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

# FORM 10-KSB

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

Commission file number 0-29222

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

|Delaware                                 |  | 13-3575874                           | 
|---------------------------------------- |  | ------------------------------------ | 
|(State of 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)

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.   x

The issuers revenues for the period ended December 31, 2004 were
$1,691,063.

As of May 16, 2005, 62,545,773 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 May 16, 2005, was $16,261,901.

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 Plan of Operation                                                     
|Item 7.              |  | Financial Statements                                                               
|Item 8.              |  | Changes in and Disagreements with Accountants on Accounting andFinancial 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 and Reports on Form 8-K                                                   
|Item 14.             |  | Principal Accountant Fees and Services                                             
|                    
|Signatures           |  | 43                                                                                 
|                    
|Exhibit Index        |  | 44                                                                                 
|                    
|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 by the end of 2005 or early in 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Our difficulty or inability to compete 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. Our previous
clinical trials have concentrated on melanoma (M-Vax), ovarian carcinoma (O-Vax), and renal cell carcinoma. We are planning a new
clinical trial for non-small cell lung cancer, which we anticipate commencing in the second quarter of 2005.

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.

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.

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.

Recent Development  Capital Infusion  April 2005

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 and institutional
investors. We received gross proceeds received of approximately $8,616,000, and incurred offering-related expenses of
approximately $579,374. In connection with the private placement, we also issued to the investors warrants to purchase

1

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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. All warrants
issued in this private placement expire on April 5, 2010. We intend to use the proceeds of this private offering for general
working capital purposes, including our continuing plan of operation discussed below under Item 6  Managements
Plan of Operation.

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 United States 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.

2

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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.

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.

Planned Commercial and Clinical Activities with the AC Vaccine

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 & 4 melanoma patients in France. This filing was prepared in accordance with Common Technical Document
(CTD) filing requirements that were developed for the filing for approval of biological products with regulatory authorities in
the United States, Europe and Japan. If approved, this BLA would permit us to market M-Vax, the AC Vaccine for melanoma, to
patients in France on a commercial basis.

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). The regulations differentiate these products from standard pharmaceutical products.
The regulations evaluate cell and gene therapy products by the level and type of manipulation to the product. Some cellular
products, including M-Vax, will be regulated differently from standard drugs. For these

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technologies, marketing approval may be granted if the therapeutic is
manufactured in a current Good Manufacturing Practices (cGMP)-compliant facility and if a reasonable claim for efficacy can be
established. In November 2003, we held a pre-BLA meeting with AFSSAPS representatives to discuss revisions to the manufacturing of
the AC Vaccine, the planned testing of the final product and our desire to file our BLA utilizing the data generated to date.
These discussions laid the foundation for our final BLA submission to AFSSAPS. In this filing, we use the data generated in the
studies conducted at TJU as the basis for our efficacy claims for M-Vax.

In November 2004, we amended
a previously accepted Investigational New Drug (INDs) applications in the United States for the treatment of patients with
melanoma. The amendment included changing the manufacturing location from our Philadelphia facility to our facility in Lyon,
France and the addition of a control arm to the clinical study. Currently the study is being reviewed by various hospitals
Institutional Review Boards for approval of the study at the various Institutions.

In December 2003/January
2004, we filed two INDs in France for use of the AC Vaccine for hepatic and peritoneal cancer, which will include patients that
have ovarian and colorectal cancers that have metastasized to these locations. We believe that the AC Vaccine is a technology that
has application in a broad spectrum of solid tumor cancers. By initiating and completing trials for other cancer indications, we
are seeking to demonstrate this.

The Company had previously
initiated clinical trials to evaluate the safety and efficacy of M-Vax and O-Vax (our AC Vaccine for ovarian cancer). 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 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 would like 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.

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

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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 Agency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 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, 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

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, an estimated that 172,570 new cases of lung cancer
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, 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 will form the basis of our planned Phase I-II clinical trial to determine the
safety of an autologous, hapten-modified NSCLC vaccine and its ability to induce a DTH response. We anticipate that we will file
an IND application and that this clinical trial will be initiated in the second quarter of 2005.

Compassionate Use of M-Vax

Beginning in 2003 and
continuing in 2004, we made M-Vax available for sale 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. We treated one patient on a compassionate use basis in 2003, and treated 26 additional patients to date. An
additional 11 patients presented to us for treatment on a compassionate use basis were untreatable with the vaccine as a result of
inadequate cell count, the samples received were not melanoma or sterility issues.

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Compassionate use of M-Vax is
important to us and our AC Vaccine technology because it allows us to gain clinical data on patients and to continue to expand the
process development steps needed for a full regulatory approval of the vaccine and it also expands the availability of the AC
Vaccine within the scientific and medical communities that 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. Additionally, the compassionate use of our vaccine provides us with modest
revenue. Compassionate use sales currently are paid for by the hospital that contract for the acquisition of the vaccine or via
patients insurance.

Novel Anti-Estrogens

We have licensed from The
Texas A&M University System (Texas A&M) 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 Texas A&M License). Texas A&M has filed U.S. patents for both the Texas A&M compounds and
their anticancer uses. During 2001, we announced the issuance of an U.S. patent on the use of our anti-estrogen compound in
combination with tamoxifen. We have made certain foreign patent applications related to this combined use. We will evaluate
additional U.S. and non-U.S. patent coverage based on the results of ongoing laboratory research.

Anti-estrogens have been
proven to be clinically useful anticancer therapies. Current treatments, such as tamoxifen, block the growth of some cancers by
preventing estrogen to bind to the estrogen receptor on cancer cells. The estrogen receptor is a nuclear protein that upon binding
to estrogen binds to DNA and activates transcription of a series of hormone-responsive genes. Although tamoxifen and other
selective estrogen receptor modifiers have shown clinical benefit in battling breast cancer, there has been a disconcerting side
effect from these treatments: the increased incidence of endometrial cancer.

Our anti-estrogen compound
works on the estrogen receptor indirectly through the aryl hydrocarbon receptor. In pre-clinical studies of the compounds, it has
been documented that there is an inhibitory cross-talk between the aryl hydrocarbon receptor and the estrogen
receptor. Additionally, as documented in a recent publication in Cancer Research (2001 May 15; 61(10):3902-7) this compound has
been shown to enhance the anticancer activity of tamoxifen in the breast while blocking the uterine estrogenic effects of
tamoxifen. Unexpectedly, the compound has also shown activity against human pancreatic cancer cells. This is a promising finding,
because pancreatic cancer is a devastating disease with no effective therapies.

Our lead compound, 6-MCDF,
was selected by the Drug Development Group (DDG) of the National Cancer Institute (NCI) in November 2001
for further testing under the Developmental Therapeutics Program (DTP) of the NCI/NIH. As the drug discovery and
development arm of the NCI, the DTP plans, conducts and facilitates pre-clinical development of therapeutic agents for cancer and
AIDS. The DDG reviews all chemotherapeutic agents presented to the NCI for possible development toward clinical trials, and is
responsible for oversight and key pre-clinical decision-making. 6-MCDF was accepted for preclinical development program for
studies on formulation, range-finding toxicology and additional efficacy testing. Studies have been initiated under this program
by the DDG to test the efficacy of the compound in estrogen-receptor-negative cell lines, a target that is currently not treatable
with existing estrogen receptor modulating drugs. These studies have been concluded by the DDG providing a data that will be
useful for the further development of the compound. No further studies have been planned by the DDG at this time.

Under our agreements with
Texas A&M, we intend to continue to expend resources on the research and development of 6-MCDF and possibly related compounds.
As the development progresses,

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we anticipate we will continue to explore strategic opportunities to license
our rights to these compounds to another company.

# Contract Manufacturing

As a result of our clinical
activities in the United States 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
entered into two separate contract manufacturing relationships in France, one of which has been completed. This 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, Japan 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 cGMP (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 would
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 requires annual funding from OPI of approximately $1,500,000 (US) for each of 2004 and 2005, and
places 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 is expected to cover a majority of the
manufacturing costs in 2005.

We 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.

# License and Research Agreements

The Thomas Jefferson University (TJU) License and Research Agreement

We entered into license and
research agreements 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

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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 are 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). Our BLA filing in France for the marketing of the AC
Vaccine for melanoma in France triggered our obligation to make this next milestone payment to TJU, which we anticipate paying in
the second quarter of 2005.

In connection with the TJU
License, we also entered into a Clinical Study and Research Agreement with TJU (the TJU Research Agreement). Under the TJU License
and the TJU Research Agreement, we have 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 has pertained to applications of the AC
Vaccine technology beyond the core vaccine products we are developing.

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 United States. This spending includes funding provided pursuant to the TJU Research Agreement, our internal expenditures
and external expenditures incurred by us. 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 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, $150,000 of which we paid in July 2004, and the balance of which we were obligated to pay in
November 2004. In April 2005, we paid $150,000 to TJU in satisfaction of all our outstanding liabilities to TJU under the TJU
Research Agreement. We do not believe that the termination of this agreement will have any meaningful effect upon us or our
ability to continue our AC Vaccine development efforts.

In November 2004, Dr. Berd
joined the Company 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
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 Agreement.

The Texas A&M License and Research Agreement

We entered into license and
research agreements with Texas A&M University for a series of novel cancer-fighting anti-estrogen compounds in February 1997.
Under the Texas A&M License, we are obligated to make milestone payments to Texas A&M as follows: $24,000 upon the
initiation of a specified toxicity evaluation, $12,000 upon completion of a toxicity evaluation demonstrating acceptable toxicity
levels, $12,000 upon the submission of an IND to the FDA or its equivalent in a major market country, $5,000 upon the completion
of the first Phase I clinical investigations and $15,000 upon the FDAs granting of the first NDA. In addition, we are
required to achieve certain milestones toward development of a licensed product within certain specified time frames.

In connection with the Texas
A&M License, in May 1997, we entered into a three-year Sponsored Research Agreement with Texas A&M (the Texas A&M
Research Agreement). Under the Texas A&M License and the Texas A&M Research Agreement, we agreed to provide minimum yearly

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funding of $108,750 for Texas A&Ms research. Texas A&M waived
any up front payment by us for the Texas A&M License in recognition of our three-year research funding commitment. Currently
there is no research agreement in place with the University. We are evaluating potential studies with the principal investigator
at Texas A&M and may decide to enter into a further research alliance.

We are also obligated to pay
royalties on any net sales revenue derived from these compounds and a percentage of net sales revenues received from sublicenses
of the compounds.

We bear the expense of
maintaining and defending the patents that are subject to the Texas A&M 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. We are also developing an anti-estrogen compound for the treatment of cancer, but
we do not consider this to be a major program.

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.

In 2004, we incurred research
and development expense of $3,005,565 compared to $1,984,193 in 2003, and $6,349,530 in 2002. Research and development expenses
have been $39,872,552 for the period from inception through December 31, 2004. 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.

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# 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.
| | - |  | -------------------------------------------------------------------------------

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 foreign patents have been issued that are
subject to this license, and there are several U.S. patent applications and international or foreign counterpart applications
pending. The following table summarizes the issued U.S. patents for 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     |             
|          
|6,333,028  |  | Methods of using haptenized ovarian carcinoma tumor cells                   |             | December 25, 2001 |             
|          
|6,403,104  |  | Hapten-conuugated mammalian cells and methods of making and using thereof   |             | June 11, 2002     |             
|          
|6,458,369  |  | Composition comprising tumor cells and extracts and method of using thereof |             | October 1, 2002   |             

Patent 5,290,551 which was
originally issued on March 1, 1994 Treatment of melanoma with a vaccine comprising irradiated autologous melanoma tumor
cells conjugated to a hapten is currently under re-issue.

These patents cover methods
of making the vaccine, composition of matter, as well as claims to 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.

In 1997, we entered into an
exclusive, worldwide license agreement with Texas A&M University for all of its patents and pending patent applications
relating to a series of novel cancer-fighting anti-estrogen compounds. Currently, two U.S. patents have been issued and additional
U.S. patent applications and international or foreign counterpart applications are pending, all of which are subject to the Texas
A&M license. Texas A&M is responsible for filing patent applications. With our prior written authorization, the principal
investigator of this technology has the right to publish works and findings subject to our combined license and research
agreements. The following table summarizes the issued U.S. patents subject to this license.

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|Patent No. |  | Patent                                                                                  | Date Issued |                  | Date Expires
|---------- |  | --------------------------------------------------------------------------------------- | ----------- | ---------------- | ------------
|          
|5,516,790  |  | Synthesis and application of alkyl-substituted dibenzoflurans as antitumorigenic agents |             | May 14, 1996     |             
|          
|6,136,845  |  | Endocrine therapy for breast cancer; combined treatment with tamoxifen plus alkyl PCDFs |             | October 24, 2000 |             

These patents cover
composition of matter, claims to therapeutic use, and claims to use in combination with other therapy.

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 cells from a patient, treating those cells 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.

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.

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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 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.

# 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 or any other of our immunotherapies or compounds.

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.

Other Companies Developing Cancer Vaccines

A number of companies or
research institutions are developing cancer vaccines, including Ribi ImmunoChem Research, Inc./Corixa, Cancer Vax, 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.

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# 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 United States, 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.

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 Boards which 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).

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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 AFFSSAPS 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 AFFSSAPS; (v)
approval of the manufacturing processes and controls; and (vi) AFFSSAPS 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.

Using the data generated in
the studies conducted at TJU as the basis for the efficacy claims of M-Vax, we submitted a Biologics License Application (BLA) to
the French authorities in March 2005. 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 United States, 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.

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

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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, 2004, we
had 20 total employees, consisting of 17 full-time employees at our subsidiary in France and 3 full-time employees in the U.S. Our
other consultants, scientific advisors and directors devote only a portion of their time to our business.

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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, including the net proceeds of the private placement that we closed in April 2005, will be sufficient
to fund operations through the end of 2005, 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 by the end of 2005 or early in
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 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.

The response of AFSSAPS to
our planned BLA filing is uncertain, due to the lack of a clear regulatory path for approval of autologous products in France.
Accordingly, we cannot predict the timing or nature of the response of AFSSAPS to our BLA filing.

We now conduct all AC Vaccine manufacturing out of our Lyon, France
facility, which will create business uncertainties and logistical risks when we recommence treating patients in clinical trials in
the U.S.

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. As we recommence clinical trials in the U.S. for melanoma or commence trials for
non-small cell lung cancer, we will encounter various business uncertainties and logistical risks associated with the transport of
biologics (consisting of human tumor 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

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would have significantly disrupted our treatment of patients. There are
additional risks associated with the transport of biologics and vaccines, including the limited shelf life 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 in the U.S.

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 approved by the FDA, we have not initiated these
clinical studies because of our limited cash resources. Even if we initiate these studies and even if we obtain approval for our
AC Vaccine drug candidates from one or more foreign regulatory agencies, we still may not have the funding to complete the U.S.
regulatory approval process or we may fail to obtain FDA approval for the same products. We may never be able to commercialize our
AC Vaccine products in the U.S.

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.

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

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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.

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.

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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 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.

# 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.

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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 executive 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 do we 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.

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

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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, 2004),
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 $13,250. 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 February 2008 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, 2004.

We did not have an annual
meeting of stockholders in 2004 for the election of directors or other customary matters, due to the cash constraints of the
Company. We anticipate having an annual meeting of stockholders in September 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 Nasdaq, or by OTC, as applicable, 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.

|                                    
|------------------------------------
|
|                                    
|Fiscal year ended December 31, 2003 
|First quarter                       
|Second quarter                      
|Third quarter                       
|Fourth quarter                      
|                                    
|Fiscal year ending December 31, 2004
|First quarter                       
|Second quarter                      
|Third quarter                       
|Fourth quarter                      
|                                    

The last reported sale price
for our common stock on the OTC Bulletin Board on May 16, 2005, was $0.26 per share. At May 16, 2005, there were 61,415,018shares 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, 2004, 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 its 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
earnings and other resources of the Company, if any, will be retained by us for investment in its business.

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# ITEM 6.    Managements 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 $68,781,914 as of
December 31, 2004. We incurred net losses of $9,425,564, $3,286,100, and $3,457,908 for the years ended December 31, 2002,
2003, and 2004, respectively. We expect to continue to incur operating losses, primarily due to the expenses associated with our
product development efforts in Europe, clinical development efforts in Europe, the cost of maintaining our manufacturing facility
in the United States, activities related to planned reestablishment of our clinical trials for M-Vax and possible studies in
non-small cell lung cancer (NSCLC), and pre-clinical studies.

Our ability to continue as an
operating company depends upon, among other things, our ability to raise additional capital early in 2006 to allow us to develop
products, obtain regulatory approval for our proposed products, and enter into agreements for product development, manufacturing
and commercialization. M-Vax 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 obtain the necessary funding, we intend to
continue to be engaged in the development and commercialization of our AC Vaccine products and our other products and compounds.

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 would like 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 manufacture of 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 Agencys concerns, would result in a new product from a regulatory
perspective and given the Agencys recommendation that the Company 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, 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.

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 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.

Recent Development  Capital Infusion

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 and institutional
investors. We received gross proceeds received of approximately $8,616,766, and incurred offering-related expenses of
approximately $580,000. 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. All warrants issued in this private placement expire on April 5, 2010. We intend
to use the proceeds of this private offering for general working capital purposes, including our continuing 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.

We have, throughout 2003 and
2004, laid the foundation for a significantly more aggressive development plan that we have not been able to pursue during the
past three years. The steps that were taken in 2003 and 2004 to implement this plan include:

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| |  |  | Continuing development work on the AC Vaccine, particularly in
France.
| | - |  | ----------------------------------------------------------------------

| |  |  | Pre-Biological License Application (BLA) filing meetings and
follow-up contacts with representatives of AFSSAPS (the French counterpart of the FDA) regarding our filing of a BLA in France for
the AC Vaccine.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| |  |  | Alliance with OPI to place management of their French facility
under Genopoietic management control and to obtain funding of the combined facility manufacturing operations from OPI.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Established and maintained at our Lyon, France facility the
designation Establissment Pharmaceutique 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 Medical Director 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 :

| |  |  | Recommence our clinical trial in the U.S. for the treatment of
melanoma with the AC Vaccine, using DTH as the endpoint. We have received all FDA approvals to recommence this clinical trial, and
we anticipate treating patients in the second quarter of 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Commence a Phase I-II clinical trial in non-small cell lung cancer
in collaboration with the University of Pennsylvania Cancer Center. We anticipate submitting an IND application to the FDA for
treatment of NSCLC with the AC Vaccine by the end of June 2005.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | Pursue our BLA filing with AFSSAPs for the approval of commercial
sale of the AC Vaccine for treatment of melanoma in France. We anticipate that this will be ongoing in 2005.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

We continually evaluate our
plan of operations 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

27

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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 through the end of 2005 and into the first quarter of 2006. The full implementation of this plan of
operation beyond that time is dependent upon us obtaining additional funding before the end of 2005 or early in 2006. We believe
we have the facilities, the facility managers and technical staff, the scientific staff and consultants in place to implement this
plan.

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 out current compassionate use and clinical activities planned, we anticipate
that this excess capacity will 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
manufacturing alliance with OPI that is providing approximately $1,500,000 (US) funding per year from OPI for our combined
facilities for 2004 and 2005, which combined facilities are under the management of Genopoietic, our French subsidiary. This
funding commitment and certain other grant revenue, tax refunds and existing cash resources in France, should be sufficient to
fund the manufacturing operations of our French facilities in 2005. OPI is not presently current in its payment obligations to us
under this manufacturing alliance, and we may choose to terminate the agreement if we are not brought current in the near future.
Although the OPI contract was critical to our ongoing operations in 2004, with the recent capital infusion, this contract is no
longer critical to our ongoing operations in France.

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. Although we are not currently
conducting any clinical or pre-clinical development programs at our Philadelphia facility, we would consider re-activating that
facility if a sufficiently significant opportunity presented itself.

Results of Operations

Revenue recognized in 2004
was $1,691,063 compared to revenue in 2003 of $930,727. The increase in revenues was attributable to revenues realized related to
contract manufacturing related to the OPI contract entered into in February 2004 plus additional revenue earned pursuant to a
pilot manufacturing agreement entered into with Aventis during 2004 versus the prior years revenue which related to a contract
manufacturing agreement that was in run-off through the second half of 2003.

During 2004, our
manufacturing, research and development expenses increased 51% from $1,984,193 to $3,005,565, largely as a result of increased in
clinical activities in France and the U.S. with the AC Vaccine and the preparation of the BLA filing for M-Vax for approval in
France. Expenses for the periods are broken out by region as follows:

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

28

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In the United States there
was an overall expense decrease resulting from the cancellation of license agreement with Rutgers and no additional costs being
incurred on research agreements with Rutgers or TJU. These decreases in expenses were partially offset by increases in expenses
associated with the re-launch of clinical activities in the United States and the hiring of a Chief Medical Officer.

The increase in the costs
incurred in France are due to the filing of two new INDs in France for additional indications, validation and support work
necessary for the filing of the amended INDs in the Untied States and increased costs associated with the preparation and
validation work necessary for the filling of the BLA being prepared for submission to the French regulatory authorities.

Selling, general and
administrative expenses decreased approximately 8%, from $2,210,836 for the year ended 2003 to $2,025,934 for the year ended 2004.
Expenses for the periods are broken out by region as follows:

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

In the United States, the
decrease in costs is the result of decreased administrative salaries and decreased outside professional fees associated with
marketing, business development and legal activities.

In France there was an
increase in administrative expenses due to a higher salaries included in general and administrative expenses with support staff
and higher allocation of the General Managers salary and additional costs allocated to general and administrative expenses related
to the OPI contract manufacturing agreement which do not constitute research and development expenses.

Interest income decreased
from $15,557 earned in 2003 to $13,522 for the year 2004. The decline is a function of the decrease in the average invested asset
base combined with a reduction in the rates on commercial paper in which we typically invested.

We anticipate that our
spending over the next 12 months for manufacturing, research and development expenses will increase as compared with 2004 as we
continue to implement and accelerate the plan of operation described above.

Liquidity and Capital Resources

We presently anticipate that
our current resources, including the net proceeds of the private placement that we closed in April 2005, should be sufficient to
fund operations through the end of 2005 and possibly into the first part of 2006, depending upon how aggressively we implement our
development plans discussed above. That current operating plan includes anticipated expenses relating to (1) recommencing our
clinical trials for M-Vax in the U.S., (2) costs associated with our BLA submission in France in March 2005, (3) our planned
clinical trial for non-small cell lung cancer, which we expect to commence in 2005, (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 money or to initiate additional
contract manufacturing relationships on terms favorable to us by the end of 2005 or early in 2006 to continue our operations
through 2006. If we are unable to raise additional money, secure additional contract manufacturing relationships or enter into
strategic alliances, we will have to curtail our development initiatives.

29

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If our current and planned
clinical trials for the AC Vaccine in the United States 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 would not likely 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 through 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 that we will require on acceptable terms,
if at all. If additional funds are not raised in early 2006, we will likely cease operations in 2006.

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 whenever 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 would necessitate a goodwill
impairment assessment include a significant adverse change in legal factors or in the business climate, an adverse action or
assessment by a regulator, unanticipated competition, a loss of key personnel, or 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 has a carrying
value of $188,387 at December 31, 2004, and resulted from our acquisition of Genopoeitic in August 2000. We performed our annual
goodwill impairment test in

30

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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.

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. 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 the Companys 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 March 2004, the EITF
reached a consensus on recognition and measurement guidance previously discussed under EITF No. 03-01  The Meaning
of Other-Than-Temporary Impairment and its Application to Certain Investments,(EITF 03-01).The consensus clarifies the meaning of other than
temporary impairment and its application to investments classified as either
available-for-sale or held to maturity under SFAS 115 Accounting for Certain
Investments in Debt and Equity Securities,and investments accounted for under
the cost method or equity method. The recognition and measurement guidance for which the
consensus was reached is to be applied to other than temporary impairment evaluations. In
September 2004, the Financial Accounting Standards Board (FASB) issued a
final FASB staff position (FSP), FSP EITF No. 03-01-01, that delays the
effective date for the measurement and recognition guidance of EITF 03-01. Adoption of
this standard will not have an effect on our carrying value of investments or our results
of operations.

In April 2004, the EITF
issued Statement No. 03-06, Participating Securities and the Two-Class Method Under FASB Statement
No. 128, Earnings per Share,(EITF 03-06). EITF 03-06 addresses a number of questions regarding the
computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the
holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. EITF 03-06
also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a
participating security and how to apply the two-class method of computing earnings per share once it is determined that a security
is participating, including how to allocate undistributed

31

---

earnings to such a security. EITF 03-06 is effective for fiscal periods
beginning after March 31, 2004. The adoption of EITF 03-06 did not have a material effect on our earnings per share.

In December 2004, the
FASB issued SFAS No. 123R, Share-Based Payment  An Amendment of FASB Statements No. 123 and 95(SFAS 123R).The new pronouncement replaces the existing requirements under SFAS 123 and APB 25. According
to SFAS 123R, all forms of share-based payments to employees, including employee stock options and employee stock purchase plans,
would be treated the same as any other form of compensation by recognizing the related cost in the statement of operations. This
pronouncement eliminates the ability to account for stock-based compensation transactions using APB 25 and generally would require
that such transactions be accounted for using a fair-value based method. For public companies, the FASB has determined that SFAS
123R is effective for awards and stock options granted, modified or settled in cash in fiscal years beginning after
December 15, 2005. Accordingly, we will adopt SFAS 123R beginning with our quarter ending March 31, 2006. SFAS 123R provides
transition alternatives for public companies to restate prior interim periods or prior years. We are in the process of evaluating
the impact of this standard on our financial statements.

# ITEM 7.    Financial Statements

The Companys
consolidated financial statements appear following the signature page to this Report. See Financial Statements.

The accompanying Financial
Statements have been prepared assuming that the Company will continue as a going concern. The reports of independent registered public accounting firms
included with the Financial Statements are unqualified opinions with an explanatory paragraph about conditions raising
substantial doubt about the Companys 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

The Companys principal
executive officer and principal accounting officer, based on his evaluation within 90 days prior to the date of this report of the
Companys disclosure controls and procedures (as defined in Exchange Act Rule 13a14(c)), have concluded that the
Companys disclosure controls and procedures are adequate and effective for purposes of Rule 13a14(c) in timely
alerting him to material information relating to the Company required to be included in the Companys filings with the SEC
under the Securities Exchange Act of 1934. There were no significant changes in the Companys internal controls or in other
factors that could significantly affect internal controls subsequent to the date of their evaluation.

# ITEM 8B.  Other Information

None.

32

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# PART III

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

The executive officers and
directors of the Company, as well as certain information about them, are as follows:

|Name                          | Age |    | Position with the Company
|----------------------------- | --- | -- | -------------------------
|                             
|John K. A. Prendergast, Ph.D. |     | 50 |                          
|                             
|Richard P. Rainey             |     | 38 |                          
|                             
|David Berd, MD                |     | 59 |                          
|                             
|Andrés Crespo                 |     | 48 |                          
|                             
|Henry E. Schea III            |     | 51 |                          
|                             
|Edson D. de Castro            |     | 65 |                          
|                             
|Andrew W. Dahl, Sc.D.         |     | 61 |                          
|                             
|Carl Spana, Ph.D.             |     | 41 |                          

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 a member of the Board 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

33

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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.

Henry E. Schea IIIhas
been the Director of Quality Systems for AVAX since May 2002. Mr. Schea has over 20 years experience in research, product
development, GMP manufacturing and quality control and assurance, with a focus in cell and gene therapies. From 1981 to 1991, Mr.
Schea served in various manufacturing and quality control positions at Amgen. From 1991 through 2001, Mr. Schea developed quality
systems for new biotech firms including Gene Medicine and Chimeric Therapies. Mr. Schea received his B.S. in Microbial Genetics
from the University of Massachusetts in 1976.

Edson D. de Castro has
been a member of the Board of Directors 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 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.

34

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The Company has not adopted a
Code of Ethics (as defined by the rules of Securities and Exchange Commission). The Company believes that its time and limited
resources are better spent managing the Companys cash flow and its strategic opportunities than on the development of these
codes and designations.

# Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the
Securities Exchange Act of 1934, as amended, requires the Companys directors, executive officers and holders of more than
10% of the Companys 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 the Company with copies of all such filings. Specific due dates for these reports have been established and the Company is
required to 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, 2004, and representations from certain Reporting Persons, the
Company believes that all Reporting Persons complied with the Section 16(a) filing requirements in the year ended December 31,
2004.

# ITEM 10.    Executive Compensation

# Executive Compensation

The following Summary
Compensation Table sets forth the compensation earned by the persons serving as the Companys chairman of the board, its
chief executive officer and the other named key employees (who were the only other employees of the Company who made in excess of
$100,000 in 2004) (the Named Officers) for the last three fiscal years. The Company has no long-term incentive plans.

The Companys 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 the dramatic reduction in the executive staff of the Company, 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 the Companys 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 the Company, which will consist of
not less than five days of service per calendar month.

35

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Neither Andrés Crespo
nor Henry Schea served as an officer of the Company in 2003 or 2004. They are included in the following tables because they were
key employees of the Company who made in excess of $100,000.

# Summary Compensation Table
Annual Compensation

|Name and Principal Position   | Year |  | Salary($) |      | Bonus($) |   | Shares ofcommon stockUnderlyingOptions/SARs(#) |  | All OtherCompensation($)
|----------------------------- | ---- |  | --------- | ---- | -------- | - | ---------------------------------------------- |  | ------------------------
|                             
|John K.A. Prendergast, Ph.D.  |      |  |           | 2004 |          | $ | 0                                              |  | $                       
| Chairman of the Board (1)   |      |  |           | 2003 |          | $ | 0                                              |  | $                       
|                              |      |  |           | 2002 |          | $ | 0                                              |  | $                       
|                             
|Richard P. Rainey, C.P.A.    |      |  |           | 2004 |          | $ | 195,000                                        |  | $                       
|President and Corporate       |      |  |           | 2003 |          | $ | 182,521                                        |  | $                       
|Secretary (2)                 |      |  |           | 2002 |          | $ | 147,875                                        |  | $                       
|                              |      |  |           | 2001 |          | $ | 133,068                                        |  | $                       
|                             
|Andrés Crespo  General       |      |  |           | 2004 |          | $ | 178,758                                        |  | $                       
|Manager, Genopoeitic          |      |  |           | 2003 |          | $ | 162,621                                        |  | $                       
|                             
|Henry E. Schea III  Director |      |  |           | 2004 |          | $ | 125,000                                        |  | $                       
|of Quality Systems            |      |  |           | 2003 |          | $ | 119,792                                        |  | $                       
|                             
|Dr. David Berd  Chief        |      |  |           | 2004 |          | $ | 30,000                                         |  | $                       
|Medical Officer (4)          

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

36

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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.     |                                                  |  |                                                         | 40,000  |                            | 3.04%  |               
|Chairman of the Board             |                                                  |  |                                                         | 150,000 |                            | 11.41% |               
|                                 
|Richard P. Rainey, C.P.A.        |                                                  |  |                                                         | 250,000 |                            | 19.01% |               
|President and Corporate Secretary |                                                  | 
|                                 
|Andrés Crespo  General Manager,  |                                                  |  |                                                         | 175,000 |                            | 13.31% |               
|Genopoeitic                       |                                                  | 
|                                 
|Henry E. Schea III  Director of  |                                                  |  |                                                         | 100,000 |                            | 7.60%  |               
|Quality Systems                   |                                                  | 
|                                 
|Dr. David Berd  Chief Medical    |                                                  |  |                                                         | 200,000 |                            | 15.21% |               
|Officer (4)                      

During 2004 1,240,000 options
were granted to employees and directors of the company. The Company has not granted any stock appreciation rights. In accordance
with the terms of the Companys 2000 Directors Stock Option Plan, on January 2, 2004, the four directors of the
Company were each automatically granted options to purchase 40,000 shares of common stock, at an option exercise price of $0.17
per share. The options vest quarterly over a four-year period of continuing service as a director. Effective February 2, 2004, the
Company granted 380,000 options to employees pursuant to the 2001 Stock Option Plan. Effective October 1, 2004, the Board of
Directors granted stock options to Mr. Rainey, Dr. Prendergast and Dr. Spana for 250,000, 150,000 and 100,000 shares,
respectively, at an option exercise price of $0.125 per share. Effective November 1, 2004, the Board of Directors granted stock
options to Dr. Berd for 200,000 shares at an option exercise price of $0.22 per share. All options vest quarterly over a four-year
period of continuing service as an employee or director of the Company, as applicable. The option grants to Dr. Prendergast and
Dr. Spana reflect the additional demands on those two directors due to our limited executive management team. The options vest
quarterly over 16 quarters from the date of grant.

37

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

|                             | Number of SecuritiesUnderlying UnexercisedOptions at December 31, 2004 |  | Value of UnexercisedIn-The-Money Optionsat December 31, 2004 (1)
|---------------------------- | ---------------------------------------------------------------------- |  | ----------------------------------------------------------------
|                            
|
|                            
|John K.A. Prendergast, Ph.D. |                                                                        |  | -0-                                                             
|Richard P. Rainey, C.P.A.    |                                                                        |  | -0-                                                             
|Andrés Crespo                |                                                                        |  | -0-                                                             
|Henry E. Schea III           |                                                                        |  | -0-                                                             
|David Berd                   |                                                                        |  | -0-                                                             

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

# Employment Agreements

Richard P. Rainey. On
February 14, 2005, the Company executed a new Employment Agreement with Richard P. Rainey, which supersedes all prior employment
agreements and letters with Mr. Rainey. The new Employment Agreement is effective as of April 1, 2004, which is the date that his
prior employment agreement expired. Pursuant to the terms of the Employment Agreement, Mr. Rainey continues to serve as President
of the Company. The initial term of the Employment Agreement expires March 31, 2007.

Under the terms of the
Employment Agreement, Mr. Rainey receives a current annual base salary of $200,000 and is entitled to receive a discretionary
annual incentive bonus targeted to be 30% of his base salary. Under the new Employment Agreement, we granted Mr. Rainey an option
to purchase 250,000 shares of common stock under the Companys 2001 Stock Option Plan at an exercise price of $0.125 per
share. All such options vest at a rate of 1/16 per quarter over a four-year period, and are exercisable for a period of seven
years from their grant date. Mr. Rainey is also entitled to additional stock options at the sole discretion of our Board of
Directors.

The Employment Agreement
provides that Mr. Rainey is to receive a lump sum payment equal to two times his Base Salary upon termination of his employment
following a Change in Control, as defined in the Employment Agreement. Upon termination for any reason other than, (i) following a
Change of Control, (ii) due to Mr. Raineys death or to his disability, (iii) by us for just cause, or (iv) by
Mr. Rainey for good reason, then we are required to pay Mr. Rainey, as his sole damages for his termination, a lump
sum payment equal to his annual base salary. Such amount will not be set-off against amounts earned from alternative employment.
In addition, any stock options granted to Mr. Rainey will thereupon become immediately vested. If, at any time prior to
March 31, 2007, (i) Mr. Raineys employment is terminated by us with just cause, (ii) Mr. Rainey terminates
his employment for good reason, or (iii) Mr. Raineys employment is terminated due to death or disability, we are
required to pay Mr. Rainey, or his estate, his base salary accrued but unpaid as of the date of termination.

The Employment Agreement also
contains a two-year covenant not to compete (assuming Mr. Rainey is dismissed for cause), a three-year covenant not to disclose
confidential information and an 18-month non-solicitation agreement.

Dr. David Berd.   Effective
November 1, 2004, the Company entered into an Employment Letter with Dr. David Berd, under which Dr. Berd was named the
Companys Chief Medical Officer. Dr. Berd is the inventor of the AC Vaccine technology that the Company licenses from Thomas
Jefferson

38

---

University (TJU). Dr. Berd has worked closely with the Company as a tenured
professor at TJU and a consultant to the Company during the 10 year period in which the Company has had the AC Vaccine in
development. Dr. Berds initial employment term with the Company was for six months, running through April 30, 2005. This has
been extended to October 31, 2005. Any agreement to extend Dr. Berds employment beyond October 31, 2005will be completed no
later than 60 days prior to the scheduled end of Dr. Berds initial employment period.

Under the terms of the
Employment Letter, Dr. Berd receives a current annual base salary of $180,000 per year, payable pro rata for any partial calendar
year for which the Company employs Dr. Berd. Pursuant to this Employment Letter, Dr. Berd was granted an option under the
Companys 2001 Stock Option Plan to purchase 200,000 shares of common stock exercisable for seven years at an exercise price
equal to $0.22 per share, which was the market value of the common stock as of the effective date of the Employment Letter. The
option vests at the rate of 25% per quarter until the first anniversary of the effective date.

# Compensation of Directors

Effective November 2, 2001,
we elected to pay 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 2004, we had no
in-person Board meetings, no in-person committee meetings, and six telephonic Board or committee meetings.

In accordance with the terms
of our 2000 Directors Stock Option Plan, on January 2, 2004, each of our four directors was each automatically granted
options to purchase 40,000 shares of common stock, at an option exercise price of $0.17 per share. The options vest quarterly over
a four-year period of continuing service as a director.

See Executive
Compensation above for a description of certain compensation paid to Dr. Prendergast in 2003 and 2004 and stock options
awarded to Dr. Prendergast and Dr. Spana 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 April 6, 2005, 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 ClassBeneficiallyOwned (1)
|------------------------------------------ | -------------- |  | ------------ | -------------------------------------- |  | ----------------------------------------
|Named Executive Officers and Directors (2) |                |  |              |                                        |  |                                         
|Richard P. Rainey, C.P.A. (3)              |                |  | Common Stock |                                        |  |                                         
|Edson D. de Castro (4)                     |                |  | Common Stock |                                        |  |                                         
|Andrew W. Dahl, Sc.D. (5)                  |                |  | Common Stock |                                        |  |                                         
|John K.A. Prendergast, Ph.D. (6)           |                |  | Common Stock |                                        |  |                                         
|Carl Spana, Ph.D. (7)                      |                |  | Common Stock |                                        |  |                                         
|David Berd, MD                             |                |  | Common Stock |                                        |  |                                         
|Andres Crespo (8)                          |                |  | Common Stock |                                        |  |                                         
|Henry E. Schea III (8)                     |                |  | Common Stock |                                        |  |                                         
|All executive officers and directors       |                | 
|as a group (5 persons) (9)                 |                |  | Common Stock |                                        |  |                                         

39

---

|5% Shareholders                                   |  |  |              |  |  |  |            |  |        |  | 
|------------------------------------------------- |  |  | ------------ |  |  |  | ---------- |  | ------ |  | 
|Rock Castle Ventures, L.P.                        |  |  | Common Stock |  |  |  | 5,452,630  |  | 8.36%  |  | 
|Park Place Columbia LTD                           |  |  | Common Stock |  |  |  | 5,405,616  |  | 8.37%  |  | 
|Aqua RIMCO LTD                                    |  |  | Common Stock |  |  |  | 9,558,937  |  | 14.76% |  | 
|Firebird Global Master Fund, LTD                  |  |  | Common Stock |  |  |  | 3,466,667  |  | 5.47%  |  | 
|Yoshinoro SHIRONO                                 |  |  | Common Stock |  |  |  | 9,558,823  |  | 14.76% |  | 
|CS Equity Fund Management Company                 |  |  | Common Stock |  |  |  | 7,821,666  |  | 12.15% |  | 
|Executive officers, directors and 5% shareholders |  |  |              |  |  |  | 45,633,231 |  | 69.95% |  | 

|_________________
*Represents less than 1%.
|-------------------------------------------
|(1)                                        
|(2)                                        
|(3)                                        
|(4)                                        
|(5)                                        
|(6)                                        
|(7)                                        
|(8)                                        
|(9)                                        

40

---

# Equity Compensation Plan Information

The following table sets
forth as of December 31, 2004 (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 compensationplans approved bysecurity holders     |     |  |     | 2,358,889 |    
|                                                        
|Equity compensationplans not approved bysecurity holders |     |  |     | 1,773,328 |    
|                                                        
|Total                                                    |     |  |     | 4,132,217 |    

The warrants and options
issued without stockholder approval include (1) warrants to purchase 218,759 shares of common stock at an exercise price of
$11.125 per share issued to certain brokers and finders in connection with the Companys 2000 private placement of
securities, all of which expired on March 10, 2005; (2) 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; (3) warrants to purchase 733,333 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; and (4) warrants to
purchase 300,000 shares of common stock at an exercise price of $0.23 per share issued to two individuals for certain financial
advisory services, which expire on December 16, 2009.

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 include 71,000 options to acquire common stock issued to two former consultants to the
Company, 50,000 of which have expired since December 31. 2004. The remaining 21,000 options have an exercise of $2.25 per share
and expire on November 30, 2005. See Note 5 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 security holders consist of the 1992 Stock Option Plan, the 2001 Stock Option Plan and the 2000 Director Stock Option
Plan.

41

---

# 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 common stock of the Company 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 the report.

# 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, 2003, and 2004 by the Companys principal
accounting firm, Ernst & Young LLP:

|                   | 2003 |  | 2004
|------------------ | ---- |  | ----
|                   |      |  |     
|Audit fees (1)     |      |  | $   
|Audit-related fees |      |  |     
|                  
|Tax fees           |      |  |     
|All other fees     |      |  |     
|                   |      |  |     
|Total              |      |  | $   

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

The Audit Committee has
adopted a policy (the Pre-Approval Policy) under which audit and non-audit services to be rendered by the
Companys 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 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 the Companys independent auditor in 2004 were all audit-related and pre-approved by the Audit
Committee. The Pre-Approval Policy also specifies certain services (consistent with the SEC rules and regulations) that may not be
provided by the Companys independent auditors in any circumstance. 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. Ernst & Young LLP provided no services in 2004 in reliance
upon this de minimus exception.

42

---

# 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: May 19, 2005 | By:                        | /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. Rainey                             | May 19, 2005
|                                    | President (Principal Executive, Financial and
|                                    | Accounting Officer)                          
|                                   
|/s/   Edson D. de Castro            | Edson D. de Castro                            | May 19, 2005
|                                    | Director                                     
|                                   
|/s/   John K. A. Prendergast, Ph.D. | John K. A. Prendergast, Ph.D.                 | May 19, 2005
|                                    | Director                                     
|                                   
|/s/   Carl Spana, Ph.D.             | Carl Spana, Ph.D.                             | May 19, 2005
|                                    | Director                                     
|                                   
|/s/   Andrew W. Dahl, Sc.D.         | Andrew W. Dahl, Sc.D.                         | May 19, 2005
|                                    | Director                                     

43

---

# 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 |  | License Agreement dated February 17, 1997, by and between the
Company and The Texas A&M University System.6
|---- |  | -----------------------------------------------------------------------------------------------------------

|10.5 |  | 2001 Stock Option Plan.1
|---- |  | ------------------------

|10.6 |  | 2000 Directors Stock Option Plan.7
|---- |  | -----------------------------------

|10.7 |  | Note Purchase Agreement dated as of November 17, 2003.8
|---- |  | -------------------------------------------------------

|10.8 |  | Form of Convertible Note in connection with the December 2003 bridge financing.8
|---- |  | --------------------------------------------------------------------------------

|10.9 |  | Form of Warrant in connection with the December 2003 bridge financing.8
|---- |  | -----------------------------------------------------------------------

|10.10 |  | Society in Participation Agreement between Genopoetic and Opisodia dated January 29, 2004.9
|----- |  | -------------------------------------------------------------------------------------------

|10.11 |  | Securities Purchase Agreement dated as of May 17, 2004.10
|----- |  | ---------------------------------------------------------

|10.12 |  | Form of Series 2004A Warrant to purchase common stock.10
|----- |  | --------------------------------------------------------

|10.13 |  | Form of Series 2004B Warrant to purchase common stock.10
|----- |  | --------------------------------------------------------

|10.14 |  | Employment Agreement between AVAX Technologies, Inc. and
Richard P. Rainey dated as of April 1, 2004.11
|----- |  | -------------------------------------------------------------------------------------------------------

44

---

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

|10.15 |  | Employment Letter between AVAX Technologies, Inc. and Dr. David
Berd dated as of November 1, 2004.11
|----- |  | ----------------------------------------------------------------------------------------------------

|10.16 |  | Securities Purchase Agreement dated as of April 5, 2005.12
|----- |  | ----------------------------------------------------------

|10.17 |  | Form of Series 2005A Warrant to purchase common stock.12
|----- |  | --------------------------------------------------------

|10.18 |  | Form of Series 2005B Warrant to purchase common stock.12
|----- |  | --------------------------------------------------------

|21 |  | Subsidiaries of the Company.*
|-- |  | -----------------------------

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

|23.2 |  | Consent of Ernst & Young 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.
|-- |  | ----------------------------------------------------------------------------------------------------------------------

45

---

# Consolidated Financial Statements

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

# Years ended December 31, 2004 and 2003
and the period from January 12, 1990
(Incorporation) to December 31, 2004
With Reports of Independent Registered Public Accounting Firms



---

AVAX Technologies, Inc.
(a development stage company)

Consolidated Financial Statements

Years ended December 31, 2004 and 2003 and for the period from January 12, 1990
(Incorporation) to December 31, 2004

# Contents

|Reports of Independent Registered Public Accounting Firms                                          | F-1 
|-------------------------------------------------------------------------------------------------- | ----
|                                                                                                  
|Consolidated Financial Statements                                                                 
|                                                                                                  
|Consolidated Balance Sheet as of December 31, 2004                                                 | F-3 
|                                                                                                  
|Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2004
|and 2003 and for the period from January 12, 1990 (incorporation) to December 31, 2004             | F-4 
|                                                                                                  
|Consolidated Statements of Stockholders Equity (Deficit) for the years ended December 31, 2004   
|and 2003 and for the period from January 12, 1990 (incorporation) to December 31, 2004             | F-5 
|                                                                                                  
|Consolidated Statements of Cash Flows for the years ended December 31, 2004 and 2003 and for      
|the period from January 12, 1990 (incorporation) to December 31, 2004                              | F-8 
|                                                                                                  
|Notes to Consolidated Financial Statements                                                         | F-10



---

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, 2004, and the related consolidated statements
of operations and comprehensive loss, stockholders equity (deficit), and cash flows for the year then ended and for the
period from January 12, 1990 (incorporation) to December 31, 2004. 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 audit.

We conducted our audit 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 audit provides 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, 2004,
and the consolidated results of their operations and their cash flows for the year then ended and for the period from January 12,
1990 (incorporation) to December 31, 2004 in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred recurring
losses from operations and may not have adequate capital to fund its operations through 2005. 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 financial statements do not include any adjustments that might result from the outcome of this
uncertainty.

/s/   Briggs, Bunting & Dougherty LLP

Philadelphia, PA
April 19, 2005

F-1

---

Report of Independent Registered Public Accounting Firm

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

We have audited the accompanying consolidated statements of operations and
comprehensive loss, stockholders equity (deficit) and cash flows of AVAX Technologies, Inc. (a development stage company)
for the year ended December 31, 2003. 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 audit.

We conducted our audit 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. We were not engaged to perform an audit of the
Companys internal control over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of AVAX Technologies, Inc. for the year ended
December 31, 2003, in conformity with U.S. generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As more fully described in Note 1, the Company has incurred recurring operating losses
and has inadequate capital to fund existing operations through 2004. These conditions raise substantial doubt about the
Companys ability to continue as a going concern. Managements plans in regard to these matters are also described in
Note 1. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

/s/   Ernst & Young LLP

Kansas City, Missouri
March 18, 2004

F-2

---

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

|                                                                                                 | December 31,
2004
|------------------------------------------------------------------------------------------------ | -----------------
|                                                                                                 |                  
|Assets                                                                                           |                  
|Current assets:                                                                                  |                  
|Cash and cash equivalents                                                                        |                  
|Accounts receivable, net of allowance for doubtful accounts of $192,066                          |                  
|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                                                                                 |                  
|Loans payable  ANVAR grant payable                                                              |                  
|                                                                                                 |                  
|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  36,071,568                                                       |                  
|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-3

---

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,
|------------------------------------------------------------------ | ---------------------- |  | ---------------------------------------------------------
|
|                                                                   |                        | 
|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 (loss), net                                     |                        |  |                                                          
|                                                                   |                        | 
|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-4

---

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

|                               | Series A
Convertible
Preferred Stock |  | Series B
Convertible
Preferred Stock |            | Series C
Convertible
Preferred 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     

|                               | Additional
Paid-In
Capital |  | Subscription
Receivable |           | Deferred
Compensation |   | Unrealized
Loss on
Marketable
Securities |   | Other
Comprehensive
Income |   | Deficit
Accumulated
During the
Development
Stage |   | Total
Stockholders
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-5

---

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

|                                | Series A
Convertible
Preferred Stock |  | Series B
Convertible
Preferred Stock |   | Series C
Convertible
Preferred 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         |                                      | 
|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           |                                      |  |                                      |  |                                      |  |            

|                                | Additional
Paid-In
Capital |  | Subscription
Receivable |            | Deferred
Compensation |  | Unrealized
Loss on
Marketable
Securities |   | Other
Comprehensive
Income |            | Deficit
Accumulated
During the
Development
Stage |  | Total
Stockholders
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-6

---

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

|                                 | Series A
Convertible
Preferred Stock |  | Series B
Convertible
Preferred Stock |   | Series C
Convertible
Preferred 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 commons     |                                      | 
|stock                            |                                      |  |                                      |  |                                      |   |            
|Foreign currency translation     |                                      | 
|adjustment                       |                                      |  |                                      |  |                                      |   |            
|Net loss                         |                                      |  |                                      |  |                                      |   |            
|                                 |                                      | 
|Balance at December 31, 2004     |                                      |  |                                      |  |                                      | $ |            
|                                 |                                      | 

|                                 | Additional
Paid-In
Capital |  | Subscription
Receivable |            | Deferred
Compensation |   | Unrealized
Loss on
Marketable
Securities |   | Other
Comprehensive
Income |          | Deficit
Accumulated
During the
Development
Stage |   | Total
Stockholders
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 commons     |                            | 
|stock                            |                            |  |                         | 2,852,656  |                       |   |                                         |   |                            |         |                                                  |   |                                    
|Foreign currency translation     |                            | 
|adjustment                       |                            |  |                         |           |                       |   |                                         |   |                            |         |                                                  |   |                                    
|Net loss                         |                            |  |                         |           |                       |   |                                         |   |                            |         |                                                  |   |                                    
|                                 |                            | 
|Balance at December 31, 2004     |                            |  | $                       | 69,426,457 |                       | $ | (422                                     | ) | $                          |         |                                                  | $ |                                    
|                                 |                            | 

See accompanying notes.

F-7

---

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

|                                                                        | Year ended December 31 |  | Period from January 12,
1990 (Incorporation) to
December 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-8

---

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

|                                                                 | Year ended December 31 |  | Period from January 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 (decrease) in cash and cash equivalents             |                        |  |                                                           
|Cash and cash equivalents at beginning                           |                        | 
|of period                                                        |                        |  |                                                           
|                                                                 |                        | 
|Cash and cash equivalents at end of period                       |                        |  | $                                                         
|                                                                 |                        | 
|                                                                
|Supplemental disclosure of cash flow information                 |                        | 
|Interest Paid                                                    |                        |  | $                                                         
|                                                                 |                        | 
|Non-cash activity:                                               |                        | 
|Conversion of accounts payable into common stock                 |                        |  | $                                                         
|                                                                 |                        | 
|Common stock warrants issued with convertible notes              |                        |  | $                                                         
|                                                                 |                        | 
|Conversion of bridge loan into common stock                      |                        |  | $                                                         
|                                                                 |                        | 
|Payment of interest with common stock                            |                        |  | $                                                         
|                                                                 |                        | 

See accompanying notes.

F-9

---

AVAX Technologies, Inc. and Subsidiaries
(a development stage company)
Notes to Consolidated Financial Statements
December 31, 2004 and 2003

# 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(see Note 4). 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 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.

F-10

---

# 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, 2004, the Company incurred a net loss of approximately
$3,458,000 and a use of cash in operating activities of approximately $2,578,000. The Companys cash requirements were
satisfied through a private placement of common stock in May, 2004 (see Note 5), 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. In addition, in April 2005 the Company completed an additional private placement of common stock (see Note
12). However, the Company may have insufficient resources to maintain its existing plan of operations throughout 2005. These
conditions raise substantial doubt about the Companys ability to continue as a going concern. Additional debt or equity
financing may be required to fund ongoing operations in 2005. 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 2005. 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.

In 1999, the Joint Venture Companies were included in the consolidated
financial statements of the Company. Due to additional investment by AVT in the Joint Venture Companies in 2000, whereby AVT
acquired a 50% ownership interest, and AVTs substantial and active involvement in the operations of the Joint Venture
Companies late in 2000, the Company no longer exercised control over the Joint Venture Companies. During January 2002, the Joint
Venture Companies repurchased 90% of AVTs interest in each company in exchange for cash consideration of approximately
$1,860,000 AUD (approximately $970,000 US). This resulted in AVAX Holdings owning a 95% interest in the Joint Venture Companies as
of the date of the transaction, giving AVAX Holdings control of the companies and requiring that the results of AVAX Holdings and
its majority owned subsidiaries be consolidated into AVAXs consolidated results.

# 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. Royalty income related to product sales is recognized sixty days
after the product is received for administration to the patient in accordance with the product distribution agreement.

# 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

F-11

---

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. Charges in the valuation allowance have not been material to the financial statements. 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 cash equivalents and accounts receivable. The Company places its cash with its principal bank which is a high
credit quality financial institution. The cash deposits may, at times, be in excess of the FDIC insurance limit or not covered by
the FDIC. 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.

# Cash and cash equivalents

For purposes of reporting cash flows, the Company considers all highly liquid
financial instruments with maturities of three months or less when purchased to be cash equivalents.Cash equivalents as of
December 31, 2004 totaled $1,137,998 and consists of money market accounts.

# 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.

During the second quarter ended June 30, 2003 certain estimated accruals
recorded in prior periods were decreased by $770,082 as a result of the settlement of litigation and other claims and lengthy
periods of inactivity related to other disputed charges, for which accruals had been recorded. The total impact of the adjustment
to these accruals was a decrease in research and development expenses for the twelve-month period of $719,253 and a decrease in
administrative expenses of $50,829 for the twelve-month period ended December 31, 2003.

# Deferred revenue

The company records as deferred revenue amounts received in advance of the
provision of services in accordance with contracts or grants. At December 31, 2004 deferred revenue consisted of $102,464 received
from a grant for which the services had not been provided and an amount of $122,076 related to the OPI contract (see Note
3).

# Depreciation

Depreciation is computed using the straight-line method over the estimated
useful lives of the 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 new 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.

F-12

---

The following pro-forma table reflects the effects of the adoption of SFAS
No. 142 on net loss for the period from January 12, 1990 (Incorporation) to December 31, 2004 to exclude amortization of goodwill.
The years ending December 31, 2004 and 2003 have been accounted for under SFAS No. 142.

|                                            | Period from January 12, 1990(Incorporation) toDecember 31, 2004
|------------------------------------------- | ---------------------------------------------------------------
|                                            |                                                                
|Loss from continuing operations as reported |                                                                
|Goodwill amortization                       |                                                                
|                                            |                                                                
|Loss from continuing operations as adjusted |                                                                
|                                            |                                                                
|Net loss as reported                        |                                                                
|Goodwill amortization                       |                                                                
|                                            |                                                                
|Net loss as adjusted                        |                                                                
|                                            |                                                                

# 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.

# Reclassifications

Certain prior year and cumulative expenses for legal costs for patents have
been reclassified from research and development expenses to general and administrative expenses, to conform to current year
presentation.

# 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 or warrant 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      |                        
|                                                         |                        

F-13

---

# 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.

# Recently Issued Accounting Standards

In March 2004, the EITF reached a consensus on recognition and
measurement guidance previously discussed under EITF No. 03-01  The Meaning of Other-Than-Temporary Impairment and
its Application to Certain Investments,(EITF 03-01).The consensus clarifies the meaning of other
than temporary impairment and its application to investments classified as either available-for-sale or held to maturity under
SFAS 115 Accounting for Certain Investments in Debt and Equity Securities,and investments accounted for under
the cost method or equity method. The recognition and measurement guidance for which the consensus was reached is to be applied to
other than temporary impairment evaluations. In September 2004, the Financial Accounting Standards Board (FASB)
issued a final FASB staff position (FSP), FSP EITF No. 03-01-01,that delays the effective date for the
measurement and recognition guidance of EITF 03-01. Adoption of this standard will not have an effect on our carrying value of
investments or our results of operations.

In April 2004, the EITF issued Statement No. 03-06,
Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings per Share,(EITF 03-06). EITF 03-06 addresses a number of questions regarding the computation of earnings per share by
companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends
and earnings of the company when, and if, it declares dividends on its common stock. EITF 03-06 also provides further guidance in
applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to
apply the two-class method of computing earnings per share once it is determined that a security is participating, including how
to allocate undistributed earnings to such a security. EITF 03-06 is effective for fiscal periods beginning after March 31,
2004. The adoption of EITF 03-06 did not have a material effect on the Companys earnings per share calculation.

In December 2004, the FASB issued SFAS No. 123R,
Share-Based Payment  An Amendment of FASB Statements No. 123 and 95"(SFAS 123R).The new pronouncement replaces the existing requirements under SFAS 123 and APB 25. According to SFAS 123R, all forms of
share-based payments to employees, including employee stock options and employee stock purchase plans, would be treated the same
as any other form of compensation by recognizing the related cost in the statement of operations. This pronouncement eliminates
the ability to account for stock-based compensation transactions using APB 25 and generally would require that such transactions
be accounted for using a fair-value based method. For public companies, the FASB has determined that SFAS 123R is effective for
awards and stock options granted, modified or settled in cash in interim or annual periods beginning after December 15, 2005.
SFAS 123R provides transition alternatives for public companies to restate prior interim periods or prior years. The Company is in
the process of evaluating the impact of this standard on the 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

F-14

---

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 were $115,000 and $341,000 for the years ended December 31, 2004 and 2003, respectively. This
level of funding satisfies the Companys obligations under its research agreement. The Company has recorded in accounts
payable an amount of $385,000. The research agreement was terminated by TJU in March 2004.

In December 1996, the Company entered into an agreement with Rutgers for the
exclusive worldwide license to develop, manufacture and sell products embodying the Compounds (See Note 1). In consideration for
the license agreement, the Company paid cash of $15,000, has agreed to pay $15,000 in each subsequent year as a license
maintenance fee and has issued warrants to Rutgers to purchase 125,000 shares of common stock at a price of $8.24 per share based
on the achievement of certain development milestones. The first 75,000 warrants will expire in 2006, and the final 50,000 warrants
will expire in 2011. These warrants, once issued, shall provide for cashless exercise, piggyback registration rights and certain
antidilution rights.

In September 2004 the Company and Rutgers agreed to cancel the license
agreement in exchange for a payment of $25,000 to Rutgers which was in full satisfaction of all obligations to Rutgers under the
License and Research agreements. Previously issued warrants to Rutgers pursuant to the license agreement were cancelled.

In February 1997, the Company entered into an agreement with Texas A&M
for the exclusive worldwide license to develop, manufacture and sell products embodying the Texas A&M Compounds (See Note 1).
Under the terms of the license agreement, the Company had agreed to fund research in the amount of approximately $108,000 per year
for the first three years. The Company was also obligated to pay certain milestone payments as follows: $24,000 upon initiation of
certain toxicity evaluations; $12,000 upon completion of toxicity evaluations demonstrating certain acceptable toxicity levels;
$12,000 upon the submission of an IND to the FDA, or comparable international agency; $5,000 upon completion of the first Phase I
clinical investigation; and $15,000 upon receipt by the Company of NDA approval from the FDA to market products.

In addition, the Company was obligated to pay royalties on its worldwide net
revenue derived from the Compounds and a percentage of all revenues received from sublicensees of products derived from the
Compounds. Such royalty payments to be no less than $50,000 in the first year of commercial marketing, $100,000 in the second year
and $200,000 in the third year and all following years. The research agreement was extended until January 2004 with no additional
funding requirements. No further agreement or extensions have been made to the research agreement.

# 3.    Contractual Joint Manufacturing Alliance

In February 2004 the Company entered into a manufacturing alliance with
OPISODIA, SAS, a French pharmaceutical company (OPI) that will provide approximately $1,500,000 (US) funding per year from OPI 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. Proceeds received from OPI as a result of the
alliance for the year ended December 31, 2004 were $1,523,214. Expenses which are allocated to OPI pursuant to the agreement of
$1,401,138 were recorded as revenue to the extent the proceeds received. Amounts received in excess of expenses allocated to the
OPI contract for the period ended December 31, 2004 were $122,076 and were recorded in deferred revenue in the accompanying
consolidated balance sheet. The allocation of the expenses is based upon the allocation of the number of employees of the alliance
available to work on the manufacture of OPIs products. 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.

# 4.    Acquisition of GPH and Genopoietic

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.

F-15

---

Upon the closing of the transaction, the Company entered into a Rights
Agreements dated as of August 24, 2000 between the Company and the two primary shareholders of Holdings, pursuant to which each
individual has the right to acquire up to an additional 1,100,000 shares of the Companys common stock, upon the successful
and timely achievement of development and commercialization milestones by Genopoietic. These contingent shares have not been
included as part of the purchase price.

Simultaneously with the closing of the transaction the Company entered into a
Research Funding Agreement with Genopoietic whereby the Company agreed to provide funding to Genopoietic over the next five years
in the amount of $8,000,000. Provision of this funding is contingent upon the Companys financial health and may be withheld
at the discretion of Company management. In connection with the termination of various agreements between the Company and the
former owners of Genopoietic, the Company also terminated this Research Funding Agreement.

The acquisition of Holdings and Genopoietic was accounted for as a purchase.
The assets and liabilities of both companies have been recorded on the books of the Company at their fair market values. The
operating results of the acquired business have been included in the consolidated statements of operations and comprehensive loss
from August 24, 2000, the effective date of the acquisition.

Aggregate consideration for the acquisition of $8,226,397 was allocated,
based on estimated fair values on the acquisition date, as follows:

|Acquired in-process research and development          |  |  | $ | 4,420,824  |  
|----------------------------------------------------- |  |  | - | ---------- | -
|Acquired intellectual property and other intangibles: |  | 
|Acquired existing technology                          |  |  |   | 3,114,671  |  
|Patents                                               |  |  |   | 904,259    |  
|Assembled workforce                                   |  |  |   | 301,420    |  
|Assets acquired                                       |  |  |   | 895,423    |  
|Liabilities assumed                                   |  |  |   | (1,410,200 | )
|                                                      |  | 
|Total purchase price                                  |  |  | $ | 8,226,397  |  
|                                                      |  | 

The acquired existing technology and patents were amortized over their
estimated useful lives of ten years and the intangible asset related to assembled workforce is being amortized over its estimated
useful life of four years through 2001. Pursuant to the adoption of SFAS No. 142, the assembled workforce has been reclassified as
goodwill and is no longer amortized.

Acquired in-process research and development represented the present value of
the estimated after-tax cash flows expected to be generated by the purchased technology, which, at the acquisition date, had not
yet reached technological feasibility. The cash flow projections for revenues were based on estimates of growth rates and the
aggregate size of the respective market for each product; probability of technical success given the stage of development at the
time of acquisition; products sales cycles; and the estimated life of a products underlying technology. Estimated operating
expenses and income taxes were deducted from estimated revenue projections to arrive at estimated after-tax cash flows. The rates
utilized to discount projected cash flows were 25% to 55% depending upon the relative risk of each technology and the technologies
stage of development. In-process research and development acquired in this transaction is reflected as an expense in the
accompanying consolidated statements of operations and comprehensive loss.

All estimates and projections were based upon assumptions the Company
believed to be reasonable at the time of acquisition, but which are inherently uncertain and unpredictable. If these projects are
not successfully developed, the business, operating results and financial condition of the Company may be adversely affected. As
of the date of the acquisition, the Company concluded that once completed, the technologies under development can only be
economically used for their specific and intended purposes and that such in-process technology has no alternative future use after
taking into consideration the overall objectives of the project, progress toward the objectives and uniqueness of developments to
these objectives. If the projects fail, the economic contribution expected to be made by the acquired in-process research and
development will not materialize.

Due to various changes in 2001 in the Companys scope of operations and
the availability of capital to pursue product development and marketing initiatives, the Company undertook an evaluation of the
strategic value of each of its core technologies for purposes of determining future development plans. Based upon this review that
was completed in the fourth quarter of 2001, the Company determined they would not pursue further development and marketing of the
technologies and patents capitalized in the 2000 acquisition of Holdings and Genopoietic. As such, future cash flows related to
these acquired intangible assets were determined to be minimal and uncertain. Based on these factors, the net book value of the
acquired existing technology ($2,647,471) and patents ($768,620) capitalized in the acquisition, amounting to $3,416,091 in the
aggregate, was considered impaired and written off in 2001.

F-16

---

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.

# 5.    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), a related party, 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.

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, a related party, 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, 2004, 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

F-17

---

exercise price of $12.79 per share, for an aggregate warrant exercise price
of $2,890,817. The warrants are exercisable until 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 May 21, 2004, the Company closed the private placement of 10,166,667
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 were $3,050,000. Advisory fees and expenses of $156,677 were incurred resulting in net proceeds of $2,893,323.

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.

# Stock Options  1992 Stock Option Plan

In April 1992, the Board of Directors approved the 1992 Stock Option Plan
(the 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 Plan was amended in
June 1999, to increase the number of shares issuable to 1,500,000. The 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 Plans adoption date and generally expire 7
years from the date of grant.

The following summarizes activity in the Plan:

|                                            | Number of Options
|------------------------------------------- | -----------------
|                                            |                  
|Balance at December 31, 1994                |                  
|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                |                  
|                                            |                  

F-18

---

# 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.

|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 |  
|                             |  | 

# 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.

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

|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   |  
|                             |  | 

F-19

---

# 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.

|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 |  
|                                          |  | 

Authorized but unissued shares of common stock were reserved for issuance at
December 31, 2004 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                                              |  |  |  | 232,786    | 
|Warrants to purchase common stock                             |  |  |  | 1,478,034  | 
|Warrants to purchase Series B convertible preferred stock     |  |  |  | 654,437    | 
|2000 financing warrants                                       |  |  |  | 444,710    | 
|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  | 
|                                                              |  | 
|                                                              |  |  |  | 19,440,322 | 
|                                                              |  | 

F-20

---

A summary of applicable stock option and warrant activity and related
information for the years ended December 31, 2004 and 2003 is as follows:

|                                 | 2004 |  | 2003
|-------------------------------- | ---- |  | ----
|                                 |      | 
|
|                                 |      | 
|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 $0.14 to
$12.79. The option and warrant contracts expire at various times through January of 2014.

# 6.   Loans Payable

# 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.

# ANVAR Grant Payable

The Companys French subsidiary receives financial support from a French
governmental agency (ANVAR). The grants, 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, are accounted for as long term debt. If certain products are commercialized, the December 31, 2004
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 grant proceeds received is 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.

F-21

---

# 7.    Income Taxes

At December 31, 2004, the Company has net operating loss carryforwards of
approximately $67,089,000 for federal income tax purposes that expire in varying amounts between 2005 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 31,2004
|------------------------- | ----------------
|                          |                 
|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, 2003 was $25,045,000.

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)             |                        
|                                           |                        

# 8.    Commitments and Contingencies

# Leases

In December 1997, the Company entered into a 10-year lease agreement for
manufacturing facility space that commenced in February 1998 and contains an option to terminate after five years. 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 $379,530 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 $163,609 at December 31, 2004 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 new office space. The Company provided the landlord with an unconditional commercial letter of credit in the amount of $37,001
as security for the lease. This lease expired during November, 2004 and was not renewed.

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Rent expense under these agreements was approximately $425,000 and $392,000
for the years ended December 31, 2004 and 2003, 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, 2004 are $323,231 in 2005, $244,740 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 are $48,000 (see Note 1). The agreement was terminated in November, 2004 when the
Scientist joined the Company as a full time employee.

# Other

In January 2000, the Company entered into an Agreement for Services with a
contract research organization to assist the Company in the performance of its clinical trials. The agreement was to extend over
the life of the clinical trials, which has an expected term of in excess of seven years with payments made upon the achievement of
various milestones in the study. At signing, total expected payments under this agreement were approximately $11,138,000. This
agreement was terminated in June of 2001. Expenses incurred related to this agreement were $597,346 and $1,500,950 for the years
ended December 31, 2001 and 2000, respectively. The Company was in a dispute with the vendor as the amount and the method of
calculation of the liability due upon the termination of this agreement. The Company accrued during 2001 and 2002 approximately
$700,000 which represents what the Company has calculated as the balance due under the agreement plus additional costs estimated
to settle the matter while the vendor has claimed the Companys liability is approximately $1,500,000. During 2003 the
Company settled this matter for the amount of $250,000 and recorded a decrease in expenses in research and development expenses of
$434,000.

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, 2004:

|                                             | Cost |  | AccumulatedDepreciation |           | Net
|-------------------------------------------- | ---- |  | ----------------------- | --------- | ---
|                                             |      | 
|Office furniture and equipment               |      |  | $                       | 288,802   |    
|Manufacturing facility and related equipment |      |  |                         | 3,386,133 |    
|                                             |      | 
|Total                                        |      |  | $                       | 3,674,935 |    
|                                             |      | 

Depreciation expense was $395,118 and $414,305 for the years ended December
31, 2004 and 2003, respectively.

# 10.    Employee Benefit Plan

During 1996, the Company established a discretionary 401(k) plan for all
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 2004 or 2003.

# 11.    Related Party Transactions

During 2004 and 2003 the Company paid additional compensation of $126,000 and
$116,625, respectively, 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 Board of Directors.

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# 12.    Subsequent Events

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 and institutional investors. The Company received gross
proceeds of approximately $8,616,000, and incurred offering-related expenses of $579,374 payable to advisors related to the
fundraising. 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. All warrants issued in this private placement expire on April 5, 2010.

F-24

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