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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 
 Form 10-KSB
 þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2006
 OR
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 For the transition period from  to
 Commission file number 0-935
 CYTOCORE, INC.
 (Name of small business issuer in its charter)
 Delaware(State or other jurisdiction of 
incorporation or organization)
    
    36-4296006(I.R.S. Employer
Identification No.)414 N. Orleans St., Suite 502, Chicago, IL(Address of principal executive offices)
    
    60610(Zip Code)
 (312) 222-9550
 Securities registered under Section 12(b) of the Exchange Act:
 Title of each class
    
    Name of each exchange on which registeredNone
    
    Not Applicable
 Securities registered under Section 12(g) of the Exchange Act:
 Common Stock, $0.001 par value
 o
 þ o
 o
 o þ
    Documents Incorporated By Reference
  o þ




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CYTOCORE, INC.
Annual Report on Form 10-KSB
December 31, 2006
  
 TABLE OF CONTENTS
 PagePART IItem 1.
    
    Description of BusinessOverview
    
    
    1Recent Developments
    
    
    2Information About Industry Segments
    
    
    2Description of Business
    
    
    2Products
    
    
    2InPath Systems
    
    
    2Automated Microscopy Instruments
    
    
    3AcCell
    
    
    3AIPS
    
    
    4Drug Delivery System
    
    
    4Markets and Distribution Methods
    
    
    5Government Regulation, Clinical Studies and Regulatory Strategy
    
    
    5Competition
    
    
    9Operations
    
    
    9Intellectual Property
    
    
    10Research and Development
    
    
    11Component and Raw Materials
    
    
    11Working Capital Practices
    
    
    12Employees
    
    
    12Financial Information About Foreign and Domestic Operations and Export Sales
    
    
    12Risk Factors
    
    
    12Item 2.
    
    Description of Property
    
    
    16Item 3.
    
    Legal Proceedings
    
    
    16Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    19PART IIItem 5.
    
    Market for Common Equity and Related Stockholder Matters and Small Business Issuer Purchases Of Equity SecuritiesMarket Information
    
    
    19Holders
    
    
    19Dividends
    
    
    19Stock Transfer Agent
    
    
    20Securities Authorized for Issuance under Equity Compensation Plans
    
    
    20Recent Sales of Unregistered Securities and Use of Proceeds from Registered Securities
    
    
    22Issuance of Securities
    
    
    22Conversions
    
    
    23Purchases of Equity Securities by the Small Business Issuer and Affiliated Purchasers
    
    
    24Item 6.
    
    Managements Discussion and Analysis or Plan of Operation
    
    
    24Forward-Looking Statements
    
    
    24Overview
    
    
    25Critical Accounting Policies and Significant Judgments and Estimates
    
    
    26




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PageResults of Operations
    
    
    26Revenue
    
    
    26Costs and Expenses
    
    
    27Cost of Goods SoldResearch and Development
    
    
    27Selling, General and Administrative
    
    
    27Other Income and Expense
    
    
    27Interest Income
    
    
    27Interest Expense
    
    
    28Restructuring Settlements
    
    
    28Net Loss
    
    
    28Liquidity and Capital Resources
    
    
    28Off-Balance Sheets Arrangements
    
    
    29Item 7.
    
    Financial Statements
    
    
    29Item 8.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    29Resignation of Auditors
    
    
    29Item 8A.
    
    Controls and Procedures
    
    
    30Evaluation of Disclosure Controls and Procedures
    
    
    30Changes in Internal ControlsItem 8B.
    
    Other Information
    
    
    31PART IIIItem 9.
    
    Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act
    
    
    31Code of Ethics
    
    
    31Item 10.
    

Executive
Compensation
    
    
    32Item 11.
    
    Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
    
    
    32Item 12.
    
    Certain Relationships and Related Transactions, and Director Independence
    
    
    32Item 13.
    
    Exhibits
    
    
    32Item 14.
    
    Principal Accountant Fees and Services
    
    
    39Signatures
    
    
    40Index to Financial StatementsReports of Independent Registered Public Accounting Firms
    
    
    F-1  F-2Consolidated Balance Sheets at December 31, 2006 and 2005
    
    
    F-3Consolidated Statements of Operations for the two years ended December 31, 2006 and 2005
    
    
    F-4Consolidated Statements of Cash Flows for the two years ended December 31, 2006 and 2005
    
    
    F-5Consolidated Statements of Stockholders Deficit for the two years ended December 31, 2006 and 2005
    
    
    F-6-F-7Notes to Consolidated Financial Statements
    
    
    F-8Form of Common Stock Purchase WarrantForm of Subscription AgreementEmployment Agreement - Augusto OcanaEmployment Agreement - Robert McCulloughConsulting Agreement - Future Wave ManagementConsulting Agreement - EBM, Inc.Common Stock Purchase WarrantCommon Stock Purchase WarrantCommon Stock Purchase WarrantCommon Stock Purchase WarrantSubsidiaries of the CompanyConsent of Amper, Politziner & Mattia P.C.Consent of Altschuler, Melvoin and Glasser LLPCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906




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PART I
 
 Item 1. Description of Business
 
 Overview
 2
   2
  1




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Recent Developments
 2
 
 Information About Industry Segments
  
 Description of Business
    
 Products
 
 The InPath System
  2




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
    
    CCIs FDA-approved unique sample collection device, the e2 Collector consisting of a small disposable
balloon, shaped to fit the cervix. The device is intended to
replace the spatula and brush currently used to collect patient
cytology samples.
    
    The Cocktail-CVX and Cocktail-GCI and other protein markers, which
are fully-automated biochemical assays that get applied to a
sample to identify abnormal cells. In the laboratory version of
the InPath System slide-based test, this biochemical assay is
applied to sample cells released from the collection device into a
liquid preservative and deposited on a glass slide. An instrument
then performs an automated analysis of the sample by means of an
optical scan that detects the presence of multiple wavelengths of
fluorescent light. This light is produced by fluorescent reporter
tags, which are attached to certain components used in the
Cocktail-CVX and Cocktail-GCI and other biochemical assays. In
the laboratory version of the InPath System, our new
fully-integrated workstation  the Automated Image Proteomic
System or AIPS workstation  uses a camera to read the various
wavelengths of light from the sample.
    
    Custom-designed image analysis software which controls the automated
instruments and analyzes the captured wavelengths of light.
 
 Automated Microscopy Instruments
 
 AcCell
    3




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AIPS
  
    
    Robotic slide-feeding systems to load and unload multiple cassettes and slides to the image system;
    
    Bar code readers to ensure proper identification of samples being analyzed;
    
    Unique image analysis software;
    
    Electro-mechanical scanning stages to facilitate accurate slide screening;
    
    Automated cellular focusing on slides; and
    
    Data management software to facilitate primary or secondary review of samples and
report results into record-keeping systems.
  
 Drug Delivery System
 2
 Research and Product Development
  
    
    Positioning CCI to grow from a cyto screening focused company to a bio
pharmaceutical company
    
    Positioning CCI to develop commercial products based on a new biomarker that detects
both cervical, bladder and endometrial cancers
    
    Granting CCI rights to commercialize a unique drug delivery system to apply FDA
approved drugs to existing cervical lesions
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##### Table of Contents




    
    Leveraging CCI technology previously developed for the e2 Collector
handle
    
    Additional applications may develop in other types of epithelial cancers and could
become the basis for diagnostic testing rather than screen testing
    
    Providing physicians with a non-surgical therapeutic treatment option for cervical
lesions
 
 Markets and Distribution Methods
   
 Government Regulation, Clinical Studies and Regulatory Strategy
   2
  5




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i.e.,
  6




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2 2
     7




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InPath System Product Introduction Timelines
 Product
    
    Process
    
    Timelinee2 Collector
    
    Clinical trials
    
    CompletedRegulatory submission & review
    
    September 2001Regulatory clearance
    
    May 2002Follow up clinical trial
    
    Q4 2006Sales
    
    Q3 2007Cocktail-CVX & GCI
    
    Clinical trials (1)
    
    Q1-4 2007Regulatory submission & review (1)
    
    Q1 2008Regulatory clearance projected (1)
    
    Q3 2008U.S. sales (1)
    
    Q4 2008International sales (1)
    
    Q4 2008Product development and clinical trials (2,3)
    
    Q2 2008 - Q4 2009AIPS
    
    Product development & pre production mfg (2)
    
    Q1 2007 - Q1 2008Sales (2)
    
    Q2 2008Drug Delivery System (3)
    
    Instrument Development
    
    Q2-4 2008Patient Trials
    
    Q1- 3 2009Regulatory submission & review
    
    Q4 2009Regulatory clearance
    
    Q2 2010Sales
    
    Q3 2010
 
 (1)
    
    All of the above target dates pertain to the EndoScan test for uterine/
endometrial cancer.(2)
    
    Sales would pertain to the EndoScan test in 2008 and 2009. Base product
development and pre production manufacturing would apply to all cancer recognition
imaging software. Trials for bladder and cervical cancer would occur in 2008 and 2009
with expected FDA approval in late 2009-2010 time frame.(3)
    
    If trial and development expenses are not funded through e2
Collector and EndoScan sales additional capital will be required.  8




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Competition
      
 Operations
  2
  9




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Intellectual Property
      10




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2
   
 Research and Development
    
 Components and Raw Materials
 2
 11




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Working Capital Practices
   
 Employees
  
 Financial Information About Foreign and Domestic Operations and Export Sales
   
 Risk Factors
  There is a limited market for penny stocks such as our common stock .
  12




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The historically volatile market price of our common stock may affect the value of our
stockholders investments.
  
    
    general economic and other external market factors;
    
    announcements of mergers, acquisitions, licenses and strategic agreements;
    
    announcements of private or public sales of securities;
    
    announcements of new products or technology by us or our competitors;
    
    ability to finance our operations;
    
    fluctuations in operating results; and
    
    announcements of the FDA relating to products.
 Our common stock is unlikely to produce dividend income for the foreseeable future.
  Our common stock is subject to dilution, and an investors ownership interest and related
value may decline.
    13




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We have a history of operating losses
and there are doubts as to our ability to continue as a going
concern.




We continue to have the need to raise funds for operating purposes.
  We are unable to issue more common stock
  We may not be able to meet our long-term capital requirements.
  14




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Our products are subject to government regulation and they may not receive necessary
government approvals.
 2 2
  We may not be able to compete with companies that are larger and have more resources.
  We may not be able to market our products.
  We may not be able to adequately protect our intellectual property.
  15




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Management turnover could cause our business to suffer.
  
 Item 2. Description of Property
  
 Item 3. Legal Proceedings
 Settled in 2006
 Ungaretti & Harris LLP
 Hill & Barlow LLP.
 Medical College of Georgia Research Institute, Inc.
 16




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Account Resource
 Arthur Lipper III
 The Lumber Company (formerly Garrett Realty, Inc.).
 The Lash Group, Inc.
 Reid Jilek
 17




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Pending as of December 31, 2006; Subsequent Events
 Peter Gombrich.
 The Regents of the University of California
   Other claims
 Other Creditors.
  18




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Item 4. Submission of Matters to a Vote of Security Holders
 There were no matters submitted to a vote of stockholders during the fourth quarter of 2006.
 
 PART II
 
 Item 5.
    
    Market for Common Equity and Related Stockholder Matters and Small Business Issuer
Purchase of Equity Securities
 
 Market Information
  Range of CommonStockHigh
    
    LowYear Ended December 31, 20061st Quarter
    
    $
    0.15
    
    
    $
    0.052nd Quarter
    
    $
    0.25
    
    
    $
    0.113rd Quarter
    
    $
    0.23
    
    
    $
    0.154th Quarter
    
    $
    0.44
    
    
    $
    0.17Year Ended December 31, 20051st Quarter
    
    $
    0.12
    
    
    $
    0.072nd Quarter
    
    $
    0.07
    
    
    $
    0.053rd Quarter
    
    $
    0.16
    
    
    $
    0.024th Quarter
    
    $
    0.10
    
    
    $
    0.04
 
 Holders
  
 Dividends
   19




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Stock Transfer Agent
  
 Securities Authorized for Issuance under Equity Compensation Plans
  20




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Equity Compensation Plan Information
 Number of securitiesWeighted-average
    
    remaining available forNumber of securities to
    
    exercise price of
    
    future issuance under equitybe issued upon exercise
    
    outstanding
    
    compensation plans (excludingof outstanding options,
    
    options, warrants,
    
    securities reflected inwarrants and rights
    
    and rights
    
    column (a))Plan category
    
    (a)
    
    (b)
    
    (c)Equity Compensation Plans Approved by
Security Holders1999 Equity Incentive Plan (as
amended)  20,000,000 shares
    
    
    2,257,991
    
    
    $
    0.2767
    
    
    
    16,869,3421999 Employee Stock Purchase Plan 
200,000 shares
    
    
    
    
    
    
    
    
    
    
    160,415Equity Compensation Plans Not Approved
by Security HoldersWarrants issued with debt and equity(1)
    
    
    35,828,718
    
    
    $
    0.1614
    
    
    
    Warrants issued for financial and IR
services (2)
    
    
    5,270,125
    
    
    $
    0.1566
    
    
    
    Warrants issued for officer and
director compensation (3)
    
    
    10,250,000
    
    
    $
    0.1683
    
    
    
    Warrants issued in forgiveness of
debt and other services (4)
    
    
    3,697,660
    
    
    $
    0.1232
    
    
    
    Warrants from AccuMed acquisition (5)
    
    
    39,834
    
    
    $
    15.0600
    
    
    
    Total
    
    
    57,344,328
    
    
    $
    0.3309
    
    
    
    17,029,757
 
 1)
    
    CCI has issued warrants in conjunction with the issuance of debt and equity. The issuance
of warrants significantly reduced the cash costs that would otherwise be associated with
raising capital.2)
    
    CCI has generally included warrants in compensation agreements for providers of investor
relations and/or public relations services. Warrants were also issued to financial advisors as
remuneration for the procurement of equity, debt and preferred stock convertible into
equity. This practice significantly reduces the cash costs to CCI to obtain these services.3)
    
    In lieu of cash payment for employment services during fiscal
year 2006, 4,000,000 warrants each were issued to the
former CEO David Weissberg M.D., and our current CFO Robert McCullough Jr. In addition,
Augusto Ocana M.D., our current CEO, was issued 500,000 warrants. Directors John Abeles
M.D. and Alexander Milley were issued 625,000 warrants each for services rendered. Former Vice
President of Legal and Regulatory Affairs, Edward Renner was issued 500,000 warrants for services.4)
    
    CCI has issued warrants to settle debt and pay for services rendered.5)
    
    In September 2001, CCI completed the acquisition of AccuMed by merging it into a wholly-owned
subsidiary of CCI. As a result, CCI assumed stock options and warrants outstanding on the
records of AccuMed at the time of the acquisition. The remainder of the options that were
assumed in the acquisition are included in total options outstanding under the Companys 1999
Equity Incentive Plan. 21




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Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
 
 Issuance of Securities
 ommon Stock
   Warrants.
      22




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Conversions
   Bridge I.
 Bridge III.
 Bridge IV.
 23




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Preferred Stock
   
 Purchases of Equity Securities by the Small Business Issuer and Affiliated Purchasers
  
 Item 6. Managements Discussion and Analysis or Plan of Operation
 
 Forward-Looking Statements
   24




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Overview
 2
 2
  2
 2 2 2
 25




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Critical Accounting Policies and Significant Judgments and Estimates
   Revenue Recognition.
 Share-Based Payment
 
 Results of Operations
 Fiscal Year Ended December 31, 2006 as compared to Fiscal Year Ended December 31, 2005
 
 Revenue
  26




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Costs and Expenses
 Cost of Revenues
  
 Research and Development
  
 Selling, General and Administrative
  
 Other Income and Expense
 
 Interest Income
  27




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Interest Expense
  
 Restructuring Settlements
  
 Net Loss
  
 Liquidity and Capital Resources
    28




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Off-Balance Sheet Arrangements
  
 Item 7. Financial Statements
  
 Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
 
 Resignation of Auditors
    29




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Item 8A. Controls and Procedures
 
 Evaluation of Disclosure Controls and Procedures
 Limitation On Effectiveness of Controls
     1.
    
    The Company currently has insufficient resources and an insufficient
level of monitoring and oversight, which may restrict the Companys ability to
gather, analyze and report information relative to the financial statements in a
timely manner, including insufficient documentation and review of the selection and
application of generally accepted accounting principles to significant non-routine
transactions. In addition, the limited size of the accounting department makes it
impractical to achieve an optimum segregation of duties.2.
    
    The Company currently has an insufficient level of monitoring and
oversight controls for contract and agreements. This may restrict the Companys
ability to gather, analyze and report information relative to the financial
statements in a timely manner, including insufficient documentation and review of
the selection and application of generally accepted accounting principles to significant
non-routine transactions.
 30




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3.
    
    The Company currently has insufficient resources, tools and expertise to
properly value equity instruments in accordance with generally accepted accounting
principles.4.
    
    The Company does not have the needed expertise in house to appropriately
handle all tax related matters and related accounting treatment.5.
    
    The Companys current accounting package has very limited controls built
into the software and allows data to be easily modified, added or deleted without a
detailed audit trail.
 Remediation Plans
  1.
    
    Review the operation of the accounting department and expand the
department based upon the results of this review. Provide additional training and
resource materials for the accounting department.2.
    
    Using outside consultants to assist the company to review and document
the procedures and strengthen its internal control over significant financial
transactions and financial reporting and formalize the reporting process.3.
    
    Establish procedures for formally notifying the accounting department of
all contracts and significant transactions.4.
    
    Employ an outside tax consultant to assist in these matters.5.
    
    Evaluate our current accounting software and using consultants if
necessary identify a software package that incorporates sufficient controls for the
preparation of our consolidated financial statement and SEC reporting.
 
 Item 8B. Other Information
  
 PART III
 
 Item 9.
    
    Directors, Executive Officers, Promoters, Control Persons and Corporate Governance;
compliance with Section 16(a) of the Exchange Act
  
 Code of Ethics
 Code of Ethics and Business Conduct for Officers, Directors and
Employees
 31




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Item 10. Executive Compensation
  
 Item 11.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 12.
    
    Certain Relationships, Related Transactions and Director Independence
  
 Item 13. Exhibits
   Exhibit No.
    
    Description2.1
    
    Stock and Membership Interest Exchange Agreement dated as of December 4, 1998 among Bell
National Corporation, InPath, LLC and the InPath Members (as such term is defined therein).
(Incorporated herein by reference to Appendix A to the Bell National Corporation Definitive
Proxy Statement on Schedule 14A, filed on April 30, 1999 (the 1999 Proxy Statement).)2.2
    
    Agreement and Plan of Merger of Bell National Corporation and Ampersand Medical
Corporation. (Incorporated herein by reference to Appendix C to 1999 Proxy Statement.)2.3
    
    Agreement and Plan of Merger by and among AccuMed International, Inc., AccuMed Acquisition
Corp. and Ampersand Medical Corporation, dated as of February 7, 2001, and Amendment No. 1
thereto. (Incorporated herein by reference to Appendix I to Registration Statement (as
amended) on Form S-4, No. 333-61666, as filed on May 25, 2001 (the May 2001 S-2).)3.1
    
    Certificate of Incorporation, as amended. (Incorporated
herein by reference to Exhibit 3.1 to the Companys Current Report on Form 8-K dated September 26, 2001.)3.2
    
    By-laws of Ampersand Medical Corporation. (Incorporated herein by reference to Appendix E
to the 1999 Proxy Statement.)3.3
    
    Certificate of Designation, Preferences and Rights of Series A Convertible Preferred Stock
of Ampersand Medical Corporation. (Incorporated herein by reference to Exhibit 3.5 to the
Ampersand Medical Corporation Annual Report on Form 10-K (as amended) for the fiscal year
ended December 31, 2000, as filed on March 29, 2001 (the 2000 10-K).)
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Exhibit No.
    
    Description3.4
    
    Certificate of Designation, Preferences and Rights of Series B Convertible Preferred Stock
of Ampersand Medical Corporation. (Incorporated herein by reference to Exhibit 3.6 to the
2000 10-K.)3.5
    
    Section 6 of Article VII of the By-laws of Ampersand Medical Corporation, as amended.
(Incorporated herein by reference to Exhibit 3.3 to the May 2001 S-2.)3.6
    
    Certificate of Designation, Preferences and Rights of Series C Convertible Preferred Stock. (Incorporated herein by reference to Exhibit 3.4 to the Companys
Registration Statement on Form S-2 (as amended), File No. 333-83578, as filed on February
28, 2002 (the February 2002 S-2).)3.7
    
    Certificate of Amendment of Certificate of Designation, Preferences and Rights of Series C
Convertible Preferred Stock. (Incorporated herein by reference to Exhibit 3.5 to the
February 2002 S-2.)3.8
    
    Certificate of Amendment of Amended Certificate of Designation, Preferences and Rights of
Series C Convertible Preferred Stock. (Incorporated herein by reference to Exhibit 3.6 to
the February 2002 S-2.)3.9
    
    Certificate of Designations, Preferences and Rights of Series D Convertible Preferred
Stock. (Incorporated herein by reference to Exhibit 3.7 to the February 2002 S-2.)3.10
    
    Certificate of Designation, Preferences and Rights of Series E Convertible Preferred Stock.
(Incorporated herein by reference to Exhibit 3.8 to the February 2002 S-2.)3.11
    
    Certificate of Amendment to Certificate of Incorporation of the Company, dated August 5,
2004. (Incorporated herein by reference to Exhibit 3.1 to the Companys Form 10-QSB for
the quarter ended June 30, 2004, as filed on August 16, 2004 (the 2004 2Q 10-QSB).)3.12
    
    Certificate of Amendment to
Certificate of Incorporation,  on June 22,
2006. (Incorporated herein by reference to Exhibit 3.1 to the
 Companys Form 10-QSB for the Quarter end June 30, 2006, as
filed on August 21, 2006)4.2
    
    Common Stock Purchase Warrant issued to Holleb & Coff on July 4, 1999 representing the
right to purchase 250,000 shares of Common Stock of Ampersand Medical Corporation.
(Incorporated herein by reference to Exhibit 4.3 to the Ampersand Medical Corporation
Annual Report on Form 10-K for the fiscal year ended December 31, 1999, as filed on March
31, 2000 (the 1999 10-K).)4.10
    
    Common Stock Purchase Warrant issued to Monsun AS on April 1, 2002 representing the right
to purchase 200,000 shares of common stock of the Company. (Incorporated herein by
reference to Exhibit 4.31 to the June 2002 S-2.)4.12
    
    Form of Common Stock Purchase Warrant issued in connection with certain Bridge I financing
in June 2002. (Incorporated herein by reference to Exhibit 4.33 to the June 2002 S-2.)
 33




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Exhibit No.
    
    Description4.13
    
    Common Stock Purchase Warrant issued to Richard A. Domanik, M.D, with an issue date of May
31, 2002, representing the right to purchase 51,493 shares of common stock of the Company.
(Incorporated herein by reference to Exhibit 4.34 to the Registration Statement on Form
S-2, File No. 333-100150, as filed on September 27, 2002 (the September 2002 S-2).)4.14
    
    Amendment No. 1, dated August 19, 2002, to the Common Stock Purchase Warrant issued in
connection with certain Bridge I financing. (Incorporated herein by reference to Exhibit
4.36 to the Companys Annual Report on Form 10-K for the year ended December 31, 2002, as
filed on July 21, 2003 (the 2002 10-K).)4.15
    
    Form of Common Stock Purchase Warrant to be issued in connection with certain Bridge II
Financing beginning in October 2002. (Incorporated herein by reference to Exhibit 4.37 to
the 2002 10-K.)4.16
    
    Common Stock Purchase Warrant issued to Qwestar Resources on November 1, 2002 representing
the right to purchase 200,000 shares of common stock of the Company. (Incorporated herein
by reference to Exhibit 4.38 to the 2002 10-K.)4.17
    
    Common Stock Purchase Warrant issued to Suzanne M. Gombrich on April 2, 2003 representing
the right to purchase 1,000,000 shares of common stock of the Company. (Incorporated herein
by reference to Exhibit 4.39 to the Companys Quarterly Report on Form 10-QSB for the
quarter ended June 30, 2003, as filed on August 13, 2003 (the 2003 2Q 10-QSB).)4.18
    
    Common Stock Purchase Warrant issued to Dan Burns on August 20, 2003 representing the right
to purchase 1,100,000 shares of common stock of the Company. (Incorporated herein by
reference to Exhibit 4.40 to the Companys Quarterly Report on Form 10-QSB for the quarter
ended September 30, 2003, as filed on November 19, 2003 (the 2003 3Q 10-QSB).)4.19
    
    Common Stock Purchase Warrant issued to Dan Burns on September 16, 2003 representing the
right to purchase 935,000 shares of common stock of the Company. (Incorporated herein by
reference to Exhibit 4.41 to the 2003 3Q 10-QSB.)4.20
    
    Common Stock Purchase Warrant issued to David Weissberg on September 16, 2003 representing
the right to purchase 400,000 shares of common stock of the Company. (Incorporated herein
by reference to Exhibit 4.42 to the 2003 3Q 10-QSB.)4.21
    
    Common Stock Purchase Warrant issued to Reid Jilek on September 2, 2003 representing the
right to purchase 500,000 shares of common stock of the Company. (Incorporated herein by
reference to Exhibit 4.43 to the 2003 3Q 10-QSB.)4.22
    
    Common Stock Purchase Warrant issued to Dan Burns on March 19, 2004 representing the right
to purchase 500,000 shares of common stock of the Company. (Incorporated herein by
reference to Exhibit 4.1 to the Companys Quarterly Report on Form 10-QSB for the quarter
ended March 31, 2004, as filed on May 18, 2004 (the 2004 1Q 10-QSB).)4.23
    
    Common Stock Purchase Warrant issued to Dan Burns on March 4, 2004 representing the right
to purchase 67,000 shares of common stock of the Company. (Incorporated herein by
reference to Exhibit 4.2 to the 2004 1Q 10-QSB.)4.24
    
    Common Stock Purchase Warrant issued to Dan Burns on May 5, 2004 representing the right to
purchase 500,000 shares of common stock of the Company. (Incorporated herein by reference
to Exhibit 4.1 to the Companys Form 10-QSB for the quarter ended June 30, 2004, as filed
on August 16, 2004 (the 2004 2Q 10-QSB).)
 34




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##### Table of Contents



Exhibit No.
    
    Description4.25
    
    Common Stock Purchase Warrant issued to Dan Burns on June 4, 2004 representing the right to
purchase 530,000 shares of common stock of the Company. (Incorporated herein by reference
to Exhibit 4.2 to the 2004 2Q 10-QSB.)4.26
    
    Common Stock Purchase Warrant issued to Don Hancock on June 4, 2004 representing the right
to purchase 250,000 shares of common stock of the Company. (Incorporated herein by
reference to Exhibit 4.3 to the 2004 2Q 10-QSB.)4.27
    
    Form of common stock purchase warrant issued to private placement agents on June 15, 2004
representing the right to purchase an aggregate 681,625 shares of common stock of the
Company. (Incorporated herein by reference to Exhibit 4.4 to the 2004 2Q 10-QSB.)4.28
    
    Form of common stock purchase warrant issued to vendors as part of restructuring
settlements during the quarter ended June 30, 2004 representing the right to purchase an
aggregate 483,984 shares of common stock of the Company. (Incorporated herein by reference
to Exhibit 4.5 to the 2004 2Q 10-QSB.)4.30
    
    Common Stock Purchase Warrant issued to Ken Sgro on September 15, 2004 representing the
right to purchase 192,000 shares of common stock of the Company. (Incorporated herein by
reference to Exhibit 4.2 to the 2004 3Q 10-QSB.)4.32
    
    Common Stock Purchase Warrant issued to Jorge Leon, Ph.D., on September 15, 2004
representing the right to purchase 25,000 shares of common stock of the Company.
(Incorporated herein by reference to Exhibit 4.4 to the 2004 3Q 10-QSB.)4.33
    
    Common Stock Purchase Warrant issued to Jan L. Dorfman on September 15, 2004 representing
the right to purchase 20,000 shares of common stock of the Company. (Incorporated herein by
reference to Exhibit 4.5 to the 2004 3Q 10-QSB.)4.34
    
    Common Stock Purchase Warrant with an issue date of July 18, 2003 in favor of Azimuth
Corporation representing the right to purchase 2,875,000 shares of common stock of the
Company. (Incorporated herein by reference to Exhibit 4.39 of the Companys Annual Report
on Form 10-K for the fiscal year ended December 31, 2004, as filed on April 14, 2005 (the
2004 10-K).)4.35
    
    Common Stock Purchase Warrant with an issue date of July 18, 2003 in favor of Cadmus
Corporation representing the right to purchase 3,625,000 shares of common stock of the
Company. (Incorporated herein by reference to Exhibit 4.40 to the 2004 
10-K.)4.36
    
    Common Stock Purchase Warrant issued to Michael Pasini on February 15, 2005 representing
the right to purchase 200,000 shares of common stock of the Company. (Incorporated herein
by reference to Exhibit 4.1 to the Companys Quarterly Report on Form 10-QSB for the
quarter ended March 31, 2005, as filed on August 16, 2005.)4.37
    
    Common Stock Purchase Warrant issued to Dan Burns on May 2, 2005 representing the right to
purchase 556,500 shares of common stock. (Incorporated herein by reference to Exhibit 4.1
to Companys Quarterly Report on Form 10-QSB for the quarter ended June 30, 2005, as filed
on May 20, 2005.)4.38
    
    Form of subscription agreement to
purchase common stock of the Company at $0.025 per share.
(Incorporated herein by reference to Exhibit 4.38 to the 2005
10-KSB.)
 35




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##### Table of Contents



Exhibit No.
    
    Description4.39
    
    Form of common stock purchase warrant issued as part of 2005 financings representing the
right to purchase shares of common stock of the Company at $0.10 per
share (Incorporated herein by reference to Exhibit 4.39 to the 2005
10-KSB.)4.40
    
    Common Stock Purchase Warrant issued to Reid Jilek on March 1, 2006 representing the right
to purchase 1,000,000 shares of common stock. (Incorporated herein by
reference to Exhibit 4.40 to the 2005
10-KSB.)4.41
    
    Common Stock Purchase Warrant issued to Eric Gombrich on March 1, 2006 representing the
right to purchase 300,000 shares of common stock. (Incorporated
herein by reference to Exhibit 4.41 to the 2005
10-KSB.)4.42*
    
    Form of common stock purchase warrant issued as part of 2006 financings representing the
right to purchase shares of common stock of the Company at $0.18 per share4.43*
    
    Form of subscription agreement used to purchase common stock of the Company during 2006.10.2+
    
    1999 Equity Incentive Plan established as of June 1, 1999, as amended. (Incorporated herein
by reference to Appendix B to the Companys Definitive Proxy Statement on Schedule 14A, as
filed on July 1, 2004.)10.3+
    
    1999 Employee Stock Purchase Plan. (Incorporated herein by reference to Appendix G to the
1999 Proxy Statement.)10.4
    
    $500,000 Convertible Promissory Note issued to Monsun, AS on November 1, 2000.
(Incorporated herein by reference to Exhibit 10.23 to the 2000 10-K.)10.5
    
    Lease Agreement between Ampersand Medical Corporation and O.P., L.L.C, dated May 18, 2000,
pertaining to premises located at 414 N. Orleans, Suite 510, Chicago, Illinois 60610.
(Incorporated by reference to Exhibit 10.32 to the 2000 10-K.)10.6
    
    First Amendment to Lease Agreement between Ampersand Medical Corporation and O.P., L.L.C.,
dated February 13, 2001, pertaining to additional premises at 414 N. Orleans, Suite 503,
Chicago, Illinois 60610 and extending the term of the original lease until February 28,
2006. (Incorporated by reference to Exhibit 10.33 to the 2000 10-K.)10.7
    
    $25,000 Promissory Note issued to Northlea Partners, Ltd. on August 6, 2001. (Incorporated
herein by reference to Exhibit 10.41 to the August 2001 S-4.)10.8
    
    Form of Convertible Promissory Note issued in connection with certain Bridge I financing
beginning in March 2002. (Incorporated herein by reference to Exhibit 10.42 to the 2002
10-K.)10.9
    
    Amendment No. 1 to Convertible Promissory Note issued in connection with certain Bridge I
financing dated August 20, 2003. (Incorporated herein by reference to Exhibit 10.43 to the
2002 10-K.)10.10
    
    Form of Bridge II Convertible Promissory Note Indenture, including Form of Convertible
Promissory Note, Form of Security Agreement, Form of Collateral Sharing Agreement, and Form
of Warrant issued in connection with certain Bridge II Financing beginning in October 2002.
(Incorporated herein by reference to Exhibit 10.44 to the 2002 10-K.)10.12
    
    Amendment No.1 to the 12% Convertible Secured Promissory Note issued in connection with
certain Bridge II financing in October 2002. (Incorporated herein by reference to Exhibit
10.47 to the 2003 3Q 10-QSB.)
 36




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##### Table of Contents



Exhibit No.
    
    Description10.13
    
    Amendment No. 1 dated July 31, 2003 to the Indenture dated October 1, 2002 issued in
connection with certain Bridge II financing in October 2002 (Incorporated herein by
reference to Exhibit 10.48 to the 2003 3Q 10-QSB.)10.15
    
    Proposal for consulting agreement with Reid Jilek. (Incorporated herein by reference to
Exhibit 10.50 to the 2003 3Q 10-QSB.)10.16
    
    Form of Subscription Agreement for Bridge III $1,500,000 minimum offering/$4,000,000
Maximum Offering placed by Bathgate Capital Partners LLC. (Incorporated herein by reference
to Exhibit 10.47 to the 2003 10-KSB.)10.17
    
    Form of Note for Bridge III $1,500,000 minimum offering/$4,000,000 Maximum Offering placed
by Bathgate Capital Partners LLC. (Incorporated herein by reference to Exhibit 10.48 to the
2003 10-KSB.)10.18
    
    Form Registration Rights Agreement issued in connection with Bridge III Offering.
(Incorporated herein by reference to Exhibit 10.49 to the 2003 10-KSB.)10.19
    
    Form of General Security Agreement by the Company in connection with Bridge III Offering.
(Incorporated herein by reference to Exhibit 10.50 to the 2003 10-KSB.)10.20
    
    Form of Warrant issued in connection with Bridge III Offering. (Incorporated herein by
reference to Exhibit 10.51 to the 2003 10-KSB.)10.21
    
    Form of Subscription Agreement for Bridge IV Offering. (Incorporated herein by reference to
Exhibit 4.3 to the 2004 1Q 10-QSB.)10.22
    
    Form of Note for Bridge IV Offering. (Incorporated herein by reference to Exhibit 4.4 to
the 2004 1Q 10-QSB.)10.23
    
    Form of General Security Agreement for Bridge IV Offering. (Incorporated herein by
reference to Exhibit 4.5 to the 2004 1Q 10-QSB.)10.24
    
    Form of Registration Rights Agreement for Bridge IV Offering. (Incorporated herein by
reference to Exhibit 4.6 to the 2004 1Q 10-QSB.)10.25
    
    Form of Subscription Agreement for the Companys August 2004 common stock offering.
(Incorporated herein by reference to Exhibit 4.6 to the 2004 3Q 10-QSB.)10.26
    
    Settlement Agreement, effective as of October 14, 2004, by and among the Company, AccuMed
and MonoGen, Inc. and accompanying License Agreement, made as of October 14, 2004, by and
between MonoGen, Inc., the Company and AccuMed. (Incorporated herein by reference to
Exhibit 4.8 to the Companys Form 10-QSB/A for the quarter ended September 30, 2004, as
filed on November 17, 2004.)10.27
    
    Form of Subscription Agreement for the Companys common stock offering beginning in
December 2004. (Incorporated herein by reference to Exhibit 10.28 to the 2004 10-K.)10.28
    
    General Release and Settlement Agreement, effective as of July 18, 2003, by and among the
Company, Azimuth Corporation and Cadmus Corporation. (Incorporated herein by reference to
Exhibit 10.29 to the 2004 10-K.)
 37




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##### Table of Contents



Exhibit No.
    
    Description10.29
    
    Agreement, made as of December 31, 2004, between British Columbia Cancer Agency Branch and
the Company, AccuMed and Oncometrics. (Incorporated herein by reference to Exhibit 10.30 to
the 2004 10-K.)10.30
    
    Settlement Agreement, entered into as of December 2004, by and between Bruce Patterson and
Invirion, Inc. and the Company. (Incorporated herein by reference to Exhibit 10.31 to the
2004 10-K.)10.31
    
    Lease proposal letter agreement, dated September 22, 2004 from Spectrum Real Estate
Services to the Company pertaining to the lease of premises located at 414 N. Orleans,
Suite 510, Chicago, Illinois 60610 to be effective as third amendment to original lease.
(Incorporated herein by reference to Exhibit 10.32 to the 2004 10-K.)10.32
    
    Strategic alliance agreement entered into by the Company in November 2004. (Incorporated
herein by reference to Exhibit 10.33 to the 2004 10-K.)10.33
    
    Settlement Agreement and Mutual Release effective June 7, 2005, by and between the
Cleveland Clinic Foundation and the Company. (Incorporated herein by reference to Exhibit
10.1 to the 2005 3Q 10-QSB.)10.34
    
    General Release and Confidentiality Agreement, entered into October 2005, by and between
Eric Gombrich and the Company. (Incorporated herein by reference to Exhibit 10.2 to the
2005 3Q 10-QSB.)10.35
    
    Settlement Agreement and Mutual Release, entered into October 2005, by and among the Lash
Group Inc., Peter Gombrich and the Company. (Incorporated herein by reference to Exhibit
10.3 to the 2005 3Q 10-QSB.)10.36
    
    Clinical Study Agreement, entered into January 2006, between University Hospitals of
Cleveland and the Company. (Incorporated herein by reference to
Exhibit 10.36 to the 2005 10-KSB.)10.37
    
    Separation Agreement, entered into December 31, 2005, between Denis M. ODonnell, M.D. and
the Company. (Incorporated herein by reference to Exhibit 10.37 to the 2005
10-KSB.)10.38
    
    Consulting Agreement, dated January 27, 2006 and effective March 1, 2006, by and between
the Company and GSG Enterprises LLC (Incorporated herein by reference to Exhibit 10.1 to
the 2006 3Q 10-QSB/A.)10.39+*
    
    Employment agreement dated November 15, 2006 between Augusto Ocana and the Company.10.40+*
    
    Employment agreement dated November 20, 2006 between Robert McCullough and the Company.10.41*
    
    Consulting agreement dated November 20, 2006 between Future Wave Management and the Company.10.42*
    
    Consulting agreement dated November 20, 2006 between EBM, Inc. and the Company.10.43+*
    
    Common Stock Purchase Warrant dated December 1, 2006 issued to Augusto Ocana representing
the right to purchase 500,000 shares of common stock10.44
    
    Common Stock Purchase Warrant dated September 28, 2006 issued to David Weissburg
representing the right to purchase 4,000,000 shares of common stock
(Incorporated herein by reference to Exhibit 10.2 to the 2006   3Q
10-QSB.)10.45+*
    
    Common Stock Purchase Warrant dated September 28, 2006 issued to Robert Mccullough Jr.
representing the right to purchase 4,000,000 shares of common stock
 38




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##### Table of Contents



Exhibit No.
    
    Description10.46+*
    
    Common Stock Purchase Warrant dated September 28, 2006 issued to Alexander Milley.
representing the right to purchase 625,000 shares of common stock10.47+*
    
    Common Stock Purchase Warrant dated September 28, 2006 issued to John Ables. representing
the right to purchase 625,000 shares of common stock14
    
    Code of Ethics and Business Conduct of Officers, Directors and Employees of CytoCore, Inc.
(Incorporated herein by reference to Exhibit 99.1 to the 2003 10-KSB.)21*
    
    Subsidiaries of the Company23.1*
    
    Consent of Amper, Politziner & Mattia P.C.23.2*
    
    Consent of Altschuler, Melvoin and Glasser LLP31.1*
    
    Certification of the Chief Executive Officer of CytoCore, Inc. pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.31.2*
    
    Certification of the Chief Financial Officer of CytoCore, Inc. pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.32.1*
    
    Certification of the Chief Executive Officer of CytoCore, Inc. Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2*
    
    Certification of the Chief Financial Officer of CytoCore, Inc., Pursuant to 18 U.S.C.
Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 Item 14. Principal Accountant Fees and Services
  39




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##### Table of Contents



SIGNATURES
  CYTOCORE, INC.By:
    /s/ Augusto OcanaAugusto OcanaChief Executive Officer By:
    /s/ Robert McCullough, Jr.Robert McCullough, Jr.Chief Financial Officer   Signature
    
    Title
    
    Date/s/Augusto Ocana
    
    Chief Executive Officer
    
    April 12, 2007Augusto Ocana
    
    (Principal Executive
Officer and Director)/s/ Robert McCullough, Jr.
    
    Chief Financial Officer
    
    April 12, 2007Robert McCullough, Jr
    
    (Principal Accounting Officer and
Director)/s/ Alexander M. MilleyAlexander M. Milley
    
    Director
    
    April 12, 2007/s/ John AbelesJohn Abeles
    
    Director
    
    April 12, 2007/s/ Clint SeversonClint Severson
    
    Director
    
    April 12, 2007
 40




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
      /s/ Amper, Politziner & Mattia, P.C.April 16, 2007Edison, New Jersey
 F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
      
 F-2




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##### Table of Contents



CYTOCORE, INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
 (Dollars in thousands, except per share amounts)
 December 31,2006
    
    
    2005AssetsCurrent Assets:Cash and cash equivalents
    
    $
    874
    
    
    $
    Accounts receivables
    
    
    24
    
    
    
    38Inventories
    
    
    
    
    
    
    26Prepaid expenses and other current assets
    
    
    122
    
    
    
    73Total current assets
    
    
    1,020
    
    
    
    137Fixed Assets, net
    
    
    242
    
    
    
    233Licenses, patents, and technology, net of amortization
    
    
    20
    
    
    
    20Total assets
    
    $
    1,282
    
    
    $
    390Liabilities and Stockholders DeficitCurrent Liabilities:Checks issued in excess of amounts on deposit
    
    $
    
    
    
    $
    5Accounts payable
    
    
    1,434
    
    
    
    3,714Accrued payroll costs
    
    
    421
    
    
    
    643Accrued expenses
    
    
    1,825
    
    
    
    2,292Deferred revenue
    
    
    25
    
    
    
    25Due to stockholder
    
    
    
    
    
    
    37Lease obligation
    
    
    
    
    
    
    96Notes payablerelated parties
    
    
    
    
    
    
    70Notes payable
    
    
    425
    
    
    
    3,557Total current liabilities
    
    
    4,130
    
    
    
    10,439Long-term liabilitiesConvertible securities
    
    
    567
    
    
    
    Stockholders Deficit:Preferred stock; $0.001 par value; shares authorized 10,000,000; 574,642 and 1,102,192 shares issued
and outstanding at December 31, 2006 and 2005, respectively (Liquidation value of all
classes of preferred stock of $5,005 at December 31, 2006)
    
    
    2,920
    
    
    
    7,716Common stock, $0.001 par value; 375,000,000 shares authorized; 312,429,579 and 154,665,084 shares
issued and 312,237,491 and 154,472,996 shares outstanding at December 31, 2006 and
2005, respectively
    
    
    312
    
    
    
    155Additional paid-in capital
    
    
    70,925
    
    
    
    52,386Treasury stock at cost; 192,088 shares at December 31, 2006 and 2005
    
    
    (327
    )
    
    
    (327
    )Accumulated deficit
    
    
    (77,170
    )
    
    
    (69,911
    )Accumulated comprehensive lossCumulative translation adjustment
    
    
    (75
    )
    
    
    (68
    )Total stockholders deficit
    
    
    (3,415
    )
    
    
    (10,049
    )Total liabilities and stockholders deficit
    
    $
    1,282
    
    
    $
    390
  F-3




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##### Table of Contents



CYTOCORE, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (Dollars in thousands, except per share amounts)
 Year Ended December 31,2006
    
    
    2005Net Sales
    
    $
    94
    
    
    $
    117Operating expenses:Cost of
revenues (includes impairment charge of property assets of $169, net of settlement of trade debt of $176 for the year ended December 31, 2006)
    
    
    19
    
    
    
    21Research and development (net of settlement of trade debt of $342 and $274 for the
year ended December 31, 2006 and 2005, respectively)
    
    
    854
    
    
    
    (100
    )Selling, general and administrative expenses (net of settlement of trade debt
of $994 and $255 for the year ended December 31, 2006 and 2005, respectively)
    
    
    3,967
    
    
    
    1,346Total costs and expenses
    
    
    4,840
    
    
    
    1,267Operating loss
    
    
    (4,746
    )
    
    
    (1,150
    )Other income (expense):Interest expenserelated party
    
    
    (14
    )
    
    
    (9
    )Interest expense (net of interest settlement of $70 and $0 for the year ended
December 31, 2006 and 2005, respectively)
    
    
    (1,818
    )
    
    
    (3,167
    )Interest income
    
    
    12
    
    
    
    Total other income (expense)
    
    
    (1,820
    )
    
    
    (3,176
    )Loss from operations before income taxes
    
    
    (6,566
    )
    
    
    (4,326
    )Income taxes
    
    
    
    
    
    
    Net loss
    
    
    (6,566
    )
    
    
    (4,326
    )Preferred stock dividends
    
    
    (693
    )
    
    
    (20
    )Net loss applicable to common stockholders
    
    $
    (7,259
    )
    
    $
    (4,346
    )Basic and fully diluted net loss per common share
    
    $
    (.03
    )
    
    $
    (.04
    )Weighted average number of common shares outstanding
    
    
    241,431,458
    
    
    
    110,037,893
  F-4




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##### Table of Contents



CYTOCORE, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Dollars in thousands)
 Year Ended December 31,2006
    
    
    2005Operating Activities:Net loss
    
    $
    (6,566
    )
    
    $
    (4,326
    )Amortization of debt discount
    
    
    173
    
    
    
    2,673Depreciation and amortization
    
    
    41
    
    
    
    117Amortization of fees
    
    
    
    
    
    
    80Non-cash interest related to warrant modification
    
    
    100
    
    
    
    Loss on sale of fixed assets
    
    
    
    
    
    
    3Impairment charge of property asset
    
    
    169
    
    
    
    Non-cash interest on beneficial note conversion settled in stock
    
    
    1,321
    
    
    
    Stock and warrants issued for legal settlements
    
    
    210
    
    
    
    421Stock and warrants issued to non-employees for services
    
    
    832
    
    
    
    58Non-cash compensation expense
    
    
    1,270
    
    
    
    Gain on settlements of trade indebtedness
    
    
    (1,581
    )
    
    
    Stock returned for settlement
    
    
    
    
    
    
    (47
    )Changes in assets and liabilities:Accounts receivable
    
    
    14
    
    
    
    (8
    )Inventories
    
    
    26
    
    
    
    21Due from stockholder
    
    
    
    
    
    
    (1
    )Prepaid expenses and other current assets
    
    
    (50
    )
    
    
    (58
    )Checks issued in excess of amounts on deposit
    
    
    (5
    )
    
    
    5Accounts payable
    
    
    (745
    )
    
    
    (713
    )Lease obligation
    
    
    (14
    )
    
    
    (13
    )Accrued expenses
    
    
    (447
    )
    
    
    425Net cash used for operating activities
    
    
    (5,252
    )
    
    
    (1,363
    )Cash used in investing activities:Capital purchases
    
    
    (219
    )
    
    
    (27
    )Net cash used for investing activities
    
    
    (219
    )
    
    
    (27
    )Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    7,362
    
    
    
    1,483Financing costs in connection with private placement of stock
    
    
    (79
    )
    
    
    Payments of notes payable
    
    
    (1,185
    )
    
    
    (104
    )Proceeds from exercise of warrants
    
    
    247
    
    
    
    Net cash provided by financing activities
    
    
    6,345
    
    
    
    1,379Net increase/(decrease) in cash and cash equivalents
    
    
    874
    
    
    
    (11
    )Cash and cash equivalents at beginning of year
    
    
    
    
    
    
    11Cash and cash equivalents at end of year
    
    $
    874
    
    
    $
    Supplemental disclosure of cash flow information:Cash paid during the year for:Interest
    
    $
    319
    
    
    $
    3Non-cash transaction during the year for:Preferred stock and cumulative dividends converted into common stock
    
    $
    5,489
    
    
    $
    71Convertible promissory notes and accrued interest converted into common stock
    
    $
    2,370
    
    
    $
    4,494Settlement of trade debt with stock
    
    $
    321
    
    
    $
    
  F-5




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##### Table of Contents



CYTOCORE, INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
 (Dollars in thousands)
 AccumulatedPreferred Stock
    
    
    Common Stock
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    Other
    
    
    TotalPar Value $0.001
    
    
    Par Value $0.001
    
    
    Treasury Stock
    
    
    Paid-In
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Loss
    
    
    DeficitJanuary 1, 2005
    
    
    1,119,192
    
    
    $
    7,767
    
    
    
    99,792,292
    
    
    $
    100
    
    
    
    192,088
    
    
    $
    (327
    )
    
    $
    45,961
    
    
    $
    (65,565
    )
    
    $
    (59
    )
    
    $
    (12,123
    )Comprehensive Loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,326
    )
    
    
    
    
    
    
    (4,326
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9
    )
    
    
    (9
    )Total net comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,335
    )Series C preferred stock and
cumulative dividends
converted to common stock
    
    
    (17,000
    )
    
    
    (51
    )
    
    
    118,260
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71
    
    
    
    (20
    )
    
    
    
    
    
    
    Bridge I conversions
    
    
    
    
    
    
    
    
    
    
    2,008,962
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    292
    
    
    
    
    
    
    
    
    
    
    
    294Bridge III conversions
    
    
    
    
    
    
    
    
    
    
    15,282,236
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    1,560
    
    
    
    
    
    
    
    
    
    
    
    1,575Bridge IV conversions
    
    
    
    
    
    
    
    
    
    
    25,605,000
    
    
    
    26
    
    
    
    
    
    
    
    
    
    
    
    2,599
    
    
    
    
    
    
    
    
    
    
    
    2,625Sale of common stock
    
    
    
    
    
    
    
    
    
    
    11,858,334
    
    
    
    12
    
    
    
    
    
    
    
    
    
    
    
    1,471
    
    
    
    
    
    
    
    
    
    
    
    1,483Common stock subscribed for
services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    16Common stock returned for
settlement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (47
    )
    
    
    
    
    
    
    
    
    
    
    (47
    )Warrants issued for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    42Warrants issued in settlement
of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    421
    
    
    
    
    
    
    
    
    
    
    
    421December 31, 2005
    
    
    1,102,192
    
    
    $
    7,716
    
    
    
    154,665,084
    
    
    $
    155
    
    
    
    192,088
    
    
    $
    (327
    )
    
    $
    52,386
    
    
    $
    (69,911
    )
    
    $
    (68
    )
    
    $
    (10,049
    )
  F-6




---



##### Table of Contents



CYTOCORE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS DEFICIT
(Dollars in thousands)
 AccumulatedPreferred Stock
    
    
    Common Stock
    
    
    
    
    
    
    
    
    
    
    Additional
    
    
    
    
    
    
    Other
    
    
    TotalPar Value $0.001
    
    
    Par Value $0.001
    
    
    Treasury Stock
    
    
    Paid-In
    
    
    Accumulated
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Loss
    
    
    DeficitJanuary 1, 2006
    
    
    1,102,192
    
    
    $
    7,716
    
    
    
    154,665,084
    
    
    $
    155
    
    
    
    192,088
    
    
    $
    (327
    )
    
    $
    52,386
    
    
    $
    (69,911
    )
    
    $
    (68
    )
    
    $
    (10,049
    )Comprehensive Loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,566
    )
    
    
    
    
    
    
    (6,566
    )Foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )Total net comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,573
    )Series B preferred stock and
cumulative dividends
converted to common stock
    
    
    (139,370
    )
    
    
    (557
    )
    
    
    851,040
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    607
    
    
    
    (51
    )
    
    
    
    
    
    
    Series C preferred stock and
cumulative dividends
converted to common stock
    
    
    (207,500
    )
    
    
    (264
    )
    
    
    1,517,593
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    363
    
    
    
    (101
    )
    
    
    
    
    
    
    Series E preferred stock and
cumulative dividends
converted to common stock
    
    
    (180,680
    )
    
    
    (3,975
    )
    
    
    7,209,963
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    4,509
    
    
    
    (541
    )
    
    
    
    
    
    
    Bridge I conversions
    
    
    
    
    
    
    
    
    
    
    4,281,941
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    638
    
    
    
    
    
    
    
    
    
    
    
    642Bridge II conversions
    
    
    
    
    
    
    
    
    
    
    1,693,056
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    252
    
    
    
    
    
    
    
    
    
    
    
    253Bridge III conversions
    
    
    
    
    
    
    
    
    
    
    3,362,701
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    333
    
    
    
    
    
    
    
    
    
    
    
    336Related party notes converted
    
    
    
    
    
    
    
    
    
    
    900,188
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    119
    
    
    
    
    
    
    
    
    
    
    
    120Monsun note conversion
    
    
    
    
    
    
    
    
    
    
    7,624,327
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    2,332
    
    
    
    
    
    
    
    
    
    
    
    2,340Sale of common stock, net of
financing costs of $79,317
    
    
    
    
    
    
    
    
    
    
    80,064,292
    
    
    
    80
    
    
    
    
    
    
    
    
    
    
    
    7,203
    
    
    
    
    
    
    
    
    
    
    
    7,283Stock issued for sale of stock
in prior year
    
    
    
    
    
    
    
    
    
    
    38,210,498
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    (38
    )
    
    
    
    
    
    
    
    
    
    
    Exercise of warrants
    
    
    
    
    
    
    
    
    
    
    2,023,079
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    245
    
    
    
    
    
    
    
    
    
    
    
    247Common stock issued for
services
    
    
    
    
    
    
    
    
    
    
    6,809,032
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    512
    
    
    
    
    
    
    
    
    
    
    
    519Common stock issued in
settlement of debt
    
    
    
    
    
    
    
    
    
    
    2,928,271
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    318
    
    
    
    
    
    
    
    
    
    
    
    321Common stock issued for
compensation
    
    
    
    
    
    
    
    
    
    
    288,514
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    38Warrant conversion exercise price
modification
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    100Convertible securities in excess of
authorized
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (567
    )
    
    
    
    
    
    
    
    
    
    
    (567
    )Stock appreciation rights liability
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (180
    )
    
    
    
    
    
    
    
    
    
    
    (180
    )Warrants issued for compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,232
    
    
    
    
    
    
    
    
    
    
    
    1,232Warrants issued for services
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    313
    
    
    
    
    
    
    
    
    
    
    
    313Warrants issued in settlement
of trade debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    210
    
    
    
    
    
    
    
    
    
    
    
    210December 31, 2006
    
    
    574,642
    
    
    $
    2,920
    
    
    
    312,429,579
    
    
    $
    312
    
    
    
    192,088
    
    
    $
    (327
    )
    
    $
    70,925
    
    
    $
    (77,170
    )
    
    $
    (75
    )
    
    $
    (3,415
    )
  F-7




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##### Table of Contents



CYTOCORE, INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2006 and 2005
(Tabular data in thousands, except per share amounts)
 Note 1. The Company and Basis of Presentation
     Liquidity
  F-8




---



##### Table of Contents



Note 2. Summary of Significant Accounting Policies
 Principles of Consolidation
  Use of Estimates
  Revenue Recognition
  Cash and Cash Equivalents
  Inventory of Instruments, Component Parts and Labor
  Property and Equipment
  Furniture and fixtures
    
    5 yearsLaboratory equipment
    
    5 yearsComputer and communications equipment
    
    3 yearsDesign and tooling
    
    5 yearsLeasehold improvements
    
    Useful life or term of lease, whichever is shorter
  F-9




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##### Table of Contents



Licenses, Patents, and Technology
  Impairment or Disposal of Long-Lived Assets
  Research and Development Costs
    Foreign Currency Translation
  Fair Value of Financial Instruments
  Other Comprehensive Income (Loss)
  Net Loss Per Share
  F-10




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##### Table of Contents



Income Taxes
  Risks from Concentrations
   Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes.
  Fair Value Measurements.
  Note 3. Fixed Assets
  2006
    
    
    2005Furniture and fixtures
    
    $
    124
    
    
    $
    116Laboratory equipment
    
    
    595
    
    
    
    595Computer and communications equipment
    
    
    331
    
    
    
    320Design and tooling
    
    
    201
    
    
    
    170Leasehold improvements
    
    
    28
    
    
    
    281,279
    
    
    
    1,229Less accumulated depreciation and amortization
    
    
    (1,037
    )
    
    
    (996
    )Total
    
    $
    242
    
    
    $
    233
  F-11




---



##### Table of Contents



Note 4. Licenses, Patents, and Technology
  2006
    
    
    2005Licenses
    
    $
    20
    
    
    $
    20Patent costs
    
    
    133
    
    
    
    133LabCorp. Technology Agreement
    
    
    260
    
    
    
    260Subtotal
    
    
    413
    
    
    
    413Less accumulated amortization
    
    
    (393
    )
    
    
    (393
    )Total
    
    $
    20
    
    
    $
    20
  Note 5. Accrued Expenses
  2006
    
    
    2005Accrued interest
    
    $
    478
    
    
    $
    898Accrued interestrelated party
    
    
    
    
    
    
    34Accrued settlement costs
    
    
    438
    
    
    
    438Accrued taxes (see Note 11)
    
    
    589
    
    
    
    589Accrued Compensation
    
    
    180
    
    
    
    Other accrued expenses
    
    
    140
    
    
    
    333Total
    
    $
    1,825
    
    
    $
    2,292
 Note 6. Notes PayableRelated Parties
  2006
    
    
    2005Northlea Partners, Ltd., $25,000 Promissory Note issued August 6, 2001;
interest rate 15% per annum
    
    $
    
    
    
    $
    25Northlea Partners, Ltd., $15,000 Promissory Note issued September 20, 2001;
interest rate 9% per annum
    
    
    
    
    
    
    15Northlea Partners, Ltd., $15,000 Bridge II convertible promissory note issued
May 1, 2003; interest rate 12% per annum (see description under Bridge II
notes in Note 7-Notes Payable for other terms and conditions)
    
    
    
    
    
    
    15Northlea Partners, $25,000 Bridge III convertible promissory note
issued May 21, 2004;
interest rate 10% per annum (see description under Bridge III notes in Note 7- Notes
Payable for other terms and conditions)
    
    
    
    
    
    
    15$
    
    
    
    $
    70
 F-12




---



##### Table of Contents



Peter Gombrich Amounts Due
  Note 7. Notes Payable
  2006
    
    
    2005Bridge I Convertible Promissory Notes; due December 31, 2002; interest
rate 7% per annum; convertible into common stock at 75% of the market price
on date of conversion; beneficial conversion feature valued at $1,042,000 at
June 30, 2002; warrants at an exercise price of $0.25 per share; additional
warrants at an exercise price of $0.20
    
    $
    
    
    
    $
    500Bridge II Convertible Promissory Notes; due July 31, 2004; interest rate
12% or 15% per annum; convertible into common stock at $0.10 or $0.15 per share;
beneficial conversion feature valued at $1,777,000 and $330,000 at
December 31, 2003 and 2002, respectively;
warrants at an exercise price of $0.15 or $0.20 per share
    
    
    50
    
    
    
    1,285Bridge III Convertible Promissory Notes; due December 31, 2008; interest rate 10%
per annum; convertible into common stock at $0.10 per share; beneficial
conversion feature valued at $1,604,000 at June 30, 2004; warrants at an
exercise price of $0.15 per share
    
    
    
    
    
    
    115Monsun, AS, $500,000 Promissory Note issued November 1, 2000; due July 31, 2002;
interest rate 20% per annum, compounded into principal amount;
beneficial conversion feature valued at $125,000 at November 1, 2000
    
    
    
    
    
    
    953MonoGen, Inc., $305,000 Promissory Note issued October 14, 2004; interest at 14% per
annum; first installment of $25,000 due November 1, 2004 with monthly
principal and interest installments of $10,000 thereafter; due January 1, 2007
    
    
    305
    
    
    
    305Xillix Technologies Corporation, $361,000 Promissory Note issued June 26, 1998; interest
rate Canadian Prime plus 6% per annum; represents a debt of AccuMed
    
    
    34
    
    
    
    34Ungaretti & Harris LLP, $211,368 Secured Promissory Note issued May 8, 2003; interest
at 12% per annum; due September 30, 2003
    
    
    
    
    
    
    51Ernst & Young LLP, $30,800 Promissory Note issued July 17, 2003; interest at 12% per annum
commencing January 1, 2003; due December 31, 2003
    
    
    
    
    
    
    31Western Economic Diversification, $221,000 Promissory Note issued June 1989; no interest;
represents a debt of Oncometrics
    
    
    
    
    
    
    247Robert Shaw, $25,000 Promissory Note issued September 20, 2001; interest rate 9% per annum
    
    
    15
    
    
    
    15Ventana Medical Systems, Inc., $62,946 Promissory Note issued November 30, 2003; due
December 31, 2003; interest at 8% per annum payable after December 31, 2003
    
    
    21
    
    
    
    21$
    425
    
    
    $
    3,557
 F-13




---



##### Table of Contents



Bridge I.
   Bridge II.
   F-14




---



##### Table of Contents



Bathgate Capital Partners, LLC  Bridge III
    Bridge IV.
   F-15




---



##### Table of Contents



Monsun.
   MonoGen, Inc.
 Ungaretti & Harris LLP.
 Ernst & Young LLP.
 Western Economic Diversification.
  Defaults.
 F-16




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##### Table of Contents



Note 8. Stockholders Equity
   For the Years Ended December 31,2006
    
    
    2005Basic and Diluted:Net loss applicable to common stockholder
    
    
    ($7,259
    )
    
    
    ($4,346
    )Weighted average common shares outstanding
    
    
    241,431,458
    
    
    
    110,037,893Net loss per common share
    
    
    ($.03
    )
    
    
    ($.04
    )
  Preferred Stock
  Shares Issued &
    
    Shares Issued &Outstanding
    
    OutstandingOffering
    
    Shares Authorized
    
    2006
    
    2005Series A convertible
    
    
    590,197
    
    
    
    82,655
    
    
    
    82,655Series B convertible, 10% cumulative
    
    
    1,500,000
    
    
    
    225,736
    
    
    
    365,106Series C convertible, 10% cumulative
    
    
    1,666,666
    
    
    
    38,333
    
    
    
    245,833Series D convertible, 10% cumulative
    
    
    300,000
    
    
    
    175,000
    
    
    
    175,000Series E convertible, 10% cumulative
    
    
    800,000
    
    
    
    52,918
    
    
    
    233,598Undesignated Preferred Series
    
    
    5,143,137
    
    
    
    
    
    
    
    Total Preferred Stock
    
    
    10,000,000
    
    
    
    574,642
    
    
    
    1,102,192
 Convertible Cumulative Preferred Stock Conversions:
   F-17




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##### Table of Contents



Summary of Preferred Stock Terms
 Series A Convertible Preferred StockLiquidation Value:
    
    $4.50 per shareConversion Price:
    
    $10.3034 per shareConversion Rate:
    
    0.4367Liquidation Value divided by Conversion Price ($4.50/$10.3034)Voting Rights:
    
    NoneDividends:
    
    NoneConversion Period:
    
    Any timeSeries B Convertible Preferred StockLiquidation Value:
    
    $4.00 per shareConversion Price:
    
    $1.00 per shareConversion Rate:
    
    4.00Liquidation Value divided by Conversion Price ($4.00/$1.00)Voting Rights:
    
    NoneDividends:
    
    10%QuarterlyCommencing March 31, 2001Conversion Period:
    
    Any timeCumulative dividends in arrears at December 31, 2006 were $529,649Series C Convertible Preferred StockLiquidation Value:
    
    $3.00 per shareConversion Price:
    
    $0.60 per shareConversion Rate:
    
    5.00Liquidation Value divided by Conversion Price ($3.00/$0.60)Voting Rights:
    
    NoneDividends:
    
    10%QuarterlyCommencing March 31, 2002Conversion Period:
    
    Any timeCumulative dividends in arrears at December 31, 2006 were $59,382Series D Convertible Preferred StockLiquidation Value:
    
    $10.00 per shareConversion Price:
    
    $1.00 per shareConversion Rate:
    
    10.00Liquidation Value divided by Conversion Price ($10.00/$1.00)Voting Rights:
    
    NoneDividends:
    
    10%QuarterlyCommencing April 30, 2002Conversion Period:
    
    Any timeCumulative dividends in arrears at December 31, 2006 were $904,726Series E Convertible Preferred StockLiquidation Value:
    
    $22.00 per shareConversion Price:
    
    $0.80 per shareConversion Rate:
    
    27.50Liquidation Value divided by Conversion Price ($22.00/$0.80)Voting Rights:
    
    Equal in all respects to holders of common sharesDividends:
    
    10%QuarterlyCommencing May 31, 2002Conversion Period:
    
    Any timeCumulative dividends in arrears at December 31, 2006 were $591,067
 Issuance of Common Shares for Cash
 2006
  F-18




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##### Table of Contents



2005
    Issuance of Common Stock for Services and as a Settlement of Debt
 2006
   2005
  F-19




---



##### Table of Contents



Issuance of Common Stock as Payment for Employee Compensation
  Issuance of Warrants for Services and Settlement of Debt
 2006
     2005
   Issuance of warrants for debt
  F-20




---



##### Table of Contents



Issuance of Warrants as Payment for Employee Compensation
   Exchange of Certain Convertible Promissory Notes for Common Shares
    Application of Black-Scholes Valuation Model
  2006
    
    2005Expected volatility
    
    84% - 206%
    
    277%Expected term (years)
    
    3  5
    
    2.5  5Risk-free interest rate
    
    4.25%-4.50%
    
    4.61%Expected dividend yield
    
    0%
    
    0%Forfeiture rate
    
    0%
    
    0%Resulting weighted average grant date fair value
    
    $0.12
    
    
 F-21




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##### Table of Contents



Warrants
  Total Warrant
    
    
    Warrant Shares
    
    
    Exercise Price
    
    
    Weighted AverageShares Outstanding
    
    
    Exercisable
    
    
    (not weighted)
    
    
    Years until Expiration51,493
    
    
    
    51,493
    
    
    $
    0.01
    
    
    
    0.411,000,000
    
    
    
    1,000,000
    
    
    $
    0.04
    
    
    
    4.17556,500
    
    
    
    556,500
    
    
    $
    0.06
    
    
    
    3.349,335,751
    
    
    
    9,335,751
    
    
    $
    0.10
    
    
    
    2.574,000,000
    
    
    
    
    
    
    $
    0.1275
    
    
    
    2.75500,000
    
    
    
    500,000
    
    
    $
    0.13
    
    
    
    2.9215,070,917
    
    
    
    15,070,917
    
    
    $
    0.15
    
    
    
    3.09474,984
    
    
    
    474,984
    
    
    $
    0.16
    
    
    
    2.274,457,000
    
    
    
    4,457,000
    
    
    $
    0.17
    
    
    
    1.985,792,303
    
    
    
    5,792,303
    
    
    $
    0.18
    
    
    
    3.72166,667
    
    
    
    166,667
    
    
    $
    0.19
    
    
    
    2.5610,021,797
    
    
    
    6,021,797
    
    
    $
    0.20
    
    
    
    3.802,885,000
    
    
    
    2,885,000
    
    
    $
    0.25
    
    
    
    0.31284,091
    
    
    
    284,091
    
    
    $
    0.32
    
    
    
    5.00250,000
    
    
    
    250,000
    
    
    $
    0.33
    
    
    
    2.54200,000
    
    
    
    200,000
    
    
    $
    0.70
    
    
    
    0.2513,278
    
    
    
    13,278
    
    
    $
    7.51
    
    
    Perpetual13,278
    
    
    
    13,278
    
    
    $
    15.05
    
    
    Perpetual13,278
    
    
    
    13,278
    
    
    $
    22.62
    
    
    PerpetualTotal
    
    
    55,086,337
    
    
    
    47,086,337
  Convertible Securities
  F-22




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##### Table of Contents



Note 9. Equity Incentive Plan and Employee Stock Purchase Plan
      F-23




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##### Table of Contents



2006
    
    2005Expected volatility
    
    84% - 206%
    
    277%Expected term (years)
    
    3  5
    
    2.5  5Risk-free interest rate
    
    4.25%-4.50%
    
    4.61%Expected dividend yield
    
    0%
    
    0%Forfeiture rate
    
    0%
    
    0%Resulting weighted average grant date fair value
    
    $0.12
    
    
    For the Year Ended December 31, 2005(in thousands except for per share amounts)Net loss applicable to common shareholders as reported
    
    $
    (4,326
    )Deduct: Total stock-based compensation expense determined
under the fair value based method for all awards and
forfeitures, net of related taxes
    
    
    (9
    )Pro forma net loss applicable to common shareholders
    
    $
    (4,335
    )Basic loss and diluted per share applicable to common
shareholders  as reported
    
    $
    (.04
    )Basic and diluted loss per share applicable to common
shareholders  pro forma
    
    $
    (.04
    )
  1999 Stock Option Plan
 Weighted
    
    
    
    
    
    Weighted AverageAverage
    
    Aggregate
    
    RemainingExercise
    
    Intrinsic
    
    Contractual LifeOptions
    
    Price
    
    Value
    
    (Years)Outstanding at December 31, 2004
    
    
    4,947,727Granted
    
    
    Exercised
    
    
    Forfeited
    
    
    (943,736
    )
    
    $
    1.9032Outstanding at December 31, 2005
    
    
    4,003,991
    
    
    $
    0.4412
    
    
    $
    0.00Granted
    
    
    Forfeited
    
    
    (1,746,000
    )
    
    $
    0.5662Outstanding and exercisable at
December 31, 2006
    
    
    2,257,991
    
    
    $
    0.2767
    
    
    $
    433,500
    
    
    
    1.68
 F-24




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##### Table of Contents



WeightedWeighted
    
    
    
    
    
    AverageAverage
    
    Aggregate
    
    RemainingOptions and
    
    Exercise
    
    Intrinsic
    
    ContractualWarrants
    
    Price
    
    Value
    
    Life (Years)Outstanding at December 31, 2004
    
    
    Granted
    
    
    Exercised
    
    
    Forfeited
    
    
    Outstanding at December 31, 2005
    
    
    Granted
    
    
    10,250,000
    
    
    $
    0.17Forfeited
    
    
    Outstanding at December 31, 2006
    
    
    10,250,000
    
    
    $
    0.17
    
    
    $
    323,100
    
    
    
    3.86Exercisable at December 31, 2006
    
    
    2,250,000
    
    
    $
    0.18
    
    
    $
    71,000
  Stock Appreciation Rights
  Note 10. Leases
  F-25




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##### Table of Contents



OperatingYear
    
    Leases2007
    
    $
    912008
    
    $
    62Total lease payments
    
    $
    153
 Note 11. Income Taxes
  2006
    
    
    2005Deferred tax assets related to:Net operating loss carryforwards
    
    $
    26,308
    
    
    $
    24,271Writedown of intangibles
    
    
    14
    
    
    
    16Accrued liabilities
    
    
    150
    
    
    
    231Accrued expenses
    
    
    132
    
    
    
    12226,604
    
    
    
    24,640Less valuation reserve
    
    
    26,604
    
    
    
    24,640Net deferred tax asset
    
    $
    
    
    
    $
    
     F-26




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##### Table of Contents



Note 12. Commitments and contingencies
 Legal Proceedings
 Settled in 2006
 Ungaretti & Harris LLP
 Hill & Barlow LLP.
 Medical College of Georgia Research Institute, Inc.
 Account Resource
 Arthur Lipper III
 The Lumber Company (formerly Garrett Realty, Inc.).
 F-27




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##### Table of Contents



The Lash Group, Inc.
 Reid Jilek
 Pending as of December 31, 2006
 Peter Gombrich.
 The Regents of the University of California
  F-28




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##### Table of Contents



Other claims
 Other Creditors.
  Commitments
     Note 13 Related Party Transactions
  F-29




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##### Table of Contents



Note 14. Subsequent Events
    F-30