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# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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# FORM 10-KSB

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

For the fiscal year ended December 31, 2005

Commission file number 0-29222

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AVAX TECHNOLOGIES, INC.
(Name of small business issuer in its charter)

|Delaware                                 |  | 13-3575874                           | 
|---------------------------------------- |  | ------------------------------------ | 
|(State or other jurisdiction             |  | (I.R.S. Employer Identification No.) | 
|of incorporation or organization)        | 
|                                        
|2000 Hamilton Street                     | 
|Suite 204                                | 
|Philadelphia, PA                         |  | 19130                                | 
|(Address of principal executive offices) |  | (Zip Code)                           | 

Issuers telephone number: (215) 241-9760

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

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

Common Stock, par value $.004 per share
(Title of class)

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

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 
o

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

Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).o

State the issuers revenues for its most recent fiscal year. $1,623,701
for the fiscal year ended December 31, 2005.

As of March 24, 2006, 62,545,753 shares of the registrants common
stock, par value $.004 per share, were outstanding or are issuable upon conversion of the outstanding shares of Series C Preferred
Stock. The aggregate market value of the voting and common equity held by non-affiliates (assuming 100% conversion of the
outstanding shares of preferred stock) computed by reference to the average bid and asked prices of the common stock on the OTC
Bulletin Board on March 3, 2006, was $10,314,153.

Documents incorporated by reference: None.

Transitional Small Business Disclosure Format:   
Yes 
o   
No 
x





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# AVAX Technologies, Inc.

# Index to Form 10-KSB

|                     |     | Page                                                                                                           
|-------------------- | --- | ---------------------------------------------------------------------------------------------------------------
|PART I               |     |                                                                                                                
|                    
|Item 1.              |     | Description of Business                                                                                        
|Item 2.              |     | Description of Property                                                                                        
|Item 3.              |     | Legal Proceedings                                                                                              
|Item 4.              |     | Submission of Matters to a Vote of Security Holders                                                            
|                    
|PART II              |    
|                    
|Item 5.              |     | Market for Common Equity And Related Stockholder Matters                                                       
|Item 6.              |     | Managements Discussion and Analysis or Plan of Operation                                                      
|Item 7.              |     | Financial Statements                                                                                           
|Item 8.              |     | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                           
|Item 8A.             |     | Controls and Procedures                                                                                        
|Item 8B.             |     | Other Information                                                                                              
|                    
|PART III             |    
|                    
|Item 9.              |     | Directors, Executive Officers, Promoters And Control Persons; Compliance with Section 16(a) of the Exchange Act
|Item 10.             |     | Executive Compensation                                                                                         
|Item 11.             |     | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                 
|Item 12.             |     | Certain Relationships and Related Transactions                                                                 
|Item 13.             |     | Exhibits                                                                                                       
|Item 14.             |     | Principal Accountant Fees and Services                                                                         
|                    
|Signatures           | 40 
|                    
|Exhibit Index        | 41 
|                    
|Financial Statements | F-1

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# CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

In this report, in other
filings with the SEC and in press releases and other public communications throughout the year, AVAX Technologies, Inc.
(AVAX, the Company, we or us) makes, or will make statements that plan for or
anticipate the future. These forward-looking statements include statements about the future of biotechnology products and the
biopharmaceutical industry, statements about our future business plans and strategies, and other statements that are not
historical in nature. These forward-looking statements are based on our current expectations. Many of these statements are found
in the Description of Business section beginning on page 1 and in Managements Discussion and Analysis of
Financial Condition and Plan of Operation.

Forward-looking statements
may be identified by words or phrases such as believe, expect, anticipate, should,
planned, may, estimated and potential. The Private Securities Litigation Reform
Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe
harbor, and because forward-looking statements involve future risks and uncertainties, listed below are a variety of factors that
could cause actual results and experience to differ materially from the anticipated results or other expectations expressed in our
forward-looking statements. These factors include:

| |  |  | Our history of operating losses, our continuing cash requirements,
our need to raise additional capital in the first half of 2006, and the uncertainty of our prospects of reaching a meaningful
level of revenues.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The business uncertainties arising from our decision to conduct
all AC Vaccine manufacturing activities at our Lyon, France facility and the logistical issues and risks relating to shipping
biologics from the U.S. and other countries to France and the vaccine from France to patients in the U.S. and other countries.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Uncertainty about whether our products will successfully complete
the long, complex and expensive clinical trial and regulatory approval process for approval of new drugs in the U.S. and certain
European countries.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Uncertainty about whether our AC Vaccine technology can be
developed to produce safe and effective products and, if so, whether our AC Vaccine products will be commercially accepted and
profitable.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Difficulties arising from our competition with other clinical
trials and treatment regimens for patients and clinical sites for our clinical trials.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | The expenses, delays, uncertainties and complications typically
encountered by development stage biopharmaceutical businesses, many of which are beyond our control.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Our financial and development obligations and our responsibility
to meet requisite research funding levels under our license agreements in order to protect our rights to our products and
technologies.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Each of the other factors discussed in this report, under Item 1
 Description of Business  Risk Factors.
| | - |  | ------------------------------------------------------------------------------------------------------------

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# AVAX TECHNOLOGIES, INC.

# PART I

# ITEM 1.   Description of Business

# GENERAL

Overview

We are a development stage
biotechnology company specializing in the development and commercialization of individualized vaccine therapies and other
technologies for the treatment of cancer. Our vaccine consists of autologous (the patients own) cancer cells that have been
treated with a chemical (haptenized) to make them more visible to the patients immune system. We refer to our
cancer vaccine technology as autologous cell vaccine immunotherapy and to the vaccine as the AC Vaccine. Our previous clinical
trials for the AC Vaccine have concentrated on melanoma, ovarian carcinoma and renal cell carcinoma. In 2005, we commenced a Phase
I-II clinical trial for the treatment of non-small cell lung cancer. We refer to our AC Vaccine as

| |  |  | M-Vax for the treatment of melanoma,                  
| | - |  | ------------------------------------------------------
| |  |  | O-Vax for the treatment of ovarian cancer, and        
| |  |  | L-Vax for the treatment of non-small cell lung cancer.

We also offer biological
manufacturing services to other biotechnology and pharmaceutical companies. These services are provided utilizing the same
facilities and personnel that produce our products for clinical and commercial purposes.

In 1995, we identified the AC
Vaccine research being conducted by Dr. David Berd, an oncologist and professor at Thomas Jefferson University (TJU)
in Philadelphia, and licensed the rights to Dr. Berds research. Since then, we have focused our efforts on the development
of an immunotherapy for the treatment of cancer, the AC Vaccine technology. On November 1, 2004, Dr. Berd joined our company as
Chief Medical Officer.

In August 2000, we acquired
Genopoietic S.A. and its corporate affiliate (Genopoietic), based in Lyon, France, which developed cell and gene-based
therapies in collaboration with Pierre et Marie Curie University and Centre National de la Recherche Scientifique. As part of that
acquisition, we acquired a biological clean room facility in Lyon, France, at which we now conduct all AC Vaccine manufacturing.
In the last three years, much of our development and manufacturing efforts relating to the AC Vaccine have shifted to our Lyon
facility, due to the expertise and staffing at that facility and recent developments in France and other European countries that
should facilitate development of autologous products, such as the AC Vaccine, in Europe.

The Lyon facility has been
inspected by AFSSAPs (the French equivalent of the U.S. Food and Drug Administration) and has received the designation of
Etablissment Pharmaceutique and more recently has obtained the designation Etablissement Thérapies
Gèniques et Cellulaires. The Etablissment Pharmaceutique designation is required for the production of any commercial
product to be sold in France and throughout Europe. The Etablissment Therapies Geniques et Cellulaires designation is required in
France for the commercial production of cell and gene therapy products.

We were incorporated in the
State of New York on January 12, 1990, under the name Nehoc, Inc. On May 29, 1992, we changed our name to Appex Technologies,
Inc. On October 22, 1992, we merged into Walden Laboratories, Inc. (Walden), a Delaware corporation, that was
incorporated on September 18, 1992. On December 27, 1995, Walden sold its former leading product under development, an
over-the-counter nutritional dietary and medicinal food supplement, and its related patents and intellectual property to a
subsidiary of Interneuron Pharmaceuticals, Inc. We changed our name from Walden Laboratories, Inc., to AVAX Technologies, Inc.,
effective March 26, 1996.

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Our principal executive
office is located at 2000 Hamilton Street, Suite 204, Philadelphia, Pennsylvania 19130. The telephone number at that address is
(215) 241-9760.

Current Cancer Therapies

Cancer is a diverse and
complex disorder with multiple causes and variable outcomes. Genetic pre-disposition, environmental factors and diet are among the
numerous contributing factors that are associated with the development and evolution of this heterogeneous disease. Each year in
the U.S. alone, over 1.5 million new individuals are diagnosed with various forms of cancer and, as our overall life span
increases, the incidence of the disease is expected to increase.

In a healthy person, tissues
and organs consist of cells that are, in part, regulated by the immune system. Normal cell function is characterized by cell
growth, cell division and then programmed cell death (the latter referred to as apoptosis) as new cells are generated and function
in place of the original cell. Cancer is characterized by the unregulated growth of cells that proliferate as tumors, which can
metastasize (i.e., spread) throughout the body, resulting in deposits of tumor cells, called metastases. Cancer cells have adopted
many mechanisms by which they can elude the defense systems of the body. A significant feature of their proliferation is their
ability to evade recognition by the patients immune system. The metastatic tumors disrupt normal tissue and organ functions,
which in the worst circumstances leads to the death of the patient.

We believe that for a therapy
to be effective it must eliminate or control the growth of the cancer, both at its site of origin and at the site of metastases.
Patients with cancer typically undergo a first line of treatment through surgical removal of tumors. Treatments that follow
surgery (referred to as adjuvant treatments) include radiation, hormone therapy and chemotherapy. Initial surgery and radiation
therapy treat cancer at its origin, but are limited because certain tissues cannot be removed surgically or do not tolerate
radiation. Moreover, cancers frequently spread prior to detection, and surgery and radiation cannot control metastases.
Chemotherapy and hormonal therapy are frequently used to treat tumor metastases. These therapies, however, can cause severe side
effects, including damage to normal tissue. Additionally, chemotherapy and hormonal therapy may shrink tumors, but rarely
eliminate them completely. Our approach to development of cancer therapies is to find targets that are novel or to discover
compounds that are structurally different from existing therapies with the intent of making the treatments more specific and less
toxic.

The Immune System

The immune system is involved
intimately in the regulation of the growth of cells and tissues within the body as well as acting as a natural defense against
disease. These functions are performed by a variety of specialized cells. These cells recognize specific chemical structures,
called antigens, which are found on disease-causing agents, including tumors. Antigens trigger an immune response, which results
in the eventual removal of antigen from the body.

The type of immune response
is characterized by the way the response was initiated through specialized cells known as lymphocytes. There are two main
categories of lymphocytes: B-lymphocytes, or B-cells, and T-lymphocytes, or T-cells. Each category of lymphocytes has a different
role in the immune response. T-cells combat disease by killing antigen bearing cells directly or by making chemicals called
cytokines that work indirectly. In this way, T-cells eliminate cancers and virally infected tissue. T-cell immunity is also known
as cell-mediated immunity and is commonly thought to be a key defense against tumors and cells chronically infected by viruses. In
contrast, activation of B-cells leads to the production of specific antibodies. The antibodies are secreted by B-cells and bind to
antigen found on pathogens or tumor cells resulting in their destruction.

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Cancerous cells are cells
that have changed (or mutated) so that they express certain antigens that may or may not be recognized as foreign by the immune
system. We believe that the antigens are distinct for each patient so that effective immunization can only be accomplished by
using each patients own cancer cells. In addition, we believe that by a process called haptenization, the cancer antigens
are changed so that they become visible to the patients immune system. This allows the immune system to mount a response
against the cancer antigens.

# Development and Clinical Programs

Autologous Cell Vaccine Immunotherapy (AC Vaccine)

The only major program that
we are presently developing for the treatment of cancer is our AC Vaccine technology, licensed from TJU. The AC Vaccine
immunotherapy technology is based on the concept of haptenization. This idea has a long history, beginning with the work of the
immunologist and Nobel laureate Karl Landsteiner in the 1920s. He and other scientists showed in animal models that
attaching a small chemical (a hapten) to a protein allowed that protein to be recognized by the immune system even if the animals
were originally unresponsive to the protein. This work has been expanded by a number of researchers in various animal models. We
now understand that a large number of T-cells react against the haptenized material and that a small percentage of the T-cells
also react against the unmodified, natural material. We believe that tumor antigens, which are proteins, are similarly affected by
haptenization.

Our AC Vaccine technology
utilizes the patients tumor as the basis for a therapeutic vaccine. By extracting cancer cells from a tumor and then
treating them with a hapten called dinitrophenyl (DNP), a vaccine is prepared that should be able to elicit a systemic immune
response to the unmodified, native cancer cells. The induction of an immune response has been documented in a number of scientific
publications. We believe that the best test of tumor immunity in patients is Delayed Type Hypersensitivity (DTH). DTH has long
been used as a test for immunity to microbes, such as tuberculosis and is familiar to patients as the Tine test or PPD. DTH to
cancer cells is tested in the same way, except that the patients cancer cells are the test agent. We have demonstrated that
the DTH test to cancer cells is meaningful by showing a strong statistical relationship between the intensity of DTH and clinical
outcomes, especially 5-year survival. We believe that the future acceptance of this relationship between DTH and clinical outcomes
by the U.S. and European regulatory agencies is critical to the regulatory approval path for our AC Vaccine product candidates.

Our leading AC Vaccine
product candidate is M-Vax, which is designed as an immunotherapy for the post-surgical treatment of late stage (stages 3 and 4)
melanoma. Melanoma is a highly malignant tumor that can spread so rapidly that it can be fatal within months of diagnosis. The
incidence of melanoma is increasing at a faster rate than most other cancers in the U.S., Australia, Northern Europe and Canada.
Although there are several causative factors, rising exposure by the general population to ultraviolet radiation in sunlight
appears to be the most significant. The National Cancer Institute estimates that the incidence of melanoma in the U.S. is growing
at a rate of approximately 4% annually.

Melanoma patients may be
categorized according to the following staging system:

| |  |  | Stage 1lesion less than 1.5mm thickness and no apparent
spreading (metastasis) from primary cancer site;
| | - |  | ---------------------------------------------------------------------------------------------------------

| |  |  | Stage 2lesion greater than 1.5mm thickness and no apparent
spreading from primary cancer site;
| | - |  | -----------------------------------------------------------------------------------------------

| |  |  | Stage 3metastasis to regional draining lymph nodes; and
| | - |  | --------------------------------------------------------

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| |  |  | Stage 4distant (bloodbourne) metastasis.
| | - |  | -----------------------------------------

Historically, patients with
stage 3 melanoma have been treated with surgery followed by a year-long regimen of the drug, alpha interferon. This is a
biological drug and currently the only FDA-approved post-surgical treatment for patients with stage 3 melanoma. While alpha
interferon has been proven to prolong relapse-free survival, its impact on overall survival has been questioned. Further, use of
alpha interferon can be associated with many severe side effects, often leading to either reduction in dosage or complete
discontinuation before the full course of treatment is completed. Due to limited efficacy and highly toxic side effects,
chemotherapy has not been widely used in the treatment of stage 3 patients. Stage 4 melanoma is usually treated with chemotherapy
or cytokines, such as interferon or interleukin-2. Long-term remissions, however, are unusual and five-year survival rate for
stage 4 melanoma is very low.

Clinical Results Achieved with the AC Vaccine

We believe that M-Vax is the
first immunotherapy to suggest, from clinical trial results, that its use may result in a significant improvement in the survival
rate for patients with stage 3 melanoma. There have been 214 patients with stage 3 melanoma treated with M-Vax, who had already
had their lymph node tumors excised and processed into vaccines. These studies are mature, in that all surviving patients have
completed the planned 5-year follow-up. The 5-year overall survival of these patients is 44%. This compares with the historical
post-surgical survival rates of approximately 2232%. In a total of over 480 patients treated with the AC Vaccine by us or at
TJU in clinical trials, no serious side effects have been reported. We believe that only relatively minor side effects, such as
brief bouts of mild nausea and soreness and swelling at the site of the injection, have been observed to date.

Patients who receive M-Vax
may develop an immune response to their own melanoma cells as measured by a DTH test to autologous melanoma cells. DTH, which is
manifest by the development of a hive at the site of injection of the test material, is known to be a measure of the activity of
T-lymphocytes, which are white blood cells that are crucial in tumor rejection. In the stage 3 adjuvant studies, patients who
developed positive DTH to their own melanoma cells that were not modified with the hapten had significantly greater chance of
5-year year survival than those who did not (59% vs. 29%, P<.001). We consider this difference to be highly statistically
significant. In all these patients, DTH was tested in conjunction with control materials that indicated that all patients had
functioning immune systems.

We believe that the DTH test
can be used as a surrogate marker of vaccine activity. In our planned future clinical activities, we will propose to use the DTH
test as a primary endpoint to measure activity of the vaccine. As we expand the use of the vaccine into new indications our intent
is to use DTH response as the primary indicator of activity of the vaccine and the basis upon which we will proceed further with
clinical development. Use of DTH response as an indicator of vaccine activity significantly decreases the duration of studies and,
thus, reduces the cost of conducting clinical trials and reaching a primary endpoint.

As is noted below, we
currently treat patients in Europe on a compassionate use basis. Certain clinicians have reported to us that they have
administered the M-Vax vaccine with interleukin-2 or interferon, which are two current chemotherapies available to melanoma
patients. These European clinicians have reported to us what they believe were positive clinical responses to the combined
treatment regimes. In addition, another investigator who has worked with a haptenized vaccine similar to ours recently published
positive clinical results with her vaccine combined with interleukin-2. As part of future clinical programs, we may pursue
treating later stage melanoma patients with M-Vax plus either interleukin-2 or interferon, which may boost the AC Vaccines
effectiveness.

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Current Commercial and Clinical Activities with the AC Vaccine

In June 2005, we launched a
Phase I-II clinical study in the U.S. for the treatment of patients with stage 3 or 4 melanoma. Patients are treated with M-Vax
after being assigned to one of four dosage arms, one of which is a zero dose. We consider the zero dose arm of the study to be the
control arm of the clinical trial. The schedule of administration has already been optimized in previous trials. The regimen
includes low dose cyclophosphamide, which potentiates the immune response, probably by inhibiting regulatory T-cells, which dampen
the anti-tumor immune response. Also, Bacillus Calmette-Guerin (BCG) is admixed with the AC Vaccine, because it
functions as an immunological adjuvant.

The major endpoints of the
current clinical study are the development of immunity to the patients own melanoma cells and a formal assessment of the
safety of M-Vax. Patients are tested for DTH response to their own DNP-modified and unmodified melanoma cells prior to treatment
and after the initial seven weekly vaccine injections. Those who remain well are eligible for a booster injection of M-Vax at the
six-month point. Adverse events caused by the vaccine are measured and recorded. DTH results are obtained at
2 1⁄2-months, and the maximum duration of the study for an individual patient is 9 months.

Seven clinical sites in the
U.S. are participating in this study. Final results are expected in calendar year 2006, and we expect that M-Vax will be shown to
be safe. We also believe that one or more of the vaccine dosages will regularly induce a positive DTH response to the
patients own DNP-modified melanoma cells, which, in some cases, will be carried over their own unmodified melanoma cells.
The optimal dose determined by this trial will be used for our planned pivotal registration trials of M-Vax.

In March 2005, we submitted a
Biological License Application (BLA) filing with AFSSAPs (the French counterpart of the U.S. Food and Drug
Administration) for the treatment of stage 3 and 4 melanoma patients in France. In February 2006, AFSSAPs notified us that the
filing was not approvable with the current data and that additional data would be necessary to support an approval. We are
continuing to work with AFSSAPs to define what additional data are necessary and to evaluate the opportunities to treat patients
in France under a compassionate use protocol while we are generating the additional data.

We have previously conducted
clinical trials to evaluate the safety and efficacy of M-Vax and O-Vax (our AC Vaccine for ovarian cancer). In March and April
2001, we received first oral notification and then written confirmation from the FDA that clinical activities then underway for
both our M-Vax and O-Vax autologous cancer vaccines were placed on clinical hold pending further review by the agency. The written
notification from the FDA confirming the clinical hold identified the specific issues that the FDA wanted addressed, which dealt
primarily with the sterility of autologous tumors received by us at the Philadelphia facility and the assurance that vaccines
being provided to patients would meet FDA sterility guidelines.

In conjunction with the
clinical hold, the FDA conducted an inspection of our manufacturing facility in Philadelphia, which inspection was completed in
May 2001. As a result of that facility inspection, we received a Form 483, which is a finding of manufacturing facility
deficiencies, to which we initially responded at the end of June 2001. The issues raised in the Form 483 were essentially
consistent with those in the clinical hold letters, focusing primarily with the sterility of autologous tumors received by us at
the Philadelphia facility, the handling of sterile and non-sterile tumors and assurance that vaccines being provided to patients
would meet FDA sterility guidelines. No significant new areas of concern were identified in the Form 483.

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In developing our response to
the FDA clinical hold letters and the Form 483, we identified and began to implement a number of product development initiatives
related to the AC Vaccine technology. As a result, we determined certain product improvements to the vaccine could be instituted
that would address certain concerns of the FDA and make the vaccine more viable from a
regulatory and commercial perspective. Throughout the remainder of 2001 and into 2002, we continued to evaluate (1) the
prospect of freezing the haptenized cells for distribution to the end user, (2) steps that could be taken to help ensure that
final released vaccines prepared by us are sterile and (3) tests to determine the minimal number of cells necessary for the
vaccine to be effective. Based upon the results of these efforts, we reengineered the manufacturing steps to create and release
the vaccine technology to take advantage of these potential product improvements.

In working with the FDA to
resolve the issues identified as part of the clinical hold, we concluded that (1) it would no longer be feasible to continue the
clinical development of the original AC Vaccine format without the ability to ensure clinical samples have completed sterility
testing prior to administration (referred to as the fresh vaccine product format), and (2) a revised product format
needed to be established, tested and reviewed by the FDA which allowed us to test the vaccine for sterility prior to
administration of the vaccine to patients. Through these research and development activities we developed a new product format for
the production and distribution of the AC Vaccine, referred to as the frozen vaccine technology. Based upon the
changes to the manufacturing of the product, the FDA recommended that we consider preparing and filing new INDs for the frozen
vaccine. At the recommendation of the FDA, we inactivated the INDs for M-Vax and O-Vax, given the FDAs view that the
revisions to the manufacturing process, necessary to address the FDAs concerns, would result in a new product from a
regulatory perspective and given the FDAs recommendation that we file new INDs for indications utilizing the new product.

Based upon the continuing
interactions with the FDA, in 2002, we determined it was necessary to file new INDs for the revised product format for the AC
Vaccine for melanoma and ovarian cancer, which IND filings were accepted by the FDA. Our Philadelphia facility was cleared to
begin processing clinical samples for administration to patients in clinical trials. Due to a lack of funding at that time, we
decided not to initiate the clinical trials and instituted further cost minimization steps, which resulted in additional
management changes at the end of 2002.

Non-Small-Cell Lung Cancer

Lung cancer is currently the
leading cause of cancer death in the Western Hemisphere for both men and women, eclipsing the combined mortalities from breast,
colon, and prostate cancers. According to the American Cancer Society, in 2005, there were an estimated 172,570 new lung cancer
cases in the U.S. and 163,510 deaths from lung cancer. Historically, 80-85% of lung cancer cases have been non-small cell lung
cancer (NSCLC). The low cure rate associated with NSCLC can be attributed to the absence of effective screening, the
propensity for early spread, and the lack of effective treatment options for metastatic spread.

We believe that NSCLC may be
a good target for our AC Vaccine immunotherapy approach. Lung cancers are chemically-induced, which increases the likelihood that
they will express antigens recognized by the immune system. Also, in clinical trials of M-Vax, we observed that melanoma lung
metastases were more likely to respond well to the AC Vaccine than metastases in other sites.

In February 2004, we
announced a collaboration with the thoracic surgery team at the University of Pennsylvania Cancer Center. This collaboration
allowed us to complete a feasibility study of the autologous, hapten-modified vaccine for NSCLC. The study demonstrated that
vaccines could be manufactured successfully from most early stage tumors. All the vaccines manufactured as part of the feasibility
study also passed sterility tests. These results formed the basis of our Phase I-II clinical trial of L-Vax to determine the
safety of an autologous, hapten-modified NSCLC vaccine and its ability to induce a positive DTH response, as described below.

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In November 2005, the FDA
approved our IND for the treatment of resectable NSCLC. We commenced a Phase I-II clinical study of L-Vax for the treatment of
NSCLC at the University of Pennsylvania Cancer Center in January 2006. The study subjects will be
patients with completely resectable primary NSCLC (stage 1, 2, and early 3). They will undergo standard surgical resection, and
the tumor tissue will be sent to us for manufacture of the L-Vax vaccine. Eligible patients will be assigned to one of three
dosage groups. The schedule of administration will be the same as the one optimized in previous melanoma trials. The regimen for
the NSCLC Phase I-II study includes low dose cyclophosphamide, which potentiates the immune response, probably by inhibiting
regulatory T-cells, which, in turn, dampen the anti-tumor immune response. Also, BCG is admixed with the vaccines because it
functions as an immunological adjuvant.

The major endpoints of this
study are the development of immunity to the patients own NSCLC cells and a formal assessment of the safety of L-Vax.
Patients will be tested for DTH response to their own DNP-modified and unmodified NSCLC cells prior to treatment and after the
initial seven weekly vaccine injections. Following completion of the post-vaccine DTH testing, patients will be offered standard
chemotherapy, which is now considered a standard of care, as an adjuvant treatment. After chemotherapy, patients who remain well
will be eligible for a booster injection of L-Vax at the eight-month point. Adverse events caused by the L-Vax vaccine will be
measured and recorded, with DTH results obtained at 2 1⁄2 months and the maximum duration of the study for an individual
patient being 12 months.

Final results of the L-Vax
study are expected in calendar year 2006. At that time, we anticipate that L-Vax will be shown to be safe. We also believe that
one or more of the vaccine dosages will regularly induce a positive DTH response to the patients own DNP-modified melanoma
cells, which, in some cases, will be carried over their own unmodified NSCLC cells. The optimal dose determined by this trial will
be used for our planned pivotal registration trials of L-Vax.

Compassionate Use of M-Vax

Beginning in 2003 and
continuing through the present, we have made M-Vax available on a compassionate use basis in various European countries.
Compassionate use is considered for patients who have failed to respond to accepted standards of care for their cancer and are
facing a prognosis of death. Compassionate use of M-Vax has been permitted by regulatory authorities in France, Spain and Belgium
(even though there is no approval for marketing of M-Vax in those countries) when the patients prognosis is poor and there
are no alternative treatments available. Through December 31, 2005, we had 54 patients presented for treatment on a
compassionate use basis, of which 31 patients were treated. The patients who were not treated were untreatable with the AC Vaccine
due to inadequate cell count in the tumor sample received, the tumor sample received was not melanoma, sterility issues with the
tumor sample, or the death of the patient prior to treatment being available. Patients presented for treatment on a compassionate
use basis are normally stage 4 melanoma patients who are facing a prognosis of death.

Compassionate use of M-Vax is
important to us and our AC Vaccine technology because it allows us to gain additional clinical experience on patients and to
continue to expand the process development steps needed for a full regulatory approval of the vaccine. Compassionate use of M-Vax
also expands the visibility of the AC Vaccine within the scientific and medical communities in Europe, which are now seeking out
the compassionate use of M-Vax. These experiences of oncology leaders in various European countries may become critical to the
overall market and regulatory acceptance of the AC Vaccine technology in Europe. This also will allow us to educate practitioners
to maintain and aseptically handle and ship tumors to reduce incidences where tumors become contaminated.

Other Potential Cancer Treatment Compounds

In December 1996, we entered
into an agreement with Rutgers University to develop, commercially manufacture and sell products embodying a series of compounds
for the treatment of cancer. During 2004, we agreed with Rutgers to cancel the license agreement and all our obligations
associated with the license agreement.

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In February 1997, we licensed
from The Texas A&M University System an issued U.S. patent and certain U.S. and foreign patent applications relating to a
series of novel cancer-fighting anti-estrogen compounds that may be especially effective against hormone-dependent tumors. The
development of the anti-estrogren compounds is no longer a significant part of our plan of operation. We have been notified by
Texas A&M that Texas A&M considers us to be in violation of the license agreement and that our rights under the license
agreement have been revoked. We dispute the contention by Texas A&M and intend to continue to defend our rights to this
technology.

# Contract Manufacturing

As a result of our clinical
activities in the U.S. and France, we have developed a level of expertise related to the clinical production and regulation of
cell and gene therapies. Cell and gene therapy research and development has been ongoing for a number of years, but specific
regulations of these products by most regulatory agencies are just beginning to evolve. In February 2002 (effective April 2002),
the United States Pharmacopia published a chapter on manufacturing and testing requirements relating to cell and gene therapies.
Prior to the publication of this chapter, there was no published guidance for companies engaged in the production and testing of
cell and gene therapies. Likewise, in Europe the European Medicines Evaluation Agency is currently developing guidelines for the
production, testing and regulation of cell and gene therapies.

Based on our expertise, we
have entered into various contract manufacturing relationships in France. Contract manufacturing has been made possible by the
validation of our manufacturing facility first in France by AFSSAPs and secondly through successful IND filings in the United
States and in Europe. A contract manufacturing engagement normally consists of two components. The first component of the
engagement is a feasibility study. The feasibility study typically involves the transfer of production techniques from an
unrelated scientific laboratory to our facilities. After transferring the techniques, we are engaged to develop the required
procedures, tests and assays so that the product can be produced in compliance with current Good Manufacturing Practices
requirements. After validating the procedures, tests and assays, we would then contract to produce the necessary components for
the manufacturing section to be filed as part of an IND application.

Upon acceptance of the IND by
a regulatory agency, the second component of the engagement would then commence. This component consists of the manufacturing and
testing of clinical samples for administration to patients as part of a clinical trial. As part of this operation, we contract to
maintain all the necessary paperwork and documentation to demonstrate the work was done in compliance with standards established
by the applicable regulatory agency. In addition, the documentation would be used to support further IND filings and could be used
as a component of a BLA for approval to market the product.

In February 2004, our
subsidiary, Genopoeitic, entered into an expanded contract manufacturing alliance with OPISODIA SAS, a French pharmaceutical
company (OPI). The agreement required annual funding from OPI of approximately $1,500,000 (US) for each of 2004 and
2005, and placed the existing OPI facilities and personnel under the direction of Genopoeitics management. The funding from
OPI covered a majority of the manufacturing costs of the combined French facilities in 2004 and 2005. This alliance was terminated
by agreement between OPI and Genopoeitic in May 2005.

We have entered into new
agreements and intend to enter into future contract manufacturing arrangements only to the extent the required work does not limit
or interfere with our own clinical development programs.

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# License and Research Agreements

The Thomas Jefferson University License and Research Agreement

We entered into a license
agreement with TJU for the AC Vaccine technology in November 1995. The TJU license is a perpetual royalty-bearing license for the
rights to the AC Vaccine technology, and provides for certain payments upon the occurrence of certain milestones. As partial
consideration, we paid $10,000 to TJU for the TJU license, $10,000 upon initiation of the first clinical trial, and $25,000 upon
our receipt of approval from the FDA (or comparable international agency) to market products relating to the AC Vaccine technology
(which payment was triggered by our receipt of that regulatory approval in Australia). We also issued to each of TJU and Dr. Berd,
229,121 shares of our common stock, representing 7.5% (15% in the aggregate) of our total outstanding voting securities at that
time.

In addition to the milestone
payments we have already made to TJU, we were obligated to pay TJU $10,000 upon the first filing of a marketing application with
the FDA (or comparable filing with a comparable international agency).

We are presently obligated
under the TJU license to spend a minimum of $500,000 per year on the development of the AC Vaccine technology until commercialized
in the U.S. If we file for FDA approval of a Company-sponsored marketing application for the right to market an AC Vaccine
product, we may elect to spend less than $500,000 per year on the development of the AC Vaccine technology during the period of
time the marketing application is under review by the FDA.

In connection with the TJU
license, we also entered into a Clinical Study and Research Agreement with TJU in 1995. Under the TJU license and the TJU research
agreement, we agreed to provide TJU with minimum sponsored research funding relating to the development of additional
immunotherapies based on the AC Vaccine technology. We renewed this agreement for a three-year period through November 2004. The
research conducted by Dr. Berd and TJU under the TJU research agreement pertained to applications of the AC Vaccine technology
beyond the core vaccine products we are developing.

In 2004, we reached an
agreement with TJU to terminate the TJU research agreement and all our obligations thereunder in exchange for a final payment by
us to TJU of $300,000, half of which we paid in 2004. In April 2005, we paid the balance of $150,000 to TJU. We do not believe
that the termination of the TJU research agreement has had any meaningful effect upon us or our ability to continue our AC Vaccine
development efforts.

In November 2004, Dr. Berd
joined our staff as our Chief Medical Officer. Dr. Berd continues to be instrumental to our regulatory and development efforts for
the AC Vaccine technology.

We are also obligated to pay
TJU royalties on our net sales revenue and a percentage of all revenues received from sublicenses relating to the AC Vaccine
technology. We bear the expense of maintaining and defending the patents that are subject to the TJU license.

# Research and Development Expense

Our research and development
activities focus primarily on clinical development and trials of our AC Vaccine technology for the treatment of melanoma, ovarian
cancer, lung cancer and other cancers. Our clinical development program includes the development of techniques, procedures and
tests that need to be developed as part of the manufacturing of our biological product so that the product can be evaluated and
potentially approved by regulatory authorities.

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Our research and development
expenses consist primarily of costs associated with the clinical trials of our product candidates, compensation and other expenses
for research personnel, payments to collaborators under contract research agreements, costs for our consultants and compensation,
materials, maintenance and supplies for the operation and maintenance of our biological clean room facilities, which are necessary
for the production of materials to be used in clinical trials. All of these costs qualify as research and development expenses in
accordance with the guidance included in Statement of Financial Accounting Standards No. 2 Accounting for Research and
Development Costs.

Manufacturing costs included
in this category relate to the costs of developing, supporting and maintaining facilities and personnel that produce clinical
samples in compliance with current Good Manufacturing Practices (cGMP). Our facilities and the personnel maintained
for manufacturing are currently at what we feel are the minimum required for compliance with cGMP. Based upon the current capacity
of our facilities, our personnel and our current and future planned clinical trials, we have excess capacity for the production
and testing of biological products. We use this excess capacity to generate cash in the form of contract manufacturing alliances.
Because the incremental costs incurred to provide these services are not material or quantifiable, they are not presented
separately.

Contract manufacturing
encompasses services we provide to other biotechnology or pharmaceutical companies that are pursuing the clinical development of
biological products. The engagements generally consist of two components. The first component is process validation in which the
contracting company provides information on its product and the processes and techniques used to produce the product. Procedures
are developed, documented and cataloged for the cGMP production of the product using known and acceptable techniques, tests and
materials. Small scale lots are produced, and techniques, feasibility of the production processes and tests validated. The end
product of the first phase of an engagement is a pilot batch of product and the necessary production formulation and techniques to
be used to file an IND with regulatory authorities for human clinical trials. The second phase of an engagement consists of the
production of batches of product to be used in human clinical trials. The typical engagement results in production of small
batches of product to be used in early stage (Phase I and II) clinical trials.

In 2005, we incurred research
and development expense of $3,534,948 compared to $3,005,565 in 2004, and $1,984,193 in 2003. Research and development expenses
have been $43,407,500 for the period from inception through December 31, 2005. The majority of these costs relate to clinical
research and development of the AC Vaccine technology. Our management estimates that greater than 90% of the periodic and
cumulative research and development expenses incurred relate to our one major program, the AC Vaccine. At this time, due to the
risks inherent in the clinical trial process, risks associated with the product and product characterization and risks associated
with regulatory review and approval of clinical product candidates, we are unable to estimate with any certainty the costs we will
incur in the continued development of our product candidates for commercialization.

# Intellectual Property and Other Technology Protections

Our success will depend in
large part on our ability to:

| |  |  | Maintain and obtain patent and other proprietary protection for
products, process and uses of our products;
| | - |  | -----------------------------------------------------------------------------------------------------------
| |  |  | Defend patents;                                                                                            
| |  |  | Preserve trade secrets; and                                                                                
| |  |  | Operate without infringing the patents and proprietary rights of
third parties.                            

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We intend to seek appropriate
patent protection for our proprietary technologies by filing patent applications when possible in the United States and selected
other countries. In November 1995, we entered into an exclusive, worldwide license agreement with TJU for all of its patents and
pending patent applications relating to the AC Vaccine. Currently, four U.S. patents have been issued and one U.S. patent is in
the process of re-issue, all of which are subject to the TJU license. In addition two Australian patents (AU727316 and AU757980)
have been issued that are subject to this license. Several patent applications are currently pending in the U.S. and other jurisdictions. The
following table summarizes the issued U.S. patents relating to the AC Vaccine:

|Patent No. |  | Patent                                                                      |  | Date Issued       |  | Date Expires     
|---------- |  | --------------------------------------------------------------------------- |  | ----------------- |  | -----------------
|          
|6,248,585  |  | Composition for preserving haptenized tumor cells for uses in vaccines      |  | June 19, 2001     |  | November 16, 2019
|          
|6,333,028  |  | Methods of using haptenized ovarian carcinoma tumor cells                   |  | December 25, 2001 |  | July 24, 2017    
|          
|6,403,104  |  | Hapten-conjugated mammalian cells and methods of making and using thereof   |  | June 11, 2002     |  | March 16, 2020   
|          
|6,458,369  |  | Composition comprising tumor cells and extracts and method of using thereof |  | October 1, 2002   |  | May 4, 2019      

U.S. Patent No. 5,290,551,
Treatment of Melanoma with a Vaccine comprising Irradiated Autologous Melanoma Tumor Cells Conjugated to a Hapten, was
originally issued on March 1, 1994, and is currently under re-issue examination.

These patents cover methods
of making the vaccine, composition of matter, as well as therapeutic use. We intend to continue using our scientific expertise to
pursue and file patent applications on new developments with respect to processes, methods and compositions to enhance our
intellectual property position in the field of cancer treatment.

Any patents or patent rights
that we obtain may be circumvented, challenged or invalidated by our competitors. In addition, others may challenge that our
products and processes specifically infringe their patents. On September 17, 1999, a complaint was filed against us in the
U.S. District Court for the District of Maryland by Intracel Corporation. Intracel sought monetary damages and an injunction
against the use of our autologous cell vaccine technologies. Intracel claimed that our technologies infringed their U.S. patent
entitled Active Specific Immunotherapy. Intracel later withdrew their case.

We also rely on trade secrets
and proprietary know-how related to the production and testing of our products, especially when we do not believe that patent
protection is appropriate or can be obtained. Our policy is to require each of our employees, consultants and advisors to execute
a confidentiality and inventions agreement prohibiting the disclosure of our confidential information before they begin a
relationship with us.

# Manufacturing and Marketing

AC Vaccines  General

Our AC Vaccine products under
development are individualized therapies that are manufactured by first receiving tumors from a patient, treating those tumors to
break them down to the basic cancer cell and creating a liquid vaccine using the cells as a raw material, then delivering the
vaccine to the doctors office for administration to the patient. We believe that the key to success in developing and
distributing individualized therapies relies upon a model employing central processing, so that manufacturing cell based products
can be a standardized process that can benefit from economies of scale and efficient distribution. The basic model for the vaccine
is cells in-product out, where the final product looks like a traditional mass-produced drug to the end-user, but is
manufactured individually. We are not currently treating patients in the U.S. or Europe, other than on a compassionate use basis
in certain European countries, because the AC Vaccine products have not yet been approved for treatment.

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Manufacturing the AC Vaccine

Based upon re-engineering the
manufacture of the vaccine technology, we no longer require regional manufacturing capabilities. We made a strategic decision in
early 2003 to use our facility in Lyon, France as our primary facility for the production of our cell based therapies. The Lyon
facility has been inspected by AFSSAPs (the French equivalent of the U.S. FDA) and has received the designation of
Etablissment Pharmaceutique and more recently has obtained the designation Etablissement Thérapies
Gèniques et Cellulaires. The Etablissment Pharmaceutique designation is required for the production of any commercial
product to be sold in France and throughout Europe. The Etablissment Therapies Geniques et Cellulaires designation is required in
France for the commercial production of cell and gene therapy products.

Other Foreign Markets for M-Vax

During 2002, we entered into
a distribution agreement with Ferrer Internacional, S.A. for the sales and marketing of the vaccine in certain territories in
Europe, Latin America and Asia. With the assistance of Ferrer, we are investigating potential market opportunities to begin
initiating sales of M-Vax in certain countries in Europe. The commercialization of M-Vax in one or more European countries will be
subject to meeting certain requirements determined by each applicable regulatory agency.

# Sources and Availability of Raw Materials

We do not expect to encounter
significant difficulties in obtaining raw materials for M-Vax, O-Vax, L-Vax or any of our other AC Vaccine products, because they
consist primarily of a readily available chemical reagents and the patients own tumor cells. We administer the AC Vaccine
with BCG. BCG is an approved product for other cancer indications and is being administered by other companies as a separate
vaccine. There are several sources of BCG, each formulation of which differs based upon the original source of the product. If we
are unable to continue to obtain the current strain of BCG used in our clinical trials, we may not be permitted by regulatory
authorities to use another strain of BCG without conducting additional clinical studies with the new strain of BCG.

# Competition

Cancer Drugs  General

We are aware of estimates
that more than 300 companies are reported to have more than 1,000 cancer drugs, including chemotherapies and immunotherapies,
under development worldwide, many of which are under development in the U.S. A substantial number of these drugs are, or may be in
direct competition with, M-Vax, O-Vax, L-Vax or any other of our immunotherapies.

Our competitors include (i)
large established pharmaceutical and biotechnology companies with commitments to oncology or antiviral research, development and
marketing, including, Schering Plough Corporation, Chiron Corporation, Bristol-Myers Squibb and Johnson & Johnson; (ii)
smaller biotechnology companies with similar strategies, including IDEC Pharmaceuticals, Inc. and Biomira Diagnostics; and (iii)
many development stage companies licensing or developing oncology therapeutics. In addition, many research institutes, hospitals
and universities are working to develop products and processes in the same field of cancer that may in the future be in direct
competition with our products.

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Other Companies Developing Cancer Vaccines

A number of companies and
research institutions are developing cancer vaccines, including Ribi ImmunoChem Research, Inc./Corixa, Cancer Vax, Medarex, Genta,
and Progenics, Inc., in melanoma; AltaRex, Genentech and Biomira, in breast cancer; Intracel in colorectal cancer; Cell Genesys in
lung cancer; Dendreon in prostate, multiple myeloma, ovarian and breast cancers; and Antigenics in renal cell and other cancers.
In addition to the primary indications noted, most companies are also exploring the use of their vaccines in other indications.

The principal competitive
factors in the area of cancer immunotherapies are (i) the efficacy of the product, (ii) the timing of the entry of the product
into the market and (iii) cost of goods and ease of use. Initially, we face competition from these companies for the registration
of new patients in clinical trials currently under way and planned trials. There are a limited number of persons eligible for
participation in any particular clinical trial, and we and our research partners compete directly with other pharmaceutical and
biotechnology companies, research firms, hospitals and universities for the inclusion of patients in the clinical trials.
Enrollment rates for clinical trials are a key determinant in the timelines for bringing products to market.

# Government Regulation

The research, pre-clinical
development, clinical trials, product manufacturing and marketing conducted by us or on our behalf are subject to regulation by
the FDA in the U.S., AFSSAPs (the French equivalent of the U.S. FDA) in France, and similar health authorities in other foreign
countries, as well as the European Medical Evaluations Agency (EMEA) which has broad oversight over most European
Member States. Our proposed products and technologies also may be subject to certain other international, U. S. federal, state and
local government regulations, including, the Federal Food, Drug and Cosmetic Act, Public Health Service Act, and their state,
local and foreign counterparts.

Generally, the steps required
before a pharmaceutical or therapeutic biological agent may be marketed in the U.S. include: (i) pre-clinical laboratory tests,
pre-clinical studies in animals, toxicity studies and formulation studies; (ii) the submission to the FDA of an IND for human
clinical testing, that must become effective before human clinical trials commence; (iii) adequate and well-controlled human
clinical trials to establish the safety and efficacy of the drug; (iv) the submission of a marketing application to the FDA; (v)
approval of the manufacturing processes and controls; and (vi) FDA approval of the marketing application prior to any commercial
sale or shipment of the drug.

Pre-clinical studies include
laboratory evaluation of the product, mostly conducted under Good Laboratory Practice regulations, and animal studies to assess
the pharmacological activity and the potential safety and effectiveness of the drug. The results of the pre-clinical studies are
submitted to the FDA in the IND. Unless the FDA objects to an IND, it becomes effective 30 days following submission and the
clinical trial described in the IND may then begin.

Clinical trials begin when a
drug is approved for testing on humans. There are usually said to be three main phases of clinical trials that a drug must go
through in the U.S. before the drug is approved to be manufactured and marketed to the public. These phases may involve testing of
drugs in healthy human volunteers (Phase I) for assessment of safety, followed by tests of effectiveness and safety in patients
with illnesses the drug is designed to treat (Phases II and III). In most instances, Phase III studies are the final group of
studies that are conducted before a product can be approved by the FDA for commercial use. In the case of life-threatening
illness, the study process and phases of clinical trials may be compressed and accelerated. In some cases, Phase II trials are
deemed sufficient for market approval by the FDA or foreign regulatory authorities. Pivotal registration trials are large-scale
Phase II or III trials, the data obtained from which are intended to be used to provide for the registration of a drug or product
for market use.

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Every clinical trial must be
conducted under the review and oversight of an institutional review board at each institution participating in the trial. The
institutional review board evaluates, among other things, ethical factors, the safety of human subjects, and the possible
liability of the institution. In addition, when a sponsor has more than one clinical site participating in a study, they typically
establish a Data Safety Monitoring Board that has oversight responsibilities for the safe conduct of the clinical studies.

The results of the
pre-clinical and clinical trials are submitted to the FDA as part of an application to market the drug. The marketing application
also includes information pertaining to the chemistry, formulation and manufacture of the drug and each component of the final
product. The FDA review of a marketing application takes from one to two years on average to complete, though reviews of
treatments for cancer and other life-threatening diseases may be accelerated. The process may take substantially longer, however,
if the FDA has questions or concerns about a product. Following review, the FDA may ultimately decide that an application does not
satisfy regulatory and statutory criteria for approval or that further information and testing is required. In some cases, the FDA
may approve a product but require additional clinical tests following approval that are referred to as post marketing studies
(i.e., Phase IV).

In addition to obtaining FDA
approval for each product, each domestic drug manufacturing facility must be registered with, and approved by the FDA. Domestic
manufacturing facilities are subject to inspections by the FDA and must comply with current Good Manufacturing Practices. To
supply products for use in the U.S., foreign manufacturing facilities also must comply with current Good Manufacturing Practices,
and are subject to periodic inspection by the FDA or by comparable foreign regulatory agencies under reciprocal agreements with
the FDA.

If marketing approval of any
of our products is granted, we must continue to comply with FDA requirements not only for manufacturing, but also for labeling,
advertising, record keeping, and reporting to the FDA of adverse experiences and other information. In addition, we must comply
with federal and state health care anti-kickback laws and other health care fraud and abuse laws that affect the marketing of
pharmaceuticals. Failure to comply with applicable laws and regulations could subject us to administrative or judicial enforcement
actions, including product seizures, injunctions, civil penalties, criminal prosecution, refusals to approve new products or
withdrawal of existing approvals, as well as increased product liability exposure.

The regulatory approval
process for new drugs in France is substantially similar to the process described above for the U.S. Generally, the steps required
before a pharmaceutical or therapeutic biological agent may be marketed in France include (i) pre-clinical laboratory tests,
pre-clinical studies in animals, toxicity studies and formulation studies; (ii) the submission to AFSSAPs of an IND for human
clinical testing, that must be approved before human clinical trials commence; (iii) adequate and well-controlled human clinical
trials to establish the safety and efficacy of the drug; (iv) the submission of a marketing application to AFSSAPs; (v) approval
of the manufacturing processes and controls; and (vi) AFSSAPs approval of the marketing application prior to any commercial sale
or shipment of the drug.

The primary difference
between the U.S. and French regulatory processes is the evolution of the thinking of each regulatory agency to the application of
the procedures described above, which were designed for traditional, mass-produced prescription drugs and similar procedures, to
the regulation of autologous products, meaning those products, such as the AC Vaccine, whose origin is primarily from the patient
with minimal manipulation.

In 2002, AFSSAPs published
the first regulations specific to the regulation of cell and gene therapies that are produced on an individual patient basis,
which includes the AC Vaccine technology. These regulations differentiate these products from standard pharmaceutical products. We
interpret that these regulations will evaluate cell and gene therapy products by the level and type of manipulation to the
product. We believe that certain cellular products, including M-Vax, will be regulated differently from standard drugs. For these
technologies, marketing approval will be authorized upon the satisfaction of two criteria. One of the requirements will be that
the therapeutic is manufactured in a cGMP-compliant facility and manner. Secondly, the therapeutic will need to be able to
demonstrate a reasonable claim for efficacy.

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Using the data generated in
the studies conducted at TJU as the basis for the efficacy claims of M-Vax, we submitted the equivalent of a Biologics License
Application to the French authorities in March 2005 under their Cell and Gene Therapy Regulations. In preparing the submission, we
utilized the format for the Common Technical Document (CTD) provided by the International Conference of Harmonization
and adopted by the U.S., Europe and Japan. The purpose of the CTD is to harmonize the filing requirements for biologic products in
the various regions. We received acknowledgement from AFSSAPs of receipt of our submission effective March 23, 2005. In February
2006, we received notification from AFSSAPs that additional clinical data will be necessary for approval of the product under
these regulations. We are meeting with the agency to discuss the additional requirements, potential planned studies to obtain the
information and to discuss our ability to make the vaccine available on a compassionate use basis while this data is being
accumulated.

For clinical investigation
and marketing outside the U.S. and France, we also are subject to certain foreign regulatory requirements governing human clinical
trials and marketing approval for drugs. The requirements governing the conduct of clinical trials, product licensing, pricing and
reimbursement vary widely for European countries both within and outside the European Union (EU). Normally, foreign
marketing authorizations are applied for at a national level, although within the EU certain registration procedures are available
to companies wishing to market their products in more than one EU member state. If any applicable regulatory authority is
satisfied that adequate evidence of safety, quality and efficacy has been presented, a marketing authorization will be granted.
The system for obtaining marketing authorizations within the EU registration system is a dual one in which certain products, such
as biotechnology and high technology products and those containing new active substances, will have access to a central regulatory
system that provides registration throughout the entire EU. Other products will be registered by national authorities in
individual EU member states, operating on a principle of mutual recognition.

# Employees

As of December 31, 2005, we
had 22 total employees, consisting of 18 full-time employees at our subsidiary in France and 4 full-time employees in the U.S.

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# RISK FACTORS

Investing in our
securities involves a high degree of risk. Before making a decision about investing in our securities, one should carefully
consider the risk factors listed below, as well as the rest of the information contained in this annual report on Form 10-KSB and
our other reports filed with the Securities and Exchange Commission.

Because of our continuing need for capital, there remain questions as to
our ability to continue as a going concern.

We presently anticipate that
our current cash resources will be sufficient to fund operations through the first half of 2006, depending upon how aggressively
we implement our development plans. We have only a limited ability to generate revenues from operations, and any revenues we
generate are almost certain to be substantially less than our operating expenses. Accordingly, it will be necessary to raise
additional equity capital in the first half of 2006. Because of our limited cash and financial resources, our ability to continue
as a going concern is in question.

In the past, we have had
periods in which we have been unable to raise adequate capital, and as a result, we have ceased certain of our product development
programs and have taken numerous other steps to reduce our cash expenditures. Each of these steps, while conserving cash, has
slowed the prospects of success in various product development efforts.

We have no way of knowing if
we will be able to complete any additional financings.

We are pursuing a regulatory approval process in France that is the result
of recently published regulations, for which there is no clear approval path, which could delay our planned regulatory approval
goals in France.

In March 2005, we submitted
to AFSSAPs (the French regulatory authority) a biological license application (BLA) for approval of our AC Vaccine (M-Vax) for the
treatment of patients in France with stage 3 & 4 melanoma. The basis upon which we filed this application is data that were
obtained in non-controlled, single site, clinical trials conducted by Dr. Berd at TJU. The rules under which we made this
submission were recently enacted and, to our knowledge, represent the first ever regulations that are specifically developed for
the regulation of cell and gene therapy treatments. The clinical trials that are the basis upon which we submitted our clinical
data are non-controlled, meaning they do not include a comparative treatment against which the results of the clinical product are
compared. In general, most drugs require controlled studies that they are compared against alternate treatments to measure their
effect and efficacy.

In February 2006, we received
notification from AFSSAPs that additional clinical data will be necessary for approval of the product under these regulations. We
are meeting with the agency to discuss the additional requirements, potential planned studies to obtain the information and to
discuss our ability to make the vaccine available on a compassionate use basis while this data is being accumulated. The response
of AFSSAPs to our planned BLA filing has been uncertain, due to the lack of a clear regulatory path for approval of autologous
products in France. Accordingly, we cannot predict the timing or ultimate outcome of the regulatory review by AFSSAPs of our BLA
filing.

We now conduct all AC Vaccine manufacturing out of our Lyon, France
facility, which creates business uncertainties and logistical risks for the treatment of patients in our clinical trials.

We previously manufactured
our AC Vaccine for U.S. patients enrolled in our clinical trials at our facility in Philadelphia. We now conduct all AC Vaccine
manufacturing at our Lyon, France facility. In our current clinical trials in the U.S. for M-Vax and L-Vax, we encounter various
business uncertainties and logistical risks associated with the transport of biologics (consisting of human tumor

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cells) to France and shipping a patients individualized AC Vaccine back
to the U.S. Had we been using this business model in September 2001, the September 11 attacks in the U.S. and the resultant
suspensions and interruptions of international travel and shipments would have significantly disrupted our treatment of patients.
There are additional risks associated with the transport of biologics and vaccines, including the time constraints under which a
tumor must be received and processed and the specialized shipping requirements of the vaccine after it is manufactured. Although
we have developed plans to manage these risks, we may encounter disruptions that we are unable to control, which could adversely
affect the willingness of U.S. patients to enroll in our clinical studies or otherwise disrupt our clinical development of the AC
Vaccine.

The U.S. clinical trial and regulatory approval process for our products
has been and will continue to be expensive and time consuming and the outcome uncertain.

To obtain regulatory approval
for the commercial sale of our products in the U.S., we must demonstrate through clinical trials that our products are safe and
effective. We will continue to incur substantial expense for, and devote a significant amount of time to, pre-clinical testing and
clinical trials of our products in the U.S. The results from pre-clinical testing and early clinical trials are not totally
predictive of results that may be obtained in later clinical trials. Data obtained from pre-clinical testing and clinical trials
are susceptible to varying interpretations, which may delay, limit or prevent regulatory approval. In addition, regulatory delays
or rejections may be encountered as a result of many factors, including changes in regulatory policy during the period of product
development. Our business and financial condition will be materially and adversely affected by any delays in, or termination of,
our clinical trials.

Our clinical trials for the
AC Vaccine were placed on clinical hold by the FDA in spring 2001. We did not re-file the INDs until fall 2002 to recommence
clinical trials. That delay was costly to us in terms of both time and money. During that 16-month period, we were unable to
proceed with any patients in our AC Vaccine clinical trials. Similar delays could occur in the future, resulting in significant
delays, expense and lost opportunities. Even though the new INDs have been initiated, we still may not be able to obtain the
funding to complete the U.S. regulatory approval process or we may fail to obtain FDA approval for our products. We may never be
able to commercialize our AC Vaccine products in the U.S.

We administer the AC Vaccine
with Bacillus Calmette-Guerin (BCG), which is an approved product for other cancer indications and is being administered by other
companies as a separate vaccine. There are several sources of BCG, each formulation of which differs based upon the original
source of the product. If we are unable to continue to obtain the current strain of BCG used in our clinical trials, we may not be
permitted by regulatory authorities to use another strain of BCG without conducting additional clinical studies with the new
strain of BCG.

We compete with other clinical programs and other treatments for patients
for our clinical trials, which will affect our ability to enroll quickly our clinical trials.

We have competed with
numerous clinical trials and other treatment regimens (both in the U.S. and Europe) for patients for our clinical trials and will
compete with those programs for patients for our clinical trials. Companies with clinical trials, including us, provide
information and other incentives to oncologists and other specialists as an inducement to participate in clinical trials. A
physician is required to place patients in clinical trials based upon the physicians assessment of the likely benefits of
that clinical trial to the patient. The information provided by us regarding any future clinical trials may not be sufficient to
persuade physicians to place their patients in our clinical trials. We have experienced intense competition for patients for our
previous clinical trials.

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We are operating in a regulated industry where the guidance for acceptable
manufacturing and testing of our products and processes is evolving, which creates uncertainties, delays and expense for us.

Regulatory standards require
that we produce our products in compliance with current Good Manufacturing Practices (cGMP). These requirements, as
dictated by the applicable U.S. and European regulatory authorities, adopt the methods for end product standards and methods of
analysis, which in the U.S. guidance is published in the United States Pharmacopoeia (similar guidance for Europe is published in
the European Pharmacopoeia). In February 2002, the United States Pharmacopeia issued a new general information chapter entitled
cell and gene therapy products, which became effective April 2002. This relates to the production and testing of cell
and gene therapy products. This is the first known industry general guideline specifically related to the manufacture of cell and
gene therapy products. New guidance can be expected as the cell and gene therapy areas of the pharmaceutical industry expand. We
will be required to adapt our existing physical facilities, process and procedures to these standards for the production of our
products during clinical testing and for future commercialization. The inability to adapt to these evolving standards will delay
our ability to produce product for clinical testing and would delay our ability to enter into clinical trials.

During 2002, the French
regulatory authority, AFSSAPs, published information defining clinical regulations for cell and gene therapy products. We believe
that this is the first guidance by a regulatory authority that defines the clinical evaluation of cell and gene therapy products
separately from other pharmaceutical products. We will need to adapt to and adhere to these new guidelines to obtain approval for
our lead technology. As with any new regulatory scheme, there is not a clear precedent for resolving certain issues, which could
further delay regulatory reviews and approvals of our products.

We are a development stage biopharmaceutical company, and we may never
develop or successfully market any products.

Investors must evaluate us in
light of the expenses, delays, uncertainties and complications typically encountered by development stage biopharmaceutical
businesses, many of which we have already experienced and many of which are beyond our control. The risks of a development stage
biopharmaceutical company that we have already encountered include:

| |  |  | the FDA clinical hold of our AC Vaccine clinical trials in 2001
and the resultant substantial expenses and delays in resolving the FDA concerns and refiling new INDs for the reformulated AC
Vaccine products;                                                                          
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | manufacturing challenges relating to the production of a vaccine
from the patients own cancer cells, such as the sterility issues we previously experienced at our Philadelphia facility;                                                                                               
| |  |  | our failure to develop a market for the AC Vaccine in Australia,
notwithstanding substantial expenditures of time and money to do so;                                                                                                                                                    
| |  |  | our inability to agree with the FDA on an acceptable potency assay
(which is a biological measure of the drugs active ingredients) of our product prior to administration of the vaccine, which
will be required for later stage clinical trials and commercial approval of the vaccine;
| |  |  | our inability to generate any meaningful revenues from any other
products or services while we work to develop our lead products and technologies; and                                                                                                                                   
| |  |  | the cutbacks in our development plans and programs due to the
limited cash resources in recent years, which will continually require us to raise additional capital.                                                                                                                     

As a result of these and
likely continuing challenges of being a development stage biopharmaceutical company, our products may never be successfully
developed or marketed.

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Even if our AC Vaccine technology receives regulatory approval and is
determined to be safe and effective, our products may not gain commercial acceptance.

Even if the AC Vaccine
technology is safe and effective, there is no guarantee of commercial acceptance. Because the AC Vaccine technology is a new
approach to the treatment of cancer, it must be accepted by both patients and physicians before it can be successfully
commercialized. Due to the nature of the vaccine technology it requires that current practitioners revise the way they think about
cancer and cancer treatment. The marketplace of ideas, technologies and information is crowded, and we must develop the means to
reach leading specialist physicians in each market with the AC Vaccine story.

If governmental and insurance reimbursement is not available or is
insufficient, a market for our products may never develop or be economically feasible.

The availability of
governmental and insurance reimbursements of the costs of the vaccine is critical to ultimate physician and patient acceptance of
the AC Vaccine technology. In both the U.S. and other countries, sales of our products will depend in part upon the availability
of reimbursement from third-party payors, which include government health administration authorities, managed care providers, and
private health insurers. For new products or technologies, reimbursement must be established under existing governmental or
insurance regulations or practices. We will be required to obtain reimbursement approvals (both governmental and insurance) in
each country in which we obtain appropriate regulatory authority to market the AC Vaccine products.

In addition, third-party
payors are increasingly challenging the price and examining the cost effectiveness of medical products and services. Significant
uncertainty surrounds the reimbursement status of newly approved health care products, and our products may not be considered cost
effective by a particular governmental authority or insurer. Adequate third-party reimbursement may not be available to enable us
to maintain price levels sufficient to realize an appropriate return on our investment in the research and development of our
products.

We may lose control over the marketing and distribution of our vaccines if
we cannot afford to support our products.

We may have to depend on
third parties to develop, market and distribute our products. We currently do not have the resources to develop fully, market or
distribute M-Vax, O-Vax, L-Vax or any other products that we may develop in the future. Moreover, it is particularly difficult and
expensive to develop and distribute the AC Vaccine products, because they are custom made for each individual patient. We may have
less control over marketing and distribution activities performed by third parties than if we were performing those functions with
our own facilities and employees. This lack of direct control could adversely affect the results of these activities.

Current and future legislation may make our products unprofitable.

Current and future
legislation can and likely will continue to affect directly the ultimate profitability of pharmaceutical products and
technologies. The U.S. and other countries continue to propose and pass legislation designed to reduce the cost of healthcare.
Accordingly, legislation and regulations affecting the pricing of our products may change before the products are approved for
marketing to the public. Adoption of new legislation and regulations could further limit reimbursement for our products. If
third-party payors fail to provide adequate coverage and reimbursement rates for our products, the market acceptance of the
products may be adversely affected. In that case, our business and financial condition will suffer. We are not aware of any
specific legislation or regulation in the U.S. or Europe designed to limit reimbursement for products like ours, but we believe
that there is a credible risk that political and budget considerations could change dramatically the funding available for vaccine
reimbursement.

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# We may not be able to control the pricing of our products
overseas.

Foreign government
regulations and programs will likewise affect foreign pricing opportunities for our products. Virtually all foreign countries
regulate or set the prices of pharmaceutical products, which is a separate determination from whether a particular product will be
subject to reimbursement under that governments health plans. There are systems for reimbursement and pricing approval in
each country and moving a product through those systems is time consuming and expensive.

We may not be able to obtain or defend our patents, or operate without
infringing upon the rights of others.

We, as well as our current
and potential future licensors, may be unable or have difficulty obtaining and defending our patents and maintaining our trade
secrets. If so, we could be delayed or prevented from manufacturing, using or selling our products. It is also possible that one
of our products or technologies may infringe upon an existing U.S. or foreign patent of a third party, or that other patents could
issue in the future that could interfere with our ability to make or sell our products. If we are involved in a patent dispute, we
may have to pay significant legal costs, license fees or damages, and may have to stop producing and selling our products and
technologies. It is also possible that if we require the use of other patents in order to be able to commercialize our products,
we may not be able to obtain licenses for those patents.

Our management team has been dramatically reduced in order to reduce our
current cash requirements.

We have always been dependent
upon our small management team to obtain funding for the research and development of our products, to decide which of our products
to promote, to shepherd the products through the clinical trial and regulatory approval process, and to stimulate business
development and seek out new products and technologies for development. In December 2002, we terminated two senior executives, at
the recommendation of management, in order to reduce our cash requirements. It is more difficult for us to implement our plans
with a significantly reduced management team. In addition, our current financial condition makes it more difficult for us to
retain our current executives and key employees.

We may not be able to compete with other companies, research institutes,
hospitals or universities that are developing and producing cancer treatment products and technologies.

Many other companies,
research institutes, hospitals and universities are working to develop products and technologies in our specific field of cancer
research. Many of these entities have more experience than we do in developing and producing cancer treatment products. Most of
these entities also have much greater financial, technical, manufacturing, marketing, distribution and other resources than we
possesses. We believe that numerous pharmaceutical companies are engaged in research and development efforts for products that
could directly compete with our products under development. In addition, some of our competitors have already begun testing
products and technologies similar to our own. These other entities may succeed in developing products before us or that are better
than those that we are developing. We expect competition in our specific area of research to intensify.

The trading volume of our common stock is relatively low and a more active
market may never develop.

The average daily trading
volume in our common stock varies significantly, but is usually low. On many days, the common stock trades less than 15,000
shares. This low average volume and low average number of transactions per day may affect the ability of our stockholders to sell
their shares in the public market at prevailing prices. A more active trading market for our common stock may never develop.

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Our common stock was delisted from Nasdaq in 2003, which will continue to
have an adverse impact on the liquidity and pricing of our common stock.

Our common stock was moved
from the Nasdaq National Market to the Nasdaq SmallCap Market in 2002 and was delisted from the Nasdaq SmallCap Market in 2003 due
to the continuing failure of our stock to meet the continuing listing requirements of both the Nasdaq National and SmallCap
Markets. We believe that the delisting has hurt the liquidity and pricing of our common stock, which trades on the OTC Bulletin
Board. The trading efficiencies for our common stock associated with a listing on Nasdaq or a national security exchange will
continue until our stock is re-listed, which may never occur.

Because our common stock is a penny stock, you may have
difficulty selling our common stock in the secondary trading market.

The SEC has adopted
regulations that generally define a penny stock to be any equity security that has a market price of less than $5.00
per share or with an exercise price of less than $5.00 per share. Additionally, if the equity security is not registered or
authorized on a national securities exchange or Nasdaq, the equity security also would constitute a penny stock.
Because our common stock falls within the definition of penny stock, these regulations require the delivery, prior to certain
transactions involving our common stock, of a risk disclosure schedule explaining the penny stock market and the risks associated
with it. Disclosure is also required to be made in certain circumstances regarding compensation payable to both the broker-dealer
and the registered representative and current quotations for the securities. In addition, monthly statements are required to be
sent disclosing recent price information for the penny stocks. Accordingly, the ability of broker-dealers to sell our common stock
and the ability of stockholders to sell our common stock in the secondary market is limited. As a result, the market liquidity for
our common stock is adversely affected by the application of these penny stock rules. Trading in our common stock will likely
continue to be adversely affected by the application of these rules.

The rights of our preferred stockholders are superior to the rights of our
common stockholders.

The holders of our Series C
preferred stock have certain rights that are superior to the rights of holders of our common stock, including a liquidation
preference over the common stock. In the case of (1) a liquidation, (2) if we cease to exist by virtue of a merger in which we are
not the surviving corporation, or (3) if one person or entity acquires more than 50% of the voting power of the Company, holders
of our Series C preferred stock will receive $100 per share in cash or securities (a total of $3,675,000 as of December 31, 2005),
before any distributions are made to the holders of our common stock. Additionally, the holders of the Series C preferred stock
are entitled to the consideration per share of common stock that they would have received from the transaction if they had
converted all of their shares of Series C preferred stock into common stock immediately before the transaction. These rights of
the Series C preferred stock holders could result in the holders of those shares receiving substantially more of the consideration
in a merger transaction than they would otherwise have received if they had actually converted their shares of Series C preferred
stock into common stock before the merger transaction. The holders of our common stock would, accordingly, receive a lesser amount
in a merger transaction of that type than they would have received if there were no outstanding shares of the Series C preferred
stock.

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# ITEM 2.   Description of Property

We lease a pharmaceutical and
gene therapy clinical manufacturing facility in Lyon, France. The facility consists of approximately 9,000 square feet of which
approximately 7,000 square feet are utilized for manufacturing development, including 3,000 square feet of clean rooms and 2,000
square feet for office space. Currently, the monthly rental on the facility is approximately $13,800. The lease is for a 9-year
period through 2009 and is extendable for another 9-year period. The lease may be cancelled by us after July 2006.

We lease a facility in
Philadelphia, Pennsylvania, which is used for executive offices and is suitable for our clinical manufacturing activities. The
facility consists of approximately 11,900 square feet, of which approximately 9,300 square feet are suitable for manufacturing
development, while the remaining 2,600 square feet are used for office space. We have options for additional space. Currently, the
monthly rental on the facility is approximately $13,860. The lease is for a 10-year period through November 2007 and is extendable
for two five-year periods.

We believe that each of these
properties is adequately covered by insurance.

# ITEM 3.   Legal Proceedings

We are periodically involved
in ordinary, routine litigation and administrative proceedings incidental to our business. As of the date of this report, there
are no pending or, to our knowledge, threatened material claims against us.

# ITEM 4.   Submission of Matters to a Vote of Security Holders

No matters were submitted to
a vote of security holders during the quarter ended December 31, 2005.

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# PART II

# ITEM 5.   Market For Common Equity And Related Stockholder Matters

Our common stock was publicly
traded on the OTC Bulletin Board from December 19, 1996, through July 9, 1997. From 1997 until 2003, our common stock was
listed for quotation on the Nasdaq under the symbol AVXT, initially on the Nasdaq SmallCap Market and later on the
Nasdaq National Market. The stock was moved from the Nasdaq National Market to the Nasdaq SmallCap Market in 2002 and was delisted
from Nasdaq in August 2003 due to our failure to maintain Nasdaqs minimum continuing listing standards. Since that time, the
common stock has been traded on the OTC Bulletin Board under the symbol AVXT.OB. The following table sets forth, for
the periods indicated, the high and low sales price for the common stock, as reported by OTC for the quarters presented.
Over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions.

|                                     | High |  | Low
|------------------------------------ | ---- |  | ---
|Fiscal year ended December 31, 2004  |      |  |    
|First quarter                        |      |  | $  
|Second quarter                       |      |  |    
|Third quarter                        |      |  |    
|Fourth quarter                       |      |  |    
|                                    
|Fiscal year ending December 31, 2005 |      | 
|First quarter                        |      |  | $  
|Second quarter                       |      |  |    
|Third quarter                        |      |  |    
|Fourth quarter                       |      |  |    

The last reported sale price
for our common stock on the OTC Bulletin Board on March 3, 2006, was $0.22 per share. At March 3, 2006, there were 61,415,018
shares of common stock outstanding, which were held by approximately 5,000 record and beneficial stockholders. The 36,750 shares
of Series C preferred stock outstanding at December 31, 2005, are convertible into 1,130,755 shares of common stock, excluding the
effect of any fractional shares.

We have not paid any cash
dividends on our common stock since our formation. The payment of dividends, if any, in the future, with respect to the common
stock, is, subject to applicable state corporation law on permissible dividends, within the discretion of the Board of Directors
and will depend on our earnings, capital requirements, financial condition and other relevant factors. We anticipate that all our
earnings and other resources, if any, will be retained for investment in our business.

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# ITEM 6.   Managements Discussion and Analysis or Plan of Operation

# GENERAL

Since our inception, we have
concentrated our efforts and resources on the development and commercialization of biotechnology and pharmaceutical products and
technologies. We have been unprofitable since our founding and have incurred a cumulative net loss of $72,485,682 as of
December 31, 2005. We incurred net losses of $3,703,768 and $3,457,908 for the 12 months ended December 31, 2005 and
2004, respectively. We expect to continue to incur operating losses, primarily due to the expenses associated with our product
development efforts, the cost of maintaining our manufacturing facilities in Europe and the U.S. and activities related to the
conduct of our clinical trials for the AC Vaccine in the U.S. and Europe.

Our ability to continue as an
operating company depends upon, among other things, our ability to raise additional capital from time to time to allow us to
develop products, obtain regulatory approval for our proposed products, and enter into agreements for product development,
manufacturing and commercialization. Our M-Vax product does not currently generate any material revenue, and we may never achieve
significant revenues or profitable operations from the sale of M-Vax or any other products that we may develop.

# PLAN OF OPERATION

Background

In November 1995, we acquired
the rights to the AC Vaccine technology pursuant to the TJU license. Assuming we can continue to obtain the necessary funding, we
intend to continue to be engaged in the development and commercialization of our AC Vaccine products.

We experienced events during
2001 that significantly affected our operations. In March and April 2001, we received first oral notification and then written
confirmation from the FDA that clinical activities for both our M-Vax and O-Vax autologous cancer vaccines were placed on clinical
hold pending further review by the agency. The written notification from the FDA confirming the clinical hold identified the
specific issues that the FDA wanted addressed, which primarily dealt with the sterility of autologous tumors received by us at the
Philadelphia facility and the assurance that vaccines being provided to patients would meet FDA sterility guidelines.

In conjunction with the
clinical hold, the FDA conducted an inspection of our manufacturing facility in Philadelphia, which inspection was completed in
May 2001. As a result of that facility inspection, we received a Form 483, which is a finding of manufacturing facility
deficiencies, to which we initially responded at the end of June 2001. The issues raised in the Form 483 were essentially
consistent with those in the clinical hold letter, with no new significant areas of concern identified.

In developing our response to
the FDA clinical hold letters and the Form 483, we identified and began to implement a number of product development initiatives
related to the AC Vaccine technology. As a result, we determined certain product improvements to the vaccine could be instituted
that would address certain concerns of the FDA and make the vaccine more viable from a regulatory and commercial perspective.
Throughout the remainder of 2001 and into 2002, we continued to evaluate (1) the prospect of freezing the haptenized cells
for distribution to the end user, (2) steps that could be taken to help ensure that final released vaccines prepared by us
are sterile and (3) tests to determine the minimal number of cells necessary for the vaccine to be effective. Based upon the
results of these efforts, we re-engineered the manufacturing steps to create and release the vaccine technology to take advantage
of these potential product improvements.

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Based upon the changes to the
product, the FDA recommended that we consider preparing and filing new INDs for the frozen vaccine. At the recommendation of the
FDA, we decided to place our original INDs for M-Vax and O-Vax on inactive status, given the FDAs view that the revisions to
the manufacturing process, necessary to address the FDAs concerns, would result in a new product from a regulatory
perspective and given the Agencys recommendation that we file new INDs for indications utilizing the new product. Based upon
the continuing interactions with the FDA in 2002, we determined to file new INDs for the revised product format for the AC Vaccine
for melanoma and ovarian cancer. Our Philadelphia facility was validated and cleared to begin processing clinical samples for
administration to patients in clinical trials. Due to a lack of funding at that time, however, we decided not to initiate the
clinical trials and instituted further cost minimization steps that resulted in additional management changes at the end of 2002.

Also during 2002, based upon
a negative reaction by authorities in Australia to an application for product reimbursement for M-Vax, we determined that we would
be unable to support further the operation in Australia and a decision was made to discontinue and liquidate the Australian joint
venture companies. We had not received formal rejection of our reimbursement application, but a panel of oncologists selected by
the regulatory authority in Australia had recommended against governmental reimbursement for M-Vax in Australia. Subsequent to our
liquidation of the Australian entity, we received formal notification of our rejection of reimbursement by the appropriate
authorities. Our experience in Australia demonstrated the importance of obtaining support for the technology among the leading
oncologists within a particular country or community, which we were never able to achieve in Australia during this period. The
results of the Australian operation, which was consolidated in our results beginning in the first quarter of 2002, are treated as
a discontinued operation and its results are separated from our results from continuing operations.

In November 2003, we
completed a bridge financing of $950,000 (before expenses of approximately $26,250), which provided funding for U.S. operations
(and certain of our European costs) for the balance of 2003 and the first half of 2004. Seven individual and institutional
investors participated in the financing. On May 21, 2004, we closed a private placement of our common stock for gross proceeds of
$3.05 million. In conjunction with the closing of the private placement, the $950,000 principal amount of the bridge notes and
accrued interest in the amount of $23,275 were converted into approximately 7,487,000 shares of common stock in accordance with
the terms of the bridge notes.

On April 5, 2005, we
closed a private placement of 25,343,430 shares of common stock at a purchase price of $0.34 per share with 12 accredited or
institutional investors. We received gross proceeds of approximately $8,616,000. In connection with the private placement, we also issued to the investors warrants to purchase 3,801,515 shares of
common stock at a warrant exercise price of $0.41 per share, and warrants to purchase 3,801,515 shares of common stock at a
warrant exercise price of $0.48 per share. In addition, the Company issued warrants to its advisors relating to this fundraising
to purchase 2,287,293 shares of common stock at a warrant exercise price of $0.37 per share. These warrants were valued at
$435,705 using the Black-Scholes pricing model. Offering related expenses in connection with this fundraising amounted to
$1,065,945 of which $630,240 was paid in cash and the balance relates to the warrants issued to the advisors. All warrants issued
in this private placement expire on April 5, 2010. We are using the proceeds of this private offering for general working capital
purposes, including funding our current plan of operation discussed below.

Plan of Operation

The following is a summary of
our plan of operation based on our current cash resources and assuming no material capital infusion in the next 12 months.

In the past three years, we
have laid the foundation for a significantly more aggressive development plan that we have only recently been able to begin to
pursue. The steps that were taken in the last three years to implement this plan include:

| |  |  | Continuing development work on the AC Vaccine.
| | - |  | ----------------------------------------------

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| |  |  | Pre-Biological License Application (the BLA) filing
meetings, preparation and filing of the BLA and more recently, responding to comments received regarding the BLA for use of M-Vax
in the treatment of stage 3 and 4 melanoma patients.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Two IND filings in France relating to the AC Vaccine for
indications other than melanoma.
| | - |  | -----------------------------------------------------------------------------------------

| |  |  | Established and maintained at our Lyon, France facility the
designation Establissment Pharmaceutique and Establissment Gene and Cell Therapy under applicable French
regulations.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Commenced treatment of melanoma patients in Europe on a
compassionate use basis with our AC Vaccine.
| | - |  | ----------------------------------------------------------------------------------------------------

| |  |  | Hired Dr. David Berd as our full-time Chief Medical Officer to
oversee directly the development of the AC Vaccine technology for us.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------

With this foundation and the
net proceeds from our April 2005 private placement of common stock and warrants, we are pursuing the following plan of operation:

| |  |  | Recommencing our clinical trial in the U.S. for the treatment of
melanoma with the AC Vaccine, using DTH as the endpoint, which began enrolling patients in June 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Conducting a Phase I-II clinical trial in non-small cell lung
cancer in collaboration with the University of Pennsylvania Cancer Center, which began enrolling patients in January 2006.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Continuing to offer M-Vax on a compassionate use basis in Spain
and Belgium, and to seek approval of compassionate use in other European countries to broaden the acceptance of the therapy within
the European oncology community.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Continue to explore the appropriate regulatory approval path for
commercialization of the AC Vaccine in one or more European countries.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Approach the FDA with clinical data generated from our clinical
trials in the U.S., and with the BLA French submission information, to determine the expected clinical programs that we will need
to complete to be in a position to submit clinical data for approval of the vaccine in the U.S.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Begin planning and implementation of later stage pivotal
registration trials in the U.S. for the appropriate indications.
| | - |  | -------------------------------------------------------------------------------------------------------------------------

We continually evaluate our
plan of operation discussed above to determine the manner in which we can most effectively utilize our limited cash resources. The
timing of completion of any aspect of our plan of operations is highly dependant upon the availability of cash to implement that
aspect of the plan and other factors beyond our control. We believe we have the current cash resources to pursue this plan of
operation into the first half of 2006. The full implementation of this plan of operation beyond that time is dependent upon us
obtaining additional funding in the first half of 2006. We believe we have the facilities, the facility managers, the technical
and scientific staff and consultants in place to implement this plan.

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We are currently engaged in
contract manufacturing and the development and commercialization of biotechnology and pharmaceutical products and technologies.
These activities take advantage of the facilities and personnel that we are required to maintain to ensure that we process our
products in accordance with cGMP requirements. With our current compassionate use and clinical activities planned, we anticipate
that excess capacity will continue to exist at our Lyon, France facility for the foreseeable future. In 2002, we entered into a
contract manufacturing engagement at our Lyon, France facility, which was completed in November 2003. In February 2004, we entered
into a second manufacturing alliance that provided approximately $1,500,000 (US) funding per year for 2004 and 2005. As of the end
of May 2005, we orally agreed to terminate that manufacturing alliance.

We will continue to pursue
additional contract manufacturing agreements in the U.S. and France, which would provide us with additional revenue to fund our
operations and the costs of the facilities. We believe that we have developed significant expertise in producing certain
biological products for clinical and development purposes, and that this expertise can be marketed by us to other companies and
research institutions engaged in clinical trials and product development programs. In addition, we have invested significant
amounts to establish and maintain current Good Manufacturing Practices (cGMP) at our manufacturing facilities in
Philadelphia, Pennsylvania and Lyon, France. We believe that services provided by these facilities may be valuable to other
companies that wish to avoid the significant cash outlays associated with buying or building their own cGMP facilities. We
currently utilize our Philadelphia facility for logistical support in our current clinical trials and for storage of samples. We
anticipate re-initiating vaccine processing at this facility in the future in support of larger planned studies.

Managements Discussion and Analysis of Financial Condition
and Results of Operations

Revenue recognized in 2005
was $1,623,701 compared to revenue in 2004 of $1,691,063. The decrease in revenues was due to a lower amount of revenue being
recognized in the current year related to contract manufacturing than the prior year, which was partially offset by increases in
revenues realized from compassionate use sales of M-Vax.

During 2005, our
manufacturing, research and development expenses increased 17.6% from $3,005,565 to $3,534,948, largely as a result of the launch
of the M-Vax and L-Vax clinical studies in the U.S. as well as additional headcount in the U.S. to support the clinical
activities. Expenses for the periods are broken out by region as follows:

|              | Year Ended December 31,
|------------- | -----------------------
|
|United States |                        
|France        |                        
|              |                        
|              |                        
|              |                        

In the U.S., there was an
overall expense increase resulting from the launch of the clinical studies, formation and implementation of two data safety
monitoring boards for the melanoma and non-small cell lung cancer studies, the addition of a Chief Medical Officer and a research
coordinator and increased travel associated with site visits and monitoring.

The increase in the costs
incurred in France are due to additional costs associated with the initiation of vaccine production activities in support of the
U.S. clinical studies and increased depreciation associated with the validation and implementation of new manufacturing equipment.

Selling, general and
administrative expenses decreased approximately 4.5%, from $2,025,934 for the year ended 2004 to $1,933,911 for the year ended
2005. Expenses for the periods are broken out by region as follows:

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|              | Year Ended December 31,
|------------- | -----------------------
|
|United States |                        
|France        |                        
|              |                        
|              |                        
|              |                        

In the U.S., the decrease in
costs is the result of a decrease in rent expense with the closure of the office in Kansas in 2004 and lower travel costs
associated with investor relations activities. The decreases in expenses were partially offset by increases in salary and bonuses
paid to senior management.

Interest income increased
from $13,522 earned in 2004 to $141,390 in 2005. The increase is a function of a higher average invested balance of funds during
2005 combined with higher interest rates during 2005.

We anticipate our spending
over the next 12 months for manufacturing, research and development expenses will increase as compared with 2005, as we continue
to implement and accelerate the plan of operation described above.

Liquidity and Capital Resources

We presently anticipate that
our current resources should be sufficient to fund operations through the first half of 2006, depending upon how aggressively we
implement our development plans discussed above. Our current operating plan includes anticipated expenses relating to (1)
continuing our clinical trials for M-Vax in the U.S., (2) planning and implementing our pivotal registration trial for melanoma in
the U.S., (3) continuing our clinical trials for non-small cell lung cancer in the U.S., (4) continuing maintenance costs
associated with our Philadelphia facility for future utilization in production or contract manufacturing, and (5) continuing costs
associated with maintaining a cGMP-compliant facility in Lyon, France. We will need to raise additional capital or initiate
additional contract manufacturing relationships on terms favorable to us in the first half of 2006 to continue our operations
through the end of 2006. If we are unable to raise additional capital, secure additional contract manufacturing relationships or
enter into strategic alliances, we will have to curtail our development initiatives.

If our current and planned
clinical trials for the AC Vaccine in the U.S. or France do not demonstrate continuing progress toward taking one or more products
to market, our ability to raise additional capital to fund our product development efforts would likely be seriously impaired. The
ability of a biotechnology company, such as AVAX, to raise additional capital in the marketplace to fund its continuing
development operations is conditioned upon the company continuing to move its development products toward ultimate regulatory
approval and commercialization. If in the future we are not able to demonstrate adequate progress in the development of one or
more products, we will not be able to raise the capital we need to continue our then-current business operations and business
activities, and we will likely not have sufficient liquidity or cash resources to continue operating.

Because our working capital
requirements depend upon numerous factors, including progress of our research and development programs, pre-clinical and clinical
testing, timing and cost of obtaining regulatory approvals, changes in levels of resources that we devote to the development of
manufacturing and marketing capabilities, competitive and technological advances, status of competitors, and our ability to
establish collaborative arrangements with other organizations, there can be no assurance that our current cash resources will be
sufficient to fund our operations beyond the first half of 2006. Because we have no committed external sources of capital, and
expect no significant product revenues for the foreseeable future, we will require additional financing to fund future operations
or will need to enter into contract manufacturing relationships on terms favorable to us. There can be no assurance, however, that
we will be able to obtain the additional funds or attract contract manufacturing relationships on acceptable terms, if at all. If
additional funds are not raised in the first half of 2006, we will have to curtail our initiatives by the end of 2006.

28

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Critical Accounting Policies

Our discussion and analysis
of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related
disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form
the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates
under different assumptions or conditions. Our accounting policies are described in more detail in Note 1 to our
consolidated financial statements. We have identified the following as the most critical accounting policies and estimates used in
the preparation of our consolidated financial statements.

Goodwill.   In
accordance with Statement of Financial Accounting Standards, or SFAS, No. 142, Goodwill and Other Intangible Assets, we do not
amortize goodwill. Instead, we review goodwill for impairment at least annually and when events or changes in circumstances
indicate a reduction in the fair value of the reporting unit to which the goodwill has been assigned. Conditions that necessitate
a goodwill impairment assessment include (i) a significant adverse change in legal factors or in the business climate,
(ii) an adverse action or assessment by a regulator, (iii) unanticipated competition, (iv) a loss of key personnel,
or (v) the presence of other indicators that would indicate a reduction in the fair value of our Genopoeitic subsidiary to
which the goodwill has been assigned. SFAS No. 142 prescribes a two-step process for impairment testing of goodwill. The first
step of the impairment test is used to identify potential impairment by comparing the fair value of the entity to which the
goodwill has been assigned to its carrying amount, including the goodwill. Such a valuation requires significant estimates and
assumptions, including estimating future cash inflows from contracts and other sources, and developing appropriate discount rates
and probability rates. If the carrying value of the reporting unit exceeds the fair value, the second step of the impairment test
is performed in order to measure the impairment loss.

Our goodwill had a carrying
value of $188,387 at December 31, 2005, and resulted from our acquisition of Genopoeitic in August 2000. We performed our annual
goodwill impairment test in accordance with SFAS No. 142 and determined that the carrying amount of goodwill was recoverable. We
considered internal risk-adjusted cash flow projections, which utilize several key assumptions, including estimated timing of cash
inflows into Genopoeitic.

Impairment of Long-Lived
Assets.   Long-lived assets to be held and used, including property and equipment and intangible assets subject
to amortization, are reviewed for impairment at least annually and whenever events or changes in circumstances indicate that the
carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a
significant decline in the market price of an asset or asset group, a significant adverse change in the extent or manner in which
an asset or asset group is being used, a significant adverse change in legal factors or in the business climate that could affect
the value of a long-lived asset or asset group, or the presence of other indicators that would indicate that the carrying amount
of an asset or asset group is not recoverable. Determination of recoverability is based on the undiscounted future cash flows
resulting from the use of the asset or asset group and its eventual disposition. The determination of the undiscounted cash flows
requires significant estimates and assumptions including determining the timing and expected costs to complete in-process
projects, projecting regulatory approvals and estimating future cash inflows from product sales and other sources. 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 fair value. Following our long-lived asset impairment review for the fiscal
year ended December 31, 2005, we have determined that no impairment of long-lived assets existed.

29

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Research and Development
Costs.   Research and development costs, including payments related to research and license agreements, are
expensed when incurred. Contractual research expenses are recorded pursuant to the provisions of the contract under which the
obligations originate. Research and development costs include all costs incurred related to the research and development,
including manufacturing costs incurred, related to our research programs. We are required to produce our products in compliance
with current Good Manufacturing Practices (cGMP), which requires a minimum level of staffing, personnel and facilities
testing and maintenance. Based upon our current staffing level required to be in compliance with cGMP, we have excess capacity.
Utilizing this excess capacity, revenue is generated in the form of contract manufacturing engagements. Accordingly, costs
associated with the contract manufacturing revenues are not broken out from our research and development costs, as these costs
would not differ even if the contracts were not in place.

Impact of Recently Issued Accounting Standards

In December 2004, the
Financial Accounting Standards Board (the FASB) issued a revision of Financial Accounting Standards No. 123
(SFAS 123R), which requires all share-based payments to employees and directors, including grants of employee stock
options, to be recognized in the income statement based on their values. We expect to calculate the value of share-based payments
under SFAS 123R on a basis substantially consistent with the fair value approach of SFAS 123. We will adopt SFAS 123R in our
fiscal quarter beginning January 1, 2006, using the modified prospective method. We expect the adoption of SFAS 123R will
have a material impact on our results of operations in that fiscal quarter and in each subsequent quarter, although it will have
no impact on our overall liquidity. We cannot reasonably estimate the impact of adoption because it will depend on levels of
share-based payments granted in the future as well as certain assumptions that can materially affect the calculation of the value
share-based payments to employees and directors. However, had we adopted SFAS 123R in prior periods, the impact of the standard
would have approximated the impact of SFAS 123 as described in the disclosure of pro forma net loss and pro forma loss per common
share in Note 1 of Notes to Consolidated Financial Statements included under Item 8 of this report. The adoption of SFAS
123R may affect the way we compensate our employees or may cause other changes in the way we conduct our business.

# ITEM 7.   Financial Statements

Our consolidated financial
statements appear following the signature page to this report. See Financial Statements.

The accompanying Financial
Statements have been prepared assuming that we will continue as a going concern. The report of independent registered public
accounting firm included with the Financial Statements is an unqualified opinion with an explanatory paragraph about conditions
raising substantial doubt about our ability to continue as a going concern.

# ITEM 8.   Changes In and Disagreements with
Accountants on Accounting and Financial Disclosure

None.

# ITEM 8A.   Controls and Procedures

Our principal executive
officer and principal accounting officer, based on his evaluation within 90 days prior to the date of this report of our
disclosure controls and procedures (as defined in Exchange Act Rule 13a15(e)), have concluded that our disclosure controls
and procedures are adequate and effective for purposes of Rule 13a15 in timely alerting him to material information relating
to us required to be included in our filings with the SEC under the Securities Exchange Act of 1934. There were no significant
changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of
their evaluation.

# ITEM 8B.   Other Information

None.

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# PART III

# ITEM 9.   Directors, Executive Officers, Promoters And Control Persons; Compliance with Section 16(a) of
                  the Exchange Act

Our executive officers and
directors, as well as certain information about them, are as follows:

|Name                          | Age |  | Position with the Company
|----------------------------- | --- |  | -------------------------
|                             
|John K. A. Prendergast, Ph.D. |     |  |                          
|                             
|Richard P. Rainey             |     |  |                          
|                             
|David Berd, MD                |     |  |                          
|                             
|Andrés Crespo                 |     |  |                          
|                             
|Edson D. de Castro            |     |  |                          
|                             
|Andrew W. Dahl, Sc.D.         |     |  |                          
|                             
|Carl Spana, Ph.D.             |     |  |                          

John K. A. Prendergast,
Ph.D.,has been a director of the Company since July 1996. Dr. Prendergast has served as President and principal of
Summercloud Bay, Inc., a biotechnology-consulting firm, since 1993. He is a co-founder or member of the Board of Directors of
Avigen, Inc. and Palatin Technologies, Inc. From October 1991 through December 1996, Dr. Prendergast was a Managing Director of
The Castle Group Ltd. Dr. Prendergast received his M.Sc. and Ph.D. from the University of New South Wales, Sydney, Australia and a
C.S.S. in Administration and Management from Harvard University. In November 2003, Dr. Prendergast was named Chairman of the Board
of the Company.

Richard P. Rainey, C.P.A.,has been the President and Secretary of the Company since December 2002, Vice President for Finance and Administration since
March 28, 2001, and previously served as Controller of the Company since September 1998. Prior to joining the Company, Mr. Rainey
was a partner with Rainey & Rainey, a certified public accounting firm that he founded in 1993. During that period, Rainey
& Rainey provided accounting and consulting services to corporations with an emphasis in health care. From 1988 to 1993, Mr.
Rainey was an associate with Ernst & Young, LLP specializing in auditing and consulting. Mr. Rainey received his B.S. in
Accounting from Pennsylvania State University in 1988.

David Berd, M.D.,
joined the Company as Chief Medical Officer in November 2004. He has been Professor of Medicine at Thomas Jefferson University
since 1984. Dr. Berd is the inventor of the AC-Vaccine technology, and conducted all the clinical trials of the vaccine completed
to date. He is the author of numerous published papers on the basic science and clinical testing of the vaccine. Dr. Berd is a
board-certified medical oncologist, and received training at the University of Pennsylvania and Yale University School of
Medicine.

Andrés Crespo
joined the Company as General Manager of its Genopoietic subsidiary when it was acquired by the Company in 2000. Prior to joining
Genopoietic, Dr. Crespo was in charge of biopharmaceutical production for Rhône-Poulenc and later Rhône-Poulencs
Gencell division, where he was responsible for organizing the coordination of the various Rhône-Poulenc laboratories
specializing in gene therapy. Dr. Crespo was also in charge of the GMP production of gene therapy vectors while at
Rhône-Poulenc. Dr. Crespo received his M.Sc. and Ph.D. from the University of Toulouse in Pharmaceutical Sciences.

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Edson D. de Castro has
been a director of the Company since October 1993. Since 1990, Mr. de Castro has been consulting for companies and participating
as a member of certain Boards of Directors. Mr. de Castro was one of five co-founders of Data General Corporation in 1968 for
which, from 1968 to 1989, he served as its President and Chief Executive Officer, and from 1989 to 1990, he served as its Chairman
of the Board of Directors. From 1995 to 1997, Mr. de Castro was the Chief Executive Officer and Chairman of the Board of Directors
of Xenometrix, Inc. Mr. de Castro was a founder and Executive Committee Member of the Massachusetts High Tech Council. Mr. de
Castro is a Trustee of Boston University. Mr. de Castro received his B.S. in Electrical Engineering from the University of Lowell
in 1960.

Andrew W. Dahl, Sc.D.,
has been a director of the Company since September 1999. Since March 2005, Dr. Dahl has served as the Vice President of Consumer
Driven Health and Human Resources of Alegent Health, a nonprofit, multi-hospital and health system headquartered in Omaha,
Nebraska. He served as President and CEO of Evolution Benefits, a Division of Evolution Health, LLC., from July 2000 through
February 2005. From July 1994 through December 1999, Dr. Dahl served as the President and Chief Executive Officer of HealthNet,
Inc. From July 1990 through March 1994, Dr. Dahl served as President and Chief Executive Officer of IVF America, Inc. (now known
as IntegraMed America), where he was instrumental in taking the corporation public. Dr. Dahl also served as Executive Vice
President and Chief Operating Officer of St. John Health and Hospital Corporation in Detroit, a university-affiliated medical
center, and was Vice President for Development of the Hospital Corporation of America, Management Company. Dr. Dahl received his
Sc.D. from The Johns Hopkins University and a M.P.A. from Cornell University. Dr. Dahl is also a fellow in the American College of
Health Care Executives.

Carl Spana, Ph.D., has
been a director of the Company since September 1995 and was our Interim President from August 1995 to June 15, 1996. Dr. Spana is
a co-founder of Palatin Technologies, Inc. and has been its president and chief executive officer since June 2000. He has been a
director of Palatin since June 1996 and has been a director of RhoMed Incorporated since July 1995. Dr. Spana has served Palatin
in other executive capacities prior to June 2000. Dr. Spana was vice president of Paramount Capital Investments, LLC, a
biotechnology and biopharmaceutical merchant banking firm, and of The Castle Group Ltd., a medical venture capital firm. Through
his work at Paramount Capital Investments and Castle Group, Dr. Spana co-founded and acquired several private biotechnology firms.
From July 1991 to June 1993, Dr. Spana was a Research Associate at Bristol-Myers Squibb, a publicly traded pharmaceutical company,
where he was involved in scientific research in the field of immunology. Dr. Spana received his Ph.D. in molecular biology from
The Johns Hopkins University and his B.S. in biochemistry from Rutgers University.

# Audit Committee, Financial Expert and Code of Ethics

Our Audit Committee is
consists of Mr. Dahl, Mr. de Castro and Mr. Spana. Our Board of Directors has determined that Mr. de Castro and Dr. Spana qualify
as audit committee financial experts, as defined by the rules of the Securities and Exchange Commission. Mr. de Castro
and Dr. Spana are independent within the meaning of Nasdaq Rules 4200(a)(15) and 4350(d), which are the independence tests
utilized by the Board even though our common stock is no longer listed on Nasdaq.

We adopted a Code of Ethics
at a meeting of the Board of Directors held on June 14, 2005, which applies to our principal executive officer and principal
financial officer.

# Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the
Securities Exchange Act of 1934, as amended, requires our directors, executive officers and holders of more than 10% of our common
stock (collectively, Reporting Persons) to file with the SEC initial reports of ownership and reports of changes in
ownership of common stock. The Reporting Persons are required by regulations of the SEC to furnish us with copies of all such
filings. Specific due dates for these reports have been established and we are required to

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identify those persons who failed to timely file these reports. Based on its
review of the copies of filings received by it with respect to the fiscal year ended December 31, 2005, and representations
from certain Reporting Persons, we believe that all Reporting Persons complied with the Section 16(a) filing requirements in the
year ended December 31, 2005, other than Form 4s for the option grants to Mr. Rainey and Dr. Pendergast on June 7, 2005,
which were not filed in 2005 due to an administrative oversight. The Form 4s for those option grants were filed in 2006.

# ITEM 10.   Executive Compensation

# Executive Compensation

The following Summary
Compensation Table sets forth the compensation earned by the persons serving as our chairman of the board, chief executive officer
and the other named key employees (who were the only other employees who made in excess of $100,000 in 2005) (the Named
Officers) for the last three fiscal years. We have no long-term incentive plans.

Our Chairman of the Board,
Dr. John Prendergast, is not an employee of the Company. He has served as an independent director of the Company since 1996. Due
to our dramatic reduction in the executive staff, since 2002, Dr. Prendergast, at the request of the Board of Directors, has
assisted management in certain strategic initiatives and related matters. The Board of Directors continues to view Dr. Prendergast
as an independent director, but his compensation has significantly exceeded the customary fees for outside directors due to the
services provided by Dr. Prendergast at the request of the Board. All extraordinary consulting fees paid to Dr. Prendergast have
been approved by the other members of the Board, all of whom are independent within the meaning of Nasdaq Rule 4200(a)(15), which
is the independence test utilized by the Board even though our common stock is no longer listed on Nasdaq. Effective December 1,
2003, the Board approved monthly compensation to Dr. Prendergast of $10,500, plus reimbursement of out-of-pocket expenses for
consulting services provided by Dr. Prendergast to us, which will consist of not less than five days of service per calendar
month.

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Andrés Crespo did not
serve as an officer of the Company in 2004 or 2005. Mr. Crespo is included in the following tables because he was a key employee
of the Company.

# Summary Compensation Table
Annual Compensation

|Name and Principal Position             |  |  | Year |  |  | Salary($) |         | Bonus($) |   | Shares ofCommon StockUnderlyingOptions/SARs(#) |  | All OtherCompensation($)
|--------------------------------------- |  |  | ---- |  |  | --------- | ------- | -------- | - | ---------------------------------------------- |  | ------------------------
|John K.A. Prendergast, Ph.D.            |  |  | 2005 |  |  | $         | 0       |          | $ | 50,000                                         |  |                         
| Chairman of the Board (1)             |  |  | 2004 |  |  | $         | 0       |          | $ | 0                                              |  |                         
|                                        |  |  | 2003 |  |  | $         | 0       |          | $ | 0                                              |  |                         
|                                       
|Richard P. Rainey, C.P.A.               |  |  | 2005 |  |  | $         | 238,750 |          | $ | 75,000                                         |  |                         
| President and Corporate Secretary (2) |  |  | 2004 |  |  | $         | 195,000 |          | $ | 0                                              |  |                         
|                                        |  |  | 2003 |  |  | $         | 182,521 |          | $ | 150,000                                        |  |                         
|                                       
|Andrés Crespo                           |  |  | 2005 |  |  | $         | 186,697 |          | $ | 50,000                                         |  |                         
| General Manager, Genopoeitic          |  |  | 2004 |  |  | $         | 178,758 |          | $ | 0                                              |  |                         
|                                        |  |  | 2003 |  |  | $         | 162,621 |          | $ | 0                                              |  |                         
|                                       
|Dr. David Berd                          |  |  | 2005 |  |  | $         | 203,333 |          | $ | 30,000                                         |  |                         
| Chief Medical Officer (4)             |  |  | 2004 |  |  | $         | 30,000  |          | $ | 0                                              |  |                         

|_________________
|-----------------
|(1)              
|(2)              
|(3)              
|(4)              

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# Option/SAR Grants in the Last Fiscal Year

|Name and Principal Position                                      |  |  | Number ofSecuritiesUnderlyingOptions/SARsGranted |  |  | % of TotalOptions/SARsGranted toEmployees inFiscal Year |  |  | Exerciseor BasePrice($/Sh) |  |  | ExpirationDate
|---------------------------------------------------------------- |  |  | ------------------------------------------------ |  |  | ------------------------------------------------------- |  |  | -------------------------- |  |  | --------------
|John K.A. Prendergast, Ph.D.     Chairman of the Board          |  |  | 275,000                                          |  |  | 17%                                                     |  |  | $  0.30                    |  |  | 6/7/12        
|                                                                
|Richard P. Rainey, C.P.A.     President and Corporate Secretary |  |  | 500,000                                          |  |  | 30%                                                     |  |  | $  0.30                    |  |  | 6/7/12        
|                                                                
|Andres Crespo     General Manager, Genopoeitic                  |  |  | 200,000                                          |  |  | 12%                                                     |  |  | $  0.30                    |  |  | 6/7/12        
|                                                                
|Dr. David Berd     Chief Medical Officer (4)                    |  |  | 250,000                                          |  |  | 15%                                                     |  |  | $  0.30                    |  |  | 6/7/12        

During 2005, 1,648,250
options were granted to our employees and directors. We have not granted any stock appreciation rights. All options vest quarterly
over a four-year period of continuing service as an employee or director, as applicable.

# Aggregate Option Exercises In Last Fiscal Year and Fiscal Year-End Option Values

|Name                         |  |  | Shares Acquiredon Exercise (#) |  |  | Number of SecuritiesUnderlying UnexercisedOptions at Fiscal Year EndingDecember 31, 2005 |         | Value of UnexercisedIn-The-Money Optionsat Fiscal Year EndingDecember 31, 2005 (1)
|---------------------------- |  |  | ------------------------------ |  |  | ---------------------------------------------------------------------------------------- | ------- | ----------------------------------------------------------------------------------
|
|John K.A. Prendergast, Ph.D. |  |  | -0-                            |  |  |                                                                                          | 199,351 |                                                                                   
|Richard P. Rainey, C.P.A.    |  |  | -0-                            |  |  |                                                                                          | 375,625 |                                                                                   
|Andrés Crespo                |  |  | -0-                            |  |  |                                                                                          | 101,563 |                                                                                   
|David Berd                   |  |  | -0-                            |  |  |                                                                                          | 93,750  |                                                                                   

|_________________
|-----------------
|(1)              

# Compensation of Directors

Effective November 2, 2001
until December 31, 2005, we paid our non-employee directors a fee of $4,000 per meeting for Board meetings attended in person,
$1,000 per meeting for committee meetings attended in person and $500 per meeting for telephonic Board and committee meetings. In
2005, we had 3 in-person Board meetings, 4 in-person committee meetings, and 6 telephonic Board or committee meetings.

Effective January 1, 2006,
the Compensation Committee of the Board of Directors approved the following compensation for non-employee directors, which
compensation will not be paid to Dr. Prendergast for so long as he is separately compensated for the additional services he is
providing to the Company as our Chairman of the Board:

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# Non-Employee Director Compensation
Effective January 1, 2006

|Stock Option Grants                      |  |                                         | 
|---------------------------------------- |  | --------------------------------------- | 
|Initial GrantNew Board Member           |  | 50,000*                                 | 
|Annual Grants                            |  | 30,000*                                 | 
|*To vest one year from the date of grant | 
|                                        
|Cash Compensation                        | 
|                                        
|In-Person Board Meeting                  |  | $5,000                                  | 
|Telephonic Board Meeting                 |  | $750 per hour up to a maximum of $2,000 | 
|In-Person Committee Meeting              |  | $1,000                                  | 
|Telephonic Committee Meeting             |  | $750                                    | 
|Audit Committee Chairman                 |  | $6,000 per year                         | 
|Compensation Committee Chairman          |  | $3,000 per year                         | 

See Executive
Compensation above for a description of certain compensation paid to Dr. Prendergast in 2003, 2004 and 2005 and stock
options awarded to Dr. Prendergast for additional services provided by Dr. Prendergast to us, at the request of our Board of
Directors.

# ITEM 11.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets
forth, as of March 15, 2006, certain information regarding the beneficial ownership of the common stock (i) by each person known
by us to be the beneficial owner of more than five percent of the outstanding shares of the common stock, (ii) by each of our
Named Officers (as defined herein) and directors and (iii) by all our executive officers and directors as a group.

|Name and Address of Beneficial Owner                            |  |  | Title of Stock |  |  | Amount andNature ofBeneficialOwnership |           | Percentage of Class (1)
|--------------------------------------------------------------- |  |  | -------------- |  |  | -------------------------------------- | --------- | -----------------------
|                                                               
|Named Executive Officers and Directors (2)                     
|Richard P. Rainey, C.P.A. (3)                                   |  |  | Common Stock   |  |  |                                        | 1,161,729 |                        
|Edson D. de Castro (4)                                          |  |  | Common Stock   |  |  |                                        | 68,101    |                        
|Andrew W. Dahl, Sc.D. (5)                                       |  |  | Common Stock   |  |  |                                        | 72,222    |                        
|John K.A. Prendergast, Ph.D. (6)                                |  |  | Common Stock   |  |  |                                        | 653,399   |                        
|Carl Spana, Ph.D. (7)                                           |  |  | Common Stock   |  |  |                                        | 201,768   |                        
|David Berd, MD                                                  |  |  | Common Stock   |  |  |                                        | 322,871   |                        
|Andrés Crespo (8)                                               |  |  | Common Stock   |  |  |                                        | 101,563   |                        
|                                                               
|All executive officers and directors as a group (5 persons) (9) |  |  | Common Stock   |  |  |                                        | 2,483,782 |                        
|                                                               
|5% Shareholders                                                
|Rock Castle Ventures, L.P.                                      |  |  | Common Stock   |  |  |                                        | 5,452,630 |                        
|Park Place Columbia LTD                                         |  |  | Common Stock   |  |  |                                        | 5,405,616 |                        
|Aqua RIMCO LTD                                                  |  |  | Common Stock   |  |  |                                        | 9,558,937 |                        
|Firebird Global Master Fund, LTD                                |  |  | Common Stock   |  |  |                                        | 3,466,667 |                        
|Yoshinoro SHIRONO                                               |  |  | Common Stock   |  |  |                                        | 9,558,823 |                        
|CS Equity Fund Management Company                               |  |  | Common Stock   |  |  |                                        | 7,821,666 |                        

|_________________*Represents less than 1%.
|------------------------------------------
|(1)                                       

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|(2) | The address of the named individuals is c/o AVAX
Technologies, Inc., 2000 Hamilton Street, Suite 204, Philadelphia, Pennsylvania 19130.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes 375,625 shares of common stock that Mr.
Rainey may acquire within 60 days upon exercise of options held by Mr. Rainey and also includes 393,504 shares and 384,600
warrants owned by a partnership in which Mr. Rainey holds a 50% interest.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Represents shares of common stock that Mr. de Castro
may acquire within 60 days upon the exercise of options held by Mr. De Castro.
|--- | -----------------------------------------------------------------------------------------------------------------------------------

|(5) | Represents shares of common stock that Dr. Dahl may
acquire within 60 days upon the exercise of options held by Dr. Dahl.
|--- | -------------------------------------------------------------------------------------------------------------------------

|(6) | Includes 199,351 shares of common stock that Dr.
Prendergast may acquire within 60 days upon exercise of options held by Dr. Prendergast and also includes 261,748 shares and
192,300 warrants owned by Dr. Prendergast.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Includes 136,851 shares of common stock that Dr.
Spana may acquire within 60 days upon the exercise of options held by Dr. Spana.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(8) | Represents shares of common stock that Dr. Crespo
may acquire within 60 days of the exercise of options held by each individual.
|--- | --------------------------------------------------------------------------------------------------------------------------------

|(9) | Consists only of directors and Richard P. Rainey,
the sole executive officer of the Company as of the date of this report.
|--- | --------------------------------------------------------------------------------------------------------------------------

# Equity Compensation Plan Information

The following table sets
forth as of December 31, 2005 (a) the number of securities to be issued upon exercise of outstanding options, warrants and rights,
(b) the weighted average exercise price of outstanding options, warrants and rights and (c) the number of securities remaining
available for future issuance under equity compensation plans (excluding securities reflected in column (a)).

|                                                           | (a) |  |           | (b) |  |           | (c)
|---------------------------------------------------------- | --- |  | --------- | --- |  | --------- | ---
|
|Equity compensation plans approved by security holders     |     |  | 2,897,721 |     |  | $    0.95 |    
|                                                          
|Equity compensation plans not approved by security holders |     |  | 4,379,196 |     |  | $    0.37 |    
|                                                          
|Total                                                     

The warrants and options
issued without stockholder approval include (1) warrants to purchase 288,450 shares of common stock at an exercise price of $0.143
per share issued to a broker in connection with the Companys 2003 bridge financing, which expire on December 1, 2008; (2)
warrants to purchase 566,667 shares of common stock at an exercise price of $0.33 per share issued to a broker in connection with
the Companys 2004 private placement of securities, which expire on May 10, 2009; (3) warrants to purchase 2,287,293 shares
of common stock at an exercise price of $0.33 per share issued to two brokers in connection with the Companys 2005 private
placement of securities, which expire on May 10, 2009; and (4) warrants to purchase 300,000 shares of common stock at an exercise
price of $0.14 per share issued to two individuals for certain financial advisory services, which expire on December 16, 2009.

37

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Table of Contents

The warrants and options
issued without stockholder approval also include 161,786 options to acquire common stock issued to current and former directors
outside of the Companys stock option plans, which options were granted at various times prior to 2000 in conjunction with
services (including extraordinary levels of services) provided by those directors to the Company. Those options expire at various
times between March 15, 2006 and November 2, 2008, and have option exercise prices between $0.89 per share and $3.00 per share.

The warrants and options
issued without stockholder approval also includes 500,000 options issued to Richard Rainey, Company President, and 275,000 options
issued to John Prendergast, Chairman of the Company, which both have an exercise price of $0.30 and expire on June 7, 2012. See
Note 4 of the Notes to Financial Statements for information concerning the material terms of equity compensation plans pursuant to
which the foregoing options and warrants have been issued. Equity compensation plans approved by securityholders consist of the
1992 Stock Option Plan, the 2001 Stock Option Plan and the 2000 Director Stock Option Plan.

# ITEM 12.   Certain Relationships and Related Transactions

On December 4, 2003, we
completed a bridge financing in the aggregate principal amount of $950,000 in a private offering with various institutional and
individual investors in reliance upon the exemption from registration in Section 4(2) of the Securities Act of 1933. We issued
$950,000 aggregate principal amount of our 5% Convertible Notes due May 17, 2004, and warrants to purchase an aggregate of
7,115,300 shares of common stock at an exercise price of $0.143 per share. The notes automatically converted on May 21, 2004, in
connection with our $3,050,000 private placement of our common stock, into 7.692 shares of our common stock for each $1.00 of
unpaid principal and interest on the Notes on the conversion date (a ratio of $0.13 per share).

A partnership in which Mr.
Rainey, our President, is a 50% partner and Mr. Raineys brother is the other 50% partner, purchased $50,000 principal amount
of the Convertible Notes and associated warrants. Dr. Prendergast, our Chairman, purchased $25,000 principal amount of the
Convertible Notes and associated warrants. The Board of Directors approved the participation of both Mr. Rainey and Dr.
Prendergast in the bridge financing.

# ITEM 13.   Exhibits

# (a)   Exhibits

Exhibits are listed on the
Exhibit Index appearing immediately after the signature page for this report.

38

---

Table of Contents

# ITEM 14.   Principal Accountant Fees and Services.

The following table sets
forth the aggregate fees billed to the Company for fiscal years ended December 31, 2004 and 2005, by the Companys principal
accounting firms:

|                   | 2004 |  | 2005
|------------------ | ---- |  | ----
|Audit fees (1)     |      |  | $   
|Audit-related fees |      |  |     
|Tax fees           |      |  |     
|All other fees     |      |  |     
|                   |      |  |     
|Total              |      |  | $   
|                   |      |  |     

|_________________
|-----------------
|(1)              

The audit fees for 2004 were
paid solely to the Companys principal accounting firm, Ernst & Young LLP. For the year 2005, the Company paid $53,092 to
Briggs, Bunting & Dougherty, LLP and $4,950 to Ernst & Young LLP, in audit fees, as the Companys principal
accounting firms.

The Audit Committee has
adopted a policy (the Pre-Approval Policy) under which audit and non-audit services to be rendered by our independent
public accountants are pre-approved by the Audit Committee. Pursuant to the Pre-Approval Policy, the Audit Committee pre-approves
audit and non-audit services to be provided by the independent auditors, at specified dollar levels, which dollar levels are
reviewed by the Audit Committee periodically, and no less often than annually. Additionally, the Audit Committee may provide
explicit prior approval of specific engagements not within the scope of a previous pre-approval resolution. The services performed
by our independent auditor in 2005 were all audit-related and pre-approved by the Audit Committee. The Pre-Approval Policy also
specifies certain services that may not be provided by our independent auditors in any circumstance, which is consistent with SEC
rules and regulations. The Pre-Approval Policy also includes an exception from the pre-approval requirement for certain de minimus
non-audit engagements that are not otherwise prohibited by the Policy. Engagements in reliance upon that de minimus exception must
be promptly brought to the attention of Audit Committee and approved by the Audit Committee or one or more designated
representatives. Briggs, Bunting & Dougherty, LLP provided no services in 2005 in reliance upon this de minimus exception.

39

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Table of Contents

# SIGNATURES

In accordance with Section 13
or 15(d) of the Exchange Act, the registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.

|                       | AVAX TECHNOLOGIES, INC.   
|---------------------- | --------------------------
|                      
|Date:   March 31, 2006 | /s/   Richard P. Rainey   
|                       | Richard P. RaineyPresident

In accordance with the
Exchange Act, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

|Signature                          | Name & Title | Date                                                                              
|---------------------------------- | ------------ | ----------------------------------------------------------------------------------
|                                  
|/s/   Richard P. Rainey            |              | Richard P. RaineyPresident (Principal Executive, Financial and Accounting Officer)
|                                  
|/s/   Edson D. de Castro           |              | Edson D. de CastroDirector                                                        
|                                  
|/s/   John K.A. Prendergast, Ph.D. |              | John K.A. Prendergast, Ph.D.Director                                              
|                                  
|/s/   Carl Spana, Ph.D.            |              | Carl Spana, Ph.D.Director                                                         
|                                  
|/s/   Andrew W. Dahl, Sc.D.        |              | Andrew W. Dahl, Sc.D. Director                                                    

40

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Table of Contents

# EXHIBIT INDEX

|Exhibit No. |  | Description
|----------- |  | -----------

|3.1 |  | Certificate of Incorporation, as amended (excluding the
Certificates of Designations for the Series B and Series C Convertible Preferred Stock).(1)
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

|3.2 |  | Certificate of Amendment of Certificate of Incorporation Dated
May 10, 2004.(2)
|--- |  | -------------------------------------------------------------------------------

|3.3 |  | By-Laws.(3)
|--- |  | -----------

|4.1 |  | Reference is made to Exhibits 3.1, 3.2 and 3.3.
|--- |  | -----------------------------------------------

|4.2 |  | Specimen of common stock certificate.(3)
|--- |  | ----------------------------------------

|4.3 |  | Investors Rights Agreement Dated November 20, 1995, by and
between the Company and certain investors.(3)
|--- |  | ---------------------------------------------------------------------------------------------------------

|4.4 |  | Form of Placement Warrant Relating to Offering of Series B
Placement Warrants.(4)
|--- |  | ---------------------------------------------------------------------------------

|4.5 |  | Certificate of Designation of Series C Convertible Preferred
Stock.(5)
|--- |  | ----------------------------------------------------------------------

|4.6 |  | Series C Convertible Preferred Stock Warrant Purchase
Agreement.(5)
|--- |  | -------------------------------------------------------------------

|4.7 |  | Form of Class A and Class B common stock Purchase Warrant issued
in connection with the Series C Convertible Preferred Stock.(5)
|--- |  | --------------------------------------------------------------------------------------------------------------------------------

|10.1 |  | Clinical Study and Research Agreement dated November 20, 1995, by
and between the Company and Thomas Jefferson University.(6)
|---- |  | -----------------------------------------------------------------------------------------------------------------------------

|10.2 |  | License Agreement dated November 20, 1995, by and between the
Company and Thomas Jefferson University.(6)
|---- |  | ---------------------------------------------------------------------------------------------------------

|10.3 |  | Extension to the Clinical Study and Research Agreement dated
November 20, 1995, by and between the Company and Thomas Jefferson University.(5)
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------

|10.4 |  | 2001 Stock Option Plan.(1)
|---- |  | --------------------------

|10.5 |  | 2000 Directors Stock Option Plan.(7)
|---- |  | -------------------------------------

|10.6 |  | Form of Stock Option Agreement  2001 Plan. *
|---- |  | ---------------------------------------------

|10.7 |  | Form of Stock Option Agreement  Non-Plan Options. *
|---- |  | ----------------------------------------------------

|10.8 |  | Note Purchase Agreement dated as of November 17,
2003.(8)
|---- |  | ---------------------------------------------------------

|10.9 |  | Form of Convertible Note in connection with the December 2003 bridge financing.(8)
|---- |  | ----------------------------------------------------------------------------------

|10.10 |  | Form of Warrant in connection with the December 2003 bridge financing.(8)
|----- |  | -------------------------------------------------------------------------

|10.11 |  | Society in Participation Agreement between Genopoetic and Opisodia dated January 29, 2004.(9)
|----- |  | ---------------------------------------------------------------------------------------------

|10.12 |  | Securities Purchase Agreement dated as of May 17, 2004.(10)
|----- |  | -----------------------------------------------------------

|10.13 |  | Form of Series 2004A Warrant to purchase common stock.(10)
|----- |  | ----------------------------------------------------------

|10.14 |  | Form of Series 2004B Warrant to purchase common stock.(10)
|----- |  | ----------------------------------------------------------

|10.15 |  | Employment Agreement between AVAX Technologies, Inc. and Richard
P. Rainey dated as of April 1, 2004.(11)
|----- |  | ---------------------------------------------------------------------------------------------------------

41

---

Table of Contents

|Exhibit No. |  | Description
|----------- |  | -----------

|10.16 |  | Employment Letter between AVAX Technologies, Inc. and Dr. David
Berd dated as of November 1, 2004.(11)
|----- |  | ------------------------------------------------------------------------------------------------------

|10.17 |  | Securities Purchase Agreement dated as of April 5, 2005.(12)
|----- |  | ------------------------------------------------------------

|10.18 |  | Form of Series 2005A Warrant to purchase common stock.(12)
|----- |  | ----------------------------------------------------------

|10.19 |  | Form of Series 2005B Warrant to purchase common stock.(12)
|----- |  | ----------------------------------------------------------

|14 |  | Code of Ethics. *
|-- |  | -----------------

|21.1 |  | Subsidiaries of the Company. *
|---- |  | ------------------------------

|23.1 |  | Consent of Briggs, Bunting & Dougherty LLP, Independent
Registered Public Accounting Firm. *
|---- |  | --------------------------------------------------------------------------------------------

|31.1 |  | Certifications of Chief Executive Officer of the Company under
Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|31.2 |  | Certifications of Chief Financial Officer of the Company under
Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

|32 |  | Certification of Principal Executive Officer and Principal
Financial Officer Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. *
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|_________________
|-----------------
|*                

|(1) | Incorporated by reference and previously filed as an
exhibit to Annual Report on Form 10-KSB for year ended December 31, 2001.
|--- | ------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference and previously filed as an
exhibit to the Quarterly Report on Form 10-QSB for the first quarter of the year ended December 31, 2004.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference and previously filed as an
exhibit to the Registration Statement on Form S-3 (File No. 333-09349) filed on August 1, 1996.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference and previously filed as an
exhibit to Post Effective Amendment No. 6 to the Registration Statement on Form S-3 filed on August 17, 1998.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference and previously filed as an
exhibit to the Annual Report on Form 10-KSB for the year ended December 31, 1998.
|--- | --------------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference and previously filed as an
exhibit to Amendment No. 9 to the Registration Statement on Form S-3 filed on July 3, 1997.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference and previously filed as an
exhibit to the Annual Report on Form 10-KSB for year ended December 31, 2000.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference and previously filed as an
exhibit to the Current Report on Form 8-K filed on December 9, 2003.
|--- | -------------------------------------------------------------------------------------------------------------------------

|(9) | Incorporated by reference and previously filed as an
exhibit to the Registration Statement on Form SB-2 (File No. 333-118334) filed on August 18, 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Incorporated by reference and previously filed as an
exhibit to the Current Report on Form 8-K filed on June 2, 2004.
|---- | ---------------------------------------------------------------------------------------------------------------------

|(11) | Incorporated by reference and previously filed as an
exhibit to the Current Report on Form 8-K filed on March 18, 2005.
|---- | -----------------------------------------------------------------------------------------------------------------------

|(12) | Incorporated by reference and previously filed as an
exhibit to the Current Report on Form 8-K filed on April 7, 2005.
|---- | ----------------------------------------------------------------------------------------------------------------------

42

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Table of Contents

# Consolidated Financial Statements

# AVAX Technologies, Inc.
(a development stage company)

# Years ended December 31, 2005 and 2004
and the period from January 12, 1990
(Incorporation) to December 31, 2005
With Report of Independent Registered Public Accounting Firm



---

Table of Contents

AVAX Technologies, Inc.
(a development stage company)

Consolidated Financial Statements

Years ended December 31, 2005 and 2004 and
for the period from January 12, 1990 (Incorporation) to December 31, 2005

# Contents

|Report of Independent Registered Public Accounting Firm                                                                                                                                   |  | F-1 | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --- | 
|                                                                                                                                                                                         
|Consolidated Financial Statements                                                                                                                                                         | 
|Consolidated Balance Sheet as of December 31, 2005                                                                                                                                        |  | F-2 | 
|Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2005 and 2004 and for the period from January 12, 1990 (incorporation) to December 31, 2005 |  | F-3 | 
|Consolidated Statements of Stockholders Equity (Deficit) for the years ended December 31, 2005 and 2004 and for the period from January 12, 1990 (incorporation) to December 31, 2005    |  | F-4 | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2005 and 2004 and for the period from January 12, 1990 (incorporation) to December 31, 2005                        |  | F-7 | 
|Notes to Consolidated Financial Statements                                                                                                                                                |  | F-9 | 



---

Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
AVAX Technologies, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of AVAX
Technologies, Inc. (a development stage company) and subsidiaries as of December 31, 2005, and the related consolidated statements
of operations and comprehensive loss, stockholders equity (deficit), and cash flows for each of the two years in the period
then ended and for the period from January 12, 1990 (incorporation) to December 31, 2005. 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe 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 consolidated financial position of AVAX Technologies, Inc. and subsidiaries as of December 31, 2005,
and the consolidated results of their operations and their cash flows for each of the two years in the period then ended and for
the period from January 12, 1990 (incorporation) to December 31, 2005 in conformity with U.S. generally accepted accounting
principles.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the
Company has incurred recurring losses from operations and may not have adequate capital to fund its operations through 2006. These
conditions raise substantial doubt about the Companys ability to continue as a going concern. Managements plans
concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

/s/   Briggs, Bunting & Dougherty LLP

Philadelphia, PA
March 22, 2006

F-1

---

Table of Contents

AVAX Technologies, Inc. and Subsidiaries
(a development stage company)
Consolidated Balance Sheet

|                                                                                                 | December 31,2005
|------------------------------------------------------------------------------------------------ | ----------------
|Assets                                                                                           |                 
|Current assets:                                                                                  |                 
|Cash                                                                                             |                 
|Accounts receivable                                                                              |                 
|Inventory                                                                                        |                 
|VAT receivable                                                                                   |                 
|Prepaid expenses and other current assets                                                        |                 
|                                                                                                 |                 
|Total current assets                                                                             |                 
|Property, plant and equipment, at cost                                                           |                 
|Less accumulated depreciation                                                                    |                 
|                                                                                                 |                 
|Net property, plant and equipment                                                                |                 
|Research and development tax credit receivable                                                   |                 
|Goodwill                                                                                         |                 
|                                                                                                 |                 
|Total assets                                                                                     |                 
|                                                                                                 |                 
|                                                                                                
|Liabilities and stockholders equity                                                            
|Current liabilities:                                                                             |                 
|Accounts payable and accrued expenses                                                            |                 
|Accrued and withheld payroll taxes and liabilities                                               |                 
|Deferred revenue                                                                                 |                 
|ANVAR advances                                                                                   |                 
|                                                                                                 |                 
|Total current liabilities                                                                        |                 
|Stockholders equity:                                                                            |                 
|Preferred stock, $.01 par value:                                                                
|Authorized shares  5,000,000, including Series B  300,000 shares and Series C  120,000 shares |                 
|Series B convertible preferred stock:                                                           
|Issued and outstanding shares  0                                                               
|Series C convertible preferred stock:                                                            |                 
|Issued and outstanding shares  36,750 (liquidation preference  $3,675,000)                     |                 
|Common stock, $.004 par value:                                                                  
|Authorized shares  150,000,000                                                                  |                 
|Issued and outstanding shares  61,414,998                                                       |                 
|Additional paid-in capital                                                                       |                 
|Subscription receivable                                                                          |                 
|Accumulated other comprehensive income                                                           |                 
|Deficit accumulated during the development stage                                                 |                 
|                                                                                                 |                 
|Total stockholders equity                                                                       |                 
|                                                                                                 |                 
|Total liabilities and stockholders equity                                                       |                 
|                                                                                                 |                 

See accompanying notes.

F-2

---

Table of Contents

AVAX Technologies, Inc. and Subsidiaries
(a development stage company)
Consolidated Statements of Operations and Comprehensive Loss

|                                                                   | Year endedDecember 31, |  | Period fromJanuary 12, 1990(Incorporation) toDecember 31,2005
|------------------------------------------------------------------ | ---------------------- |  | -------------------------------------------------------------
|
|Revenue:                                                           |                        |  |                                                              
|Gain from sale of the Product                                      |                        |  | $                                                            
|Product and contract service revenue                               |                        |  |                                                              
|                                                                   |                        |  |                                                              
|Total revenue                                                      |                        |  |                                                              
|Costs and expenses:                                               
|Research and development                                           |                        |  |                                                              
|Acquired in process research and development                       |                        |  |                                                              
|Write down of acquired intellectual property and other intangibles |                        |  |                                                              
|Amortization of acquired intangibles                               |                        |  |                                                              
|Selling, general and administrative                                |                        |  |                                                              
|                                                                   |                        |  |                                                              
|Total operating loss                                               |                        |  |                                                              
|Other income (expense):                                            |                        | 
|Interest income                                                    |                        |  |                                                              
|Interest expense                                                   |                        |  |                                                              
|Other, net                                                         |                        |  |                                                              
|                                                                   |                        |  |                                                              
|Total other income (expense), net                                  |                        |  |                                                              
|                                                                   |                        |  |                                                              
|Loss before income taxes                                           |                        |  |                                                              
|Income taxes                                                       |                        |  |                                                              
|                                                                   |                        |  |                                                              
|Loss from continuing operations                                    |                        |  |                                                              
|Loss from discontinued operations                                  |                        |  |                                                              
|                                                                   |                        |  |                                                              
|Net loss                                                           |                        |  |                                                              
|Amount payable for liquidation preference                          |                        |  |                                                              
|                                                                   |                        |  |                                                              
|Net loss attributable to common stockholders                       |                        |  | $                                                            
|                                                                   |                        |  |                                                              
|Loss per common share  basic and diluted                          |                        | 
|Loss from continuing operations                                    |                        |  | $                                                            
|Loss from discontinued operations                                  |                        |  |                                                              
|                                                                   |                        |  |                                                              
|Net loss                                                           |                        |  | $                                                            
|                                                                   |                        |  |                                                              
|Weighted-average number of common shares outstanding               |                        |  |                                                              
|                                                                   |                        |  |                                                              
|Net loss                                                           |                        |  | $                                                            
|Foreign currency translation adjustment                            |                        |  |                                                              
|                                                                   |                        |  |                                                              
|Comprehensive loss                                                 |                        |  | $                                                            
|                                                                   |                        |  |                                                              

See accompanying notes.

F-3

---

Table of Contents

AVAX Technologies, Inc. and Subsidiaries
(a development stage company)
Consolidated Statements of Stockholders Equity (Deficit)

|                                                                                                        | Series AConvertiblePreferred Stock |  | Series BConvertiblePreferred Stock |            | Series CConvertiblePreferred Stock |   | Common Stock |  
|------------------------------------------------------------------------------------------------------- | ---------------------------------- |  | ---------------------------------- | ---------- | ---------------------------------- | - | ------------ | -
|
|Issuance of common stock for services in January 1990                                                   |                                    |  |                                    |           |                                    | $ |             |  
|Net loss                                                                                                |                                    |  |                                    |           |                                    |   |             |  
|                                                                                                        |                                    |  |                                    |            |                                    |   |              |  
|Balance at December 31, 1990                                                                            |                                    |  |                                    |           |                                    |   |             |  
|Issuance of common stock for services in August 1991                                                    |                                    |  |                                    |           |                                    |   |             |  
|Net loss                                                                                                |                                    |  |                                    |           |                                    |   |             |  
|                                                                                                        |                                    |  |                                    |            |                                    |   |              |  
|Balance at December 31, 1991                                                                            |                                    |  |                                    |           |                                    |   |             |  
|Conversion of note payable to related party to common stock in June 1992                                |                                    |  |                                    |           |                                    |   |             |  
|Issuance of common stock for services in May and June 1992                                              |                                    |  |                                    |           |                                    |   |             |  
|Issuance of Series A convertible preferred stock, net of issuance cost in June, July and September 1992 |                                    |  |                                    | 1,287,500  |                                    |   | 12,875       |  
|Net loss                                                                                                |                                    |  |                                    |           |                                    |   |             |  
|                                                                                                        |                                    |  |                                    |            |                                    |   |              |  
|Balance at December 31, 1992                                                                            |                                    |  |                                    | 1,287,500  |                                    |   | 12,875       |  
|Issuance of common stock for services in July and November 1993                                         |                                    |  |                                    |           |                                    |   |             |  
|Net loss                                                                                                |                                    |  |                                    |           |                                    |   |             |  
|                                                                                                        |                                    |  |                                    |            |                                    |   |              |  
|Balance at December 31, 1993                                                                            |                                    |  |                                    | 1,287,500  |                                    |   | 12,875       |  
|Issuance of common stock for services in July 1994                                                      |                                    |  |                                    |           |                                    |   |             |  
|Net loss                                                                                                |                                    |  |                                    |           |                                    |   |             |  
|                                                                                                        |                                    |  |                                    |            |                                    |   |              |  
|Balance at December 31, 1994                                                                            |                                    |  |                                    | 1,287,500  |                                    |   | 12,875       |  
|Common stock returned and canceled in April and May 1995                                                |                                    |  |                                    |           |                                    |   |             |  
|Shares issued in September and November 1995                                                            |                                    |  |                                    |           |                                    |   |             |  
|Amount payable for liquidation preference                                                               |                                    |  |                                    |           |                                    |   |             |  
|Net income                                                                                              |                                    |  |                                    |           |                                    |   |             |  
|                                                                                                        |                                    |  |                                    |            |                                    |   |              |  
|Balance at December 31, 1995                                                                            |                                    |  |                                    | 1,287,500  |                                    |   | 12,875       |  
|Repurchase of common stock in March 1996                                                                |                                    |  |                                    |           |                                    |   |             |  
|Payment of subscription receivable                                                                      |                                    |  |                                    |           |                                    |   |             |  
|Conversion of Series A preferred stock in June 1996                                                     |                                    |  |                                    | (1,287,500 | )                                  |   | (12,875      | )

[TABLE CONTINUES]

|                                                                                                        | AdditionalPaid-InCapital |  | SubscriptionReceivable |           | DeferredCompensation |   | UnrealizedLoss onMarketableSecurities |   | AccumulatedOtherComprehensiveIncome |   | DeficitAccumulatedDuring theDevelopmentStage |   | TotalStockholdersEquity(Deficit)
|------------------------------------------------------------------------------------------------------- | ------------------------ |  | ---------------------- | --------- | -------------------- | - | ------------------------------------- | - | ----------------------------------- | - | -------------------------------------------- | - | ---------------------------------
|Issuance of common stock for services in January 1990                                                   |                          |  | $                      | 920       |                      | $ |                                      |   | $                                   |  |                                              | $ |                                 
|Net loss                                                                                                |                          |  |                        |          |                      |   |                                      |   |                                     |  |                                              |   |                                 
|                                                                                                        |                          |  |                        |           |                      |   |                                       |   |                                     |   |                                              |   |                                  
|Balance at December 31, 1990                                                                            |                          |  |                        | 920       |                      |   |                                      |   |                                     |  |                                              |   |                                 
|Issuance of common stock for services in August 1991                                                    |                          |  |                        | 5,830     |                      |   |                                      |   |                                     |  |                                              |   |                                 
|Net loss                                                                                                |                          |  |                        |          |                      |   |                                      |   |                                     |  |                                              |   |                                 
|                                                                                                        |                          |  |                        |           |                      |   |                                       |   |                                     |   |                                              |   |                                  
|Balance at December 31, 1991                                                                            |                          |  |                        | 6,750     |                      |   |                                      |   |                                     |  |                                              |   |                                 
|Conversion of note payable to related party to common stock in June 1992                                |                          |  |                        | 160,465   |                      |   |                                      |   |                                     |  |                                              |   |                                 
|Issuance of common stock for services in May and June 1992                                              |                          |  |                        | 6,444     |                      |   |                                      |   |                                     |  |                                              |   |                                 
|Issuance of Series A convertible preferred stock, net of issuance cost in June, July and September 1992 |                          |  |                        | 2,258,837 |                      |   |                                      |   |                                     |  |                                              |   |                                 
|Net loss                                                                                                |                          |  |                        |          |                      |   |                                      |   |                                     |  |                                              |   |                                 
|                                                                                                        |                          |  |                        |           |                      |   |                                       |   |                                     |   |                                              |   |                                  
|Balance at December 31, 1992                                                                            |                          |  |                        | 2,432,496 |                      |   |                                      |   |                                     |  |                                              |   |                                 
|Issuance of common stock for services in July and November 1993                                         |                          |  |                        | 24,965    |                      |   |                                      |   |                                     |  |                                              |   |                                 
|Net loss                                                                                                |                          |  |                        |          |                      |   |                                      |   |                                     |  |                                              |   |                                 
|                                                                                                        |                          |  |                        |           |                      |   |                                       |   |                                     |   |                                              |   |                                  
|Balance at December 31, 1993                                                                            |                          |  |                        | 2,457,461 |                      |   |                                      |   |                                     |  |                                              |   |                                 
|Issuance of common stock for services in July 1994                                                      |                          |  |                        | 4,485     |                      |   |                                      |   |                                     |  |                                              |   |                                 
|Net loss                                                                                                |                          |  |                        |          |                      |   |                                      |   |                                     |  |                                              |   |                                 
|                                                                                                        |                          |  |                        |           |                      |   |                                       |   |                                     |   |                                              |   |                                  
|Balance at December 31, 1994                                                                            |                          |  |                        | 2,461,946 |                      |   |                                      |   |                                     |  |                                              |   |                                 
|Common stock returned and canceled in April and May 1995                                                |                          |  |                        |          |                      |   |                                      |   |                                     |  |                                              |   |                                 
|Shares issued in September and November 1995                                                            |                          |  |                        |          |                      |   | (7,109                                | ) |                                     |  |                                              |   |                                 
|Amount payable for liquidation preference                                                               |                          |  |                        | (738,289  | )                    |   |                                      |   |                                     |  |                                              |   |                                 
|Net income                                                                                              |                          |  |                        |          |                      |   |                                      |   |                                     |  |                                              |   |                                 
|                                                                                                        |                          |  |                        |           |                      |   |                                       |   |                                     |   |                                              |   |                                  
|Balance at December 31, 1995                                                                            |                          |  |                        | 1,723,657 |                      |   | (7,109                                | ) |                                     |  |                                              |   |                                 
|Repurchase of common stock in March 1996                                                                |                          |  |                        |          |                      |   | 312                                   |   |                                     |  |                                              |   |                                 
|Payment of subscription receivable                                                                      |                          |  |                        |          |                      |   | 2,771                                 |   |                                     |  |                                              |   |                                 
|Conversion of Series A preferred stock in June 1996                                                     |                          |  |                        | 11,587    |                      |   |                                      |   |                                     |  |                                              |   |                                 

F-4

---

Table of Contents

AVAX Technologies, Inc. and Subsidiaries
(a development stage company)
Consolidated Statements of Stockholders Equity (Deficit) (continued)

|                                                                                                       | Series AConvertiblePreferred Stock |  | Series BConvertiblePreferred Stock |   | Series CConvertiblePreferred Stock |  | Common Stock | 
|------------------------------------------------------------------------------------------------------ | ---------------------------------- |  | ---------------------------------- | - | ---------------------------------- |  | ------------ | 
|
|Issuance of common stock and Series B preferred stock in a private placement in May and June 1996      |                                    |  |                                    |  |                                    |  |             | 
|Issuance of common stock and Series B preferred stock for services in June 1996                        |                                    |  |                                    |  |                                    |  |             | 
|Exercise of warrants in June and July 1996                                                             |                                    |  |                                    |  |                                    |  |             | 
|Amount payable for liquidation preference                                                              |                                    |  |                                    |  |                                    |  |             | 
|Compensation related to stock options granted in May and September 1996                                |                                    |  |                                    |  |                                    |  |             | 
|Amortization of deferred compensation                                                                  |                                    |  |                                    |  |                                    |  |             | 
|Unrealized loss on marketable securities                                                               |                                    |  |                                    |  |                                    |  |             | 
|Net loss                                                                                               |                                    |  |                                    |  |                                    |  |             | 
|                                                                                                       |                                    |  |                                    |   |                                    |  |              | 
|Balance at December  31, 1996                                                                          |                                    |  |                                    |  |                                    |  |             | 
|Payment of subscription receivable                                                                     |                                    |  |                                    |  |                                    |  |             | 
|Write-off of subscription receivable                                                                   |                                    |  |                                    |  |                                    |  |             | 
|Exercise of warrants in April and June 1997                                                            |                                    |  |                                    |  |                                    |  |             | 
|Conversion of preferred to common stock                                                                |                                    |  |                                    |  |                                    |  |             | 
|Repurchase of fractional shares                                                                        |                                    |  |                                    |  |                                    |  |             | 
|Realization of loss on marketable securities                                                           |                                    |  |                                    |  |                                    |  |             | 
|Amortization of deferred compensation                                                                  |                                    |  |                                    |  |                                    |  |             | 
|Net loss                                                                                               |                                    |  |                                    |  |                                    |  |             | 
|                                                                                                       |                                    |  |                                    |   |                                    |  |              | 
|Balance at December  31, 1997                                                                          |                                    |  |                                    |  |                                    |  |             | 
|Conversion of preferred to common stock                                                                |                                    |  |                                    |  |                                    |  |             | 
|Payment of subscription receivable                                                                     |                                    |  |                                    |  |                                    |  |             | 
|Issue shares based upon reset provisions                                                               |                                    |  |                                    |  |                                    |  |             | 
|Issue compensatory shares to officer                                                                   |                                    |  |                                    |  |                                    |  |             | 
|Amortization of deferred compensation                                                                  |                                    |  |                                    |  |                                    |  |             | 
|Net loss                                                                                               |                                    |  |                                    |  |                                    |  |             | 
|                                                                                                       |                                    |  |                                    |   |                                    |  |              | 
|Balance at December  31, 1998                                                                          |                                    |  |                                    |  |                                    |  |             | 
|Conversion of preferred to common stock                                                                |                                    |  |                                    |  |                                    |  |             | 
|Issue shares based upon reset provisions                                                               |                                    |  |                                    |  |                                    |  |             | 
|Issuance of Series C preferred stock in a private placement in March 1999                              |                                    |  |                                    |  |                                    |  |             | 
|Exercise of Warrants pursuant to cashless exercise provisions                                          |                                    |  |                                    |  |                                    |  |             | 
|Capital contributed through sale of 20% interest in consolidated subsidiaries to unrelated third party |                                    |  |                                    |  |                                    |  |             | 

[TABLE CONTINUES]

|                                                                                                       | AdditionalPaid-InCapital |  | SubscriptionReceivable |            | DeferredCompensation |  | UnrealizedLoss onMarketableSecurities |   | AccumulatedOtherComprehensiveIncome |            | DeficitAccumulatedDuring theDevelopmentStage |  | TotalStockholdersEquity(Deficit)
|------------------------------------------------------------------------------------------------------ | ------------------------ |  | ---------------------- | ---------- | -------------------- |  | ------------------------------------- | - | ----------------------------------- | ---------- | -------------------------------------------- |  | ---------------------------------
|Issuance of common stock and Series B preferred stock in a private placement in May and June 1996      |                          |  |                        | 22,217,397 |                      |  |                                      |   |                                     |           |                                              |  |                                 
|Issuance of common stock and Series B preferred stock for services in June 1996                        |                          |  |                        | 99,988     |                      |  |                                      |   |                                     |           |                                              |  |                                 
|Exercise of warrants in June and July 1996                                                             |                          |  |                        | 5,624      |                      |  |                                      |   |                                     |           |                                              |  |                                 
|Amount payable for liquidation preference                                                              |                          |  |                        | (1,131,744 | )                    |  |                                      |   |                                     |           |                                              |  |                                 
|Compensation related to stock options granted in May and September 1996                                |                          |  |                        | 1,076,373  |                      |  |                                      |   |                                     | (1,076,373 | )                                            |  |                                 
|Amortization of deferred compensation                                                                  |                          |  |                        |           |                      |  |                                      |   |                                     | 112,949    |                                              |  |                                 
|Unrealized loss on marketable securities                                                               |                          |  |                        |           |                      |  |                                      |   |                                     |           |                                              |  | (2,037                           
|Net loss                                                                                               |                          |  |                        |           |                      |  |                                      |   |                                     |           |                                              |  |                                 
|                                                                                                       |                          |  |                        |            |                      |  |                                       |   |                                     |            |                                              |  |                                  
|Balance at December  31, 1996                                                                          |                          |  |                        | 24,002,882 |                      |  | (4,026                                | ) |                                     | (963,424   | )                                            |  | (2,037                           
|Payment of subscription receivable                                                                     |                          |  |                        |           |                      |  | 1,761                                 |   |                                     |           |                                              |  |                                 
|Write-off of subscription receivable                                                                   |                          |  |                        | (1,833     | )                    |  | 1,833                                 |   |                                     |           |                                              |  |                                 
|Exercise of warrants in April and June 1997                                                            |                          |  |                        | (199       | )                    |  |                                      |   |                                     |           |                                              |  |                                 
|Conversion of preferred to common stock                                                                |                          |  |                        | (5,134     | )                    |  |                                      |   |                                     |           |                                              |  |                                 
|Repurchase of fractional shares                                                                        |                          |  |                        | (76        | )                    |  |                                      |   |                                     |           |                                              |  |                                 
|Realization of loss on marketable securities                                                           |                          |  |                        |           |                      |  |                                      |   |                                     |           |                                              |  | 2,037                            
|Amortization of deferred compensation                                                                  |                          |  |                        |           |                      |  |                                      |   |                                     | 269,100    |                                              |  |                                 
|Net loss                                                                                               |                          |  |                        |           |                      |  |                                      |   |                                     |           |                                              |  |                                 
|                                                                                                       |                          |  |                        |            |                      |  |                                       |   |                                     |            |                                              |  |                                  
|Balance at December  31, 1997                                                                          |                          |  |                        | 23,995,640 |                      |  | (432                                  | ) |                                     | (694,324   | )                                            |  |                                 
|Conversion of preferred to common stock                                                                |                          |  |                        | (8,630     | )                    |  |                                      |   |                                     |           |                                              |  |                                 
|Payment of subscription receivable                                                                     |                          |  |                        |           |                      |  | 10                                    |   |                                     |           |                                              |  |                                 
|Issue shares based upon reset provisions                                                               |                          |  |                        | (12,117    | )                    |  |                                      |   |                                     |           |                                              |  |                                 
|Issue compensatory shares to officer                                                                   |                          |  |                        | 24,962     |                      |  |                                      |   |                                     |           |                                              |  |                                 
|Amortization of deferred compensation                                                                  |                          |  |                        |           |                      |  |                                      |   |                                     | 269,100    |                                              |  |                                 
|Net loss                                                                                               |                          |  |                        |           |                      |  |                                      |   |                                     |           |                                              |  |                                 
|                                                                                                       |                          |  |                        |            |                      |  |                                       |   |                                     |            |                                              |  |                                  
|Balance at December  31, 1998                                                                          |                          |  |                        | 23,999,855 |                      |  | (422                                  | ) |                                     | (425,224   | )                                            |  |                                 
|Conversion of preferred to common stock                                                                |                          |  |                        | (3,661     | )                    |  |                                      |   |                                     |           |                                              |  |                                 
|Issue shares based upon reset provisions                                                               |                          |  |                        | (84        | )                    |  |                                      |   |                                     |           |                                              |  |                                 
|Issuance of Series C preferred stock in a private placement in March 1999                              |                          |  |                        | 9,283,726  |                      |  |                                      |   |                                     |           |                                              |  |                                 
|Exercise of Warrants pursuant to cashless exercise provisions                                          |                          |  |                        | 27,000     |                      |  |                                      |   |                                     |           |                                              |  |                                 
|Capital contributed through sale of 20% interest in consolidated subsidiaries to unrelated third party |                          |  |                        | 2,099,200  |                      |  |                                      |   |                                     |           |                                              |  |                                 

F-5

---

Table of Contents

AVAX Technologies, Inc. and Subsidiaries
(a development stage company)
Consolidated Statements of Stockholders Equity (Deficit) (continued)

|                                                                                   | Series AConvertiblePreferred Stock |  | Series BConvertiblePreferred Stock |   | Series CConvertiblePreferred Stock |   | Common Stock | 
|---------------------------------------------------------------------------------- | ---------------------------------- |  | ---------------------------------- | - | ---------------------------------- | - | ------------ | 
|
|Amortization of deferred compensation                                              |                                    |  |                                    |  |                                    |   |             | 
|Net loss                                                                           |                                    |  |                                    |  |                                    |   |             | 
|                                                                                   |                                    |  |                                    |   |                                    |   |              | 
|Balance at December 31, 1999                                                       |                                    |  |                                    |  |                                    |   |             | 
|Conversion of preferred to common stock                                            |                                    |  |                                    |  |                                    |   |             | 
|Private placement of common stock, March 2000                                      |                                    |  |                                    |  |                                    |   |             | 
|Capital contribution by shareholder                                                |                                    |  |                                    |  |                                    |   |             | 
|Exercise of options and warrants                                                   |                                    |  |                                    |  |                                    |   |             | 
|Shares issued pursuant to acquisition of Subsidiary                                |                                    |  |                                    |  |                                    |   |             | 
|Elimination of contributed capital related to joint venture no longer consolidated |                                    |  |                                    |  |                                    |   |             | 
|Amortization of deferred compensation                                              |                                    |  |                                    |  |                                    |   |             | 
|Foreign currency translation adjustment                                            |                                    |  |                                    |  |                                    |   |             | 
|Net loss                                                                           |                                    |  |                                    |  |                                    |   |             | 
|                                                                                   |                                    |  |                                    |   |                                    |   |              | 
|Balance at December 31, 2000                                                       |                                    |  |                                    |  |                                    |   |             | 
|Foreign currency translation adjustment                                            |                                    |  |                                    |  |                                    |   |             | 
|Net loss                                                                           |                                    |  |                                    |  |                                    |   |             | 
|                                                                                   |                                    |  |                                    |   |                                    |   |              | 
|Balance at December 31, 2001                                                       |                                    |  |                                    |  |                                    |   |             | 
|Foreign currency translation adjustment                                            |                                    |  |                                    |  |                                    |   |             | 
|Net loss                                                                           |                                    |  |                                    |  |                                    |   |             | 
|                                                                                   |                                    |  |                                    |   |                                    |   |              | 
|Balance at December 31, 2002                                                       |                                    |  |                                    |  |                                    |   |             | 
|Conversion of preferred to common stock                                            |                                    |  |                                    |  |                                    |   |             | 
|Common stock warrants issued in conjunction with convertible notes payable         |                                    |  |                                    |  |                                    |   |             | 
|Foreign currency translation adjustment                                            |                                    |  |                                    |  |                                    |   |             | 
|Net loss                                                                           |                                    |  |                                    |  |                                    |   |             | 
|                                                                                   |                                    |  |                                    |   |                                    |   |              | 
|Balance at December 31, 2003                                                       |                                    |  |                                    |  |                                    |   |             | 
|Exercise of warrants                                                               |                                    |  |                                    |  |                                    |   |             | 
|Conversion of bridge notes to common stock                                         |                                    |  |                                    |  |                                    |   |             | 
|Private placement of common stock                                                  |                                    |  |                                    |  |                                    |   |             | 
|Issuance of warrants                                                               |                                    |  |                                    |  |                                    |   |             | 
|Foreign currency translation adjustment                                            |                                    |  |                                    |  |                                    |   |             | 
|Net loss                                                                           |                                    |  |                                    |  |                                    |   |             | 
|                                                                                   |                                    |  |                                    |   |                                    |   |              | 
|Balance at December 31, 2004                                                       |                                    |  |                                    |  |                                    | $ |             | 
|Private placement of common stock                                                  |                                    |  |                                    |  |                                    |   |             | 
|Issuance of warrants                                                               |                                    |  |                                    |  |                                    |   |             | 
|Foreign currency translation adjustment                                            |                                    |  |                                    |  |                                    |   |             | 
|Net loss                                                                           |                                    |  |                                    |  |                                    |   |             | 
|Balance at December 31, 2005                                                       |                                    |  |                                    |  |                                    | $ |             | 
|                                                                                   |                                    |  |                                    |   |                                    |   |              | 

[TABLE CONTINUES]

|                                                                                   | AdditionalPaid-InCapital |  | SubscriptionReceivable |            | DeferredCompensation |   | UnrealizedLoss onMarketableSecurities |   | AccumulatedOtherComprehensiveIncome |          | DeficitAccumulatedDuring theDevelopmentStage |   | TotalStockholdersEquity(Deficit)
|---------------------------------------------------------------------------------- | ------------------------ |  | ---------------------- | ---------- | -------------------- | - | ------------------------------------- | - | ----------------------------------- | -------- | -------------------------------------------- | - | ---------------------------------
|Amortization of deferred compensation                                              |                          |  |                        |           |                      |   |                                      |   |                                     | 269,100  |                                              |   |                                 
|Net loss                                                                           |                          |  |                        |           |                      |   |                                      |   |                                     |         |                                              |   |                                 
|                                                                                   |                          |  |                        |            |                      |   |                                       |   |                                     |          |                                              |   |                                  
|Balance at December 31, 1999                                                       |                          |  |                        | 35,406,036 |                      |   | (422                                  | ) |                                     | (156,124 | )                                            |   |                                 
|Conversion of preferred to common stock                                            |                          |  |                        | (8,615     | )                    |   |                                      |   |                                     |         |                                              |   |                                 
|Private placement of common stock, March 2000                                      |                          |  |                        | 24,186,656 |                      |   |                                      |   |                                     |         |                                              |   |                                 
|Capital contribution by shareholder                                                |                          |  |                        | 93,637     |                      |   |                                      |   |                                     |         |                                              |   |                                 
|Exercise of options and warrants                                                   |                          |  |                        | 271,273    |                      |   |                                      |   |                                     |         |                                              |   |                                 
|Shares issued pursuant to acquisition of Subsidiary                                |                          |  |                        | 7,596,800  |                      |   |                                      |   |                                     |         |                                              |   |                                 
|Elimination of contributed capital related to joint venture no longer consolidated |                          |  |                        | (2,099,200 | )                    |   |                                      |   |                                     |         |                                              |   |                                 
|Amortization of deferred compensation                                              |                          |  |                        |           |                      |   |                                      |   |                                     | 156,124  |                                              |   |                                 
|Foreign currency translation adjustment                                            |                          |  |                        |           |                      |   |                                      |   |                                     |         |                                              |   |                                 
|Net loss                                                                           |                          |  |                        |           |                      |   |                                      |   |                                     |         |                                              |   |                                 
|                                                                                   |                          |  |                        |            |                      |   |                                       |   |                                     |          |                                              |   |                                  
|Balance at December 31, 2000                                                       |                          |  |                        | 65,446,587 |                      |   | (422                                  | ) |                                     |         |                                              |   |                                 
|Foreign currency translation adjustment                                            |                          |  |                        |           |                      |   |                                      |   |                                     |         |                                              |   |                                 
|Net loss                                                                           |                          |  |                        |           |                      |   |                                      |   |                                     |         |                                              |   |                                 
|                                                                                   |                          |  |                        |            |                      |   |                                       |   |                                     |          |                                              |   |                                  
|Balance at December 31, 2001                                                       |                          |  |                        | 65,446,587 |                      |   | (422                                  | ) |                                     |         |                                              |   |                                 
|Foreign currency translation adjustment                                            |                          |  |                        |           |                      |   |                                      |   |                                     |         |                                              |   |                                 
|Net loss                                                                           |                          |  |                        |           |                      |   |                                      |   |                                     |         |                                              |   |                                 
|                                                                                   |                          |  |                        |            |                      |   |                                       |   |                                     |          |                                              |   |                                  
|Balance at December 31, 2002                                                       |                          |  |                        | 65,446,587 |                      |   | (422                                  | ) |                                     |         |                                              |   |                                 
|Conversion of preferred to common stock                                            |                          |  |                        | (5,653     | )                    |   |                                      |   |                                     |         |                                              |   |                                 
|Common stock warrants issued in conjunction with convertible notes payable         |                          |  |                        | 142,500    |                      |   |                                      |   |                                     |         |                                              |   |                                 
|Foreign currency translation adjustment                                            |                          |  |                        |           |                      |   |                                      |   |                                     |         |                                              |   |                                 
|Net loss                                                                           |                          |  |                        |           |                      |   |                                      |   |                                     |         |                                              |   |                                 
|                                                                                   |                          |  |                        |            |                      |   |                                       |   |                                     |          |                                              |   |                                  
|Balance at December 31, 2003                                                       |                          |  |                        | 65,583,434 |                      |   | (422                                  | ) |                                     |         |                                              |   |                                 
|Exercise of warrants                                                               |                          |  |                        | 47,037     |                      |   |                                      |   |                                     |         |                                              |   |                                 
|Conversion of bridge notes to common stock                                         |                          |  |                        | 943,330    |                      |   |                                      |   |                                     |         |                                              |   |                                 
|Private placement of common stock                                                  |                          |  |                        | 2,737,190  |                      |   |                                      |   |                                     |         |                                              |   |                                 
|Issuance of warrants                                                               |                          |  |                        | 115,466    |                      |   |                                      |   |                                     |         |                                              |   |                                 
|Foreign currency translation adjustment                                            |                          |  |                        |           |                      |   |                                      |   |                                     |         |                                              |   |                                 
|Net loss                                                                           |                          |  |                        |           |                      |   |                                      |   |                                     |         |                                              |   |                                 
|                                                                                   |                          |  |                        |            |                      |   |                                       |   |                                     |          |                                              |   |                                  
|Balance at December 31, 2004                                                       |                          |  | $                      | 69,426,457 |                      | $ | (422                                  | ) | $                                   |         |                                              | $ |                                 
|Private placement of common stock                                                  |                          |  |                        | 7,449,448  |                      |   |                                      |   |                                     |         |                                              |   |                                 
|Issuance of warrants                                                               |                          |  |                        | 435,705    |                      |   |                                      |   |                                     |         |                                              |   |                                 
|Foreign currency translation adjustment                                            |                          |  |                        |           |                      |   |                                      |   |                                     |         |                                              |   |                                 
|Net loss                                                                           |                          |  |                        |           |                      |   |                                      |   |                                     |         |                                              |   |                                 
|Balance at December 31, 2005                                                       |                          |  | $                      | 77,311,610 |                      | $ | (422                                  | ) | $                                   |         |                                              | $ |                                 

See accompanying notes.

F-6

---

Table of Contents

AVAX Technologies, Inc. and Subsidiaries
(a development stage company)
Consolidated Statements of Cash Flows

|                                                                                     | Year ended December 31 |  | Period fromJanuary 12, 1990(Incorporation) toDecember 31,
|------------------------------------------------------------------------------------ | ---------------------- |  | ---------------------------------------------------------
|
|                                                                                     |                        |  |                                                          
|Operating activities                                                                 |                        |  |                                                          
|Net loss                                                                             |                        |  | $                                                        
|Adjustments to reconcile net loss to net cash used in operating activities:          |                        | 
|Depreciation and amortization                                                        |                        |  |                                                          
|Amortization of discount on convertible notes payable                                |                        |  |                                                          
|Extraordinary gain related to negative goodwill on consolidated subsidiary           |                        |  |                                                          
|Cumulative effect of change in accounting                                            |                        |  |                                                          
|Amortization of deferred gain on joint venture                                       |                        |  |                                                          
|Equity in net loss of joint venture                                                  |                        |  |                                                          
|Minority interest in net loss of consolidated subsidiary                             |                        |  |                                                          
|Acquired in-process research and development charge                                  |                        |  |                                                          
|Write down of acquired intellectual property and other intangibles                   |                        |  |                                                          
|Compensatory stock issue                                                             |                        |  |                                                          
|Gain on sale of the Product                                                          |                        |  |                                                          
|Gain on sale of intellectual property                                                |                        |  |                                                          
|Accretion of interest on common stock receivable                                     |                        |  |                                                          
|Accretion of interest on amount payable to preferred stockholders and Former Officer |                        |  |                                                          
|Loss on sale of furniture and equipment                                              |                        |  |                                                          
|Issuance of common stock or warrants for services                                    |                        |  |                                                          
|Changes in operating assets and liabilities:                                         |                        | 
|Accounts receivable                                                                  |                        |  |                                                          
|Inventory                                                                            |                        |  |                                                          
|Prepaid expenses and other current assets                                            |                        |  |                                                          
|Research and development tax credit receivable                                       |                        |  |                                                          
|Accounts payable and accrued liabilities                                             |                        |  |                                                          
|Deferred revenue                                                                     |                        |  |                                                          
|Amount payable to Former Officer                                                     |                        |  |                                                          
|                                                                                     |                        |  |                                                          
|Net cash used in operating activities                                                |                        |  | $                                                        
|                                                                                    
|Investing activities                                                                 |                        | 
|Purchases of marketable securities                                                   |                        |  |                                                          
|Proceeds from sale of marketable securities                                          |                        |  |                                                          
|Proceeds from sale of short-term investments                                         |                        |  |                                                          
|Purchases of furniture and equipment                                                 |                        |  |                                                          
|Proceeds from sale of furniture and equipment                                        |                        |  |                                                          
|Cash acquired in acquisition of control of joint venture                             |                        |  |                                                          
|Organization costs incurred                                                          |                        |  |                                                          
|                                                                                     |                        |  |                                                          
|Net cash provided by (used in) investing activities                                  |                        |  | $                                                        

F-7

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Table of Contents

AVAX Technologies, Inc. and Subsidiaries
(a development stage company)
Consolidated Statements of Cash Flows (continued)

|                                                                                   | Year ended December 31 |  | Period fromJanuary 12, 1990(Incorporation) toDecember 31,
|---------------------------------------------------------------------------------- | ---------------------- |  | ---------------------------------------------------------
|
|                                                                                   |                        |  |                                                          
|Financing activities                                                               |                        |  |                                                          
|Proceeds from issuance of notes payable to related party                           |                        |  | $                                                        
|Principal payments on notes payable to related party                               |                        |  |                                                          
|Proceeds from loans payable and the related issuance of warrants                   |                        |  |                                                          
|Principal payments on loans payable                                                |                        |  |                                                          
|Payments for fractional shares from reverse splits and preferred stock conversions |                        |  |                                                          
|Financing costs incurred                                                           |                        |  |                                                          
|Shareholder capital contribution                                                   |                        |  |                                                          
|Payments received on subscription receivable                                       |                        |  |                                                          
|Proceeds received from exercise of stock warrants                                  |                        |  |                                                          
|Elimination of consolidated accounting treatment for joint venture                 |                        |  |                                                          
|Capital contribution through sale of interest in consolidated subsidiary           |                        |  |                                                          
|Net proceeds received from issuance of preferred and common stock                  |                        |  |                                                          
|                                                                                   |                        |  |                                                          
|Net cash provided by financing activities                                          |                        |  |                                                          
|Effect of exchange rate changes on cash                                            |                        |  |                                                          
|                                                                                   |                        |  |                                                          
|Net increase in cash                                                               |                        |  |                                                          
|Cash at beginning of period                                                        |                        |  |                                                          
|                                                                                   |                        |  |                                                          
|Cash at end of period                                                              |                        |  | $                                                        
|                                                                                   |                        |  |                                                          
|                                                                                  
|Supplemental disclosure of cash flow information                                   |                        | 
|Interest Paid                                                                      |                        |  | $                                                        
|                                                                                   |                        |  |                                                          
|                                                                                  
|Non-cash activity:                                                                 |                        | 
|Issuance of restricted stock compensation                                          |                        |  | $                                                        
|                                                                                   |                        |  |                                                          
|Common stock warrants issued with convertible notes                                |                        |  | $                                                        
|                                                                                   |                        |  |                                                          
|Conversion of bridge loan into common stock                                        |                        |  | $                                                        
|                                                                                   |                        |  |                                                          
|Payment of interest with common stock                                              |                        |  | $                                                        
|                                                                                   |                        |  |                                                          

See accompanying notes.

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Table of Contents

AVAX Technologies, Inc. and Subsidiaries
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2005 and 2004

# 1.   Description of Business and Significant Accounting Policies

# Description of Business

AVAX Technologies, Inc. and its subsidiaries (the Company) is a development
stage biopharmaceutical company.

In November 1995, the Company sold its leading product under development, an
over-the-counter nutritional, dietary, medicinal and/or elixorative food supplement or drug and all of the related patents and
other intellectual property. The agreement was for $2.4 million in shares of common stock of Interneuron Pharmaceuticals, Inc.
(IPI), a public company, the parent of the purchaser of the Product (the Stock). Certain common stockholders of the Company were
also common stockholders of IPI. Pursuant to the terms of the agreement, the purchase price, payable in two equal installments in
December 1996 and 1997, was fixed, and the number of shares of the Stock would vary depending on the quoted market price of the
Stock at such time. Because the Stock was receivable in two equal annual installments, the gain from the sale of the Product,
$1,951,000, was calculated by discounting the value of the Stock receivable using a discount rate of 15%.

Also in November 1995, the Company entered into a license agreement with
Thomas Jefferson University (TJU) to develop, commercially manufacture and sell products embodying immunotherapeutic vaccines for
the treatment of malignant melanoma and other cancers (the Invention) (see Note 2).

In December 1996, the Company entered into a license agreement with Rutgers
University (Rutgers) to develop, commercially manufacture and sell products embodying a series of compounds for the treatment of
cancer and infectious diseases. During 2004 the Company and Rutgers agreed to cancel the license agreement and all of the
Companys obligations associated with the license agreement(see Note 2).

In February 1997, the Company entered into a license agreement with Texas
A&M to develop, commercially manufacture and sell products embodying a series of compounds for the treatment of cancer (the
Texas A&M Compounds) (see Note 2).

In November 1999, the Company entered into a definitive joint venture
agreement with Australia Vaccine Technologies (AVT) (formerly Neptunus International Holdings Limited), a pharmaceutical group in
Australia, under the subsidiary name, AVAX Holdings Australia Pty Limited (AVAX Holdings). Under the joint venture agreement, AVAX
Holdings, through its affiliated entities AVAX Australia Pty Limited and AVAX Australia Manufacturing Pty Limited (the Joint
Venture Companies), was organized for the purpose of manufacturing and marketing M-Vax, an immunotherapy for the post-surgical
treatment of Stage 3 and 4 melanoma, in Australia and New Zealand. In January 2002, the Joint Venture Companies repurchased 90% of
AVTs interest in the two joint venture companies resulting in AVAX owning a 95% interest in the net equity of both joint
venture companies. The Company was seeking but was unable to obtain a timely governmental reimbursement for the costs of treatment
with the M-Vax in Australia, and determined to discontinue operations in Australia in order to focus the cash resources of the
Company on its U.S. and European operations. In September 2002, the Company announced that it would be discontinuing its
operations in Australia and in December 2002 the Company completed the liquidation of its Australian subsidiary.

In August 2000, the Company completed its acquisition of GPH, S.A. (Holdings)
and Genopoietic S.A. (Genopoietic) each a French societe anonyme based in Paris, France with principal its operating facility in
Lyon, France. Holdings and Genopoietic were organized in 1993 to develop gene therapy applications and market gene therapy
treatments for cancer. The Company has designated the Lyon, France operations facility as its primary source facility for the
production of vaccines to be used in clinical trials. In addition, the Company currently performs contract manufacturing and
research activities at its facilities located in Lyon. The Companys December 31, 2005 consolidated balance sheet includes
approximately $17,297 in net assets related to these subsidiaries.

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Table of Contents

The Companys business is subject to significant risks consistent with
biotechnology companies that are developing products for human therapeutic use. These risks include, but are not limited to,
uncertainties regarding research and development, access to capital, obtaining and enforcing patents, receiving regulatory
approval, and competition with other biotechnology and pharmaceutical companies. The Company plans to continue to finance its
operations with a combination of equity and debt financing and, in the longer term, revenues from product sales, if any. However,
there can be no assurance that it will successfully develop any product or, if it does, that the product will generate any or
sufficient revenues.

# Basis of Presentation

The consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. For the year ended December 31, 2005, the Company incurred a net loss of $3,703,708 and
a use of cash in operating activities of $3,710,412. The Companys cash requirements were satisfied through a private
placement of common stock in April 2005 (see Note 4), maintaining balances in accounts payable and accrued expenses on
terms in excess of those afforded in commercial practice and customer agreements and through the use of available cash. However,
the Company may have insufficient resources to maintain its existing plan of operations throughout 2006. These conditions raise
substantial doubt about the Companys ability to continue as a going concern. Management anticipates that additional debt or
equity financing will be required to fund ongoing operations in 2006. The Company is currently negotiating to raise additional
capital or secure revenue sources to fund current operations. However, there is no assurance that the Company will successfully
obtain the required capital or revenues or, if obtained, the amounts will be sufficient to fund ongoing operations in 2006. The
inability to secure additional capital could have a material adverse effect on the Company, including the possibility that the
Company could have to cease operations.

# Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
AVAX Technologies, Inc., and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

# Foreign Currency Translation

Holdings and Genopoietic use the European Euro as their functional currency
as required by the European Union. The Australian Joint Venture Companies and AVAX Holdings used the Australian Dollar as their
functional currency prior to the discontinuance of operations discussed above.

In accordance with Statement of Financial Accounting Standards (SFAS) No. 52,
Foreign Currency Translation, the financial statements of these entities have been translated into United States
dollars, the functional currency of the Company and its other wholly-owned subsidiaries and the reporting currency herein, for
purposes of consolidation.

# Use of Estimates

The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities 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. Actual results could differ from those
estimates.

# Revenue Recognition

The Companys revenues are related to the provision of contract services
and the sale of its product, the AC Vaccine Technology, for the treatment of melanoma. Contract service revenue is recognized in
installments based upon the contractual agreement entered into with clients (see Note 3). Product revenues represent
fees received or payable to the Company related to the manufacture and sale of the vaccine. Product revenue is recognized when the
vaccine is received by the hospital administering the vaccine.

The Company records as deferred revenue amounts received in advance of the
provision of services in accordance with contracts or grants. Deferred revenue consisted of $91,884 received
from a grant for which the services had not been provided as of December 31, 2005.

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Table of Contents

# Accounts Receivable

Accounts receivable are stated at the amount management expects to collect
from outstanding balances. Management provides for probable uncollectible accounts through a charge to earnings and a credit to a
valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding
after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit
to accounts receivable. There was no valuation allowance at December 31, 2005. The Company generally does not charge interest on
accounts receivable.

# Concentrations of Credit Risk

Financial instruments that potentially subject the Company to credit risk are
principally cash and accounts receivable. Cash consists of checking accounts, money market accounts and a certificate of deposit.
The Company places its cash with its principal bank that is a high credit quality financial institution. Cash deposits generally
are in excess of the FDIC insurance limits. Credit limits, ongoing credit evaluations, and account monitoring procedures are
utilized to minimize the risk of loss from accounts receivable. Collateral is generally not required.

# Fair Value of Financial Instruments

The carrying amount of accounts receivable, accounts payable and accrued
liabilities are considered to be representative of their respective fair values due to their short-term nature.

# Inventories

Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market. The Companys inventories include raw materials and supplies used in research and development
activities.

# Accrued Expenses

The Company provides a provision for accrued expenses based upon its
contractual obligation, as calculated by the Company, for all claims made for payment to the Company.

During the fourth quarter 2004 the Company came to agreement with Rutgers
University resulting in the Company forgoing further rights to the technology under the Rutgers license agreement and paying
Rutgers an amount of $25,000. In consideration for the agreement and payment Rutgers relieved the Company of all obligations to
Rutgers related to the previously completed Research Agreement and expenses reimbursable to Rutgers under the license agreement
for payment of patent expenses. Expenses for research fees and patent costs of $125,161 and $171,173 that were previously accrued
were reversed and credited to research and development expenses and administrative expenses, respectively, for the twelve-month
period ended December 31, 2004.

# Depreciation

Depreciation is computed using the straight-line method over the estimated
useful lives of furniture and equipment, which range from three to ten years. Depreciation for the Companys manufacturing
facility and related equipment are computed using the straight-line method over estimated useful lives of 5 to 10 years. Leasehold
improvements related to the building are being amortized using the straight-line method over the actual life of the lease.

# Goodwill

The Company adopted SFAS No. 142, Goodwill and Other Intangible
Assets on January 1, 2002. This accounting standard requires that goodwill and indefinite lived tangible assets no
longer be amortized but instead be tested at least annually for impairment and expensed against earnings when the implied fair
value of a reporting unit, including goodwill, is less than its carrying amount. The Company performed its annual goodwill impairment test
in accordance with SFAS No. 142 and determined that the carrying amount of goodwill was reasonable.

Prior to the adoption of SFAS No. 142, the company had recorded cumulative
amortization of $113,032. If SFAS No. 142 had been applied to earlier periods the adjusted loss from continuing operations would
be $72,368,805 and the adjusted net loss would be $72,372,650.

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Table of Contents

# Research and Development Costs

Research and development costs, including payments related to research and
license agreements, are expensed when incurred. Contractual research expenses are recorded pursuant to the provisions of the
contract under which the obligations originate. Research and development costs include all costs incurred related to the research
and development, including manufacturing costs incurred, related to the Companys research programs. The Company is required
to produce its products in compliance with current Good Manufacturing Practices (cGMP), which requires a minimum level
of staffing, personnel and facilities testing and maintenance. Based upon its current staffing level required to be in compliance
with cGMP, the Company has excess capacity. Utilizing this excess capacity, revenue is generated through contract manufacturing
engagements (see Note 3). Costs for production of products will be capitalized and charged to cost of goods sold only after the
Company has received approval to market the drug by a Regulatory Authority.

# Stock-Based Compensation

SFAS No. 123, Accounting for Stock-Based Compensation, prescribes
accounting and reporting standards for all stock-based compensation plans, including employee stock options, restricted stock,
employee stock purchase plans and stock appreciation rights. SFAS No. 123 requires compensation expense to be recorded
(i) using the new fair value method or (ii) using existing accounting rules prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, (APB 25) and related interpretations, with pro forma disclosure of
what net income and earnings per share would have been had the Company adopted the new fair value method. SFAS No. 148
Accounting for Stock Based Compensation  Transaction and Disclosures further established accounting and
disclosure requirements using a fair value based method of accounting for stock based employee compensation plans. The Company has
elected to continue to account for its stock-based compensation plans in accordance with the provisions of APB 25 using the
intrinsic value method.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option vesting period. The effects of applying SFAS No. 123 for pro forma
disclosures are not likely to be representative of the effects on reported net income or losses for future years. The
Companys pro forma information follows:

|                                                         | Year Ended December 31,
|-------------------------------------------------------- | -----------------------
|                                                         |                        
|
|                                                         |                        
|Net loss as reported                                     |                        
|Stock based compensation expense as reported             |                        
|Stock based compensation expense under fair value method |                        
|                                                         |                        
|Pro forma net loss attributable to common stockholders   |                        
|                                                         |                        
|Pro forma net loss per share - basic and diluted         |                        
|                                                         |                        
|Net loss per share, as reported - basic and diluted      |                        
|                                                         |                        

# Earnings Per Share

Net loss per share is based on net loss divided by the weighted average
number of shares of common stock outstanding during the respective periods. Diluted earnings per share information is not
presented, as the effects of stock options, warrants and other convertible securities would be anti-dilutive for the periods
presented.

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Table of Contents

# Recently Issued Accounting Standards

In December 2004, the Financial Accounting Standards Board (the
FASB) issued a revision of Financial Accounting Standards No. 123 (SFAS 123R), which requires all
share-based payments to employees and directors, including grants of employee stock options, to be recognized in the income
statement based on their values. We expect to calculate the value of share-based payments under SFAS 123R on a basis substantially
consistent with the fair value approach of SFAS 123. We will adopt SFAS 123R in our fiscal quarter beginning January 1, 2006,
using the modified prospective method. We expect the adoption of SFAS 123R will have a material impact on our results of
operations in that fiscal quarter and in each subsequent quarter, although it will have no impact on our overall liquidity. We
cannot reasonably estimate the impact of adoption because it will depend on levels of share-based payments granted in the future
as well as certain assumptions that can materially affect the calculation of the value share-based payments to employees and
directors. However, had we adopted SFAS 123R in prior periods, the impact of the standard would have approximated the impact of
SFAS 123 as described in the disclosure of pro forma net loss and pro forma loss per common share above. The adoption of SFAS 123R
may affect the way we compensate our employees or may cause other changes in the way we conduct our business.

# Reclassifications

Certain reclassifications have been made to the 2004 consolidated financial
statements to conform to the presentation followed in the preparation of the 2005 consolidated financial statements.

# 2.   License and Research Agreements

In November 1995, the Company entered into an agreement with TJU for the
exclusive worldwide license to develop, manufacture and sell the Invention (see Note 1). In consideration for the license
agreement, the Company paid cash of $10,000 and issued an aggregate of 458,243 shares of common stock to TJU and the scientific
founder (the Scientist).

Under the terms of the license agreement the Company is obligated to (i) pay
certain milestone payments as follows: $10,000 upon initiation of the first clinical trial that is approved by the Food and Drug
Administration (FDA) or comparable international agency, $10,000 upon the first filing of a New Drug Application
(NDA) with the FDA or comparable international agency, and $25,000 upon receipt by the Company of approval from the
FDA or comparable international agency to market products, (ii) enter into a research agreement to fund a study to be performed by
TJU for the development of the technology related to the Invention (the Study) at approximately $220,000 per annum for the first
three years, and (iii) following the third year, spend an aggregate of $500,000 per year (which includes costs incurred pursuant
to the research agreement plus other internal and external costs) on the development of the Invention until commercialized in the
United States. If following the third year, the Company files for United States marketing approval through a Company sponsored
NDA, the Company may elect to spend less than $500,000 per year on the development of the Invention during the period of time the
NDA is under review by the FDA. During 2000, a payment of $25,000 was made to TJU pursuant to the license agreement. In addition,
the Company is obligated to pay royalties on its worldwide net revenue derived from the Invention and a percentage of all revenues
received from sub-licensees of the Invention.

The research agreement with TJU mentioned above was to continue until
completion of the study, although it is terminable, upon notice by either party to the other, at any time. Expenses incurred
related to research funding for TJU was $115,000 for the year ended December 31, 2004. The Company has maintained the appropriate
level of spending on the development of the invention in accordance with the license agreement.

In December 1996, the Company entered into an agreement with Rutgers University to
develop, commercially manufacture and sell products embodying a series of compounds for the treatment of cancer. During 2004, the Company
agreed with Rutgers to cancel the license agreement and all obligations associated with the license agreement.

In February 1997, the Company licensed from The Texas A&M University System an
issued U.S. patent and certain U.S. and foreign patent applications relating to a series of novel cancer-fighting anti-estrogen
compounds that may be especially effective against hormone-dependent tumors. The development of the anti-estrogren compounds is no
longer a significant part of the Companys plan of operation. The Company has been notified by Texas A&M that Texas A&M considers the Company to be
in violation of the license agreement and that the Companys rights under the license agreement have been revoked. The Company disputes the contention
by Texas A&M and intends to continue to defend the Companys rights to this technology.

F-13

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Table of Contents

# 3.   Contractual Joint Manufacturing Alliance

In February 2004, the Company entered into a manufacturing alliance with
OPISODIA, SAS, a French pharmaceutical company (OPI) that provided approximately $1,500,000 (US) funding per year from
OPI for its allocated share of the manufacturing expenses for the combined French facilities of the Company and OPI for 2004 and
2005, which are under the management of Genopoietic, a French subsidiary. Pursuant to the contract the total manufacturing
expenses incurred are allocated to OPI based upon a pre-determined allocation of the total number of personnel available to work
on the OPI contract. The expenses allocated to the OPI contract do not represent additional costs incurred in performing work
under the OPI contract but instead represent ongoing research and development expenses that are allocated to the contract pursuant
to the negotiated contractual terms. This expense allocation does not represent costs incurred by the Company in performing the
contract. The Company and OPI agreed to terminate this agreement as of May 31, 2005. Revenues recognized from the OPI
contract for the years ended December 31, 2005 and 2004 were $546,803 and $1,353,091, respectively.

# 4.   Equity Transactions

# Common and Preferred Stock

In May 1996, the Companys authorized capital was increased to
50,000,000 shares of common stock, par value $.004, and 5,000,000 shares (of which 2,500,000 shares were designated as Series A
preferred stock, 300,000 shares were designated as Series B preferred stock and 120,000 shares were designated as Series C
preferred stock) of preferred stock, par value $.01. In June 1998, the Companys authorized common stock, par value $.004,
was decreased to 30,000,000 shares. In January, 2004 the Companys authorized common stock, par value $.004, was increased to
150,000,000 shares.

Pursuant to a private placement in May and June 1996, the Company issued
258,198 shares of Series B convertible preferred stock. The preferred stockholders also received 129,099 shares of common stock.
The total consideration was $25,819,800. The per share price allocated to common stock and Series B convertible preferred stock
was $1 and $99, respectively. In connection with the private placement, the Company paid $3,357,000 in commissions and
nonaccountable expenses to the Paramount Capital (Paramount) and issued 500 shares of common stock and 1,000 shares of
Series B convertible preferred stock as consideration for legal services valued at $100,000. In addition, the placement agent
received warrants to purchase 25,819.8 shares of Series B convertible preferred stock at an exercise price of $110 per share. Such
warrants are exercisable until June 11, 2006, contain certain antidilution provisions and may be exercised pursuant to a cashless
exercise feature. Other share issuance expenses amounted to $142,000.

At the second closing of the private placement on June 11, 1996, the
1,287,500 shares of Series A preferred stock were automatically converted to 321,875 shares of common stock. Notwithstanding such
conversion, holders of the Series A preferred stock have received pro rata 95.85% of shares of common stock of IPI associated with
the sale of the Product (see Note 1).

In March 2000, the Company announced the conversion of all outstanding shares
of Series B Convertible preferred stock into fully paid nonassessable shares of common stock. As of the conversion date there were
66,093 shares of Series B Convertible Preferred Stock outstanding that were convertible into 1,724,152 shares of Common Stock.

On March 1, 1999, the Company authorized and consummated an offering of
Series C Convertible Preferred Stock (the Series C Offering) pursuant to which the Company raised aggregate gross
proceeds of approximately $10,130,000. In the Series C Offering, the Company sold an aggregate of 101,300 shares of Series C
Preferred Stock combined with Class A Warrants to purchase an aggregate of 311,692 shares of Common Stock at an exercise price of
$4.00 per share and Class B Warrants to purchase an aggregate of 311,692 shares of Common Stock at an exercise price of $4.50 per
share. During 2000 2,462 of these Class A and Class B warrants were exercised. The Series C Preferred Stock, the Class A Warrants
and the Class B Warrants were sold as a unit in the Series C Offering. The Class A Warrants and Class B Warrants were exercisable
until March 1, 2004.

The Series C preferred stockholders are entitled to voting rights equivalent
to the number of common shares into which their preferred shares are convertible. The Series C preferred stockholders are also
entitled to receive, in preference to the holders of common stock, an amount per preferred share of $100 plus any declared but
unpaid dividends.

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Table of Contents

Pursuant to the terms of the private placement, each share of Series C
preferred stock was convertible at any time, in whole or in part, at the discretion of the holders, into common stock at $3.25 per
share.

In connection with the private placement, the Company paid $845,261 in
finders fees and non-accountable expenses. Of this amount $709,100 was paid to Paramount in the form of a finders fee.

During 2000 holders of 14,550 shares the Series C Preferred stock converted
these shares into 650,931 fully paid nonassessable shares of common stock. During 2001 holders of 50,000 shares of the Series C
Preferred stock converted these shares into 1,538,450 fully paid nonassessable shares of common stock. The 36,750 shares of Series
C preferred stock, outstanding at December 31, 2005, is convertible into 1,130,755 shares of common stock excluding the effect of
any fractional shares.

In March 2000, the Company completed a $25,137,000 private placement with
institutional investors. The Company sold an aggregate of 2,259,494 newly issued shares of common stock, and issued warrants to
purchase an additional 225,951 shares of common stock at an exercise price of $12.79 per share, for an aggregate warrant exercise
price of $2,890,817. The warrants expired on March 10, 2005.

In connection with services rendered in connection with the private
placement, the Company paid Gruntal & Co., L.L.C., who acted as the placement agent, a cash fee of approximately $747,000.
Other share issuance expenses amounted to approximately $54,000.

Pursuant to a prior agreement, Paramount was paid a fee due to the
participation in the private placement of certain investors previously introduced to the Company by Paramount. As a result of this
agreement, the Company paid Paramount a cash fee of approximately $140,000.

On August 24, 2000, the Company completed its acquisition of GPH, S.A.
(Holdings) and Genopoietic S.A. (Genopoietic), each a French societe anonyme based in Paris, France. In
this transaction, 100% of the outstanding shares of both Holdings, which is the majority shareholder of Genopoietic, and
Genopoietic have been contributed to the Company by the shareholders of those two entities in exchange for an aggregate of 800,000
shares of the Companys common stock valued at $7,600,000 as of the acquisition date and $5,000 in notes payable. Of the
800,000 shares issued to Professors David R. Klatzmann and Jean-Loup Salzmann (the primary shareholders), 659,756 shares have been
placed in escrow to secure their indemnification obligations under the Contribution Agreement. In addition, the Company incurred
$621,397 in acquisition costs, which were capitalized as part of the purchase price and allocated to the net assets acquired.

The Company has notified Professors Klatzmann and Salzmann that they are in
default of their obligations under the Contribution Agreement and has put them on notice that the escrow shares are being
cancelled and will revert back to the Company as treasury shares. As of the date of the financial statements, the shares have not
been formally cancelled.

On May 21, 2004, the Company closed the private placement of 10,166,167
shares of the Companys common stock plus warrants to purchase 1,525,000 shares of common stock at $0.35 per share (Series A
Warrants) and warrants to purchase 1,525,000 shares of common stock at $0.39 per share (Series B Warrants). Gross proceeds from
the offering was approximately $3,050,000. In addition, the Company issued warrants to its advisors relating to this placement to
purchase 1,155,117 shares of common stock at warrant exercise prices ranges from $0.14 to $0.33 per share. These warrants were
valued at $115,466 using the Black-Scholes pricing model. Offering related expenses in connection with this placement amounted to
$272,143 of which $156,677 was paid in cash and the balance relates to the warrants issued to the advisors.

On May 21, 2004, in compliance with the Note Purchase Agreements entered into
in December, 2003, the Company converted the principal ($950,000) and interest ($23,275) on the bridge notes into common stock at
an exercise price of $0.13 per share resulting in the issuance of 7,486,430 shares of the Companys common stock.

On April 5, 2005, the Company closed a private placement of 25,343,430 shares
of common stock at a purchase price of $0.34 per share with 12 accredited or institutional investors. The Company received gross
proceeds of approximately $8,616,000. In connection with the private placement, the Company also issued to the investors warrants
to purchase 3,801,515 shares of common stock at a warrant exercise price of $0.41 per share, and warrants to purchase 3,801,515
shares of common stock at a warrant exercise price of $0.48 per share. In addition, the Company issued warrants to its advisors
relating to this fundraising to purchase 2,287,293 shares of common stock at a warrant exercise price of $0.37 per share. These
warrants were valued at $435,705 using the Black-Scholes pricing model. Offering related expenses in connection with this
fundraising amounted to $1,065,945 of which $630,240 was paid in cash and the balance relates to the warrants issued to the
advisors.

F-15

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Table of Contents

# Stock Options  1992 Stock Option Plan

In April 1992, the Board of Directors approved the 1992 Stock Option Plan
(the 1992 Plan), which, as amended, authorized up to 437,500 shares of common stock for granting both incentive and
nonqualified stock options to employees, directors, consultants and members of the scientific advisory board of the Company. The
1992 Plan was amended in June 1999, to increase the number of shares issuable to 1,500,000. The 1992 Plan was further amended in
June 2000, to increase the number of shares issuable to 2,500,000. The exercise price and vesting period of the options are
determined by the Board of Directors at the date of grant. Options may be granted up to 10 years after the 1992 Plans
adoption date and generally expire 7 years from the date of grant.

The following summarizes activity in the 1992 Plan:

|                                            | Number ofOptions
|------------------------------------------- | ----------------
|                                            |                 
|Granted                                     |                 
|Canceled                                    |                 
|                                            |                 
|Balance at December 31, 1995, 1996 and 1997 |                 
|Granted                                     |                 
|                                            |                 
|Balance at December 31, 1998                |                 
|Granted                                     |                 
|Expired                                     |                 
|                                            |                 
|Balance at December 31, 1999                |                 
|Granted                                     |                 
|Expired                                     |                 
|Exercised                                   |                 
|                                            |                 
|Balance at December 31, 2000                |                 
|Granted                                     |                 
|Expired                                     |                 
|                                            |                 
|Balance at December 31, 2001                |                 
|Expired                                     |                 
|                                            |                 
|Balance at December 31, 2002                |                 
|Expired                                     |                 
|                                            |                 
|Balance at December 31, 2003                |                 
|Expired                                     |                 
|                                            |                 
|Balance at December 31, 2004                |                 
|Expired                                     |                 
|                                            |                 
|Balance at December 31, 2005                |                 
|                                            |                 

# Stock Options  2001 Stock Option Plan

In November 2001 the Board of Directors approved the 2001 Stock Option Plan
(the 2001 Plan), subject to shareholder approval, authorizing up to 2,500,000 shares of common stock for granting both
incentive and nonqualified stock options to employees, directors, consultants and members of the scientific advisory board of the
Company. The exercise price and vesting period of the options are determined by the Board of Directors at the date of grant.
Options may be granted up to 10 years after the 2001 Plans adoption date and generally expire 10 years from the date of
grant.

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Table of Contents

The following summarizes activity in the 2001 Plan:

|Granted                      |  |  |  | 175,108   |  
|---------------------------- |  |  |  | --------- | -
|                             |  | 
|Balance at December 31, 2001 |  |  |  | 175,108   |  
|Expired                      |  |  |  | (59,435   | )
|                             |  | 
|Balance at December 31, 2002 |  |  |  | 115,673   |  
|Expired                      |  |  |  | (90,688   | )
|                             |  | 
|Balance at December 31, 2003 |  |  |  | 24,985    |  
|Granted                      |  |  |  | 1,155,000 |  
|Expired                      |  |  |  | (379      | )
|                             |  | 
|Balance at December 31, 2004 |  |  |  | 1,179,606 |  
|Granted                      |  |  |  | 873,250   |  
|Expired                      |  |  |  |          |  
|                             |  | 
|Balance at December 31, 2005 |  |  |  | 2,052,856 |  
|                             |  | 

# Director Option Plan

In June 2000, the Company adopted the 2000 Director Stock Option plan and
authorized the plan to issue up to 480,000 shares of common stock as compensation to the outside directors of the Company for
services to be received from the Directors. During 2000, each of the Companys six outside directors received options to
purchase 40,000 shares of common stock, which vest quarterly at the rate 2,500 shares, with the first vesting period being January
1, 2000. Pursuant to the plan documents an additional 40,000 options were issued as of January 1, 2004, vesting over a four-year
period.

The following summarizes activity in the Director Option Plan:

|Granted                                   |  |  |  | 240,000 | 
|----------------------------------------- |  |  |  | ------- | 
|                                          |  | 
|Balance at December 31, 2001, 2002 & 2003 |  |  |  | 240,000 | 
|Granted                                   |  |  |  | 160,000 | 
|                                          |  | 
|Balance at December 31, 2004 & 2005       |  |  |  | 400,000 | 
|                                          |  | 

# Stock Options  Other

The Company, with the authorization of the board of directors, issues
nonqualified stock options to employees, directors, advisors, consultants and members of the scientific advisory board of the
Company. The exercise price, expiration date and vesting period of the options are determined by the Board of Directors at the
date of grant.

The following summarizes other stock option grants:

|Granted                      |  |  |  | 571,373   |  
|---------------------------- |  |  |  | --------- | -
|                             |  | 
|Balance at December 31, 1996 |  |  |  | 571,373   |  
|Granted                      |  |  |  | 580,644   |  
|                             |  | 
|Balance at December 31, 1997 |  |  |  | 1,152,017 |  
|Granted                      |  |  |  | 103,404   |  
|                             |  | 
|Balance at December 31, 1998 |  |  |  | 1,255,421 |  
|Granted                      |  |  |  | 20,000    |  
|                             |  | 
|Balance at December 31, 1999 |  |  |  | 1,275,421 |  
|Granted                      |  |  |  | 27,382    |  
|Exercised                    |  |  |  | (9,688    | )
|                             |  | 
|Balance at December 31, 2000 |  |  |  | 1,293,115 |  
|                             |  | 
|Issued                       |  |  |  | 135,000   |  
|Expired                      |  |  |  | (280,000  | )
|                             |  | 
|Balance at December 31, 2001 |  |  |  | 1,148,115 |  
|Expired                      |  |  |  | (53,000   | )
|                             |  | 
|Balance at December 31, 2002 |  |  |  | 1,095,115 |  
|Expired                      |  |  |  | (501,685  | )
|                             |  | 
|Balance at December 31, 2003 |  |  |  | 593,430   |  
|Expired                      |  |  |  | (360,644  | )
|                             |  | 
|Balance at December 31, 2004 |  |  |  | 232,786   |  
|Granted                      |  |  |  | 775,000   |  
|Expired                      |  |  |  | (71,000   | )
|                             |  | 
|Balance at December 31, 2005 |  |  |  | 936,786   |  
|                             |  | 

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Table of Contents

On June 7, 2005 the Compensation Committee of the Board of Directors
authorized the issuance of options to purchase 500,000 and 275,000 shares of the Companys common stock to Richard Rainey,
President and John Prendergast, Chairman, respectively. The exercise price of the options is $0.30 per share (the then current
market price) and the options have term of seven years through June 7, 2012.

# Warrants

The Company, with the authorization of the board of directors issues warrants
for the purchase of common stock in conjunction with equity and debt offerings as well as to consultants that assist the company
in various financial or commercial transactions. The exercise price, expiration date and vesting period of the options are
determined by the Board of Directors at the date of grant.

The following summarizes warrant grants:

|Granted                                   |  |  |  | 7,750      |  
|----------------------------------------- |  |  |  | ---------- | -
|                                          |  | 
|Balance at December 31, 1993, 1994        |  |  |  | 7,750      |  
|Granted                                   |  |  |  | 165,612    |  
|                                          |  | 
|Balance at December 31, 1995              |  |  |  | 173,362    |  
|Granted                                   |  |  |  | 931,152    |  
|Exercised                                 |  |  |  | (156,250   | )
|                                          |  | 
|Balance at December 31, 1996              |  |  |  | 948,264    |  
|Granted                                   |  |  |  | 418,569    |  
|Exercised                                 |  |  |  | (88,769    | )
|Expired                                   |  |  |  | (25,000    | )
|                                          |  | 
|Balance at December 31, 1997              |  |  |  | 1,253,064  |  
|Granted                                   |  |  |  | 115,000    |  
|Expired                                   |  |  |  | (7,750     | )
|                                          |  | 
|Balance at December 31, 1998              |  |  |  | 1,360,314  |  
|Granted                                   |  |  |  | 997,801    |  
|Exercised                                 |  |  |  | (75,000    | )
|                                          |  | 
|Balance at December 31, 1999              |  |  |  | 2,283,115  |  
|Granted                                   |  |  |  | 444,710    |  
|Exercised                                 |  |  |  | (27,588    | )
|Expired                                   |  |  |  | (250,654   | )
|                                          |  | 
|Balance at December 31, 2000, 2001 & 2002 |  |  |  | 2,449,583  |  
|Granted                                   |  |  |  | 7,308,000  |  
|Expired                                   |  |  |  | (84,000    | )
|                                          |  | 
|Balance at December 31, 2003              |  |  |  | 9,673,583  |  
|Granted                                   |  |  |  | 4,371,783  |  
|Exercised                                 |  |  |  | (338,400   | )
|Expired                                   |  |  |  | (1,110,185 | )
|                                          |  | 
|Balance at December 31, 2004              |  |  |  | 12,596,781 |  
|Granted                                   |  |  |  | 9,723,657  |  
|Expired                                   |  |  |  | (444,710   | )
|                                          |  | 
|Balance at December 31, 2005              |  |  |  | 21,875,728 |  
|                                          |  | 

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Table of Contents

Authorized but unissued shares of common stock were reserved for issuance at
December 31, 2005 as follows:

|Series C convertible preferred stock                                    |  |  |  | 1,130,755  | 
|----------------------------------------------------------------------- |  |  |  | ---------- | 
|1992 Stock option plan                                                  |  |  |  | 2,500,000  | 
|2001 Stock option plan                                                  |  |  |  | 2,500,000  | 
|2000 Directors option plan                                              |  |  |  | 480,000    | 
|Non plan options                                                        |  |  |  | 936,786    | 
|Warrants to purchase common stock                                       |  |  |  | 3,598,660  | 
|Warrants to purchase Series B convertible preferred stock               |  |  |  | 654,437    | 
|Warrants to purchase common stock pursuant to the 2003 Bridge Financing |  |  |  | 6,969,600  | 
|2004 Series A Warrants                                                  |  |  |  | 1,525,000  | 
|2004 Series B Warrants                                                  |  |  |  | 1,525,000  | 
|2005 Series A Warrants                                                  |  |  |  | 3,801,515  | 
|2005 Series B Warrants                                                  |  |  |  | 3,801,515  | 
|                                                                        |  | 
|                                                                        |  |  |  | 29,423,268 | 
|                                                                        |  | 

A summary of applicable stock option and warrant activity and related
information for the years ended December 31, 2005 and 2004 is as follows:

|                                 | 2005 |  | 2004
|-------------------------------- | ---- |  | ----
|                                 |      |  |     
|
|                                 |      |  |     
|Outstanding at beginning of year |      |  |     
|Granted                          |      |  |     
|Exercised                        |      |  |     
|Forfeited                        |      |  |     
|                                 |      |  |     
|Outstanding at end of year       |      |  |     
|                                 |      |  |     
|Exercisable at end of year       |      |  |     
|                                 |      |  |     

Exercise prices for options and warrants outstanding range from $0.13 to
$8.24. The option and warrant contracts expire at various times through January 2014.

# 5.   Convertible Debt Offering

On December 4, 2003, the Company completed a bridge financing in the
aggregate principal amount of $950,000 with eight institutional and individual investors, of which $50,000 and $25,000 were
received from an officer and a director, respectively. The notes carried a stated interest rate of 5%. On May 21, 2004, in
compliance with the Note Purchase Agreements, the Company converted the principal ($950,000) and interest ($23,275) on the bridge
notes into common stock at an exercise price of $0.13 per share resulting in the issuance of 7,486,430 shares of the
Companys common stock.

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Table of Contents

# 6.   ANVAR Advances

The Companys French subsidiary receives financial support from a French
governmental agency (ANVAR). These advances, which are subject to conditions specifying that non-compliance with such conditions
could result in the forfeiture of all or a portion of the future amounts to be received, as well as the repayment of all or a
portion of amounts received to date. If certain products are commercialized, the December 31, 2005 balance of $374,402 (1,800,000
French Francs) is repayable based on an annual royalty equal to 47% of the revenue related to the project. As such, the total
amount of advances received are recorded as a liability in the accompanying consolidated balance sheet. In case of failure or
partial success, as defined in the agreement, $75,121 (400,000 French Francs) is payable. The due date for the obligation has past
but the grantor agency has not demanded repayment of the obligation. Due to the uncertainty regarding the amount that will be
required to be returned to ANVAR, the Company maintains the full amount of the obligation as a current liability.

# 7.   Income Taxes

At December 31, 2005, the Company has net operating loss carryforwards of
approximately $70,679,073 for income tax purposes that expire in varying amounts between 2006 and 2024, if not utilized.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Companys deferred tax assets and liabilities for federal income tax purposes are as
follows:

|                          | December 31,2005
|------------------------- | ----------------
|                          |                 
|Deferred tax assets:      |                 
|Net operating losses      |                 
|Deferred compensation     |                 
|Depreciation              |                 
|Other                     |                 
|                          |                 
|Total deferred tax assets |                 
|Valuation allowance       |                 
|                          |                 
|Net deferred tax assets   |                 
|                          |                 

The valuation allowance at December 31, 2004 was $26,371,000.

Under Section 382 of the Tax Reform Act of 1986, the Companys net
operating loss carryforward could be subject to an annual limitation if it should be determined that a change in ownership of more
than 50% of the value of the Companys stock occurred over a three-year period.

The following summary reconciles the income tax benefit at the federal
statutory rate with the actual income tax provision (benefit):

|                                           | Year Ended December 31,
|------------------------------------------ | -----------------------
|                                           |                        
|
|                                           |                        
|Income taxes (benefit) at statutory rate   |                        
|State income taxes, net of federal benefit |                        
|Change in the valuation allowance          |                        
|Other                                      |                        
|                                           |                        
|Income tax provision (benefit)             |                        
|                                           |                        

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Table of Contents

# 8.   Commitments and Contingencies

# Leases

In December 1997, the Company entered into a 10-year lease agreement for
manufacturing facility space. The first months rent was payable upon signing of the lease
along with a security deposit equivalent to two months rental. This lease is secured by a one-year irrevocable standby letter of
credit whereby the lessor is the named beneficiary. This letter of credit automatically renews each December and will be reduced
by the amortized reduction of the landlord investment each year. A certificate of deposit in the amount of $108,420 at December
31, 2005 is held by the bank as collateral for the letter of credit.

In July 2000, the Company entered into a 9-year lease agreement for
manufacturing and research space in Lyon, France. The lease may be cancelled by the Company after July 2006.

In November of 2001, the Company entered into a three-year lease agreement
for office space. This lease expired during November, 2004 and was not renewed.

Rent expense under these agreements was approximately $331,832 and $425,000
for the years ended December 31, 2005 and 2004, respectively. Future minimum rental payments required under non-cancelable
operating leases with initial or recurring terms of more than one year as of December 31, 2005 are $249,041 in 2006 and $152,396
in 2007.

# Consulting Agreements

Effective in June 1996, the Company entered into consulting agreements with
the Scientist that ran through May 2003, with options to extend on a month to month basis. Annual consulting fees payable pursuant
to the agreement with the Scientist was $48,000 (see Note 1). The agreement was terminated in November 2004 when the
Scientist joined the Company as a full time employee.

# Other

The Company is subject to various legal proceedings and claims that arise in
the ordinary course of its business. Management believes, based in part upon the opinions of counsel, that the ultimate liability
with respect to these actions will not have a material adverse effect on the Companys financial position.

# 9.   Property, Plant and Equipment

The following shows the composition of the assets included in property, plant
and equipment at December 31, 2005:

|                                             | Cost |  | AccumulatedDepreciation |           | Net
|-------------------------------------------- | ---- |  | ----------------------- | --------- | ---
|                                             |      |  |                         |           |    
|Office furniture and equipment               |      |  | $                       | 312,452   |    
|Manufacturing facility and related equipment |      |  |                         | 3,477,685 |    
|                                             |      |  |                         |           |    
|Total                                        |      |  | $                       | 3,790,137 |    
|                                             |      |  |                         |           |    

Depreciation expense was $315,039 and $395,118 for the years ended December
31, 2005 and 2004, respectively.

# 10.   Employee Benefit Plan

During 1996, the Company established a discretionary 401(k) plan for all U.S.
employees over the age of 21. Employee contributions are subject to normal 401(k) plan limitations. The Company was not required
to make a contribution in 2005 or 2004.

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Table of Contents

# 11.   Related Party Transactions

During 2005 and 2004 the Company paid additional cash compensation of
$126,000 per year to one of its Board Members who took a more active role in assisting existing management of the Company. It is
anticipated that this role will continue until such time as additional management personnel are hired. The compensation was voted
upon and approved by the Compensation Committee of the Board of Directors.

The Company receives administrative support services in the form of office
space and administrative services from a partnership in which Richard Rainey, President, is a partner. The Company is not charged
for these services and does not record any expenses associated with the services due to the limited value of these services.

F-22

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