
                
                
                2,136,511
                
                
                986,424
                
                
                262,817Total
                    operating expenses
                
                
                9,126,315
                
                
                3,626,664
                
                
                3,155,784LOSS
                    FROM OPERATIONS
                
                
                (7,418,101
                )
                
                (2,487,833
                )
                
                (2,519,443
                )OTHER
                    INCOME (EXPENSE)Interest
                    Income
                
                
                206,655
                
                
                119,371
                
                
                320Interest
                    Expense
                
                
                (11,198
                )
                
                (17,993
                )
                
                (4,019
                )Total
                    other income (expense), net
                
                
                195,457
                
                
                101,378
                
                
                (3,699
                )NET
                    LOSS
                
                $
                (7,222,644
                )
                $
                (2,386,455
                )
                $
                (2,523,142
                )DIVIDENDS
                    ON CONVERTIBLE PREFERRED STOCK
                
                
                (214,928
                )
                
                (291,914
                )
                
                -NET
                    LOSS AVAILABLE TO COMMON SHAREHOLDERS
                
                $
                (7,437,572
                )
                $
                (2,678,369
                )
                $
                (2,523,142
                )NET
                    LOSS AVAILABLE TO COMMON SHAREHOLDERSPER
                    SHARE OF COMMON STOCK - BASIC ANDDILUTED
                
                $
                (0.84
                )
                $
                (0.43
                )
                $
                (0.55
                )WEIGHTED
                    AVERAGE NUMBER OF SHARES USEDIN
                    CALCULATING NET LOSS PER SHARE, BASIC ANDDILUTED
                
                
                8,906,266
                
                
                6,250,447
                
                
                4,615,571
  F-4
  CLEVELAND
          BIOLABS, INC.
  STATEMENTS
          OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
  Period
          From January 1, 2004 to December 31, 2006
  Stockholders'
                    EquityCommon
                    StockAdditionalPaid-in
                
                PenaltyShares
                
                Amount
                
                Capital
                
                SharesBalance
                    at January 1, 2004
                
                
                3,993,200
                
                $
                19,966
                
                $
                5,034
                
                $
                -Issuance
                    of shares
                
                
                1,966,800
                
                
                9,834
                
                
                2,250,920
                
                
                -Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -Balance
                    at December 31, 2004
                
                
                5,960,000
                
                
                29,800
                
                
                2,255,954
                
                
                -Issuance
                    of shares - Series A financing
                
                
                308,000
                
                
                1,540
                
                
                588,122
                
                
                -Issuance
                    of shares - stock dividend
                
                
                69,201
                
                
                346
                
                
                138,056
                
                
                -Issuance
                    of options (383,840 options issued,
                
                
                -
                
                
                -
                
                
                318,111
                
                
                -324,240
                    outstanding)Exercise
                    of options (59,600 options exercised)
                
                
                59,600
                
                
                298
                
                
                118,902
                
                
                -Accrue
                    unissued shares
                
                
                -
                
                
                -
                
                
                (81,125
                )
                
                81,125Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -Other
                    comprehensive incomeUnrealized
                    gains (losses) on short term investmentsUnrealized
                    holding gains (losses) arising during period
                
                
                -
                
                
                -
                
                
                -
                
                
                -Comprehensive
                    lossBalance
                    at December 31, 2005
                
                
                6,396,801.00
                
                
                31,984
                
                
                3,338,020
                
                
                81,125Issuance
                    of shares - previously accrued penalty shares
                
                
                54,060
                
                
                270
                
                
                80,855
                
                
                (81,125
                )Issuance
                    of shares - stock dividend
                
                
                184,183
                
                
                922
                
                
                367,445
                
                
                -Issue
                    penalty shares
                
                
                15,295
                
                
                76
                
                
                (76
                )
                
                -Issuance
                    of shares - initial public offering
                
                
                1,700,000
                
                
                8,500
                
                
                10,191,500
                
                
                -Fees
                    associated with initital public offering
                
                
                -
                
                
                -
                
                
                (1,890,444
                )
                
                -Conversion
                    of preferred stock to common stock
                
                
                3,351,219
                
                
                16,756
                
                
                5,291,385
                
                
                -Conversion
                    of notes payable to common stock
                
                
                124,206
                
                
                621
                
                
                312,382
                
                
                -Issuance
                    of options
                
                
                -
                
                
                -
                
                
                506,078
                
                
                -Exercise
                    of options
                
                
                625
                
                
                3
                
                
                2,810
                
                
                -Issuance
                    of warrants
                
                
                -
                
                
                -
                
                
                114,032
                
                
                -Proceeds
                    from sales of warrants
                
                
                -
                
                
                -
                
                
                110
                
                
                -Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -Other
                    comprehensive incomeUnrealized
                    gains (losses) on short term investmentsChanges
                    in unrealized holding gains (losses)arising
                    during period
                
                
                -
                
                
                -
                
                
                -
                
                
                -Less
                    reclassification adjustment for (gains) lossesincluded
                    in net loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -Comprehensive
                    lossBalance
                    at December 31, 2006
                
                
                11,826,389
                
                $
                59,132
                
                $
                18,314,097
                
                $
                -
 F-5
 CLEVELAND
          BIOLABS, INC.
  STATEMENTS
          OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
  Period
          From January 1, 2004 to December 31, 2006
 
 Stockholders'
                    EquityPreferred
                    StockAdditionalPaid-in
                
                PenaltyShares
                
                Amount
                
                Capital
                
                SharesBalance
                    at January 1, 2004
                
                $
                -
                
                $
                -
                
                $
                -
                
                $
                -Issuance
                    of shares
                
                
                -
                
                
                -
                
                
                -
                
                
                -Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -Balance
                    at December 31, 2004
                
                
                -
                
                
                -
                
                
                -
                
                
                -Issuance
                    of shares - Series A financing
                
                
                3,051,219
                
                
                15,256
                
                
                5,292,885
                
                
                -Issuance
                    of shares - stock dividend
                
                
                -
                
                
                -
                
                
                -
                
                
                -Issuance
                    of options (383,840 options issued,
                
                
                -
                
                
                -
                
                
                -
                
                
                -324,240
                    outstanding)Exercise
                    of options (59,600 options exercised)
                
                
                -
                
                
                -
                
                
                -
                
                
                -Accrue
                    unissued shares
                
                
                
                
                
                
                
                
                (360,000
                )
                
                360,000Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -Other
                    comprehensive incomeUnrealized
                    gains (losses) on short term investmentsUnrealized
                    holding gains (losses) arising during period
                
                
                -
                
                
                -
                
                
                -
                
                
                -Comprehensive
                    lossBalance
                    at December 31, 2005
                
                
                3,051,219
                
                
                15,256
                
                
                4,932,885
                
                
                360,000Issuance
                    of shares - previously accrued penalty shares
                
                
                240,000
                
                
                1,200
                
                
                358,800
                
                
                (360,000
                )Issuance
                    of shares - stock dividend
                
                
                -
                
                
                -
                
                
                -
                
                
                -Issue
                    penalty shares
                
                
                60,000
                
                
                300
                
                
                (300
                )
                
                -Issuance
                    of shares - initial public offering
                
                
                -
                
                
                -
                
                
                -
                
                
                -Fees
                    associated with initital public offering
                
                
                -
                
                
                -
                
                
                -
                
                
                -Conversion
                    of preferred stock to common stock
                
                
                (3,351,219
                )
                
                (16,756
                )
                
                (5,291,385
                )
                
                -Conversion
                    of notes payable to common stock
                
                
                -
                
                
                -
                
                
                -
                
                
                -Issuance
                    of options
                
                
                -
                
                
                -
                
                
                -
                
                
                -Exercise
                    of options
                
                
                -
                
                
                -
                
                
                -
                
                
                -Issuance
                    of warrants
                
                
                -
                
                
                -
                
                
                -
                
                
                -Proceeds
                    from sales of warrants
                
                
                -
                
                
                -
                
                
                -
                
                
                -Net
                    loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -Other
                    comprehensive incomeUnrealized
                    gains (losses) on short term investmentsChanges
                    in unrealized holding gains (losses)arising
                    during period
                
                
                -
                
                
                -
                
                
                -
                
                
                -Less
                    reclassification adjustment for (gains) lossesincluded
                    in net loss
                
                
                -
                
                
                -
                
                
                -
                
                
                -Comprehensive
                    lossBalance
                    at December 31, 2006
                
                
                -
                
                $
                -
                
                $
                -
                
                $
                -
 F-6
  CLEVELAND
            BIOLABS, INC.
  STATEMENTS
            OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
  Period
            From January 1, 2004 to December 31, 2006   Stockholders'
                        EquityOther
                    
                    
                    
                    
                    
                    ComprehensiveComprehensive
                    
                    Accumulated
                    
                    
                    
                    IncomeLoss
                    
                    Deficit
                    
                    Total
                    
                    (Loss)Balance
                        at January 1, 2004
                    
                    $
                    -
                    
                    $
                    (136,826
                    )
                    $
                    (111,826
                    )Issuance
                        of shares
                    
                    
                    -
                    
                    
                    -
                    
                    
                    2,260,754Net
                        loss
                    
                    
                    -
                    
                    
                    (2,523,142
                    )
                    
                    (2,523,142
                    )
                    $
                    (2,523,142
                    )Balance
                        at December 31, 2004
                    
                    
                    -
                    
                    
                    (2,659,968
                    )
                    
                    (374,214
                    )Issuance
                        of shares - Series A financing
                    
                    
                    -
                    
                    
                    -
                    
                    
                    5,897,803Issuance
                        of shares - stock dividend
                    
                    
                    -
                    
                    
                    (138,433
                    )
                    
                    (31
                    )Issuance
                        of options (383,840 options issued,
                    
                    
                    -
                    
                    
                    -
                    
                    
                    318,111324,240
                        outstanding)Exercise
                        of options (59,600 options exercised)
                    
                    
                    -
                    
                    
                    -
                    
                    
                    119,200Accrue
                        unissued shares
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -Net
                        loss
                    
                    
                    -
                    
                    
                    (2,386,455
                    )
                    
                    (2,386,455
                    )
                    
                    (2,386,455
                    )Other
                        comprehensive incomeUnrealized
                        gains (losses) on short term investmentsUnrealized
                        holding gains (losses) arising during period
                    
                    
                    (17,810
                    )
                    
                    -
                    
                    
                    (17,810
                    )
                    $
                    (17,810
                    )Comprehensive
                        loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    (2,404,265
                    )Balance
                        at December 31, 2005
                    
                    
                    (17,810
                    )
                    
                    (5,184,856
                    )
                    
                    3,556,604Issuance
                        of shares - previously accrued penalty shares
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -Issuance
                        of shares - stock dividend
                    
                    
                    -
                    
                    
                    (368,410
                    )
                    
                    (43
                    )Issue
                        penalty shares
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -Issuance
                        of shares - initial public offering
                    
                    
                    -
                    
                    
                    -
                    
                    
                    10,200,000Fees
                        associated with initital public offering
                    
                    
                    -
                    
                    
                    -
                    
                    
                    (1,890,444
                    )Conversion
                        of preferred stock to common stock
                    
                    
                    -
                    
                    
                    -
                    
                    
                    -Conversion
                        of notes payable to common stock
                    
                    
                    -
                    
                    
                    -
                    
                    
                    313,003Issuance
                        of options
                    
                    
                    -
                    
                    
                    -
                    
                    
                    506,078Exercise
                        of options
                    
                    
                    -
                    
                    
                    -
                    
                    
                    2,813Issuance
                        of warrants
                    
                    
                    -
                    
                    
                    -
                    
                    
                    114,032Proceeds
                        from sales of warrants
                    
                    
                    -
                    
                    
                    -
                    
                    
                    110Net
                        loss
                    
                    
                    -
                    
                    
                    (7,222,644
                    )
                    
                    (7,222,644
                    )
                    
                    (7,222,644
                    )Other
                        comprehensive incomeUnrealized
                        gains (losses) on short term investmentsChanges
                        in unrealized holding gains (losses)arising
                        during period
                    
                    
                    6,678
                    
                    
                    -
                    
                    
                    6,678
                    
                    $
                    6,678Less
                        reclassification adjustment for (gains) lossesincluded
                        in net loss
                    
                    
                    6,967
                    
                    
                    -
                    
                    
                    6,967
                    
                    $
                    6,967Comprehensive
                        loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    (7,208,999
                    )Balance
                        at December 31, 2006
                    
                    $
                    (4,165
                    )
                    $
                    (12,775,910
                    )
                    $
                    5,593,154
  F-7
 CLEVELAND
                BIOLABS, INC.
  STATEMENTS
                OF CASH FLOWS
  Year
                Ended
                December 31, 2006, 2005 and 2004
 
 2006
                      
                      2005
                      
                      2004CASH
                          FLOWS FROM OPERATING ACTIVITIESNet
                          loss
                      
                      $
                      (7,222,644
                      )
                      $
                      (2,386,455
                      )
                      $
                      (2,523,142
                      )Adjustments
                          to reconcile net loss to net cashused
                          by operating activities:Depreciation
                      
                      
                      94,931
                      
                      
                      44,762
                      
                      
                      2,299Noncash
                          interest expense
                      
                      
                      9,929
                      
                      
                      17,993
                      
                      
                      4,019Noncash
                          salaries and consulting expense
                      
                      
                      620,119
                      
                      
                      437,311
                      
                      
                      -Deferred
                          compensation
                      
                      
                      5,886
                      
                      
                      9,141
                      
                      
                      10,449Research
                          and development
                      
                      
                      -
                      
                      
                      -
                      
                      
                      2,256,067Changes
                          in operating assets and liabilities:Accounts
                          receivable - trade
                      
                      
                      (159,750
                      )
                      
                      225,013
                      
                      
                      (225,013
                      )Accounts
                          receivable - interest
                      
                      
                      (5,616
                      )
                      
                      (37,035
                      )
                      
                      -Other
                          prepaid expenses
                      
                      
                      (422,427
                      )
                      
                      (12,249
                      )
                      
                      -Deposits
                      
                      
                      (3,750
                      )
                      
                      (3,734
                      )
                      
                      (7,570
                      )Accounts
                          payable
                      
                      
                      380,023
                      
                      
                      10,869
                      
                      
                      169,980Deferred
                          revenue
                      
                      
                      (100,293
                      )
                      
                      100,293
                      
                      
                      -Accrued
                          expenses
                      
                      
                      99,990
                      
                      
                      (136,421
                      )
                      
                      105,000Milestone
                          payments
                      
                      
                      50,000
                      
                      
                      -
                      
                      
                      -Total
                          adjustments
                      
                      
                      569,042
                      
                      
                      655,942
                      
                      
                      2,315,231Net
                          cash (used) provided by operatingactivities
                      
                      
                      (6,653,602
                      )
                      
                      (1,730,513
                      )
                      
                      (207,911
                      )CASH
                          FLOWS FROM INVESTING ACTIVITIESSale/(purchase)
                          of short-term investments
                      
                      
                      400,000
                      
                      
                      (2,400,000
                      )
                      
                      -Issuance
                          of notes receivable
                      
                      
                      (50,000
                      )
                      
                      -
                      
                      
                      -Purchase
                          of equipment
                      
                      
                      (187,660
                      )
                      
                      (328,756
                      )
                      
                      (27,991
                      )Costs
                          of patents pending
                      
                      
                      (176,621
                      )
                      
                      (76,357
                      )
                      
                      -Net
                          cash provided by investing activities
                      
                      
                      (14,281
                      )
                      
                      (2,805,113
                      )
                      
                      (27,991
                      )CASH
                          FLOWS FROM FINANCING ACTIVITIESIssuance
                          of preferred stock
                      
                      
                      -
                      
                      
                      6,000,000
                      
                      
                      -Financing
                          costs
                      
                      
                      (1,679,456
                      )
                      
                      (402,622
                      )
                      
                      (13,000
                      )Dividends
                      
                      
                      (43
                      )
                      
                      (31
                      )
                      
                      -Issuance
                          of common stock
                      
                      
                      10,200,000
                      
                      
                      -
                      
                      
                      17Exercise
                          of stock options
                      
                      
                      2,813
                      
                      
                      -
                      
                      
                      -Issuance
                          of warrants
                      
                      
                      100
                      
                      
                      -
                      
                      
                      -Proceeds
                          from convertible notes payable
                      
                      
                      -
                      
                      
                      50,000
                      
                      
                      333,500Net
                          cash provided by financing activities
                      
                      
                      8,523,414
                      
                      
                      5,647,347
                      
                      
                      320,517NET
                          INCREASE IN CASH AND EQUIVALENTS
                      
                      
                      1,855,531
                      
                      
                      1,111,721
                      
                      
                      84,615CASH
                          AND EQUIVALENTS AT BEGINNING OF
                      
                      
                      1,206,462
                      
                      
                      94,741
                      
                      
                      10,126YEARCASH
                          AND EQUIVALENTS AT END OF YEAR
                      
                      $
                      3,061,993
                      
                      $
                      1,206,462
                      
                      $
                      94,741
  2006
                      
                      
                      2005
                      
                      
                      2004Supplemental
                          disclosures of cash flow information:Cash
                          paid during the period for interest
                      
                      $
                      1,269
                      
                      $
                      -
                      
                      $
                      -Cash
                          paid during the year for income taxes
                      
                      $
                      -
                      
                      $
                      -
                      
                      $
                      -
  Supplemental
                          schedule of noncash financing activities:
                      
                      
                      2006
                      
                      
                      2005
                      
                      
                      2004Common
                          stock issued as financing fees on issuance of preferred
                          shares
                      
                      $
                      -
                      
                      $
                      589,662
                      
                      $
                      -Conversion
                          of notes payable and accrued interest to preferred stock
                      
                      $
                      -
                      
                      $
                      102,438
                      
                      $
                      -Issuance
                          of stock options to employees, consultants, and independent
                          board
                          members
                      
                      $
                      506,078
                      
                      $
                      318,511
                      
                      $
                      -Issuance
                          of warrants to consultant
                      
                      $
                      114,042
                      
                      $
                      -
                      
                      $
                      -Exercise
                          of stock options into 59,600 common shares by consultant
                      
                      $
                      -
                      
                      $
                      119,200
                      
                      $
                      -Issuance
                          of common stock dividend to preferred shareholders
                      
                      $
                      368,367
                      
                      $
                      138,402
                      
                      $
                      -Unissued
                          shares to preferred shareholders for penalty per agreement
                      
                      $
                      -
                      
                      $
                      441,125
                      
                      $
                      -Conversion
                          of notes payable and accrued interest to common stock
                      
                      $
                      313,003
                      
                      $
                      -
                      
                      $
                      -Conversion
                          of preferred stock to common stock
                      
                      $
                      5,308,141
                      
                      $
                      -
                      
                      $
                      -
 F-8
 
 **CLEVELAND
        BIOLABS, INC.**
  **NOTES
        TO FINANCIAL STATEMENTS**
  **Note
        1. Organization**
  Cleveland
        BioLabs, Inc. (“CBL” or the “Company”) is engaged in the discovery, development
        and commercialization of products for cancer treatment and protection of
        normal
        tissues from radiation and toxins. The Company was incorporated under the
        laws
        of the State of Delaware on June 5, 2003 and is headquartered in Cleveland,
        Ohio. The Company’s initial technological development efforts are intended to be
        used as powerful antidotes with a broad spectrum of applications including
        protection from cancer treatment side effects, radiation and hypoxia. A recent
        discovery found that one of its compounds increases the number of progenitor
        (originator) stem cells in mouse bone marrow. To date, the Company has not
        developed any commercial products, but in 2006 and 2005 the Company developed
        and produced biological compounds under a single commercial development
        contract.
  **Note
        2. Summary of Significant Accounting Policies**
  A.
              Cash
                  and Equivalents - The Company considers highly liquid debt instruments
                  with original maturities of three months or less to be cash equivalents.
                  In addition, the Company maintains cash and equivalents at financial
                  institutions, which may exceed federally insured amounts at times
                  and
                  which may, at times, significantly exceed balance sheet amounts
                  due to
                  outstanding checks.
  B.
              Marketable
                  Securities and Short Term Investments - The Company considers investments
                  with a maturity date of more than three months to maturity to be
                  short-term investments and has classified these securities as
                  available-for-sale. Such investments are carried at fair value,
                  with
                  unrealized gains and losses included as accumulated other comprehensive
                  income (loss) in stockholders’ equity. The cost of available-for-sale
                  securities sold is determined based on the specific identification
                  method.
  C.
              Accounts
                  Receivable - The Company extends unsecured credit to customers
                  under
                  normal trade agreements, which generally require payment within
                  30 days.
                  Management estimates an allowance for doubtful accounts which is
                  based
                  upon management’s review of delinquent accounts and an assessment of the
                  Company’s historical evidence of collections. There is no allowance for
                  doubtful accounts as of December 31, 2006, and 2005.
  D.
              Notes
                  Receivable - On December 7, 2006 the Company entered into an agreement
                  with the Orbit Brands Corporation (Borrower) and its subsidiaries
                  whereby
                  the Company would lend up to $150,000 each on two promissory notes
                  to the
                  Borrower at a rate of 5% per annum with a maturity date of one
                  year. The
                  proceeds of the loans shall be used by the Borrower solely to cover
                  expenses associated with converting the notes into common stock
                  and
                  preparing the lending motions for the bankruptcy case involving
                  the
                  Borrower. The loans are convertible into common stock of the Borrower
                  and
                  its subsidiaries. The Company is under no obligation to fund or
                  loan any
                  additional amount to the Borrower, although in the event the Company
                  terminates, ceases or withholds its funding, any amounts funded
                  prior
                  thereto shall be forfeited, unless such termination is due to a
                  breach by
                  Borrower. As of December 31, 2006 the balance outstanding was $50,000
                  plus
                  accrued interest of $171.
  F-9
 E.
              Equipment
                  - Equipment is stated at cost and depreciated over the estimated
                  useful
                  lives of the assets (generally five years) using the straight-line
                  method.
                  Leasehold improvements are depreciated on the straight-line method
                  over
                  the shorter of the lease term or the estimated useful lives of
                  the assets.
                  Expenditures for maintenance and repairs are charged to expense
                  as
                  incurred. Major expenditures for renewals and betterments are capitalized
                  and depreciated. Depreciation expense was $94,931, $44,762, and
                  $2,299 for
                  the years ended December 31, 2006, 2005, and 2004
                  respectively.
  F.
              Impairment
                  of Long-Lived Assets - In accordance with Statements of Financial
                  Accounting Standards, or SFAS, No. 144, Accounting for the Impairment
                  or
                  Disposal of Long-Lived Assets, long-lived assets to be held and
                  used,
                  including equipment and intangible assets subject to depreciation
                  and
                  amortization, are reviewed for impairment whenever events or changes
                  in
                  circumstances indicate that the carrying amounts of the assets
                  or related
                  asset group may not be recoverable. Determination of recoverability
                  is
                  based on an estimate of discounted future cash flows resulting
                  from the
                  use of the asset and its eventual disposition. In the event that
                  such cash
                  flows are not expected to be sufficient to recover the carrying
                  amount of
                  the asset or asset group, the carrying amount of the asset is written
                  down
                  to its estimated net realizable value.
  G.
              Deferred
                  Compensation - The Company realized deferred compensation upon
                  the
                  valuation of restricted stock granted to the founding stockholders.
                  This
                  deferred compensation was expensed over the three-year vesting
                  period from
                  the grant of the stock. Capitalized Deferred Compensation was $0
                  and
                  $5,887 at December 31, 2006, and 2005, respectively. The Company
                  expensed
                  $5,887, $9,140, and $9,164 in compensation expense in 2006, 2005
                  and 2004,
                  respectively.
  H.
              Intellectual
                  Property - The Company capitalizes the costs associated with the
                  preparation, filing, and maintenance of certain intellectual property
                  rights. Capitalized intellectual property is reviewed annually
                  for
                  impairment.
  F-10
 A
        portion
        of this intellectual property is owned by the Cleveland Clinic Foundation
        (“CCF”) and granted to the Company through an exclusive licensing agreement as
        further discussed in Note 3. As part of the licensing agreement, CBL agrees
        to
        bear the costs associated with the preparation, filing and maintenance of
        patent
        applications relating to this intellectual property. If the patent application
        is approved, the costs paid by the Company are amortized on a straight-line
        basis over the shorter of seventeen years or the anticipated useful life
        of the
        patent. If the patent application is not approved, the costs associated with
        the
        preparation and filing of the patent application by the Company on behalf
        of CCF
        will be expensed as part of selling, general and administrative expenses.
        Gross
        capitalized patents pending costs are $222,789 and $67,991 on behalf of CCF
        for
        13 patent applications as of December 31, 2006 and 2005, respectively. All
        of
        the 13 CCF patent applications are still pending approval.
  The
        Company also has submitted two patent applications as a result of intellectual
        property exclusively developed and owned by the Company. If the patent
        applications are approved, costs paid by the Company associated with the
        preparation, filing, and maintenance of the patents will be amortized on
        a
        straight-line basis over the shorter of seventeen years or the anticipated
        useful life of the patent. If the patent applications are not approved, the
        costs associated with the preparation and filing of the patent application
        will
        be expensed as part of selling, general and administrative expenses at that
        time. Gross capitalized patents pending costs were $30,189 and $8,366 for
        two
        patent applications as of December 31, 2006 and 2005, respectively. The patent
        applications are still pending approval.
  I.
              Lines
                  of Credit - The Company has a working capital line of credit that
                  is fully
                  secured by short-term investments. This fully-secured working capital
                  line
                  of credit carries an interest rate of prime minus 1%, a borrowing
                  limit of
                  $500,000, and expires on July 1, 2007. At December 31, 2006, there
                  were no
                  outstanding borrowings under this credit facility
  The
        Company also has an additional line of credit for use as a margin account
        in
        forward exchange rate transactions as a hedge against foreign exchange rate
        risk. This line of credit is fully secured by short term investments, carries
        an
        interest rate of prime minus 1%, has a borrowing limit of $500,000, and expires
        on October 25, 2007. At December 31, 2006, there were no outstanding borrowings
        under this credit facility.
  J.
              Fair
                  Value of Financial Instruments - Financial instruments, including
                  cash and
                  equivalents, accounts receivable, notes receivable, accounts payable
                  and
                  accrued liabilities, are carried at net realizable value. The carrying
                  amounts of the convertible notes payable approximate their respective
                  fair
                  values as they bear terms that are comparable to those available
                  under
                  current market conditions.
  F-11
  K.
              Stock
                  Split - As a result of a 596 for 1 stock split of the Company’s issued and
                  outstanding shares of common stock, which became effective on February
                  28,
                  2005, the 10,000 issued and outstanding shares converted into 5,960,000
                  shares of common stock. Per SAB Topic 4C, all share and per share
                  stock
                  amounts have been retroactively adjusted to reflect the stock
                  split.
  L.
              Use
                  of Estimates - The preparation of financial statements in conformity
                  with
                  accounting principles generally accepted in the U.S. requires management
                  to make estimates and assumptions that affect the reported amounts
                  of
                  assets and liabilities and disclosure of contingent assets and
                  liabilities
                  at the date of the financial statements and the reported amounts
                  of
                  revenues and expenses during the reporting period. The Company
                  bases its
                  estimates on historical experience and on various other assumptions
                  that
                  the Company believes to be reasonable under these circumstances.
                  Actual
                  results could differ from those
                  estimates.
  M.
              Revenue
                  Recognition - The Company recognizes revenue in accordance with
                  Staff
                  Accounting Bulletin No. 104, “Revenue Recognition.” Revenue sources
                  consist of government grants, government contracts and commercial
                  development contracts.
  Revenues
        from federal government grants and contracts are for research and development
        purposes and are recognized in accordance with the terms of the award and
        the
        government agency. Grant revenue is recognized in one of two different ways
        depending on the grant. Cost reimbursement grants require us to submit proof
        of
        costs incurred that are invoiced by us to the government agency, which then
        pays
        the invoice. In this case, grant revenue is recognized at the time of submitting
        the invoice to the government agency.
 
 Fixed
        cost grants require no proof of costs and are paid as a request for payment
        is
        submitted for expenses. The grant revenue under these fixed costs grants
        is
        recognized using a percentage-of-completion method, which uses assumptions
        and
        estimates. These assumptions and estimates are developed in coordination
        with
        the principal investigator performing the work under the government fixed-cost
        grants to determine key milestones, expenses incurred, and deliverables to
        perform a percentage-of-completion analysis to ensure that revenue is
        appropriately recognized. Critical estimates involved in this process include
        total costs incurred and anticipated to be incurred during the remaining
        life of
        the grant. Government contract revenue is recognized periodically upon delivery
        of an invoice for allowable R&D expenses according to the terms of the
        contract. The Company has recognized grant revenue from the following agencies:
        the U.S. Army (DARPA), National Aeronautics and Space Administration (NASA),
        the
        National Institutes of Health (NIH) and the Department of Health and Human
        Services (HHS). Commercial development revenues are recognized when the service
        or development is delivered.
  F-12
  N.
              Deferred
                  Revenue - Deferred Revenue results when payment is received in
                  advance of
                  revenue being earned. When cash is received, the Company makes
                  a
                  determination as to whether the revenue has been earned by applying
                  a
                  percentage-of-completion analysis to compute the need to recognize
                  deferred revenue. The percentage of completion method is based
                  upon (1)
                  the total income projected for the project at the time of completion
                  and
                  (2) the expenses incurred to date. The percentage-of-completion
                  can be
                  measured using the proportion of costs incurred versus the total
                  estimated
                  cost to complete the contract.
  O.
              Research
                  and Development - Research and development expenses consist primarily
                  of
                  costs associated with the clinical trials of drug candidates, compensation
                  and other expenses for research and development, personnel, supplies
                  and
                  development materials, costs for consultants and related contract
                  research
                  and facility costs. Expenditures relating to research and development
                  are
                  expensed as incurred.
  P.
              Employee
                  Benefit Plan - The Company maintains a 401(k) retirement savings
                  plan that
                  is available to all full-time employees who have reached age 21.
                  The plan
                  is intended to qualify under Section 401(k) of the Internal Revenue
                  Code
                  of 1986, as amended. The plan provides that each participant may
                  contribute up to a statutory limit of their pre-tax compensation,
                  which
                  was $15,000 for employees under age 50 and $20,000 for employees
                  50 and
                  older in calendar year 2006. Employee contributions are held in
                  the
                  employees’ name and invested by the plan trustee. The plan currently
                  provides for the Company to make matching contributions, subject
                  to
                  established limits. The Company made matching contributions of
                  $48,858,
                  $0, and $0 for 2006, 2005, and 2004,
                  respectively.
  Q.
              2006
                  Equity Incentive Plan - On May 26, 2006, the Company’s Board of Directors
                  adopted the 2006 Equity Incentive Plan (“Plan”) to attract and retain
                  persons eligible to participate in the Plan, motivate Participants
                  to
                  achieve long-term Company goals, and further align Participants’ interests
                  with those of the Company’s other stockholders. The Plan expires on May
                  26, 2016 and allows up to 2,000,000 shares of stock to be awarded.
                  For the
                  year ended December 31, 2006, 45,000 options were granted to independent
                  board members. On February 14, 2007, these 2,000,000 shares were
                  registered with the SEC by filing a Form S-8 registration statement.
  R.
              Stock-Based
                  Compensation - The FASB issued SFAS No. 123(R) (revised December
                  2004),
                  Share Based Payment, which is a revision of SFAS No. 123 Accounting
                  for
                  Stock-Based Compensation. SFAS 123(R) requires all share-based
                  payments to
                  employees, including grants of employee stock options, to be recognized
                  in
                  the statement of operations based on their fair values. The Company
                  values
                  employee stock based compensation under the provisions of SFAS
                  123(R) and
                  related interpretations.
  F-13
  The
                  fair value of each stock option granted is estimated on the grant
                  date
                  using the Black-Scholes option valuation model. The assumptions
                  used to
                  calculate the fair value of options granted are evaluated and revised,
                  as
                  necessary, to reflect the Company’s experience. The Company uses a
                  risk-free rate based on published rates from the St. Louis Federal
                  Reserve
                  at the time of the option grant, assumes a forfeiture rate of zero,
                  assumes an expected dividend yield rate of zero based on the Company’s
                  intent not to issue a dividend in the foreseeable future, uses
                  an expected
                  life based on the Company’s best judgment using facts and circumstances
                  based on its limited experience, and computes an expected volatility
                  based
                  on similar high-growth, publicly-traded, biotechnology companies.
                  The
                  Company does not include the use of its own stock in the volatility
                  calculation at this time because of the brief history of the stock
                  as a
                  publicly traded security on a listed exchange. Compensation expense
                  is
                  recognized using the straight-line amortization method for all
                  stock-based
                  awards.
  The
                  fair value of warrants issued to a key consultant in exchange for
                  services
                  is estimated using the Black-Scholes option valuation model with
                  the same
                  assumptions.
  On
        March
        1, 2006, the Company granted 116,750 options pursuant to stock award agreements
        to certain employees and key consultants. On July 20, 2006, the Company granted
        45,000 fully-vested, stock options to independent board members pursuant
        to
        stock award agreements. On November 16, 2006, the Company granted 50,000
        warrants to a key consultant. The assumptions used to value these option
        and
        warrant grants using the Black-Scholes option valuation model are as
        follows:
  **March 1, 2006**
              
              **July
                  20, 2006**
              
              **November
                  16, 2006**Risk-free
                  interest rate
              
              
              4.66
              %
              
              5.04
              %
              
              4.80
              %Expected
                  dividend yield
              
              
              0
              %
              
              0
              %
              
              0
              %Expected
                  life
              
              
              5
                  years
              
              
              5
                years
              
              
              2.5
                  YearsExpected
                  volatility
              
              
              75.11
              %
              
              71.43
              %
              
              68.26
              %
  The
        Black-Scholes option valuation model was developed for use in estimating
        the
        fair value of traded options that have no vesting restrictions and are fully
        transferable. In addition, the Black-Scholes valuations model requires the
        input
        of highly subjective assumptions including the expected stock price volatility.
        Because the Company’s employee stock options and warrants have characteristics
        significantly different from those of traded derivative securities, and because
        changes in subjective input assumptions can materially affect the fair value
        estimate, in management’s opinion, the existing models do not necessarily
        provide a reliable single measure of the fair value of the Company’s options and
        warrants.
 
 F-14
 The
        Company recognized a total of $506,078, $318,511, and $0 in expense for options
        and $114,032, $0 and $0 in expense for warrants for the year-ended December
        31,
        2006, 2005, and 2004, respectively.
 
 The
        weighted average, estimated fair values of stock options granted during the
        year-ended December 31, 2006 and 2005 were $3.14 and $1.65,
        respectively.
 
 The
        following tables summarize the stock option activity for the years ended
        December 31, 2006 and 2005.
 
 **Shares**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price
                  per**
                **Share**
              
              **Weighted**
                **Average**
                **Remaining**
                **Contractual**
                **Term**
                **(in
                  Years)**Outstanding,
                  December 31, 2005
              
              
              324,240
              
              $
              0.82Granted,
                  March 1, 2006
              
              
              116,750
              
              
              4.50Granted,
                  July 20, 2006
              
              
              45,000
              
              
              6.00Exercised
              
              
              625
              
              
              4.50Forfeited,
                  Canceled
              
              
              1,875
              
              
              4.50Outstanding,
                  December 31, 2006
              
              
              483,490
              
              $
              2.17
              
              
              8.77Exercisable,
                  December 31, 2006
              
              
              243,183
              
              $
              2.27
              
              
              8.78
  **Options**
              
              **Weighted**
                **Average**
                **Exercise**
                **Price
                  per**
                **Share**
              
              **Weighted**
                **Average**
                **Remaining**
                **Contractual**
                **Term**
                **(in
                  Years)**Outstanding,
                  December 31, 2004
              
              
              -
              
              $
              -Granted,
                  March 1, 2005
              
              
              10,000
              
              
              3.00Granted,
                  July 1, 2005
              
              
              353,840
              
              
              0.55Granted,
                  December 1, 2005
              
              
              20,000
              
              
              2.00Exercised,
                  September 30, 2005
              
              
              59,600
              
              
              -Forfeited,
                  Canceled
              
              
              -
              
              
              -Outstanding,
                  December 31, 2005
              
              
              324,240
              
              $
              0.82
              
              
              9.52Exercisable,
                  December 31, 2005
              
              
              83,560
              
              $
              0.88
              
              
              9.50
 
 F-15
  S.
              Income
                  Taxes - The Company utilizes Statement of Financial Accounting
                  Standards
                  No. 109, “Accounting for Income Taxes,” which requires an asset and
                  liability approach to financial accounting and reporting for income
                  taxes.
                  The difference between the financial statement and tax basis of
                  assets and
                  liabilities is determined annually. Deferred income tax assets
                  and
                  liabilities are computed for those temporary differences that have
                  future
                  tax consequences using the current enacted tax laws and rates that
                  apply
                  to the periods in which they are expected to affect taxable income.
                  Valuation allowances are established, if necessary, to reduce the
                  deferred
                  tax asset to the amount that will, more likely than not, be realized.
                  Income tax expense is the current tax payable or refundable for
                  the year
                  plus or minus the net change in the deferred tax assets and
                  liabilities.
  T.
              Net
                  Loss Per Share - Basic and diluted net loss per share has been
                  computed
                  using the weighted-average number of shares of common stock outstanding
                  during the period.
  The
        following table presents the calculation of basic and diluted net loss per
        share:
  **2006**
              
              **2005**
              
              **2004**Net
                  loss available to common stockholders
              
              $
              (7,437,572
              )
              $
              (2,678,369
              )
              $
              (2,523,142
              )Net
                  loss per share, basic and diluted
              
              $
              (0.84
              )
              $
              (0.43
              )
              $
              (0.55
              )Weighted-average
                  shares used in computing net loss per share, basic and
                  diluted
              
              
              8,906,266
              
              
              6,250,447
              
              
              4,615,571
  The
        Company has included $214,928 and $291,914 in the numerator to account for
        cumulative dividends for Series A preferred stock that were recognized for
        2006
        and 2005, respectively. As of December 31, 2006 all of these dividends have
        been
        paid.
  The
        Company has excluded all outstanding warrants and options from the calculation
        of diluted net loss per share because all such securities are antidilutive
        for
        all applicable periods presented.
  F-16
  The
        total
        number of shares excluded from the calculations of diluted net loss per share,
        prior to application of the treasury stock method for *warrants* ,
        was
        814,424. 594,424 and 294,424 for the years ended December 31, 2006, 2005
        and
        2004, respectively. Such securities, had they been dilutive, would have been
        included in the computation of diluted earnings per share.
  The
        total
        number of shares excluded from the calculations of diluted net loss per share,
        prior to the application of the treasury stock method for *options* ,
        was
        483,490, 324,240 and 0 for the years ended December 31, 2006, 2005 and 2004,
        respectively. Such securities, had they been dilutive, would have been included
        in the computation of diluted earnings per share.
  U.
              Concentrations
                  of Risk - Grant revenue was comprised wholly from grants issued
                  by the
                  federal government and accounted for 88.0%, 88.9% and 83.5% of
                  total
                  revenue for the years ended December 31, 2006, 2005 and 2004,
                  respectively. Although the company anticipates ongoing federal
                  grant
                  revenue, there is no guarantee that this revenue stream will continue
                  in
                  the future.
  Financial
        instruments that potentially subject us to a significant concentration of
        credit
        risk consist primarily of cash and cash equivalents and securities
        available-for-sale. The Company maintains deposits in federally insured
        institutions in excess of federally insured limits. The Company does not
        believe
        it is exposed to significant credit risk due to the financial position of
        the
        depository institutions in which those deposits are held. Additionally, the
        Company has established guidelines regarding diversification of its investment
        portfolio and maturities of investments, which are designed to meet safety
        and
        liquidity.
  V.
              Foreign
                  Currency Exchange Rate Risk - The Company has entered into a manufacturing
                  agreement with a foreign third party to produce one of its drug
                  compounds
                  and is required to make payments in the foreign currency. As a
                  result, the
                  Company’s financial results could be affected by changes in foreign
                  currency exchange rates. Currently, the Company’s exposure primarily
                  exists with the Euro Dollar. As of December 31, 2006, the Company
                  is
                  obligated to make payments under the agreement of 1,295,385 Euros.
                  The
                  Company has established means to purchase forward contracts to
                  hedge
                  against this risk. As of December 31, 2006, no hedging transactions
                  have
                  been consummated.
  W.
              Comprehensive
                  Income/(Loss) - The Company applies Statement of Financial Accounting
                  Standards (SFAS) No. 130, “Reporting Comprehensive Income.” SFAS No. 130
                  requires disclosure of all components of comprehensive income on
                  an annual
                  and interim basis. Comprehensive income is defined as the change
                  in equity
                  of a business enterprise during a period from transactions and
                  other
                  events and circumstances from non-owner sources.
  F-17
 X.
              Segment
                  Reporting - As of December 31, 2006 the Company has determined
                  that it
                  operates in only one segment. Accordingly, no segment disclosures
                  have
                  been included in the notes to the consolidated financial statements.
  Y.
              Effect
                  of New Accounting Standards - In May 2005, the FASB issued SFAS
                  No. 154,
                  “Accounting Changes and Error Correction - a Replacement of APB
                  Opinion
                  No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS 154 changes the
                  requirements for the accounting for and the reporting of a change
                  in
                  accounting principle. SFAS 154 requires that a voluntary change
                  in
                  accounting principle be applied retroactively with all prior period
                  financial statements presented under the new accounting principle.
                  SFAS
                  154 is effective for accounting changes and corrections of errors
                  in
                  fiscal years beginning after December 15, 2005. The Company has
                  determined
                  that the adoption of the requirements required under SFAS 154 will
                  not
                  have a material impact on the financial statements of the
                  Company.
  On
        July
        15, 2006 the FASB issued FIN48, *Accounting
        for Uncertainty in Income Taxes - An Interpretation of FASB Statement No.
        109* . ** The
        Company does not expect that the adoption of the recognition and measurement
        requirements required under FIN48 will have a material impact on the financial
        statements of the Company.
  **Note
        3. Significant Alliances and Related Parties**
  ***The
        Cleveland Clinic Foundation***
  Effective
        July 2004, the Company entered into a strategic alliance with CCF. Under
        the
        agreement, the Company received an exclusive license to use CCF licensed
        patents
        and CCF technology for the benefit of the Company for research and drug
        development. The Company has primary responsibility to fund all newly developed
        patents; however, CCF retains patent ownership on those contained in the
        agreement. The Company also has the responsibility to secure applicable
        regulatory approvals. In partial consideration of this agreement, in December
        2004, the Company issued 1,341,000 shares of its common stock to CCF and
        recognized $2,250,000 as non-cash research and development expense in exchange
        for the stock. The calculation of this expense was based in part on an estimate
        of the Company’s value based on discussions in 2004 with potential investors, in
        which the Company was estimated to have a value of approximately $12,500,000.
        This valuation was reflected in an agreement between the Company and an
        investment bank dated September 30, 2004. This agreement set forth the terms
        on
        which the investment bank was to raise equity capital for the Company. In
        light
        of the preliminary and subjective nature of that estimate, the Company
        discounted that estimate to arrive at a valuation of $10,000,000.
  F-18
  CCF
        will
        receive milestone payments for each product developed with CCF technology
        as
        development passes through major developmental stages. In addition, the Company
        will pay CCF royalties and sublicense royalties as a percentage of net sales
        of
        all commercial products developed with CCF technology. No milestone payments,
        royalties or sublicense royalties have been paid through the year ended December
        31, 2006, although the Company has accrued $50,000 in milestone payments
        as a
        long term liability.
  The
        Company recognized $0, $0 and $105,000 in service revenues for the years
        ended
        December 31, 2006, 2005 and 2004, respectively, from CCF related to a
        high-throughput screening engagement. The Company also incurred $1,142,290,
        $475,934 and $51,129 in subcontract expense to CCF related to technology
        grants
        for the years ended December 31, 2006, 2005 and 2004, respectively. The balance
        remaining is $7,309 in accounts payable at December 31, 2006.
  The
        Company also rented office and laboratory space from an entity related to
        CCF on
        a month to month basis through May of 2005. Rent to this entity related to
        CCF
        was $0, $11,121 and $32,400 in 2006, 2005 and 2004, respectively.
  ***ChemBridge
        Corporation***
  In
        April
        2004, ChemBridge Corporation acquired 357,600 shares of the Company’s common
        stock valued at $6,081 (subject to antidilution provisions for future equity
        issues) and holds warrants to purchase an additional 264,624 shares of the
        Company’s common stock for $1.13 per share. The warrants expire in April 2010.
        Under the agreement, ChemBridge has agreed to provide chemical technology
        and
        expertise for the benefit of the Company for research and drug
        development.
  In
        April
        2004, the Company entered into a chemical libraries license agreement with
        ChemBridge. Under the terms of the agreement, the Company has a non-exclusive
        worldwide license to use certain chemical compound libraries for drug research
        conducted on its own or in collaboration with others. In return, ChemBridge
        will
        receive royalty payments on any revenue received by the Company for all
        contracts, excluding CCF, in which the libraries are used. No revenues or
        royalties have been paid through the year ended December 31, 2006.
  F-19
  The
        Company has also agreed to collaborate with ChemBridge on two optimization
        projects, wherein ChemBridge will have the responsibility of providing the
        chemistry compounds of the project and the Company will have the responsibility
        of providing the biological expertise. ChemBridge will retain a 50% ownership
        interest in two selected “confirmed hits” that make up the optimization
        projects.
  The
        parties will jointly manage the development and commercialization of any
        compounds arising from an optimization project. No “confirmed hits” have been
        selected during the year ended December 31, 2006.
  In
        addition, the Company paid ChemBridge $29,910, $3,913, and $395 for the purchase
        of chemical compounds in the normal course of business in 2006, 2005 and
        2004,
        respectively.
  ***University
        of New South Wales***
  In
        June
        2003, the Company entered into a three year collaborative research agreement
        with the University of New South Wales (UNSW) to utilize functional genomic
        technologies in an attempt to identify genes in childhood neuroblastoma as
        potential candidates for the future development of molecular-targeted gene
        therapy. Under this agreement, the Company will make monetary and in-kind
        contributions with the collaborative partner in connection with the project
        under terms of the agreement. In return, the Company co-owns resulting
        intellectual property and has a right to use this intellectual property royalty
        free for internal purposes. The collaborative parties agree to negotiate
        a
        license arrangement for commercial projects resulting from co-owned intellectual
        property. No collaborative intellectual property has been developed during
        the
        term of this agreement. The agreement expired in June 2006 and was not
        renewed.
  UNWS
        and
        two related parties to UNSW advanced funds of $109,000 and $174,500 during
        the
        year ended December 31, 2004 to the Company in exchange for convertible
        promissory notes, which mature on October 18, 2007 and November 23, 2007,
        respectively. These balances remained on the balance sheet as of December
        31,
        2005 as long-term notes payable. On July 20, 2006, the effective date of
        the
        initial public offering, the outstanding notes payable and accrued interest
        were
        converted into 124,206 shares of common stock. During the year ended December
        31, 2005 a party related to UNSW advanced $50,000 in exchange for a convertible
        promissory note, which was subsequently converted into Series A Preferred
        Stock
        and eventually converted into common stock at the effective date of the initial
        public offering. In addition, the Company paid UNSW $0, $25,011 and $30,303
        for
        subcontracted research during the years ended December 31, 2006, 2005 and
        2004,
        respectively.
  F-20
  ***Cooperative
        Research and Development Agreement***
  In
        August
        2004, the Company entered into a five-year cooperative research and development
        agreement (CRADA) with the Uniformed Service University of the Health Sciences,
        which includes the Armed Forces Radiobiology Research Institute, the Henry
        M.
        Jackson Foundation for the Advancement of Military Medicine, Inc., and CCF,
        to
        evaluate the companies’ radioprotective drug candidates and their effects on
        intracellular and extracellular signaling pathways. Under the terms of the
        agreement, all parties are financially responsible for their own expenses
        related to the agreement. The agreement may be unilaterally terminated by
        any
        party upon 30 days prior written notice.
  ***Sunrise
        Securities Corp.***
  The
        Company engaged Sunrise Securities Corp. to act as the investment banker
        for the
        private placement that took place in March 2005 and as a lead underwriter
        for
        the initial public offering in 2006. Sunrise Securities Corp. and parties
        related to Sunrise Securities Corp. are owners of both common stock and warrants
        of the Company as a result of the private placement and the initial public
        offering. The Company paid Sunrise Securities Corp. $75,000 as an initial
        retainer for underwriting work associated with the initial public offering
        and
        $945,000 from the proceeds of the initial public offering.
  ***Subcontractors***
  Three
        company stockholders received payments for subcontract/consulting services
        performed on certain grant awards and internal research and development.
        Two of
        these stockholders were subsequently hired by the Company during 2005 and
        the
        other continues to receive payments. Total subcontract expense made to the
        related parties amounted to $104,168, $100,250 and $77,250 for the years
        ended
        December 31, 2006, 2005 and 2004, respectively.
  ***Consultants***
  One
        company stockholder received payment for consulting services performed related
        to business development. Total consultant expense made to this related party
        amounted to $77,300, $49,000 and $0 for the years ended December 31, 2006,
        2005,
        and 2004, respectfully.
  **Note
        4. Stock Transactions**
  In
        June
        2003, the Company was incorporated in the State of Delaware and the founders
        entered into restricted stock agreements as the Company commenced business
        operations.
  F-21
  As
        of
        December 31, 2006 all of the restricted stock was fully vested. The founders,
        their positions and number of shares purchased appear below. The total initial
        value assigned to these shares was $25,000 because at the time, without the
        involvement of ChemBridge or CCF, the probability of becoming a going concern
        was deemed to be remote.
  **Name**
              
              **Position**
              
              **Number
                  of**
                **Shares**Dr.
                  Andrei Gudkov
              
              Chief
                  Scientific Officer
              
              1,579,400Dr.
                  Michael Fonstein
              
              Chief
                  Executive Officer, President, Chairman of the Board
              
              1,311,200Dr.
                  Yakov Kogan
              
              Executive
                  Vice President of Business Development, Secretary
              
              715,200Dr.
                  Elena Feinstein
              
              Executive
                  Vice President of Research and Development
              
              268,200Dr.
                  Veronika Vonstein
              
              General
                  Manager
              
              119,200
  In
        April
        2004, Dr. George Stark entered into a restricted stock agreement for 208,600
        shares of common stock, which fully vested at the time of issuance. As the
        transaction pre-dated ChemBridge’s investment, the Company believed that its
        value remained at $25,000, and the value assigned to these shares was $1,287.
        He
        continues to serve the Company as the Chairman of the Scientific Advisory
        Board.
  In
        August
        2004, after ChemBridge acquired its shares, the Company entered into restricted
        stock agreements with Dr. Vadim Krivokrysenko, Dr. Katerina Gurova and Dr.
        Michael Chernov for 50,660, 107,280, and 50,660 shares of common stock
        respectively. With ChemBridge’s investment, the Company deemed the probability
        of becoming a going concern to have increased slightly and the Company was
        valued at a total of $75,000. The value assigned to these shares was $3,387.
        These stockholders continue to provide the Company with molecular and cancer
        biology expertise and management of laboratory operations and drug discovery
        projects.
  In
        August
        2004, Dr. Veronika Vonstein sold all 119,200 of her shares back to the Company,
        effectively terminating her relationship with the Company, to pursue outside
        opportunities. In August 2004, Dr. Andrei Gudkov sold 29,800 shares back
        to the
        Company to maintain an appropriate percentage ownership, as determined by
        the
        founders as a group.
  F-22


In
      September 2004, the Company issued 29,800 warrants to Sunrise Securities Corp.
      and its designees at an exercise price of $2.00 per share, which expire in
      March
      2010. The warrants were issued to retain Sunrise Securities Corp. as an
      investment banker.




In
      March
      2005, the Company issued 3,000,000 shares of Series A Participating Convertible
      Preferred Stock (Series A) for $6 million in gross proceeds. These shares were
      convertible into common stock on a one-for-one basis and earn a dividend of
      6%
      payable biannually on February 1 and August 1 in cash or common stock. In
      conjunction with the issuance of the Series A shares, $50,000 of convertible
      notes held at December 31, 2004 and a $50,000 note issued February 3, 2005,
      including accrued interest, were converted into 51,219 shares of Series A
      preferred stock. The Company also issued 308,000 shares of common stock and
      300,000 warrants to purchase 300,000 shares of common stock with an exercise
      price of $2.00 per share to Sunrise Securities Corp., the private placement
      agent, and its designees as partial consideration for their services rendered.
      295,850 of these warrants expire on March 15, 2010 and 4,150 expire on March
      28,
      2010 resulting from two closing dates.




In
      March
      2005, the Company issued 10,000 stock options under a non-qualified stock option
      agreement to a consultant who works for the company on an ongoing basis. These
      options allow for the purchase of common stock at a price of $3.00 per share.
      These options have a thirteen month vesting schedule and expire on March 1,
      2015. The value of the options is being recognized as consulting expense over
      the vesting period based on the Black-Scholes option pricing model.




In
      July
      2005, the Company issued 294,240 stock options to various employees of the
      Company under non-qualified stock option agreements. These options allow for
      the
      purchase of 190,000 shares of common stock at a price of $.66 and 104,240 shares
      of common stock at a price of $0.67 per share, respectively. These options
      have
      a three-year vesting schedule and expire on June 30, 2015. The value of the
      options is being recognized as compensation expense over the vesting period
      based on the Black-Scholes option pricing model.




In
      July
      2005, the company issued fully vested options to purchase 59,600 shares of
      common stock under a non-qualified stock option agreement to an outside
      consultant who works for the company on an ongoing basis. These stock options
      were exercised at a price of $2.00 per share and the company recorded $119,200
      in consulting fees as a result of the issuance of these stock options.




On
      August
      1, 2005, the Company paid a stock dividend of 69,201 shares of common stock
      to
      holders of record of the outstanding Series A preferred stock.




F-23




In
      December 2005, the Company issued 20,000 stock options under a non-qualified
      stock option agreement to a consultant who works for the company on an ongoing
      basis. These options allow for the purchase of common stock at a price of $2.00
      per share with a two-year vesting schedule and expire on November 30, 2015.




As
      a
      condition of the issuance of the Series A preferred stock in March 2005, all
      holders of Series A preferred stock received an additional 2% of all preferred
      stock, common stock and warrants that each Series A preferred stockholder owns
      for each 30 day period that a delay occurs in a required transaction. These
      penalty shares are not subject to compounding or prorating based on the number
      of days of delay. They are earned at the end of each 30-day penalty period.
      For
      the first quarter of 2006, one penalty period occurred in which 60,000 shares
      of
      Series A preferred stock were earned at $120,000. In addition, 13,515 shares
      of
      common stock were earned at $27,030. The penalty shares were issued in January
      2006.




Pursuant
      to an Amendment to the Series A Rights Agreement, dated as of February 17,
      2006,
      the Company’s obligation to issue penalty shares was suspended for a period of
      70 days, subject to a one-time 45-day extension, while the Company’s
      registration statement was being reviewed by the SEC.




On
      February 1, 2006, the Company paid a common stock dividend of 91,776 shares
      to
      holders of the Series A preferred stock to satisfy the dividend requirement
      of
      the preferred stock issuance.




On
      March
      1, 2006, the Company issued 116,750 stock options to various employees and
      consultants of the Company under non-qualified stock option agreements. These
      options allow for the purchase of 116,750 shares of common stock at a price
      of
      $4.50. These options have a three-year vesting schedule and expire on February
      29, 2016.




On
      June
      21, 2006, after the expiration of the 115-day extension and an additional 30-day
      period, the Company incurred one additional penalty period in which 60,000
      shares of Series A preferred stock were earned at $120,000 and 15,295 shares
      of
      common stock were earned at $30,590. The Company has not incurred any further
      obligation to issue penalty shares since these issuances.




See
      Note
      8 for further details on stock option agreements.




On
      July
      20, 2006, the Company sold 1,700,000 shares of common stock in its initial
      public offering at $6.00 per share. The net proceeds to the Company from this
      offering were approximately $8,300,000. Beginning July 21, 2006, the Company’s
      shares were quoted on the Nasdaq Capital Market and listed on the Boston Stock
      Exchange under the symbols “CBLI” and “CFB” respectively. In connection with its
      initial public offering, the Company sold warrants to purchase 170,000 shares
      of
      common stock to the underwriters and their designees at a cost of $100.00.
      The
      warrants have an exercise price of $8.70 per share.




F-24




On
      July
      20, 2006, the effective date of the Company’s initial public offering, the
      Company issued 92,407 shares of common stock as accumulated dividends to the
      Series A preferred stockholders. On the same date, all of the Company’s Series A
      Preferred shares automatically converted on a one-for-one basis into 3,351,219
      shares of common stock and notes of the Company in the principal amount of
      $283,500 plus accrued interest of $29,503 automatically converted into 124,206
      shares of common stock. In connection with their appointment to the Board,
      the
      Company issued to each of the Company’s three new independent directors, options
      to purchase 15,000 shares of common stock with an exercise price of $6.00 per
      share.




On
      September 21, 2006, the SEC declared effective a registration statement of
      the
      Company registering up to 4,453,601 shares of common stock for resale from
      time
      to time by the selling stockholders named in the prospectus contained in the
      registration statement. The Company will not receive any proceeds from the
      sale
      of the underlying shares of common stock, although to the extent the selling
      stockholders exercise warrants for the underlying shares of common stock, the
      Company will receive the exercise price of those warrants. The registration
      statement was filed to satisfy registration rights that the Company had
      previously granted.




On
      November 16, 2006 the Company issued 50,000 warrants to an outside consultant.
      These warrants are immediately exercisable into common shares of the Company
      and
      have an exercise price of $6.00 per share and an expiration date of November
      16,
      2011.




F-25


**Note
        5. Convertible Notes Payable**


**2006**
            
            **2005**
            
            **2004**Unsecured
                note to a research collaborator of the Company, bearing interest
                at 6% per
                annum, principal and interest due October 2007. Mandatory conversion
                into
                common stock upon an initial public offering of the Company at the
                fixed
                conversion price of $2.52 per share. Optional conversion into common
                stock
                or a new debt agreement depending on whether the Company raises additional
                capital through additional equity or debt. Upon the option conversion,
                the
                conversion amount will be converted into common stock at the new
                issue
                price per share or into a new debt instrument with a principal amount
                equal to the conversion amount.
            
            
            —
            
            $
            109,000
            
            $
            109,000Unsecured
                note to stockholder, bearing interest at 5% per annum, principal
                and
                interest due May 2007. This note was converted into preferred stock
                in
                March 2005.
            
            
            —
            
            
            —
            
            
            50,000Two
                unsecured notes to a research collaborator of the Company, bearing
                interest at 6% per annum, principal and interest due November 2007.
                Mandatory conversion into common stock upon an initial public offering
                of
                the Company at the fixed conversion price of $2.52 per share. Optional
                conversion into common stock or a new debt agreement depending on
                whether
                the Company raises additional capital through additional equity or
                debt.
                Upon the optional conversion, the conversion amount will be converted
                into
                common stock at the new issue price per share or into a new debt
                instrument with a principal amount equal to the conversion
                amount.
            
            
            —
            
            
            174,500
            
            
            174,500$
            283,500
            
            $
            333,500Current
                portion
            
            
            —
            
            
            —
            
            
            —283,500
            
            
            333,500Long-term
                accrued interest
            
            
            —
            
            
            19,574
            
            
            4,019—
            
            $
            303,074
            
            $
            337,519




All
      the
      aforementioned convertible notes were converted into common stock on July 20,
      2006 at the completion of the initial public offering.




F-26


**Note
        6. Income Taxes**
  The
        Company accounts for income taxes under SFAS No. 109, “Accounting for Income
        Taxes.” Significant components of the Company’s net deferred tax assets are
        shown below. A valuation allowance of $4,898,000, $2,022,000 and $1,063,000
        has
        been recognized at December 31, 2006, 2005 and 2004, respectively, to offset
        all
        deferred tax assets, as realization of such asset is uncertain. The increase
        in
        the valuation allowance of $2,876,000 between 2005 and 2006 results from
        additional losses.


**2006**
            
            **2005**
            
            **2004**Deferred
                tax assetNet
                operating loss carryforwards
            
            $
            4,586,000
            
            $
            1,897,000
            
            $
            1,003,000Deferred
                compensation
            
            
            345,000
            
            
            135,000
            
            
            66,000Loss
                on short term investments
            
            
            2,000
            
            
            7,000
            
            
            —Depreciation
            
            
            (35,000)
            )
            
            (17,000)
            )
            
            (6,000)
            )Total
            
            
            4,898,000
            
            
            2,022,000
            
            
            1,063,000Valuation
                allowance
            
            $
            (4,898,000)
            )
            $
            (2,022,000)
            )
            $
            (1,063,000)
            )Net
                deferred tax asset
            
            $
            —
            
            $
            —
            
            $
            —




As
      of
      December 31, 2006, the Company has Federal net operating loss carryforwards
      of
      approximately $11,480,000. The Federal net operating loss carryforwards will
      begin to expire in 2023 unless utilized. Net operating loss carryforwards and
      available credits are subject to review and possible adjustment by the Internal
      Revenue Service and may be limited in the event of certain changes in the
      ownership interest of significant stockholders.




F-27




**Note
      7. Other Balance Sheet Details**




***Available-For-Sale
      Cash Equivalents and Marketable Securities***




Available-for-sale
      Marketable Securities consist of the following:




**Cost**
            
            **Accrued**
              **Interest**
            
            **Gross**
              **Unrealized**
              **Gains**
            
            **Gross**
              **Unrealized
                Losses**
            
            **Fair**
              **Value**December
                31, 2006 - Current Marketable Securities
            
            $
            2,000,000
            
            $
            42,479
            
            $
            -
            
            $
            4,165
            
            $
            2,038,314




Available-for
      sale marketable securities consist of certificates of deposits with various
      commercial banks throughout the country. The unrealized gains and losses on
      these securities were primarily caused by recent changes in market interest
      rates. Because the Company has the ability and intent to hold these securities
      until a recovery of fair value, which may be at maturity, the Company does
      not
      consider these securities to be other than temporarily impaired as of December
      31, 2006.




The
      Company considers investments with a maturity date of more than three months
      from the date of purchase to be short-term investments and has classified these
      securities as available-for-sale. Such investments are carried at fair value,
      with unrealized gains and losses included as accumulated other comprehensive
      income (loss) in stockholders’ equity. The cost of available-for-sale securities
      sold is determined based on the specific identification method.




As
      a
      result of changes in market interest rates on investment, the Company recognized
      unrealized gains/(losses) of $13,645, ($17,810), and $0 for the years ending
      December 31, 2006, 2005, and 2004, respectively. In 2006, the Company recaptured
      $6,967 of the previously recorded other comprehensive loss due to the maturity
      of the short term investments and recaptured $6,678 due to market value
      fluctuations of the outstanding short term investments. The Company purchased
      short-term investments and incurred unrealized losses of $17,810. These
      gains/(losses) were charged directly against Stockholders’ Equity as Other
      Comprehensive Income/(Loss) in the periods incurred. The Company intends on
      holding these securities to maturity and views these unrealized losses as
      temporary in nature.




F-28





***Equipment***




Equipment
      consists of the following:




**2006**
            
            **2005**Laboratory
                Equipment
            
            $
            347,944
            
            $
            225,997Computer
                Equipment
            
            
            132,572
            
            
            91,788Furniture
            
            
            65,087
            
            
            40,158545,603
            
            
            357,943Less
                accumulated depreciation
            
            
            (142,011
            )
            
            (47,080
            )$
            403,592
            
            $
            310,863




**Note
      8. Commitments and Contingencies**




The
      Company has entered into various agreements with third parties and certain
      related parties in connection with the research and development activities
      of
      its existing product candidates as well as discovery efforts on potential new
      product candidates. These agreements include costs for research and development
      and license agreements that represent the Company’s fixed obligations payable to
      sponsor research and minimum royalty payments for licensed patents. These
      amounts do not include any additional amounts that the Company may be required
      to pay under its license agreements upon the achievement of scientific,
      regulatory and commercial milestones that may become payable depending on the
      progress of scientific development and regulatory approvals, including
      milestones such as the submission of an investigational new drug application
      to
      the FDA, similar submissions to foreign regulatory authorities and the first
      commercial sale of the Company’s products in various countries. These agreements
      include costs related to manufacturing, clinical trials and preclinical studies
      performed by third parties.





The
      Company is also party to three agreements that require it to make milestone
      payments, royalties on net sales of the Company’s products and payments on
      sublicense income received by the Company. As of December 31, 2006, no milestone
      payments have been made, although $50,000 has been accrued under one of these
      agreements.




F-29





From
      time
      to time, the Company may have certain contingent liabilities that arise in
      the
      ordinary course of business. The Company accrues for liabilities when it is
      probable that future expenditures will be made and such expenditures can be
      reasonably estimated. For all periods presented, the Company is not a party
      to
      any pending material litigation or other material legal proceedings.




The
      Company currently has operating lease commitments in place for facilities in
      Cleveland, Ohio and Chicago, Illinois as well as office equipment. The Company
      recognizes rent expense on a straight-line basis over the term of the related
      operating leases. The operating lease expenses recognized were $160,742,
      $112,967 and $18,900 in 2006, 2005 and 2004, respectively.




Annual
      future minimum lease payments under present lease commitments are as follows.
      These future minimum payments have not been adjusted to reflect an inflation
      adjustment included in the lease for the Cleveland facilities based on the
      Gross
      Domestic Product Price Deflator.




**Operating**
              **Leases**2007
            
            $
            63,4602008
            
            
            4,9492009
            
            
            1,935$
            70,344




The
      Company has entered into stock option agreements with key employees, board
      members and consultants with exercise prices ranging from $0.00 to $6.00. These
      awards were approved by the Board of Directors. Option grants beginning in
      2005
      vest ratably over periods ranging from zero to three years. The options expire
      ten years from the date of grant, subject to the terms applicable in the
      agreement. A list of the total stock options awarded and exercised appears
      below:




**Number of**
              **Options**
            
            **Weighted Average**
              **Exercise
                Price**Outstanding
                at December 31, 2004
            
            
            —
            
            
            N/AGranted
            
            
            383,840
            
            $
            0.69Exercised
            
            
            59,600
            
            $
            —Forfeited
            
            
            —
            
            
            N/AOutstanding
                at December 31, 2005
            
            
            324,240
            
            $
            0.82Granted
            
            
            161,750
            
            $
            4.92Exercised
            
            
            625
            
            $
            4.50Forfeited
            
            
            1,875
            
            $
            4.50Outstanding
                at December 31, 2006
            
            
            483,490
            
            $
            2.17




F-30




The
      number of options and weighted average exercise price of options fully vested
      and exercisable for the years ending December 31, 2006, 2005 and 2004 were
      243,183, 83,560 and 0 options at $2.27, $0.88 and $0 respectively. A table
      showing the number of options outstanding and exercisable (fully vested) at
      December 31, 2006 appears below:




**Outstanding**
            
            **Exercisable****Exercise
                Price**
            
            **Number
                of**
              **Options**
            
            **Weighted
                Average**
              **Years
                to**
              **Expiration**
            
            **Number
                of**
              **Options**$0.66
            
            
            190,000
            
            
            8.5
            
            
            95,0000.67
            
            
            104,240
            
            
            8.5
            
            
            52,1202.00
            
            
            20,000
            
            
            8.92
            
            
            12,5003.00
            
            
            10,000
            
            
            8.17
            
            
            10,0004.50
            
            
            114,250
            
            
            9.17
            
            
            28,5636.00
            
            
            45,000
            
            
            9.56
            
            
            45,000Total
            
            
            483,490
            
            
            8.77
            
            
            243,183




The
      Company has entered into warrant agreements with strategic partners and
      consultants with exercise prices ranging from $1.13 to $8.70. These awards
      were
      approved by the Board of Directors. The warrants expire between five and six
      years from the date of grant, subject to the terms applicable in the agreement.
      A list of the total warrants awarded and exercised appears below.





**Number of**
              **Warrants**
            
            **Weighted Average**
              **Exercise
                Price**Outstanding
                at December 31, 2004
            
            
            294,424
            
            $
            1.22Granted
            
            
            300,000
            
            $
            2.00Exercised
            
            
            —
            
            
            N/AForfeited
            
            
            —
            
            
            N/AOutstanding
                at December 31, 2005
            
            
            594,424
            
            $
            1.61Granted
            
            
            220,000
            
            $
            8.09Exercised
            
            
            —
            
            
            N/AForfeited
            
            
            —
            
            
            N/AOutstanding
                at December 31, 2006
            
            
            814,424
            
            $
            3.36





The
      Company has entered into employment agreements with three key executives who,
      if
      terminated by the Company without cause as described in these agreements, would
      be entitled to severance pay.




F-31




While
      no
      legal actions are currently pending, the Company may be party to certain claims
      brought against it arising from certain contractual matters. It is not possible
      to state the ultimate liability, if any, in these matters. In management’s
      opinion, the ultimate resolution of any such claim will not have a material
      adverse effect on the financial position of the Company.





**Note
      9. Subsequent Events**




On
      January 12, 2007 the Company entered into a Sponsored Research Agreement with
      the Roswell Park Cancer Institute in Buffalo, New York whereby a portion of
      the
      research and development activities of the Company will be relocated to Buffalo,
      New York. The Roswell Park Cancer Institute has awarded the Company $3,000,000
      in research grant funding, $2,000,000 to be paid on April 1, 2007 and $1,000,000
      to be paid on April 1, 2008.


F-32
 **Item 8.** **Changes
        In and Disagreements With Accountants on Accounting and Financial****Disclosure**





There
      were no disagreements with accountants and financial disclosures for the years
      ended, December 31, 2006 and 2005 .




**Item 8A.** **Controls
        and Procedures**





**Effectiveness
      of Disclosure**





Our
      management, with the participation of our chief executive officer and chief
      financial officer, evaluated the effectiveness of our disclosure controls and
      procedures as of December 31, 2006 as defined in Rules 13a-15(e) and
      15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange
      Act. Our management recognizes that any controls and procedures, no matter
      how
      well designed and operated, can provide only reasonable assurance of achieving
      their objectives and management necessarily applies its judgment in evaluating
      the cost-benefit relationship of possible controls and procedures. Based on
      the
      evaluation of our disclosure controls and procedures as of December 31, 2006,
      our chief executive officer and chief financial officer concluded that, as
      of
      such date, our disclosure controls and procedures were effective to assure
      that
      information required to be declared by us in reports that we file or submit
      under the Exchange Act is (1) recorded, processed, summarized, and reported
      within the periods specified in the SEC’s rules and forms and (2) accumulated
      and communicated to our management, including our chief executive officer and
      chief financial officer, as appropriate, to allow timely decisions regarding
      required disclosure.





40


**Changes
        in Internal Control over Financial Reporting**


No
      change
      in our internal control over financial reporting (as defined in
      Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the
      fiscal year ended December 31, 2006 that has materially affected, or is
      reasonably likely to materially affect, our internal control over financial
      reporting.





This
      annual report does not include a report of management’s assessment regarding
      internal control over financial reporting or an attestation report of our
      registered public accounting firm due to a transition period established by
      rules of the SEC for newly public companies


**Item 8B.** **Other
        Information**





Not
      applicable.




41




**PART
      III**


**Item 9.** **Directors,
        Executive Officers, Promoters, Control Persons and Corporate Governance;
        Compliance with Section 16(a) of the Exchange Act**





See
      the
      section entitled “Directors and Executive Officers” in Part I, Item 1
      hereof for information regarding directors and executive officers.





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





Section
      16 of the Exchange Act requires our officers (as defined under Section 16),
      directors and persons who beneficially own greater than 10% of a registered
      class of our equity securities to file reports of ownership and changes in
      ownership with the SEC. Based solely on a review of the forms it has received,
      we believe that, during 2006, all Section 16 filing requirements applicable
      to
      our officers, directors and greater than 10% beneficial owners were complied
      with by such persons, except that Form 3 filings for each of CBL’s officers,
      directors and greater than 10% beneficial owners other than Dr. Fonstein and
      Sunrise Equity Partners, L.P. were not timely filed due to technical delays
      associated with obtaining the appropriate filing codes prior to our initial
      public offering. Such filings were made promptly after the technical delays
      were
      resolved.




**Code
      of Ethics for Senior Executives and Code of Conduct**





In
      May
      2006, our Board of Directors adopted a Code of Ethics for Senior Executives
      that
      is specifically applicable to its executive officers and senior financial
      officers, including its principal executive officer, its principal financial
      officer, and controller. The Code of Ethics for Senior Executives is posted
      on
      our website, www.cbiolabs.com, under the caption “Investor Information.” We have
      also adopted a Code of Conduct in order to promote honest and ethical conduct
      and compliance with the laws and governmental rules and regulations to which
      we
      are subject. The Code of Conduct is applicable to all of our employees, officers
      and directors, and is posted on the Company’s website, www.cbiolabs.com, under
      the caption “Investor Information.” A copy of the Code of Ethics for Senior
      Executives or Code of Conduct can be obtained by requesting such documents
      in
      writing from our Chief Financial Officer at our corporate
      headquarters.




**Audit
      Committee**





The
      Audit
      Committee of our Board of Directors consists of Messrs. Antal, Kasten and Perez,
      each of whom has been determined to be independent in accordance with the
      standards of the Nasdaq Capital Market. The Audit Committee generally has direct
      responsibility for our accounting policies and internal controls, financial
      reporting practices, and legal and regulatory compliance. More specifically,
      the
      Audit Committee has responsibility to review and discuss the annual audited
      financial statements and disclosures with management and the independent
      auditor; review the financial statements and disclosures provided in our
      quarterly and periodic reports with management, the senior internal auditing
      executive, and the independent auditor; oversee the external audit coverage,
      including appointment and replacement of the independent auditor and
      pre-approval of all audit and non-audit services to be performed by the
      independent auditor; and oversee internal audit coverage, including the
      appointment and replacement of the senior internal auditing executive. The
      Board
      of Directors has determined that Mr. Antal is an “audit committee financial
      expert,” as that term is defined in the SEC rules adopted pursuant to the
      Sarbanes-Oxley Act.




42





**Item 10.
        **Executive
        Compensation****


The
      following table provides information concerning the compensation for services
      in
      all capacities to us for the year ended December 31, 2006, to Michael Fonstein,
      who served as our principal executive officer, and our two most highly
      compensated executive officers (other than the principal executive officer),
      Messrs. Kogan and Marhofer (collectively, the “Named Officers”).




**SUMMARY
      COMPENSATION TABLE**





**Name
                and Principal Position**
            
            **Year**
            
            **Salary**
              **($)**
            
            **Bonus**
              **($)
                (1)**
            
            **Stock**
              **Awards**
              **($)**
            
            **Option**
              **Awards**
              **($)
                (2)**
            
            **Non-Equity**
              **Incentive**
              **Plan**
              **Compens-**
              **ation**
              **($)**
            
            **Non-**
              **Qualified
                Deferred Compens**
              **-ation**
              **Earnings**
              **($)**
            
            **All**
              **Other
                Compensation**
              **($)**
            
            **Total**Michael
                Fonstein
              Chief
                Executive Officer
            
            
            2006
              2005
            
            
            191,667
              155,000
            
            
            35,375
              -
            
            
            -
              -
            
            
            -
              -
            
            
            -
              -
            
            
            -
              -
            
            
            -
              -
            
            
            227,042
              155,000
            (3)Yakov
                N. Kogan
              Executive
                Vice President
            
            
            2006
              2005
            
            
            166,667
              143,725
            
            
            34,500
              -
            
            
            -
              -
            
            
            -
              -
            
            
            -
              -
            
            
            -
              -
            
            
            48,855
              -
            (4)
            
            250,022
              143,725John
                A. Marhofer, Jr.
              Chief
                Financial Officer
            
            
            2006
              2005
            
            
            90,000
              64,460
            
            
            17,750
              558
            
            
            -
              -
            
            
            49,559
              18,552
            
            
            -
              -
            
            
            -
              -
            
            
            -
              -
            
            
            157,309
              83,571







(1)
            Bonuses
                earned in a given year are paid during the current and the next year.
                For
                example, the bonuses indicated as earned in respect of 2006 were
                paid
                in September of 2006 and January of
                2007.






43




(2)
            Option
                award amounts are calculated using the provisions of Statement of
                Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment.
                Further details can be found in Item 6 under “Critical Accounting Policies
                -*Stock
                Based Compensation*.”




(3)
            Total
                compensation figure does not include amounts for commuting from primary
                residence in Chicago, Illinois of $9,083 for 2006 and $9,922 for
                2005.





(4)
            Represents
                tuition reimbursement for masters in business administration
                program.





CBL
      entered into employment agreements dated as of August 1, 2004 with each of
      Michael Fonstein, CBL’s Chief Executive Officer, and Yakov N. Kogan, CBL’s
      Executive Vice President. For the year ended December 31, 2006, Dr. Fonstein’s
      annual base salary was $191,667 and Dr. Kogan’s annual base salary was $166,667.
      These agreements have three-year initial terms and are renewed pursuant to
      their
      terms for successive one-year periods, unless earlier terminated in accordance
      with their terms. If either executive is terminated by CBL without cause as
      described in the agreements, he would be entitled to severance pay equal to
      nine
      months of his annual salary. The agreements also contain standard
      confidentiality, assignment of inventions, non-competition and non-solicitation
      provisions to help protect the value of CBL’s intellectual property. Mr.
      Marhofer does not have an employment agreement.




**OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-END**





Below
      is
      information relating to unexercised options held by John A. Marhofer, Jr.,
      our
      Chief Financial Officer, as of December 31, 2006. No other named executive
      officer held any unexercised options or unvested stock as of such
      date.




**Option
                Awards****Name**
            
            **Number**
              **of**
              **Securities**
              **Underlying**
              **Unexercised**
              **Options**
              **(#)**
              **Exercisable**
            
            **Number**
              **of**
              **Securities**
              **Underlying**
              **Unexercised**
              **Options**
              **(#)**
              **Unexercisable**
            
            **Equity**
              **Incentive**
              **Plan**
              **Awards:**
              **Number
                of**
              **Securities**
              **Underlying**
              **Unexercised**
              **Unearned**
              **Options**
              **(#)**
            
            **Option**
              **Exercise**
              **Price**
              **($)**
            
            **Option**
              **Expiration**
              **Date**JoJohn
                A. Marhofer, Jr.
            
            
            5,000
              11,592
            
            
            15,000
              11,592
            
            
            -
              -
            
            
            4.50
              0.67
            
            
            2/28/2016
              6/30/2015




44




The
      vesting dates for the option awards in the table above are as
      follows:




20,000
      options expiring on 2/28/2016:




5,000
      options immediately vest on grant date of 3/1/2006


5,000
      options vest on 3/1/2007


5,000
      options vest on 3/1/2008


5,000
      options vest on 3/1/2009





23,184
      options expiring on 6/30/2015:





5,796
      options immediately vested on grant date of 7/1/2005


5,796
      options vest on 7/1/2006


5,796
      options vest on 7/1/2007


5,796
      options vest on 7/1/2008





**DIRECTOR
      COMPENSATION**




Our
      independent directors, other than Dr. DiCorleto, receive a payment of $25,000
      per year for two meetings scheduled at our headquarters and an additional $2,500
      for all meetings attended throughout the year. For the period from July 20,
      2006
      (the effective date of our initial public offering) through December 31, 2006,
      we paid each of these three independent directors a fee of $12,500 for their
      services as director. In addition, we also granted to each of these three
      independent directors options to purchase 15,000 shares of Common Stock at
      our
      initial public offering price of $6.00 per share. All of those options vested
      immediately upon grant and are exercisable for ten years. Each of our
      independent directors is also reimbursed for reasonable out-of-pocket expenses
      incurred in attending Board of Directors or Board committee meetings. The total
      compensation of our non-employee directors for the year ended December 31,
      2006
      in their capacity as directors is shown in the table below.




**Name**
            
            **Fees
                Earned or**
              **Paid
                in Cash**
              **($)**
            
            **Stock
                Awards**
              **($)**
            
            **Option
                Awards**
              **($) 
                (1)**
            
            **Non-Equity**
              **Incentive
                Plan Compensation**
              **($)**
            
            **Change
                in**
              **Pension**
              **Value
                and Nonqualified Deferred Compensation Earnings**
              **($)**
            
            **All
                Other Compensation**
              **($)**
            
            **Total**
              **($)**Bernard
                L. Kasten Jr.
            
            
            12,500
            
            
            -
            
            
            56,449
            
            
            -
            
            
            -
            
            
            -
            
            
            68,949H.
                Daniel Perez
            
            
            12,500
            
            
            -
            
            
            56,449
            
            
            -
            
            
            -
            
            
            -
            
            
            68,949James
                J. Antal
            
            
            12,500
            
            
            -
            
            
            56,449
            
            
            -
            
            
            -
            
            
            -
            
            
            68,949Paul
                E. DiCorleto
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            0Andrei
                V. Gudkov
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            0




45




(1)
            Messrs.
                Kasten, Perez, and Antal each held fully vested options to purchase
                15,000
                shares of common stock outstanding as of December 31, 2006. Award
                amounts
                are calculated using the provisions of Statement of Financial Accounting
                Standards (“SFAS”) No. 123R, Share-Based Payment. Further details can be
                found in Item 6 under “Critical Accounting Policies -*Stock
                Based Compensation*.”




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





Below
      is
      a summary of securities subject to issuance or available for issuance under
      our
      equity compensation arrangements as of December 31, 2006.




Plan
                category
            
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights
              (a)
            
            Weighted-average
                exercise price of outstanding options, warrants and rights
              (b)
            
            Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected in column
                (a))
              (c)Equity
                compensation plans approved by security holders
            
            
            45,000
            
            $
            6.00
            
            
            1,955,000Equity
                compensation plans not approved by security holders
            
            
            1,252,914
            
            $
            2.81
            
            
            -Total
            
            
            1,297,914
            
            $
            2.92
            
            
            1,955,000




46


The
        terms
        under which securities were issued without security holder approval are
        described below:


In
      April
      2004, ChemBridge Corporation acquired warrants to purchase 264,624 shares of
      our
      common stock for $1.13 per share in connection with granting us access to their
      chemical compound library. The warrants expire in April 2010.




In
      September 2004, we issued 29,800 warrants to Sunrise Securities Corp. and its
      designees at an exercise price of $2.00 per share, which expire in March 2010.
      The warrants were issued to retain Sunrise Securities Corp. as an investment
      banker.




In
      conjunction with the issuance of the Series A Participating Convertible
      Preferred shares in March 2005, we issued warrants to purchase 300,000 shares
      of
      common stock with an exercise price of $2.00 per share to Sunrise Securities
      Corp., the private placement agent, and its designees as partial consideration
      for their services rendered. 295,850 of these warrants expire on March 15,
      2010
      and 4,150 expire on March 28, 2010 resulting from two closing
      dates.




In
      March
      2005, we issued 10,000 stock options under a non-qualified stock option
      agreement to a consultant who works for the company on an ongoing basis. These
      options allow for the purchase of common stock at a price of $3.00 per share.
      These options have a thirteen month vesting schedule and expire on March 1,
      2015.




In
      July
      2005, we issued 294,240 stock options to various employees of the Company under
      non-qualified stock option agreements. These options allow for the purchase
      of
      190,000 shares of common stock at a price of $.66 and 104,240 shares of common
      stock at a price of $0.67 per share, respectively. These options have a
      three-year vesting schedule and expire on June 30, 2015.




In
      December 2005, we issued 20,000 stock options under a non-qualified stock option
      agreement to a consultant who works for the company on an ongoing basis. These
      options allow for the purchase of common stock at a price of $2.00 per share
      with a two-year vesting schedule and expire on November 30, 2015.




On
      March
      1, 2006, we issued 114,250 stock options to various employees and consultants
      under non-qualified stock option agreements. These options allow for the
      purchase of 114,250 shares of common stock at a price of $4.50. These options
      have a three-year vesting schedule and expire on February 29, 2016.




47




In
      connection with our initial public offering in July 2006, we issued warrants
      to
      purchase 170,000 shares of common stock to the underwriters and their designees
      at a cost of $100.00. The warrants have an exercise price of $8.70 per
      share.




On
      November 16, 2006 we issued 50,000 warrants to an outside consultant in
      connection with assistance in capital raising activities that led to our March
      2007 private placement. These warrants are immediately exercisable into common
      shares of the Company and have an exercise price of $6.00 per share and an
      expiration date of November 16, 2011.




**SECURITY
      OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS**




The
      following table sets forth, as of March 14, 2007, certain information with
      respect to the beneficial ownership of the Common Stock by (i) each person
      known
      by CBL to own beneficially more than 5% of the outstanding shares of Common
      Stock, (ii) each CBL director, (iii) each CBL executive officer, and (iv) all
      Company executive officers and directors as a group. The calculation of the
      percentage of shares beneficially owned before the offering is based on a total
      of 11,889,099 shares of common stock outstanding as of March 14, 2007.




**Name
                and Address**
            
            **Number
                of Shares**
              **of
                Registrant**
              **Common
                Stock**
              **Beneficially
                Owned**
            
            
            
            **Percentage of**
              **Class
                Beneficially**
              **Owned********Directors
                and Executive Officers**Bernard
                L. Kasten Jr.
            
            
            15,000
            
            
            (3
            )
            
            *Director,
                Chairman of the BoardJames
                J. Antal
            
            
            15,000
            
            
            (2
            )
            
            *DirectorPaul
                E. DiCorleto
            
            
            0
            
            
            
            
            
            0
            %DirectorMichael
                Fonstein
            
            
            1,311,200
            
            
            
            
            
            11.03
            %Director,
                CEO & PresidentAndrei
                V. Gudkov
            
            
            1,549,600
            
            
            (1
            )
            
            13.03
            %Director,
                Chief Scientific OfficerYakov
                N. Kogan
            
            
            715,200
            
            
            
            
            
            6.02
            %Director,
                Executive Vice President ofBusiness
                Development, SecretaryH.
                Daniel Perez
            
            
            15,000
            
            
            (4
            )
            
            *DirectorJohn
                A. Marhofer, Jr.
            
            
            21,592
            
            
            (5
            )
            
            *Chief
                Financial OfficerAll
                directors and officers as a group (eight people)
            
            
            3,642,592
            
            
            
            
            
            30.47
            %**5%
                Stockholders**The
                Cleveland Clinic Foundation(6)
            
            
            1,341,000
            
            
            (7
            )
            
            11.28
            %ChemBridge
                Corporation(8)
            
            
            622,224
            
            
            (9
            )
            
            5.23
            %Sunrise
                Equity Partners, LP(10)
            
            
            1,436,548
            
            
            (11
            )
            
            12.08
            %Sunrise
                Securities Corp.(12)
            
            
            1,436,548
            
            
            (13
            )
            
            12.08
            %




*
      Less
      than 1%.




48




(1)
      On
      November 30, 2004, Dr. Gudkov entered into a voting agreement with the Cleveland
      Clinic whereby he irrevocably granted the Cleveland Clinic the right to vote
      all
      of his shares. On April 18, 2006, the Cleveland Clinic and Dr. Gudkov agreed
      to
      rescind that voting agreement effective as of November 30, 2004, such that
      Dr.
      Gudkov retains his rights to vote all of his shares.




(2)
      Includes options to purchase 15,000 shares of common stock, which are currently
      exercisable.




(3)
      Includes options to purchase 15,000 shares of common stock, which are currently
      exercisable.




(4)
      Includes options to purchase 15,000 shares of common stock, which are currently
      exercisable.




(5)
      Includes options to purchase 21,592 shares of common stock, which are currently
      exercisable.




(6)
      9500
      Euclid Avenue, Cleveland, Ohio 44195.




(7)
      The
      Cleveland Clinic Foundation is an Ohio non-profit corporation. The power to
      dispose of and vote these shares is controlled by corporate governance
      procedures pursuant to the Code of Regulations adopted by The Cleveland Clinic
      Foundation. Pursuant to these Regulations, the power to dispose of these shares
      is vested with the Board of Trustees and the power to vote these shares is
      vested in the (i) Chairman of the Board of Trustees, currently A. Malachi Mixon,
      II, (ii) President of the Board of Trustees, currently Delos M. Cosgrove, M.D.,
      (iii) Vice President of the Board of Trustees, currently Stephen R. Hardis,
      and
      (iv) Vice Chairman of the Board of Trustees, which office is currently vacant.
      Any vote so exercised by these officers is deemed to have been exercised by
      and
      on behalf of The Cleveland Clinic Foundation.




49




(8)
      16981
      Via Tazon, Suite G, San Diego, California 92127.




(9)
      Includes 357,600 shares of common stock and 264,624 shares of common stock
      underlying a warrant, which is currently exercisable. Eugene Vaisberg, the
      Chairman and CEO of ChemBridge Corporation, is the majority owner of ChemBridge
      Corporation and has the power to vote and dispose of securities owned by
      ChemBridge Corporation. Accordingly, he may be deemed to beneficially own the
      securities owned by ChemBridge Corporation. Mr. Vaisberg disclaims any
      beneficial ownership of the securities owned by ChemBridge Corporation.




(10)
      641
      Lexington Ave., 25th Floor, New York, New York 10022.




(11)
      Information shown is based on amendment to Schedule 13G filed by Sunrise Equity
      Partners, LP and Sunrise Securities Corp. with the SEC on January 19, 2007.
      Includes 1,185,962 shares of common stock owned by Sunrise Equity Partners,
      LP,
      and 250,586 shares of common stock owned by Sunrise Securities Corp. Level
      Counter LLC is the general partner of Sunrise Equity Partners, LP. The three
      managing members of Level Counter LLC are Nathan Low, the sole stockholder
      of
      Sunrise Securities Corp. and its president, Amnon Mandelbaum, one of the
      Managing Directors of Investment Banking at Sunrise Securities Corp., and
      Marilyn Adler, who is otherwise unaffiliated with Sunrise Securities Corp.,
      and
      a unanimous vote of all three persons is required to dispose of the securities
      of Sunrise Equity Partners, LP. Accordingly, each of such persons may be deemed
      to have shared beneficial ownership of the securities owned by Sunrise Equity
      Partners, LP. Such persons disclaim such beneficial ownership. As a result
      of
      the relationship of Mr. Low and Mr. Mandelbaum to Sunrise Securities Corp.,
      Sunrise Equity Partners, LP may be deemed to beneficially own the securities
      owned by Sunrise Securities Corp. and/or Sunrise Securities Corp. may be deemed
      to beneficially own the securities owned by Sunrise Equity Partners, LP. Sunrise
      Equity Partners, LP disclaims any beneficial ownership of the securities owned
      by Sunrise Securities Corp. and Sunrise Securities Corp. disclaims any
      beneficial ownership of the securities owned by Sunrise Equity Partners, LP.




(12)
      641 Lexington Ave., 25th Floor, New York, New
      York 10022.




(13)
      Information shown is based on amendment to
      Schedule 13G filed by Sunrise Equity Partners, LP and Sunrise Securities Corp.
      with the SEC on January 19, 2007.  Includes 250,586 shares of common stock
      owned by Sunrise Securities Corp., and 1,185,962 shares of common stock owned
      by
      Sunrise Equity Partners, LP.  Level Counter LLC is the general partner of
      Sunrise Equity Partners, LP. The three managing members of Level Countery LLC
      are Nathan Low, the sole stockholder of Sunrise Securities Corp. and its
      president, Amnon Mandelbaum, one of the Managing Directors of Investment Banking
      at Sunrise Securities Corp., and Marilyn Adler who is otherwise unaffiliated
      with Sunrise Securities crop., and a unanimous vot off all three persons is
      required to dispose of the securities of Sunrise Equity Partners, LP.
      Accordingly, each of such persons may be deemed to have shared beneficial
      ownership of securities owned by Sunrise Equity Partners, LP. Such persons
      disclaim such beneficial ownership.  As a result of the relationship of Mr.
      Low and Mr. Mandelbaum to Sunrise Securities Corp., Sunrise Equity Partners,
      LP
      may be deemed to beneficially own the securities owned by Sunrise Securities
      Corp. and/or Sunrise Securities Corp. may be deemed to beneficially own the
      securities owned by Sunrise Equity Partners, LP. Sunrise Eqiuty Partners,
      LP disclaims any beneficial ownership of the securities owned by Sunrise
      Securities Corp., and Sunrise Securities Corp. disclaims any beneficial
      ownership of the securitiees owned by Sunrise Equity Partners, LP.


**Item 12.** **Certain
        Relationships and Related Transactions and Director
        Independence**
  Transactions
        with Related
        Persons





As
      of
      July 20, 2006, the effective date of our initial public offering, the Audit
      Committee **** has
      been required
      to conduct appropriate reviews of all transactions with related persons for
      potential conflict of interest situations on an ongoing basis. All such
      transactions must be approved by our Audit Committee.




On
      or
      around May 31, 2006, we entered into a Collaboration Agreement with one of
      our
      stockholders, ChemBridge Corporation, whereby the parties agreed to collaborate
      on efforts to research and develop pharmaceutical compounds targeting RCC and
      other cancers. The financial commitment from each party depends on the success
      of each step of the project.




50




Pursuant
      to our existing license agreement with CCF, we had accrued as of December 31,
      2006 $50,000 in milestone payments, which amount is payable upon the earlier
      to
      occur of CCF’s equity ownership falling below 5% of our total outstanding shares
      (on a fully-diluted basis) or our receiving more than $30,000,000 in funding
      or
      revenues from sources other than CCF. We have subcontracted with the CCF for
      grants in the approximate amount of $220,000, and CCF provides lab services
      and personnel to CBL in the approximate amount of $725,000.




From
      July
      20, 2006, the effective date of our registration statement, through December
      31,
      2006, we did not enter into any related party transactions.




Director
      Independence




In
      accordance with Nasdaq Marketplace Rule 4350(c), a majority of CBL’s seven
      directors are "independent directors”: James J. Antal, Paul E. DiCorleto,
      Bernard L. Kasten Jr., and H. Daniel Perez. Under Nasdaq Marketplace Rule
      4200(a)(15), “independent director” means a person other than an executive
      officer or employee of the company or any other individual having a relationship
      which, in the opinion of the issuer's board of directors, would interfere with
      the exercise of independent judgment in carrying out the responsibilities of
      a
      director. The following persons are not considered independent under the Nasdaq
      Rule:





(A)
      a
      director who is, or at any time during the past three years was, employed by
      the
      company or by any parent or subsidiary of the company;




(B)
      a
      director who accepted or who has a family member who accepted any compensation
      from the company in excess of $60,000 during any period of twelve consecutive
      months within the three years preceding the determination of independence,
      other
      than the following:




(i)
      compensation for board or board committee service;




(ii)
      compensation paid to a family member who is an employee (other than an executive
      officer) of the company; or




(iii)
      benefits under a tax-qualified retirement plan, or non-discretionary
      compensation,




(C)
      a
      director who is a family member of an individual who is, or at any time during
      the past three years was, employed by the company as an executive
      officer;




(D)
      a
      director who is, or has a family member who is, a partner in, or a controlling
      shareholder or an executive officer of, any organization to which the company
      made, or from which the company received, payments for property or services
      in
      the current or any of the past three fiscal years that exceed 5% of the
      recipient's consolidated gross revenues for that year, or $200,000, whichever
      is
      more, other than the following:




(i)
      payments arising solely from investments in the company's securities;
      or




(ii)
      payments under non-discretionary charitable contribution matching
      programs.




(E)
      a
      director of the issuer who is, or has a family member who is, employed as an
      executive officer of another entity where at any time during the past three
      years any of the executive officers of the issuer serve on the compensation
      committee of such other entity; or




51




(F)
      a
      director who is, or has a family member who is, a current partner of the
      company's outside auditor, or was a partner or employee of the company's outside
      auditor who worked on the company's audit at any time during any of the past
      three years.





Messrs.
      Antal, DiCorleto, Kasten, and Perez satisfy this standard of independence.
      In
      making this determination with respect to Dr. DiCorleto, the Nominating and
      Corporate Governance Committee and the Board has considered Dr. DiCorleto’s
      affiliation with the Cleveland Clinic and satisfied itself that this affiliation
      does not detract or interfere with Dr. DiCorleto’s ability to exercise
      independent judgment and carrying out his responsibilities as director and
      serving the best interests of our stockholders. **** Messrs.
      Antal, Kasten, and Perez make up our Compensation Committee, Nominating and
      Corporate Governance Committee, and Audit Committee. As members of our Audit
      Committee, they meet the additional independence requirements for audit
      committee members under Nasdaq Marketplace Rule 4350(d). Specifically, Messrs.
      Antal, Kasten, and Perez satisfy the criteria for independence set forth in
      Rule
      10a-3(b)(1) under the Exchange Act, and have not participated in the preparation
      of the financial statements of the company or any current subsidiary of the
      company at any time during the past three years.





**Item 13.
        **Exhibits****




**Exhibit**
              **No.**
            
            **Description**3.1
            
            Certificate
                of Incorporation filed with the Secretary of State of Delaware on
                June 5,
                2003***3.2
            
            Certificate
                of Amendment of Certificate of Incorporation filed with the Secretary
                of
                State of Delaware on February 25, 2005***3.3
            
            Certificate
                of Designation of Series A Participating Convertible Preferred Stock
                filed
                with the Secretary of State of Delaware on March 8,
                2005***3.4
            
            Second
                Certificate of Amendment of Certificate of Incorporation filed with
                Secretary of State of Delaware on June 30, 2006***3.5
            
            Certificate
                of Designations, Preferences and Rights of Series B Convertible Preferred
                Stock, dated March 16, 2007******3.6
            
            Amended
                and Restated By-Laws***4.1
            
            Form
                of Specimen Common Stock Certificate*4.2
            
            Form
                of Warrants issues to designees of Sunrise Securities Corp., dated
                March
                2005*




52




4.3
            
            Form
                of Warrants issued to underwriters***4.4
            
            Warrant
                to Purchase Common Stock issued to ChemBridge Corporation, dated
                April 27,
                2004*4.5
            
            Form
                of Series B Warrant ******4.6
            
            Form
                of Series C Warrant ******10.1
            ****
            Restricted
                Stock Agreement between Cleveland BioLabs, Inc. and Michael Fonstein,
                dated as of July 5, 2003*10.2
            ****
            Restricted
                Stock Agreement between Cleveland BioLabs, Inc. and Yakov Kogan,
                dated as
                of July 5, 2003*10.3
            ****
            Restricted
                Stock Agreement between Cleveland BioLabs, Inc. and Andrei Gudkov,
                dated
                as of July 5, 2003*10.4
            ****
            Library
                Access Agreement by and between ChemBridge Corporation and Cleveland
                BioLabs, Inc., effective as of April 27, 2004*10.5
            ****
            Restricted
                Stock and Investor Rights Agreement between Cleveland BioLabs, Inc.
                and
                ChemBridge Corporation, dated as of April 27, 2004*10.6
            ****
            Common
                Stockholders Agreement by and among Cleveland BioLabs, Inc. and the
                stockholders named therein, dated as of July 1, 2004*10.7
            ****
            Exclusive
                License Agreement by and between The Cleveland Clinic Foundation
                and
                Cleveland BioLabs, Inc., effective as of July 1, 2004*10.8
            ****
            Employment
                Agreement by and between Cleveland BioLabs, Inc. and Dr. Michael
                Fonstein,
                dated August 1, 2004*10.9
            ****
            Employment
                Agreement by and between Cleveland BioLabs, Inc. and Dr. Yakov Kogan,
                dated August 1, 2004*10.10
            ****
            Consulting
                Agreement between Cleveland BioLabs, Inc. and Dr. Andrei Gudkov,
                dated
                August 1, 2004*




53




10.11
            
            Cooperative
                Research and Development Agreement by and between the Uniformed Services
                University of the Health Sciences, the Henry M. Jackson Foundation
                for the
                Advancement of Military Medicine, Inc., the Cleveland Clinic Foundation,
                and Cleveland BioLabs, Inc., dated as of August 1,
                2004**10.12
            
            Form
                of Stock Purchase Agreement between Cleveland BioLabs, Inc. and the
                Purchasers party thereto, dated as of March 15, 2005*10.13
            
            Form
                of Series A Rights Agreement by and among Cleveland BioLabs, Inc.
                and the
                parties thereto, dated as of March 15, 2005*10.14
            
            Employment
                Agreement by and between Cleveland BioLabs, Inc. and Dr. Farrel Fort,
                dated June 1, 2005*10.15
            
            Amendment
                to Employment Agreement by and between Cleveland BioLabs, Inc. and
                Dr.
                Farrel Fort, dated September 30, 2005*10.16
            
            Amendment
                to Consulting Agreement between Cleveland BioLabs, Inc. and Dr. Andrei
                Gudkov, dated as of January 23, 2006*10.17
            
            Amendment
                to Restricted Stock Agreement between Cleveland BioLabs, Inc. and
                Michael
                Fonstein, dated as of January 23, 2006*10.18
            
            Amendment
                to Restricted Stock Agreement between Cleveland BioLabs, Inc. and
                Yakov
                Kogan, dated as of January 23, 2006*10.19
            
            Amendment
                to Restricted Stock Agreement between Cleveland BioLabs, Inc. and
                Andrei
                Gudkov, dated as of January 23, 2006*10.20
            
            Amendment
                to Common Stockholders Agreement by and among Cleveland BioLabs,
                Inc. and
                the parties thereto, dated as of January 26, 2006*10.21
            
            Form
                of Amendment to Series A Rights Agreement by and among Cleveland
                BioLabs,
                Inc. and the parties thereto, dated as of February 17,
                2006*10.22
            
            Cleveland
                BioLabs, Inc. 2006 Equity Incentive Plan***10.23
            
            Process
                Development and Manufacturing Agreement between Cleveland BioLabs,
                Inc.
                and SynCo Bio Partners B.V., effective as of August 31,
                2006****




54




10.24
            
            Sponsored
                Research Agreement between Cleveland BioLabs, Inc. and Roswell Park
                Cancer
                Institute Corporation, effective as of January 12,
                2007*****10.25
            
            Securities
                Purchase Agreement, dated March 16, 2007******10.26
            
            Registration
                Rights Agreement, dated March 16, 2007******10.27
            
            Voting
                Agreement, dated March 16, 2007******23.1
            
            Consent
                of Meaden & Moore, Ltd.31.1
            
            Rule
                13a-14(a)/15d-14(a) Certification of Michael Fonstein31.2
            
            Rule
                13a-14(a)/15d-14(a) Certification of John A. Marhofer,
                Jr.32.1
            
            Section
                1350 Certification.







*
            Incorporated
                by reference to Amendment No. 1 to Registration Statement on Form
                SB-2 as
                filed on April 25, 2006 (File No. 333-131918).**
            Incorporated
                by reference to Amendment No. 2 to Registration Statement on Form
                SB-2 as
                filed on May 31, 2006 (File No. 333-131918).***
            Incorporated
                by reference to Amendment No. 3 to Registration Statement on Form
                SB-2 as
                filed on July 10, 2006 (File No. 333-131918).****
            Incorporated
                by reference to Form 8-K as filed on October 25, 2006.*****
            Incorporated
                by reference to Form 8-K as filed on January 12, 2007.******
            Incorporated
                by reference to Form 8-K as filed on March 19,
                2007.





**Item 14.** **Principal
        Accountant Fees and Services**




Meaden
      & Moore, Ltd. (“Meaden & Moore”) acts as the principal auditor for us
      and also provides certain audit-related services. We have entered into an
      engagement agreement with Meaden & Moore that sets forth the terms by which
      Meaden & Moore will perform audit services for us. That agreement is subject
      to alternative dispute resolution procedures and an exclusion of punitive
      damages. RSM McGladery performs tax services for us.




55




On
      May
      25, 2005, we engaged the accounting firm of Meaden & Moore, Ltd. as our
      independent accountants. Meaden & Moore replaced our previous accountants
      Hausser & Taylor, LLC. Hausser & Taylor, which had audited our financial
      statements for the years ending December 31, 2003 and 2004, had been engaged
      in
      late May 2005 to reissue their opinion specifically to remove the going concern
      clause as a result of our $6 million Series A Preferred Stock financing. During
      the course of that engagement, Hausser & Taylor notified us that as a result
      of their having provided assistance to management in the drafting of notes
      to
      the financial statements, they could not satisfy the independence requirement
      of
      the SEC. Meaden & Moore has reaudited our financial statements for the years
      ended December 31, 2003 and 2004.





The
      Audit
      Committee pre-approves all services provided by Meaden & Moore to us. In
      pre-approving services, the Audit Committee considers whether such services
      are
      consistent with the SEC’s rules on auditor independence. The fees for the
      services provided by Meaden & Moore to us were as follows:




Audit
      Fees were $66,500 for the year ended December 31, 2006 and were $50,235 ($21,000
      for Meaden & Moore and $29,235 for Hausser
      & Taylor) for the
      year ended December 31, 2005. Audit Fees consisted of audit work performed
      in
      the preparation of financial statements, quarterly financial statement reviews,
      statutory audits, consultation regarding financial accounting and/or reporting
      standards and filings with the SEC.




Tax
      Fees
      were $8,080 and $2,810 for the years ended December 31, 2006, and December
      31,
      2005, respectively. Tax Fees consisted of all services performed by the
      independent auditor’s tax personnel, except those related to the audit of
      financial statements, and include tax compliance, tax consulting, tax planning
      and non-recurring projects.




There
      were no fees billed by Meaden & Moore for Other Fees during the years ended
      December 31, 2006, and December 31, 2005.




56




**SIGNATURES**




In
      accordance with the requirements of the Securities Exchange Act of 1934, the
      Registrant has caused this report to be signed on its behalf by the undersigned
      thereunto duly authorized.




CLEVELAND
                BIOLABS, INC.Dated:
                March 29, 2007
            By:
            /s/
                MICHAEL FONSTEINMichael
                FonsteinChief
                Executive Officer(Principal
                Executive Officer)


CLEVELAND
                  BIOLABS, INC.Dated:
                  March 29, 2007
              By:
              /s/
                  JOHN A. MARHOFER JR.John
                  A. Marhofer Jr.Chief
                  Financial Officer(Principal
                  Financial and Accounting Officer)


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




57





**Signature**
            
            **Title**
            
            **Date**/S/    Michael
                Fonstein
              
              Michael
                Fonstein
            
            Chief
                Executive Officer, President, and Director (Principal Executive
                Officer)
            
            March 29, 2007/S/    John
                A. Marhofer Jr.
              
              John
                A. Marhofer Jr.
            
            Chief
                Financial Officer (Principal Financial and Accounting
                Officer)
            
            March 29, 2007/S/    James
                Antal
              
              James
                Antal
            
            Director
            
            March 29, 2007/S/    Paul
                DiCorleto
              
              Paul
                DiCorleto
            
            Director
            
            March 29, 2007/S/    Andrei
                Gudkov
              
              Andrei
                Gudkov
            
            Chief
                Scientific Officer, and Director
            
            March 29, 2007/S/    Bernard
                L. Kasten
              
              Bernard
                L. Kasten
            
            Director
            
            March 29, 2007/S/    Yakov
                Kogan
              
              Yakov
                Kogan
            
            Executive
                Vice President, and Director
            
            March 29, 2007/S/    H.
                Daniel Perez
              
              H.
                Daniel Perez
            
            Director
            
            March 29, 2007





58





**EXHIBIT
      INDEX**




**Exhibit**
              **No.**
            
            **Description**3.1
            
            Certificate
                of Incorporation filed with the Secretary of State of Delaware on
                June 5,
                2003***3.2
            
            Certificate
                of Amendment of Certificate of Incorporation filed with the Secretary
                of
                State of Delaware on February 25, 2005***3.3
            
            Certificate
                of Designation of Series A Participating Convertible Preferred Stock
                filed
                with the Secretary of State of Delaware on March 8,
                2005***3.4
            
            Second
                Certificate of Amendment of Certificate of Incorporation filed with
                Secretary of State of Delaware on June 30, 2006***3.5
            
            Certificate
                of Designations, Preferences and Rights of Series B Convertible Preferred
                Stock, dated March 16, 2007******3.6
            
            Amended
                and Restated By-Laws***4.1
            
            Form
                of Specimen Common Stock Certificate*4.2
            
            Form
                of Warrants issues to designees of Sunrise Securities Corp., dated
                March
                2005* 4.3
              
              Form
                  of Warrants issued to underwriters***4.4
              
              Warrant
                  to Purchase Common Stock issued to ChemBridge Corporation, dated
                  April 27,
                  2004*4.5
              
              Form
                  of Series B Warrant ******4.6
              
              Form
                  of Series C Warrant ******10.1
              ****
              Restricted
                  Stock Agreement between Cleveland BioLabs, Inc. and Michael Fonstein,
                  dated as of July 5, 2003*10.2
              ****
              Restricted
                  Stock Agreement between Cleveland BioLabs, Inc. and Yakov Kogan,
                  dated as
                  of July 5, 2003*10.3
              ****
              Restricted
                  Stock Agreement between Cleveland BioLabs, Inc. and Andrei Gudkov,
                  dated
                  as of July 5, 2003*
  59
  10.4
              ****
              Library
                  Access Agreement by and between ChemBridge Corporation and Cleveland
                  BioLabs, Inc., effective as of April 27, 2004*10.5
              ****
              Restricted
                  Stock and Investor Rights Agreement between Cleveland BioLabs,
                  Inc. and
                  ChemBridge Corporation, dated as of April 27, 2004*10.6
              ****
              Common
                  Stockholders Agreement by and among Cleveland BioLabs, Inc. and
                  the
                  stockholders named therein, dated as of July 1, 2004*10.7
              ****
              Exclusive
                  License Agreement by and between The Cleveland Clinic Foundation
                  and
                  Cleveland BioLabs, Inc., effective as of July 1, 2004*10.8
              ****
              Employment
                  Agreement by and between Cleveland BioLabs, Inc. and Dr. Michael Fonstein,
                  dated August 1, 2004*10.9
              ****
              Employment
                  Agreement by and between Cleveland BioLabs, Inc. and Dr. Yakov
                  Kogan,
                  dated August 1, 2004*10.10
              ****
              Consulting
                  Agreement between Cleveland BioLabs, Inc. and Dr. Andrei Gudkov,
                  dated
                  August 1, 2004*
 10.11
              
              Cooperative
                  Research and Development Agreement by and between the Uniformed
                  Services
                  University of the Health Sciences, the Henry M. Jackson Foundation
                  for the
                  Advancement of Military Medicine, Inc., the Cleveland Clinic Foundation,
                  and Cleveland BioLabs, Inc., dated as of August 1,
                  2004**10.12
              
              Form
                  of Stock Purchase Agreement between Cleveland BioLabs, Inc. and
                  the
                  Purchasers party thereto, dated as of March 15, 2005*10.13
              
              Form
                  of Series A Rights Agreement by and among Cleveland BioLabs, Inc.
                  and the
                  parties thereto, dated as of March 15, 2005*10.14
              
              Employment
                  Agreement by and between Cleveland BioLabs, Inc. and Dr. Farrel
                  Fort,
                  dated June 1, 2005*10.15
              
              Amendment
                  to Employment Agreement by and between Cleveland BioLabs, Inc.
                  and Dr.
                  Farrel Fort, dated September 30,
                  2005*
  60
 10.16
              
              Amendment
                  to Consulting Agreement between Cleveland BioLabs, Inc. and Dr.
                  Andrei
                  Gudkov, dated as of January 23, 2006*10.17
              
              Amendment
                  to Restricted Stock Agreement between Cleveland BioLabs, Inc. and
                  Michael
                  Fonstein, dated as of January 23, 2006*10.18
              
              Amendment
                  to Restricted Stock Agreement between Cleveland BioLabs, Inc. and
                  Yakov
                  Kogan, dated as of January 23, 2006*10.19
              
              Amendment
                  to Restricted Stock Agreement between Cleveland BioLabs, Inc. and
                  Andrei
                  Gudkov, dated as of January 23, 2006*10.20
              
              Amendment
                  to Common Stockholders Agreement by and among Cleveland BioLabs,
                  Inc. and
                  the parties thereto, dated as of January 26, 2006*10.21
              
              Form
                  of Amendment to Series A Rights Agreement by and among Cleveland
                  BioLabs,
                  Inc. and the parties thereto, dated as of February 17,
                  2006*10.22
              
              Cleveland
                  BioLabs, Inc. 2006 Equity Incentive Plan***10.23
              
              Process
                  Development and Manufacturing Agreement between Cleveland BioLabs,
                  Inc.
                  and SynCo Bio Partners B.V., effective as of August 31,
                  2006****
 10.24
              
              Sponsored
                  Research Agreement between Cleveland BioLabs, Inc. and Roswell
                  Park Cancer
                  Institute Corporation, effective as of January 12,
                  2007*****10.25
              
              Securities
                  Purchase Agreement, dated March 16, 2007******10.26
              
              Registration
                  Rights Agreement, dated March 16, 2007******10.27
              
              Voting
                  Agreement, dated March 16, 2007******23.1
              
              Consent
                  of Meaden & Moore, Ltd.31.1
              
              Rule
                  13a-14(a)/15d-14(a) Certification of Michael Fonstein31.2
              
              Rule
                  13a-14(a)/15d-14(a) Certification of John A. Marhofer,
                  Jr.
  61
 32.1
              
              Section
                  1350 Certification.
  
 *
              Incorporated
                  by reference to Amendment No. 1 to Registration Statement on Form
                  SB-2 as
                  filed on April 25, 2006 (File No. 333-131918).**
              Incorporated
                  by reference to Amendment No. 2 to Registration Statement on Form
                  SB-2 as
                  filed on May 31, 2006 (File No. 333-131918).***
              Incorporated
                  by reference to Amendment No. 3 to Registration Statement on Form
                  SB-2 as
                  filed on July 10, 2006 (File No. 333-131918).****
              Incorporated
                  by reference to Form 8-K as filed on October 25, 2006.*****
              Incorporated
                  by reference to Form 8-K as filed on January 12, 2007.******
              Incorporated
                  by reference to Form 8-K as filed on March 19,
                  2007.


62