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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-KSB

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



For the fiscal year ended December 31, 2006



Commission file number 0-29222



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AVAX TECHNOLOGIES, INC.

(Name of small business issuer in its charter)



Delaware
        13-3575874(State or other jurisdiction
of incorporation or organization)
        (I.R.S. Employer Identification No.)




2000 Hamilton Street
Suite 204
Philadelphia, PA
        19130(Address of principal executive offices)
        (Zip Code)




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



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



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



Common Stock, par value $.004 per share

(Title of class)



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Check whether the issuer (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.   YesxNoo



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



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



State the issuers revenues for its most recent fiscal year:  $734,774 for the fiscal year ended December 31, 2006.



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 April 27, 2007, was $38,356,566.



As of April 27, 2007, 142,605,753 shares of the registrants common stock, par value $.004 per share, were outstanding or are issuable upon conversion of the outstanding shares of Series C Preferred Stock.



Documents incorporated by reference:  None.



Transitional Small
 Business Disclosure Format:Yeso  Nox







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AVAX Technologies, Inc.



Index to Form 10-KSB



PagePART IItem 1.
        Description of Business
        1Item 2.
        Description of Property
        23Item 3.
        Legal Proceedings
        23Item 4.
        Submission of Matters to a Vote of Security Holders
        23PART IIItem 5.
        Market for Common Equity and Related Stockholder Matters
        24Item 6.
        Managements Discussion and Analysis or Plan of Operation
        25Item 7.
        Financial Statements
        33Item 8.
        Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
        33Item 8A.
        Controls and Procedures
        33Item 8B.
        Other Information
        33PART IIIItem 9.
        Directors, Executive Officers, Promoters and Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act
        34Item 10.
        Executive Compensation
        36Item 11.
        Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
        41Item 12.
        Certain Relationships and Related Transactions
        43Item 13.
        Exhibits
        43Item 14.
        Principal Accountant Fees and Services
        44Signatures
        45Exhibit Index
        46Financial Statements
        48






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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS



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



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




        Our history of operating losses, our continuing cash requirements, our need to raise additional capital in the first half of 2008, and the uncertainty of our prospects of reaching a meaningful level of revenues.




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




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




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





        Difficulties arising from our competition with other companies conducting 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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Table of Contents

AVAX TECHNOLOGIES, INC.



PART I



ITEM 1.
        Description of Business




GENERAL



Overview



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




        M-Vax for the treatment of melanoma. The current clinical status of our M-Vax programs are as follows:


o
        Phase I/II  Multiple dose safety and efficacy study launched in June 2005.


o
        Phase III  Registration Study has been approved by the FDA to begin enrollment. The study is the subject of a Special Protocol Assessment granted in November 2006 by the U.S. Food and Drug Administration (FDA).



        L-Vax for the treatment of non-small cell lung cancer. The current clinical status of our L-Vax program is as follows:


o
        Phase I/II  Multiple dose safety and efficacy study launched in December 2005.



        O-Vax for the treatment of ovarian cancer. The current clinical status of our O-Vax program is as follows:


o
        Phase I/II  Multiple dose safety and efficacy study anticipated to launch in the second quarter of 2007.




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 Europe, and more recently in South America, we have made M-Vax available for patient treatment on a compassionate use basis. 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. The Company receives commercial reimbursement for these compassionate use treatments.



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 our 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.



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



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



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



Current Cancer Therapies



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



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



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



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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.



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 (or T-lymphocytes, which are white blood cells that are crucial in tumor rejection) 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.



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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:




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




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




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        Stage 3metastasis to regional draining lymph nodes; and





        Stage 4distant (bloodbourne) metastasis.




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



Clinical Results Achieved with the AC Vaccine



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



Patients who receive M-Vax may develop an immune response to their own melanoma cells as measured by a DTH test to autologous melanoma cells. DTH, which is manifest by the development of a hive at the site of injection of the test material, is known to be a measure of the activity of T-lymphocytes, which are white blood cells that are crucial in tumor rejection. In the stage 3 adjuvant studies, patients who developed positive DTH to their own melanoma cells that were not modified with the hapten had a 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.



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



As is noted below, we currently treat patients in Europe and South America on a compassionate use basis. Certain clinicians have reported to us that they have administered the M-Vax vaccine with interleukin-2 or interferon, which are two current chemotherapies available to melanoma patients. These European clinicians have reported to us what they believe were positive clinical responses to the combined treatment regimes. Additional published work in a peer-reviewed journal by another clinician who has treated patients with their DNP modified tumor cells, using techniques similar to M-Vax, followed by interleukin-2 reported response rates in patients of 35%. This compares with previously reported response rates of patients treated with M-Vax alone of 11%. Response rates are defined by clinical criteria known as RECIST (or Response Evaluation Criteria in Solid Tumors, as defined by the
National Cancer Institute). This means that the patients tumors have decreased by 50% or more from their base-line evaluation (partial response), or that their tumors have completely disappeared (complete response).



Current Commercial and Clinical Activities with the AC Vaccine



In November 2006, with FDA authorization, we began our Phase III Registration Study of M-Vax. In October 2006, the FDA issued to us a Special Protocol Assessment for the study, agreeing that the proposed protocol, as designed, will allow us to gain regulatory approval with the successful conduct of the study. In addition the Special Protocol Assessment indicates that we may use response rate (using RECIST criteria) as an acceptable surrogate endpoint as a basis to obtain accelerated approval. The Special Protocol Assessment is a written agreement between us and the FDA regarding the trial design, surrogate endpoints to be used as a basis for filing for accelerated approval of M-Vax and the statistical analysis plan necessary to support the full regulatory approval of M-Vax.



The Phase III study will enroll up to 387 patients with stage 4 melanoma, who will be assigned in a double-blind fashion at a 2:1 ratio to M-Vax or a placebo vaccine. The M-Vax arm will consist of an initial dose of M-Vax (autologous DNP-modified tumor cells) followed by cyclophosphamide (CY) and six weekly doses of M-Vax administered with Bacillus of Calmette and Guerin (BCG). Following vaccine administration, patients will receive a course of low dose IL-2 administered subcutaneously. Patients assigned to the control group will receive a treatment identical to the M-Vax group, except that a placebo vaccine will replace M-Vax. The primary endpoints of the study are best overall anti-tumor response rate and the percentage of patients surviving 2 years. Secondary endpoints of the study will include overall survival time, response duration, percentage complete and
partial responses, progression free survival and treatment related adverse events.



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



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The major endpoints of the current Phase I-II clinical study are the development of immunity to the patients own melanoma cells and a formal assessment of the safety of M-Vax. Patients are tested for DTH response to their own DNP-modified and unmodified melanoma cells prior to treatment and after the initial seven weekly vaccine injections. Those who remain well are eligible for a booster injection of M-Vax at the six-month point. Adverse events caused by the vaccine are measured and recorded. DTH results are obtained at 2 1⁄2-months after surgery, and the maximum duration of the study for an individual patient is 9 months. Currently, one arm of the study has been determined to be positive and, in agreement with the FDA, and we have expanded the enrollment in this arm to obtain
additional clinical data. A second arm of the study has been closed due to the arm failing to achieve a minimum level of DTH response.



Eight clinical sites in the U.S. are participating in the current Phase I-II clinical study. Currently, enrollment in this study has ceased, as all four arms of the study are fully enrolled. Preliminary results from the study have been used as the basis to establish the doses for our Phase III study. Data from this study was the subject of a presentation at the American Association for Cancer Research meeting in April 2007.



We anticipate that these eight clinical sites will also participate in the Phase III clinical study. We likely will limit the number of clinical sites for the launch of the Phase III study to a total of 10 sites in view of our current cash resources.



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



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



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



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



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



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



Non-Small-Cell Lung Cancer



Lung cancer is currently the leading cause of cancer death in the Western Hemisphere for both men and women, eclipsing the combined mortalities from breast, colon, and prostate cancers. According to the American Cancer Society, in 2007 it is estimated that there will be 213,380 new cases of lung cancer and 160,390 deaths from lung cancer. Historically, 80-85% of lung cancer cases have been non-small cell lung cancer (NSCLC). The low cure rate associated with NSCLC can be attributed to the absence of effective screening, the propensity for early spread, and the lack of effective treatment options for metastatic spread.



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



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



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



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



Final results of the L-Vax study are expected in calendar year 2007. At that time, we anticipate that L-Vax will be shown to be safe. We also believe that one or more of the vaccine dosages will regularly induce a positive DTH response to the patients own DNP-modified melanoma cells, which, in some cases, will be carried over their own unmodified NSCLC cells. The optimal dose determined by this trial will be used for our planned pivotal registration trials of L-Vax.



Compassionate Use of M-Vax



Beginning in 2003 and continuing through the present, we have made M-Vax available on a compassionate use basis in various European countries. We have recently made M-Vax available on a compassionate use basis in various South American 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, Greece, Venezuela and Belgium (even though there is no approval for marketing of M-Vax in those countries) when the patients prognosis is poor and there are no alternative treatments available. Through December 31, 2006, we had 84 patients presented for treatment on a compassionate use basis, of which 54 patients were treated. The patients who were not treated were untreatable with the AC Vaccine
due to inadequate cell count in the tumor sample received, the tumor sample received was not melanoma, sterility issues with the tumor sample, or the death of the patient prior to treatment being available. Patients presented for treatment on a compassionate use basis are normally stage 4 melanoma patients who are facing a prognosis of death.



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



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Other Potential Cancer Treatment Compounds



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



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



Contract Manufacturing



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



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



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



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



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License and Research Agreements



The Thomas Jefferson University License and Research Agreement



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



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



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



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



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



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



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



Research and Development Expense



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



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



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



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



In 2006, we incurred research and development expense of $4,244,268 compared to $3,534,948 in 2005, and $3,005,565 in 2004. Research and development expenses have been $47,651,768 for the period from inception through December 31, 2006. The majority of these costs relate to clinical research and development of the AC Vaccine technology. Our management estimates that greater than 90% of the periodic and cumulative research and development expenses incurred relate to our one major program, the AC Vaccine. At this time, due to the risks inherent in the clinical trial process, risks associated with the product and product characterization and risks associated with regulatory review and approval of clinical product candidates, we are unable to estimate with any certainty the costs we will incur in the continued development of our product candidates for commercialization.



Intellectual Property and Other Technology Protections



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





        Maintain and obtain patent and other proprietary protection for products, process and uses of our products;



        Defend patents;



        Preserve trade secrets; and



        Operate without infringing the patents and proprietary rights of third parties.




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



Patent No.
        Patent
        Date Issued
        Date Expires6,248,585
        Composition for preserving haptenized tumor cells for uses in vaccines
        June 19, 2001
        November 16, 20196,333,028
        Methods of using haptenized ovarian carcinoma tumor cells
        December 25, 2001
        July 24, 20176,403,104
        Hapten-conjugated mammalian cells and methods of making and using thereof
        June 11, 2002
        March 16, 20206,458,369
        Composition comprising tumor cells and extracts and method of using thereof
        October 1, 2002
        May 4, 2019




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



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



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



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



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Manufacturing and Marketing



AC Vaccines - General



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



Manufacturing the AC Vaccine



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



Other Foreign Markets for M-Vax



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



Sources and Availability of Raw Materials



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



Competition



Cancer Drugs - General



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



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



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



Government Regulation



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



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



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



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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 Board that has oversight responsibilities for the safe conduct of the clinical studies.



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



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



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



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



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



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



Employees



As of December 31, 2006, we had 24 employees, consisting of 20 full-time employees at our subsidiary in France and 4 full-time employees in the U.S.



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RISK FACTORS



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



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



We presently anticipate that our current cash resources, including the net proceeds of the private placement that we closed in April 2007, will be sufficient to fund operations through the first half of 2008, depending upon how aggressively we implement our development plans. We have only a limited ability to generate revenues from operations, and any revenues we generate are almost certain to be substantially less than our operating expenses. Accordingly, it will be necessary to raise additional equity capital in the first half of 2008. Because of our limited cash and financial resources, our ability to continue as a going concern beyond 2008 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 now conduct all AC Vaccine manufacturing out of our Lyon, France facility, which creates business uncertainties and logistical risks for the treatment of patients in our clinical trials.



We previously manufactured our AC Vaccine for U.S. patients enrolled in our clinical trials at our facility in Philadelphia. We now conduct all AC Vaccine manufacturing at our Lyon, France facility. In our current clinical trials in the U.S. for M-Vax and L-Vax, we encounter various business uncertainties and logistical risks associated with the transport of biologics (consisting of human tumor cells) to France and shipping a patients individualized AC Vaccine back to the U.S. Had we been using this business model in September 2001, the September 11 attacks in the U.S. and the resultant suspensions and interruptions of international travel and shipments would have significantly disrupted our treatment of patients. There are additional risks associated with the transport of biologics and vaccines, including the time constraints under which a tumor must be received and processed and the
specialized shipping requirements of the vaccine after it is manufactured. Although we have developed plans to manage these risks, we may encounter disruptions that we are unable to control, which could adversely affect the willingness of U.S. patients to enroll in our clinical studies or otherwise disrupt our clinical development of the AC Vaccine.



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



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



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



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



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



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



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



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



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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.



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.



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



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



Current and future legislation may make our products unprofitable.



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



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



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



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



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



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



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



We are heavily dependent upon the personal reputation and personal contacts of our Chief Medical Officer, and the loss of his services could materially adversely affect our plan of operation.



The inventor of the AC Vaccine technology is Dr. David Berd, who has served as our Chief Medical Officer since November 1, 2004. Prior to then, we obtained his services in directly through our research and license agreements with TJU, where Dr. Berd was a professor in the Medical School. The acceptance of the AC Vaccine technology within the oncology world is highly dependent upon the personal reputation and the personal contacts of Dr. Berd. Dr. Berd is also critical in guiding the technology through the regulatory process in both the U.S. and Europe. If we lost his services, the development of our AC Vaccine technology could be significantly slower and less successful that it otherwise would be with his services.



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



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



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



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



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



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



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



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



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



The holders of our Series C preferred stock have certain rights that are superior to the rights of holders of our common stock, including a liquidation preference over the common stock. In the case of (1) a liquidation, (2) if we cease to exist by virtue of a merger in which we are not the surviving corporation, or (3) if one person or entity acquires more than 50% of the voting power of the Company, holders of our Series C preferred stock will receive $100 per share in cash or securities (a total of $3,675,000 as of December 31, 2006), 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 $14,800, at the current exchange rate. The lease is for a 9-year period through 2009 and is extendable for another 9-year period.



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



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



ITEM 3.
        Legal Proceedings




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



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




No matters were submitted to a vote of security holders during the quarter ended December 31, 2006.



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



High
        
        LowFiscal year ended December 31, 2005First quarter
        
        $
        0.41
        
        $
        0.28Second quarter
        
        
        0.38
        
        
        0.24Third quarter
        
        
        0.48
        
        
        0.18Fourth quarter
        
        
        0.35
        
        
        0.24Fiscal year ended December 31, 2006First quarter
        
        $
        0.28
        
        $
        0.21Second quarter
        
        
        0.33
        
        
        0.13Third quarter
        
        
        0.20
        
        
        0.10Fourth quarter
        
        
        0.29
        
        
        0.10Fiscal year ended December 31, 2007First quarter
        
        $
        0.26
        
        $
        0.097
        5Second quarter (through April 25)
        
        
        0.40
        
        
        0.235




The last reported sale price for our common stock on the OTC Bulletin Board on April 25, 2007, was $0.28 per share. At April 27, 2007, there were 141,474,998shares 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, 2006, are convertible into 1,130,755 shares of common stock, excluding the effect of any fractional shares.



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



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




GENERAL



Since our inception, we have concentrated our efforts and resources on the development and commercialization of biotechnology and pharmaceutical products and technologies. We have been unprofitable since our founding and have incurred a cumulative net loss of $77,841,182 as of December 31, 2006. We incurred net losses of $5,355,500 and $3,703,768 for the 12 months ended December 31, 2006 and 2005, respectively. We expect to continue to incur operating losses, primarily due to the expenses associated with our product development efforts, the cost of maintaining our manufacturing facilities in Europe and the U.S. and activities related to the conduct of our clinical trials for the AC Vaccine in the U.S. and Europe.



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



PLAN OF OPERATION



Background



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



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



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



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



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



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



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



On April 13, 2007, we closed a private placement of 80,060,000 shares of common stock at a purchase price of $0.125 per share with 25 accredited or institutional investors. We received gross proceeds of $10,007,500. In connection with the private placement, we also issued to the investors warrants to purchase 80,060,000 shares of common stock at a warrant exercise price of $0.15 per share. In addition, we have agreed to pay $580,350 and to issue warrants to purchase 6,190,400 shares of common stock at a warrant exercise price of $0.15 per share to certain advisors relating to this private offering. We will receive net proceeds from this private offering, after offering related expenses, of approximately $9.0 million. We are using the net proceeds to continue to implement the plan of operation described below.



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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.



The key components of our current plan of operation are:




        Enroll patients in our Phase III Registration Study in the U.S. for M-Vax for the treatment of Stage 3 and 4 melanoma patients, which trial will proceed under the Special Protocol Assessment that we received from the U.S. FDA in October 2006.





        Complete our current Phase I-II clinical trial in the U.S. for M-Vax for the treatment of Stage 3 and 4 melanoma patients.





        Continue our Phase I-II clinical in the U.S. for L-Vax, for the treatment of patients with resectable non-small cell lung cancer.





        Initiate a Phase I-II clinical trial in the U.S. for O-Vax, for the treatment of patients with ovarian cancer.





        Continue the treatment of melanoma patients in Europe and South America on a compassionate use basis with M-Vax.





        Continue our discussions with the European Medical Evaluations Agency, the FDA equivalent regulatory body for the European Union, regarding the regulatory requirements for the AC Vaccine and its continued development in Europe.




The primary focus of our plan of operation for the balance of 2007 and into 2008 will be the development of M-Vax and the clinical trials in the U.S. relating to that product.In November 2006, with FDA authorization, we began our Phase III Registration Study of M-Vax. In October 2006, the FDA issued to us a Special Protocol Assessment for the study, agreeing that the proposed protocol, as designed, will allow us to gain regulatory approval with the successful conduct of the study. In addition the Special Protocol Assessment indicates that we may use response rate (using RECIST criteria) as an acceptable surrogate endpoint as a basis to obtain accelerated approval. The Special Protocol Assessment is a written agreement between us and the FDA regarding the trial design, surrogate endpoints to be used as a basis for filing for
accelerated approval of M-Vax and the statistical analysis plan necessary to support the full regulatory approval of M-Vax.



The Phase III study will enroll up to 387 patients with stage 4 melanoma, who will be assigned in a double-blind fashion at a 2:1 ratio to M-Vax or a placebo vaccine. The primary endpoints of the study are best overall anti-tumor response rate and the percentage of patients surviving 2 years. Secondary endpoints of the study will include overall survival time, response duration, percentage complete and partial responses, progression free survival and treatment related adverse events.



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In June 2005, we launched a Phase I-II clinical study in the U.S. for the treatment of patients with stage 3 or 4 melanoma. Patients are treated with M-Vax after being assigned to one of four dosage arms, one of which is a zero dose. The major endpoints of this current Phase I-II clinical study are the development of immunity to the patients own melanoma cells and a formal assessment of the safety of M-Vax. Patients are tested for DTH response to their own DNP-modified and unmodified melanoma cells prior to treatment and after the initial seven weekly vaccine injections. DTH results are obtained at 2 1⁄2-months, and the maximum duration of the study for an individual patient is 9 months. Currently, one arm of the study has been determined to be positive and, in agreement with the
FDA, and we have expanded the enrollment in this arm to obtain additional clinical data. A second arm of the study has been closed due to the arm failing to achieve a minimum level of DTH response.



Eight clinical sites in the U.S. are participating in the current Phase I-II clinical study. Currently, enrollment in the study has ceased, as all four arms of the study are fully enrolled. Preliminary results from the study have been used as the basis to establish the doses for our Phase III study. We anticipate that these clinical sites will also participate in the Phase III clinical study. We likely will limit the number of clinical sites for the Phase III study to a total of 10 sites in view of our current cash resources.



Our current cash resources will permit us to enroll patients in the Phase III Registration Study throughout 2007, to fund the costs associated with the anticipated Phase III clinical sites and to complete the evaluation of data from the Phase I-II study as they become available. If we were able to raise additional capital in 2007, we might accelerate the Phase III study by adding more clinical sites.



We also believe that the funds from our recent private offering will permit us to continue the Phase I-II clinical study for L-Vax and to commence a Phase I-II clinical study for O-Vax in the second quarter of 2007.



Even if the Phase I-II clinical trials for L-Vax or O-Vax are completed successfully we do not have the current cash resources to commence a Phase III pivotal trial for either of those products. If we are prepared to commence a Phase III trial for either product, we may seek to partner with a larger pharmaceutical company in that Phase III trial and future commercialization of that product.



We continually evaluate our plan of operation discussed above to determine the manner in which we can most effectively utilize our limited cash resources. The timing of completion of any aspect of our plan of operations is highly dependant upon the availability of cash to implement that aspect of the plan and other factors beyond our control. We believe we have the current cash resources to pursue this plan of operation through the end of 2007 and through the first half of 2008. The full implementation of this plan of operation beyond that time is dependent upon us obtaining additional fundraising in the first half of 2008. We believe we have the facilities, the facility managers, the technical and 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 our current compassionate use and ongoing and planned clinical activities, we anticipate that excess capacity will continue to exist at our Lyon, France facility for the foreseeable future.



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

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



Revenue recognized in 2006 was $734,774 compared to revenue in 2005 of $1,623,701. The decrease in revenues was due to a lower amount of revenue being recognized in the current year related to contract manufacturing than the prior year. This decrease was necessary to focus our efforts on the launch of the two clinical studies in the U.S. for M-Vax and L-Vax, as well as preparing for the filing of a Phase III protocol with the FDA.



During 2006, our research and development expenses increased 20.1% from $3,534,948 to $4,244,268, largely as a result of the launch of the M-Vax and L-Vax clinical studies that resulted in increase transportation costs related to shipping tumors and vaccines plus costs incurred at the clinical sites for patient treatment and evaluations. Expenses for the periods are broken out by region as follows:



Year Ended December 31,2005
        
        2006United States
        
        $
        1,327,911
        
        $
        2,225,226France
        
        
        2,207,037
        
        
        2,019,042$
        3,534,948
        
        $
        4,244,268




In the U.S., the expense increase related to costs incurred in executing the M-Vax and L-Vax studies that include shipping costs for tumors and vaccines plus the costs at the clinical sites for the patient treatments and evaluations. The decrease in costs in France is the result of higher costs incurred in 2005 for facility validation in preparation of the clinical studies that did not recur in the current year. In addition there were personnel from the prior year that were replaced in the current year at lower costs.



Selling, general and administrative expenses increased approximately 2.85%, from $1,933,911 for the year ended 2005 to $1,989,188 for the year ended 2006. Expenses for the periods are broken out by region as follows:



Year Ended December 31,2005
        
        2006United States
        
        $
        1,357,338
        
        $
        1,461,491France
        
        
        576,573
        
        
        527,697$
        1,933,911
        
        $
        1,989,188




In the U.S., the increase in costs is primarily the result of recording the reversal of an accrual of legal fees in 2005, which was partially offset by decreases in salary expenses plus patents costs. In France the decreased costs related to no longer incurring marketing costs associated with the OPI contract that were incurred for the first half of 2005. These cost decreases were partially offset by increases in administrative salaries incurred in the current year with a higher allocation of the general managers salary to administration.



Interest income increased from $141,390 earned in 2005 to $143,182 in 2006. The increase is the function of higher interest rates with the overall rise in short-term interest rates, which was partially offset by a lower average invested balance during the year.



We anticipate our spending over the next 12 months for research and development expenses will increase as compared with 2006, as we continue to implement and accelerate the plan of operation described above.



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Liquidity and Capital Resources



We presently anticipate that our current resources, including the net proceeds of the private placement that we closed in April 2007, should be sufficient to fund operations through all of 2007 and the first half of 2008, depending upon how aggressively we implement our development plans discussed above. Our current operating plan includes anticipated expenses relating to (1) initiating our Phase III Registration Study for M-Vax in the U.S., (2) continuing our phase I/II clinical trials for M-Vax in the U.S., (3) continuing our clinical trials for non-small cell lung cancer in the U.S., (4) continuing maintenance costs associated with our Philadelphia facility for future utilization in production or contract manufacturing, and (5) continuing costs associated with maintaining a cGMP-compliant facility in Lyon, France. We will need to raise additional capital or initiate additional contract
manufacturing relationships on terms favorable to us in the first half of 2008 to continue our operations throughout all of calendar year 2008. If we are unable to raise additional capital, secure additional contract manufacturing relationships or enter into strategic alliances by the second quarter of 2008, we will have to slow our development initiatives.



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



Because our working capital requirements depend upon numerous factors, including progress of our research and development programs, pre-clinical and clinical testing, timing and cost of obtaining regulatory approvals, changes in levels of resources that we devote to the development of manufacturing and marketing capabilities, competitive and technological advances, status of competitors, and our ability to establish collaborative arrangements with other organizations, there can be no assurance that our current cash resources will be sufficient to fund our operations beyond the first half of 2008. Because we have no committed external sources of capital, and expect no significant product revenues for the foreseeable future, we will require additional financing to fund future operations or will need to enter into contract manufacturing relationships on terms favorable to us. There can be no
assurance, however, that we will be able to obtain the additional funds or attract contract manufacturing relationships on acceptable terms, if at all. If additional funds are not raised in the first half of 2008, we will have to curtail our initiatives beyond that point.



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 inNote 1to 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.



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



Our goodwill had a carrying value of $188,387 at December 31, 2006, and resulted from our acquisition of Genopoeitic in August 2000. We performed our annual goodwill impairment test in accordance with SFAS No. 142 and determined that the carrying amount of goodwill was recoverable. We considered internal risk-adjusted cash flow projections, which utilize several key assumptions, including estimated timing of cash inflows into Genopoeitic.



Impairment of Long-Lived Assets.Long-lived assets to be held and used, including property and equipment and intangible assets subject to amortization, are reviewed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the market price of an asset or asset group, a significant adverse change in the extent or manner in which an asset or asset group is being used, a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset or asset group, or the presence of other indicators that would indicate that the carrying amount of an asset or asset group is not recoverable. Determination of recoverability is based on the
undiscounted future cash flows resulting from the use of the asset or asset group and its eventual disposition. The determination of the undiscounted cash flows requires significant estimates and assumptions including determining the timing and expected costs to complete in-process projects, projecting regulatory approvals and estimating future cash inflows from product sales and other sources. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the asset or asset group, the carrying amount of the asset is written down to its estimated fair value. Following our long-lived asset impairment review for the fiscal year ended December 31, 2006, we have determined that no impairment of long-lived assets existed.



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



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Impact of Recently Issued Accounting Standards



In February 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits all entities to choose to elect, at specified election dates, to measure eligible financial instruments at fair value. An entity must report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date and recognize upfront costs and fees related to those items in earnings as incurred and not deferred. SFAS No. 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS No. 157, Fair Value Measurements. We are currently evaluating the impact, if any, the adoption of SFAS No. 159 may have on our financial statements.



In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 provides interpretive guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 is effective for fiscal years ending after November 15, 2006. We have reviewed the guidance of SAB 108 and has determined that the adoption of SAB No. 108 did not have any impact on our financial statements.



In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the U.S. and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, this pronouncement does not require any new fair value measurements. We are required to adopt SFAS No. 157 beginning January 1, 2008. We are currently evaluating the impact, if any, the adoption of SFAS No. 157 may have on our financial statements.



In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS No. 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. In addition, with limited exceptions, this pronouncement requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position. SFAS No. 158 is effective for fiscal years ending after December 15, 2006. As we do not have any defined benefit pension plans or other postretirement plans, the
adoption of this standard did not have any impact on our financial statements.



In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes. FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in an enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. Tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 will be effective for fiscal years beginning after December 15, 2006, and the provisions of FIN 48 will be applied to all tax positions upon initial adoption of the Interpretation. The cumulative effect of applying the provisions of this Interpretation will be reported as an adjustment to the opening balance of retained earnings for that fiscal year. As we have
provided a full valuation allowance to reserve for our net deferred tax assets at December 31, 2006, the adoption of this standard will not have a material impact on our results of operations, financial condition, or cash flows.



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Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123R, Share-Based Payment, using the modified prospective transition method and therefore did not restate results for prior periods. Prior to January 1, 2006 we accounted for share-based compensation arrangements in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees and complied with the disclosure provisions of SFAS 123, Accounting for Stock-Based Compensation. Under the modified prospective method, new awards are valued and accounted for prospectively upon adoption. Outstanding prior awards that are unvested as of January 1, 2006 are recognized as compensation cost over the remaining requisite service periods, as prior periods may not be restated. The adoption of SFAS 123R increased our expenses and reported net loss for 2006 by $148,548.



ITEM 7.
        Financial Statements




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



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



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




None.




ITEM 8A.
        Controls and Procedures




Our principal executive officer and principal accounting officer, based on his evaluation within 90 days prior to the date of this report of our disclosure controls and procedures (as defined in Exchange Act Rule 13a15(e)), has concluded that, as of the end of the period covered by our 10-KSB for the fiscal year ended December 31, 2006, our disclosure controls and procedures are designed to ensure and are effective at ensuring that information required to be disclosed by us in our periodic filings with the SEC is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms. Our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit to the SEC is accumulated and communicated to our management,
including our principal executive and principal accounting officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. There were no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of their evaluation.



There have been no changes in our internal controls over financial reporting during the fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



ITEM 8B.
        Other Information




None.




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PART III



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




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



Name
        Age
        Position with the CompanyJohn K. A. Prendergast, Ph.D.
        52
        Chairman of the Board and DirectorRichard P. Rainey
        40
        President and Corporate SecretaryDavid Berd, MD
        61
        Chief Medical OfficerEdson D. de Castro
        68
        DirectorAndrew W. Dahl, Sc.D.
        63
        DirectorCarl Spana, Ph.D.
        44
        Director




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



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



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



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



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



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



Audit Committee, Financial Expert and Code of Ethics



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



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



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Section 16(a) Beneficial Ownership Reporting Compliance



Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, executive officers and holders of more than 10% of our common stock (collectively, Reporting Persons) to file with the SEC initial reports of ownership and reports of changes in ownership of common stock. The Reporting Persons are required by regulations of the SEC to furnish us with copies of all such filings. Specific due dates for these reports have been established and we are required to identify those persons who failed to timely file these reports. Based on our review of the copies of filings received by it with respect to the fiscal year ended December 31, 2006, and representations from certain Reporting Persons, we believe that all Reporting Persons complied with the Section 16(a) filing requirements in the year ended December 31, 2006.



ITEM 10.
        Executive Compensation




Executive Compensation



The following Summary Compensation Table sets forth the compensation earned by the persons serving as our chairman of the board, chief executive officer and the other named key employees (who were the only other employees who made in excess of $100,000 in 2006) (the Named Officers) for the last three fiscal years. We have no long-term incentive plans.



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



Andrés Crespo did not serve as an officer of the Company in 2005 or 2006. Dr. Crespo is included in the following tables because he was a key employee of the Company. In January 2007, Dr. Crespo unexpectedly passed away.



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Summary Compensation Table

Annual Compensation





Name and PrincipalPosition
        
        Year
        
        Salary($)
        
        Bonus($)
        
        OptionAwards($)
        
        All OtherCompensation($)
        
        TotalCompensation($)John K.A. Prendergast, Ph.D. 
        
        2006
        
        $
        
        
        $
        
        
        $
        5,400
        
        $
        126,000
        
        $
        131,400Chairman of the Board (1)
        
        2005
        
        
        
        
        
        50,000
        
        
        55,000
        
        
        126,000
        
        
        181,000Richard P. Rainey, C.P.A.  President
        
        2006
        
        
        275,000
        
        
        
        
        
        
        
        
        
        
        
        275,000and Corporate Secretary (2)
        
        2005
        
        
        238,750
        
        
        75,000
        
        
        100,000
        
        
        
        
        
        413,750Andrés Crespo 
        
        2006
        
        
        182,706
        
        
        
        
        
        
        
        
        
        
        
        182,706General Manager, Genopoeitic (3)
        
        2005
        
        
        186,697
        
        
        50,000
        
        
        40,000
        
        
        
        
        
        276,697Dr.David Berd 
        
        2006
        
        
        220,000
        
        
        
        
        
        
        
        
        
        
        
        220,000Chief Medical Officer (4)
        
        2005
        
        
        203,333
        
        
        30,000
        
        
        50,000
        
        
        
        
        
        283,333




_______________

(1)
        The other compensation shown for Dr. Prendergast consisted of $126,000 of additional compensation paid for the additional services rendered by Dr. Prendergast as a non-employee director of the Company for each of the years 2005 and 2006.


(2)
        Mr. Raineys compensation is pursuant to his employment contract dated April 1, 2004, and his agreement provides for a minimum annual base salary of $200,000.


(3)
        Compensation is paid in Euros, and is shown in US$ at the rate of 1.2447 and 1.3196 US$ to one Euro for 2005 and 2006, respectively.


(4)
        Dr. Berds employment commenced November 1, 2004, and his agreement provides for a minimum annual base salary of $180,000.




Employment Agreements



Richard P. Rainey.On February 14, 2005, the Company executed an employment agreement (the Employment Agreement) with Richard P. Rainey, which supersedes all prior employment agreements and letters with Mr. Rainey. The Employment Agreement was 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 expired March 31, 2007. Mr. Rainey and the Company are negotiating an extension of Mr. Raineys employment while Mr. Rainey continues to serve as President of the Company under the same terms as the Employment Agreement.



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.



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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, (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, we entered into an employment letter (the 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 we license from Thomas Jefferson University (TJU). Dr. Berd has worked closely with us as a tenured professor at TJU and a consultant to us during the 10 year period in which we have had the AC Vaccine in development. Dr. Berds initial employment term with was for six months, running through April 30, 2005. This has been repeatedly extended, most recently to October 31, 2007.



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 we employ Dr. Berd. Pursuant to the 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.





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Outstanding Equity Awards at Fiscal Year-End





Option AwardsName and PrincipalPosition
        
        Number ofSecuritiesUnderlyingUnexercisedOptions(#)Exercisable
        
        Number ofSecuritiesUnderlyingUnexercisedOptions(#)Unexercisable
        
        OptionExercisePrice($)
        
        OptionExpirationDate1Richard P. Rainey, C.P.A. 
        
        25,000
        
        
        
        $
        2.938
        
        12/26/07President and Corporate Secretary
        
        50,000
        
        
        
        
        0.906
        
        3/26/08130,000
        
        
        
        
        0.890
        
        11/02/08140,625
        
        109,375
        
        
        0.125
        
        10/01/11187,500
        
        312,500
        
        
        0.300
        
        6/07/12Dr. David Berd 
        
        100,000
        
        100,000
        
        
        0.150
        
        11/01/11Chief Medical Officer
        
        93,750
        
        156,250
        
        
        0.300
        
        6/07/12


______________

1
        All options granted to employees expire seven years from the date of grant and vest quarterly over a four-year period of continuing service as an employee.




During 2006, 120,000 options were granted to our directors. We have not granted any stock appreciation rights. All options granted to directors vest quarterly over a one-year period of continuing service as a director.



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Director Compensation





Name and Principal Position
        
        Fees earnedor paid incash($)
        
        OptionAwards($)
        
        All OtherCompensation($)
        
        Total Compensation($)John K.A. Prendergast, Ph.D.  Chairman of the Board (1)
        
        $
        
        
        $
        5,400
        
        $
        126,000
        
        $
        131,400Carl Spana, Ph.D.  Board of Directors (2)
        
        
        16,400
        
        
        5,400
        
        
        
        
        
        21,800Andy Dahl, Sc. D.  Board of Directors (3)
        
        
        18,000
        
        
        5,400
        
        
        
        
        
        23,400Edson de Castro  Board of Directors (4)
        
        
        21,700
        
        
        5,400
        
        
        
        
        
        27,100


______________

(1)
        As of December 31, 2006, Dr. Prendergast had 593,101 option awards outstanding.


(2)
        As of December 31, 2006, Dr. Spana had 160,000 option awards outstanding.


(3)
        As of December 31, 2006, Dr. Dahl had 110,000 option awards outstanding.


(4)
        As of December 31, 2006, Mr. de Castro had 110,000 option awards outstanding.




In 2006, we had 3 in-person Board meetings, 1 in-person committee meeting, and 5 telephonic Board or committee meetings.



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



Non-Employee Director Compensation

Effective January 1, 2006



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




See Executive Compensation above for a description of certain compensation paid to Dr. Prendergast in 2005 and 2006 and stock options awarded to Dr. Prendergast for additional services provided by Dr. Prendergast to us, at the request of our Board of Directors.



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




The following table sets forth, as of April 27, 2007, certain information regarding the beneficial ownership of the common stock (i) by each person known by us to be the beneficial owner of more than five percent of the outstanding shares of the common stock, (ii) by each of our Named Officers (as defined herein) and directors and (iii) by all our executive officers and directors as a group.



Name and Address of Beneficial Owner
        
        Title of Stock
        
        Amount andNature ofBeneficialOwnership
        
        Percentage of Class (1)Named Executive Officers and Directors (2)Richard P. Rainey, C.P.A. (3)
        
        Common Stock
        
        4,266,104
        
        2
        .95%Edson D. de Castro (4)
        
        Common Stock
        
        77,500
        
        
        *Andrew W. Dahl, Sc.D. (5)
        
        Common Stock
        
        397,500
        
        
        *John K.A. Prendergast, Ph.D. (6)
        
        Common Stock
        
        1,969,048
        
        1
        .37%Carl Spana, Ph.D. (7)
        
        Common Stock
        
        728,667
        
        
        *David Berd, MD
        
        Common Stock
        
        422,871
        
        
        *All executive officers and directors as a group (5 persons) (8)
        
        Common Stock
        
        7,438,819
        
        5
        .10%5% ShareholdersCarmignac Innovation(9)
        
        Common Stock
        
        16,000,000
        
        10
        .62%BioCentive Limited(10)
        
        Common Stock
        
        28,400,000
        
        18
        .11%Aqua RIMCO LTD (11)
        
        Common Stock
        
        9,558,937
        
        6
        .60%Firebird Global Master Fund, LTD (12)
        
        Common Stock
        
        51,466,667
        
        30
        .74%Yoshinoro SHIRONO (13)
        
        Common Stock
        
        9,558,823
        
        6
        .60%JFE Hottinger (14)
        
        Common Stock
        
        31,502,199
        
        20
        .14%Park Place Columbia (15)
        
        Common Stock
        
        13,405,616
        
        9
        .02%


_______________

*Represents less than 1%.



(1)
        The percentage of common stock beneficially owned is determined by adding the number of shares of common stock outstanding 141,474,998 as of April 25, 2007 to the number of shares issuable upon conversion of the Series C Preferred Stock 1,130,755 as of April 25, 2007 plus, for each beneficial owner or group, any shares of common stock that owner or group has the right to acquire within 60 days of April 25, 2007, pursuant to options or warrants.


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


(3)
        Includes 580,000 shares of common stock that Mr. Rainey may acquire within 60 days upon exercise of options held by Mr. Rainey, 400,000 warrants that may be acquired by Mr. Rainey and also includes 1,293,504 shares and 784,600 warrants owned by a partnership in which Mr. Rainey holds a 50% interest.


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


(5)
        Represents shares of common stock that Dr. Dahl may acquire within 60 days upon the exercise of options held by Dr. Dahl plus warrants to purchase 160,000 shares.


(6)
        Includes 315,000 shares of common stock that Dr. Prendergast may acquire within 60 days upon exercise of options held by Dr. Prendergast and also includes 261,748 shares and 592,300 warrants owned by Dr. Prendergast.


(7)
        Includes 183,750 shares of common stock that Dr. Spana may acquire within 60 days upon the exercise of options held by Dr. Spana and 160,000 warrants to acquire common stock held by Dr. Spana.


(8)
        Consists only of directors and Richard P. Rainey, the sole executive officer of the Company as of the date of this report.


(9)
        Includes 8,000,000 warrants to purchase common stock held by the Investor.


(10)
        Includes 14,200,000 warrants to purchase common stock held by the Investor.


(11)
        Includes 2,205,908 warrants to purchase common stock held by the Investor.




41

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Table of Contents

(12)
        Includes 24,800,000 warrants to purchase common stock held by the Investor.


(13)
        Includes 2,205,882 warrants to purchase common stock held by the Investor.


(14)
        Includes 13,796,690 warrant to purchase common stock held by the Investor.


(15)
        Includes 6,067,600 warrants to purchase common stock held by the Investor.




Equity Compensation Plan Information



The following table sets forth as of December 31, 2006, (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)Plan Category
        
        Number of securities tobe issued upon exercise
of outstanding options,warrants and rights
        
        Weighted-averageexercise price of
outstanding options,warrants and rights
        
        Number of securitiesremaining available for
future issuance underequity compensationplans (excludingsecurities reflected incolumn (a))Equity compensation plans approved by security holders
        
        2,683,250
        
        
        $0.69
        
        1,706,750Equity compensation plans not approved by security holders
        
        4,587,410
        
        
        0.33
        
        Total
        
        7,270,660
        
        
        
        
        1,706,750




The warrants and options issued without stockholder approval include (1) warrants to purchase 288,450 shares of common stock at an exercise price of $0.143 per share issued to a broker in connection with the Companys 2003 bridge financing, which expire on December 1, 2008; (2) warrants to purchase 566,667 shares of common stock at an exercise price of $0.33 per share issued to a broker in connection with the Companys 2004 private placement of securities, which expire on May 10, 2009; (3) warrants to purchase 2,287,293 shares of common stock at an exercise price of $0.33 per share issued to two brokers in connection with the Companys 2005 private placement of securities, which expire on May 10, 2009; (4) warrants to purchase 300,000 shares of common stock at an exercise price of $0.14 per share issued to two individuals for certain financial advisory services, which expire
on December 16, 2009; and (5)  warrants to purchase 270,000 shares of common stock at an exercise price of $0.35 per share issued to two individuals for advisory services, which expire on October 31, 2012.



The warrants and options issued without stockholder approval also include 100,000 options to acquire common stock issued to current and former directors outside of the Companys stock option plans, which options were granted in conjunction with services (including extraordinary levels of services) provided by those directors to the Company. Those options expire on November 2, 2008, and have option exercise prices of $0.89 per share.



The warrants and options issued without stockholder approval also includes 500,000 options issued to Richard Rainey, our President, and 275,000 options issued to John Prendergast, our Chairman, which both have an exercise price of $0.30 and expire on June 7, 2012. See Note 4 of the Notes to Financial Statements for information concerning the material terms of equity compensation plans pursuant to which the foregoing options and warrants have been issued. These options were subsequently approved by shareholders at the 2006 annual meeting of stockholders.



42

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Equity compensation plans approved by stockholders consist of the 1992 Stock Option Plan, the 2001 Stock Option Plan and the 2000 Director Stock Option Plan.



ITEM 12.
        Certain Relationships and Related Transactions




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



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



On April 13, 2007, we completed a private financing in the aggregate principal amount of $10,007,500 at a price of $0.125 per share with various institution and individual investors in reliance upon the exemption from registration in Section 4(2) of the Securities Act of 1933. We issued 10,080,000 shares of our common stock and associated warrants to purchase an additional 10,080,000 shares of common stock at an exercise price of $0.15 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 of common stock and related warrants to purchase common stock in the April 2007 offering. John K.A. Prendergast, Carl Spana and Andrew Dahl, directors of the Company, and Mr. Rainey also purchased $50,000, $20,000, $20,000 and $50,000, respectively, of common stock and associated warrants to purchase common stock, in this offering. The Board of Directors approved the participation of Dr. Prendergast, Mr. Spana, Mr. Dahl and Mr. Rainey in the private placement.



ITEM 13.
        Exhibits




(a)
        Exhibits




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



43

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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, 2005 and 2006, by the Companys principal accounting firms:



2005
        
        2006Audit fees (1), (2)
        
        $
        58,042
        
        $
        56,000Audit-related fees
        
        
        
        
        
        Tax fees
        
        
        
        
        
        All other fees
        
        
        
        
        
        Total
        
        $
        58,042
        
        $
        56,000




____________


(1)
        Includes services rendered for the audit of the Companys annual financial statements, review of financial statements included in quarterly reports on Form 10-QSB and review of registration statements filed by the Company.


(2)
        For the year 2005, the Company paid $53,092 to Briggs, Bunting & Dougherty, LLP and $4,950 to Ernst & Young LLP, in audit fees, as the Companys principal accounting firms.




The Audit Committee has adopted a policy (the Pre-Approval Policy) under which audit and non-audit services to be rendered by our independent public accountants are pre-approved by the Audit Committee. Pursuant to the Pre-Approval Policy, the Audit Committee pre-approves audit and non-audit services to be provided by the independent auditors, at specified dollar levels, which dollar levels are reviewed by the Audit Committee periodically, and no less often than annually. Additionally, the Audit Committee may provide explicit prior approval of specific engagements not within the scope of a previous pre-approval resolution. The services performed by our independent auditor in 2006 were all audit-related and pre-approved by the Audit Committee. The Pre-Approval Policy also specifies certain services that may not be provided by our independent auditors in any circumstance, which
is consistent with SEC rules and regulations. The Pre-Approval Policy also includes an exception from the pre-approval requirement for certain de minimus non-audit engagements that are not otherwise prohibited by the Policy. Engagements in reliance upon that de minimus exception must be promptly brought to the attention of Audit Committee and approved by the Audit Committee or one or more designated representatives. Briggs, Bunting & Dougherty, LLP provided no services in 2005 in reliance upon this de minimus exception.



44

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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 9, 2007
        
        By:
        /s/Richard P. RaineyRichard 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 9, 2007President (Principal Executive, Financial and Accounting Officer)/s/  Edson D. de Castro
        
        Edson D. de Castro
        
        May 9, 2007Director/s/  John K.A. Prendergast, Ph.D.
        
        John K. A. Prendergast, Ph.D.
        
        May 9, 2007Director/s/  Carl Spana, Ph.D.
        
        Carl Spana, Ph.D.
        
        May 9, 2007Director/s/  Andrew W. Dahl, Sc.D.
        
        Andrew W. Dahl, Sc.D.
        
        May 9, 2007Director






45

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Table of Contents

EXHIBIT INDEX



Exhibit No.
        Description3.1
        Certificate of Incorporation, as amended (excluding the Certificate of Designation for the Series C Convertible Preferred Stock).13.2
        Certificate of Amendment of Certificate of Incorporation Dated May 10, 2004.23.3
        Certificate of Amendment of Certificate of Incorporation Dated February 20, 2007.*3.4
        By-Laws.34.1
        Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.4.2
        Specimen of common stock certificate.34.3
        Form of Placement Warrant Relating to Offering of Series B Placement Warrants.44.4
        Certificate of Designation of Series C Convertible Preferred Stock.54.5
        Form of Class A and Class B common stock Purchase Warrant issued in connection with the Series C Convertible Preferred Stock.510.1
        Clinical Study and Research Agreement dated November 20, 1995, by and between the Company and Thomas Jefferson University.610.2
        License Agreement dated November 20, 1995, by and between the Company and Thomas Jefferson University.610.3
        Extension to the Clinical Study and Research Agreement dated November 20, 1995, by and between the Company and Thomas Jefferson University.510.4
        2001 Stock Option Plan.110.5
        2000 Directors Stock Option Plan.710.6
        Form of Stock Option Agreement  2001 Plan.1310.7
        Form of Stock Option Agreement  Non-Plan Options.1310.8
        Note Purchase Agreement dated as of November 17, 2003.810.9
        Form of Warrant in connection with the December 2003 bridge financing.810.10
        Securities Purchase Agreement dated as of May 17, 2004.910.11
        Form of Series 2004A Warrant to purchase common stock.910.12
        Form of Series 2004B Warrant to purchase common stock.910.13
        Employment Agreement between AVAX Technologies, Inc. and Richard P. Rainey dated as of April 1, 2004.1010.14
        Employment Letter between AVAX Technologies, Inc. and Dr. David Berd dated as of November 1, 2004.1010.15
        Securities Purchase Agreement dated as of April 5, 2005. 1110.16
        Form of Series 2005A Warrant to purchase common stock.11






46

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Table of Contents

Exhibit No.
        Description10.17
        Form of Series 2005B Warrant to purchase common stock.1110.18
        Securities Purchase Agreement dated as of April 13, 2007. 1210.19
        Form of Series 2007A Warrant to purchase common stock.1214
        Code of Ethics. 1321
        Subsidiaries of the Company.*23.1
        Consent of Briggs, Bunting & Dougherty LLP, Independent Registered Public Accounting Firm.*31.1
        Certifications of Chief Executive Officer of the Company under Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
        Certifications of Chief Financial Officer of the Company under Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32
        Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code.*


_______________

*
        Filed herewith.


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 SB-2 (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 Current Report on Form 8-K filed on June 2, 2004.


10
        Incorporated by reference and previously filed as an exhibit to the Current Report on Form 8-K filed on March 18, 2005.


11
        Incorporated by reference and previously filed as an exhibit to the Current Report on Form 8-K filed on April 7, 2005.


12
        Incorporated by reference and previously filed as an exhibit to the Current Report on Form 8-K filed on April 19, 2007.


13
        Incorporated by reference and previously filed as an exhibit to the Annual Report on Form 10-KSB for year ended December 31, 2005.


47

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Table of Contents

# Consolidated Financial Statements

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

# Years ended December 31, 2006 and 2005
and the period from January 12, 1990
(Incorporation) to December 31, 2006
With Report of Independent Registered Public Accounting Firm



---

Table of Contents

AVAX Technologies, Inc.
(a development stage company)

Consolidated Financial Statements

Years ended December 31, 2006 and 2005 and for the period from January 12, 1990
(Incorporation) to December 31, 2006

# Contents

|Report of Independent Registered Public Accounting Firm                                                                                                                                   |  | F-1  | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | 
|                                                                                                                                                                                         
|Consolidated Financial Statements                                                                                                                                                         | 
|Consolidated Balance Sheet as of December 31, 2006                                                                                                                                        |  | F-2  | 
|Consolidated Statements of Operations and Comprehensive Loss for the years ended December 31, 2006 and 2005 and for the period from January 12, 1990 (incorporation) to December 31, 2006 |  | F-3  | 
|Consolidated Statements of Stockholders Equity (Deficit) for the years ended December 31, 2006 and 2005 and for the period from January 12, 1990 (incorporation) to December 31, 2006    |  | F-4  | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2006 and 2005 and for the period from January 12, 1990 (incorporation) to December 31, 2006                        |  | F-8  | 
|Notes to Consolidated Financial Statements                                                                                                                                                |  | F-10 | 



---

Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
AVAX Technologies, Inc.

We have audited the accompanying consolidated balance sheet of AVAX
Technologies, Inc. (a development stage company) and subsidiaries as of December 31, 2006, and the related consolidated statements
of operations and comprehensive loss, stockholders equity (deficit), and cash flows for each of the two years in the period
then ended and for the period from January 12, 1990 (incorporation) to December 31, 2006. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of AVAX Technologies, Inc. and subsidiaries as of December 31, 2006,
and the consolidated results of their operations and their cash flows for each of the two years in the period then ended and for
the period from January 12, 1990 (incorporation) to December 31, 2006 in conformity with U.S. generally accepted accounting
principles.

The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the
Company has incurred recurring losses from operations and may not have adequate capital to fund its operations through 2007. These
conditions raise substantial doubt about the Companys ability to continue as a going concern. Managements plans
concerning these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.

As discussed in Note 1 to the financial statements, effective January 1,
2006, the Company changed its method of accounting for stock-based compensation in accordance with the Statement of Financial
Accounting Standards No. 123 (Revised 2004), Share-Based Payment.

/s/   Briggs, Bunting & Dougherty, LLP

Philadelphia, Pennsylvania
May 7, 2007

F-1

---

Table of Contents

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

|                                                                             | December 31,2006
|---------------------------------------------------------------------------- | ----------------
|Assets                                                                       |                 
|Current assets:                                                              |                 
|Cash                                                                         |                 
|Accounts receivable                                                          |                 
|Inventory                                                                    |                 
|VAT receivable                                                               |                 
|Prepaid expenses and other current assets                                    |                 
|                                                                             |                 
|Total current assets                                                         |                 
|Property, plant and equipment, at cost                                       |                 
|Less accumulated depreciation                                                |                 
|                                                                             |                 
|Net property, plant and equipment                                            |                 
|Goodwill                                                                     |                 
|                                                                             |                 
|Total assets                                                                 |                 
|                                                                             |                 
|                                                                            
|Liabilities and stockholders equity                                         |                 
|Current liabilities:                                                         |                 
|Accounts payable and accrued expenses                                        |                 
|Accrued and withheld payroll taxes and liabilities                           |                 
|Deferred revenue                                                             |                 
|ANVAR advances                                                               |                 
|                                                                             |                 
|Total current liabilities                                                    |                 
|Stockholders equity:                                                        |                 
|Preferred stock, $.01 par value:                                             |                 
|Authorized shares  5,000,000, including Series C  120,000 shares           |                 
|Series C convertible preferred stock:                                        |                 
|Issued and outstanding shares  36,750 (liquidation preference  $3,675,000) |                 
|Common stock, $.004 par value:                                               |                 
|Authorized shares  150,000,000                                              |                 
|Issued and outstanding shares  61,414,998                                   |                 
|Additional paid-in capital                                                   |                 
|Subscription receivable                                                      |                 
|Accumulated other comprehensive income                                       |                 
|Deficit accumulated during the development stage                             |                 
|                                                                             |                 
|Total stockholders equity                                                   |                 
|                                                                             |                 
|Total liabilities and stockholders equity                                   |                 
|                                                                             |                 

See accompanying notes.

F-2

---

Table of Contents

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

|                                                                   | Year endedDecember 31, |  | Period fromJanuary 12, 1990(Incorporation) toDecember 31,2006
|------------------------------------------------------------------ | ---------------------- |  | -------------------------------------------------------------
|
|Revenue:                                                           |                        |  |                                                              
|Gain from sale of the Product                                      |                        |  | $                                                            
|Product and contract service revenue                               |                        |  |                                                              
|                                                                   |                        |  |                                                              
|Total revenue                                                      |                        |  |                                                              
|Costs and expenses:                                                |                        | 
|Research and development                                           |                        |  |                                                              
|Acquired in process research and development                       |                        |  |                                                              
|Write down of acquired intellectual property and other intangibles |                        |  |                                                              
|Amortization of acquired intangibles                               |                        |  |                                                              
|Selling, general and administrative                                |                        |  |                                                              
|                                                                   |                        |  |                                                              
|Total operating loss                                               |                        |  |                                                              
|Other income (expense):                                            |                        | 
|Interest income                                                    |                        |  |                                                              
|Interest expense                                                   |                        |  |                                                              
|Other, net                                                         |                        |  |                                                              
|                                                                   |                        |  |                                                              
|Total other income (expense), net                                  |                        |  |                                                              
|                                                                   |                        |  |                                                              
|Loss before income taxes                                           |                        |  |                                                              
|Income taxes                                                       |                        |  |                                                              
|                                                                   |                        |  |                                                              
|Loss from continuing operations                                    |                        |  |                                                              
|Loss from discontinued operations                                  |                        |  |                                                              
|                                                                   |                        |  |                                                              
|Net loss                                                           |                        |  |                                                              
|Amount payable for liquidation preference                          |                        |  |                                                              
|                                                                   |                        |  |                                                              
|Net loss attributable to common stockholders                       |                        |  | $                                                            
|                                                                   |                        |  |                                                              
|Loss per common share  basic and diluted                          |                        | 
|Loss from continuing operations                                    |                        |  | $                                                            
|Loss from discontinued operations                                  |                        |  |                                                              
|                                                                   |                        |  |                                                              
|Net loss                                                           |                        |  | $                                                            
|                                                                   |                        |  |                                                              
|Weighted-average number of common shares outstanding               |                        |  |                                                              
|                                                                   |                        |  |                                                              
|Net loss                                                           |                        |  | $                                                            
|Foreign currency translation adjustment                            |                        |  |                                                              
|                                                                   |                        |  |                                                              
|Comprehensive loss                                                 |                        |  | $                                                            
|                                                                   |                        |  |                                                              

See accompanying notes.

F-3

---

Table of Contents

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

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

[TABLE CONTINUES]

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

F-4

---

Table of Contents

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

|                                                                                                          | Series AConvertiblePreferred Stock |  | Series BConvertiblePreferred Stock |            | Series CConvertiblePreferred Stock |  | Common Stock
|--------------------------------------------------------------------------------------------------------- | ---------------------------------- |  | ---------------------------------- | ---------- | ---------------------------------- |  | ------------
|
|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     
|Issuance of common stock and Series B     preferred stock in a private placement in     May and June 1996 |                                    |  |                                    |           |                                    |  |            
|Issuance of common stock and Series B     preferred stock for services in June 1996                       |                                    |  |                                    |           |                                    |  |            
|Exercise of warrants in June and July 1996                                                                |                                    |  |                                    |           |                                    |  |            
|Amount payable for liquidation preference                                                                 |                                    |  |                                    |           |                                    |  |            
|Compensation related to stock options granted     in May and September 1996                               |                                    |  |                                    |           |                                    |  |            
|Amortization of deferred compensation                                                                     |                                    |  |                                    |           |                                    |  |            
|Unrealized loss on marketable securities                                                                  |                                    |  |                                    |           |                                    |  |            
|Net loss                                                                                                  |                                    |  |                                    |           |                                    |  |            
|                                                                                                          |                                    |  |                                    |            |                                    |  |             
|Balance at December 31, 1996                                                                              |                                    |  |                                    |           |                                    |  |            
|Payment of subscription receivable                                                                        |                                    |  |                                    |           |                                    |  |            
|Write-off of subscription receivable                                                                      |                                    |  |                                    |           |                                    |  |            
|Exercise of warrants in April and June 1997                                                               |                                    |  |                                    |           |                                    |  |            
|Conversion of preferred to common stock                                                                   |                                    |  |                                    |           |                                    |  |            
|Repurchase of fractional shares                                                                           |                                    |  |                                    |           |                                    |  |            
|Realization of loss on marketable securities                                                              |                                    |  |                                    |           |                                    |  |            
|Amortization of deferred compensation                                                                     |                                    |  |                                    |           |                                    |  |            
|Net loss                                                                                                  |                                    |  |                                    |           |                                    |  |            
|                                                                                                          |                                    |  |                                    |            |                                    |  |             
|Balance at December 31, 1997                                                                              |                                    |  |                                    |           |                                    |  |            
|Conversion of preferred to common stock                                                                   |                                    |  |                                    |           |                                    |  |            
|Payment of subscription receivable                                                                        |                                    |  |                                    |           |                                    |  |            
|Issue shares based upon reset provisions                                                                  |                                    |  |                                    |           |                                    |  |            
|Issue compensatory shares to officer                                                                      |                                    |  |                                    |           |                                    |  |            
|Amortization of deferred compensation                                                                     |                                    |  |                                    |           |                                    |  |            
|Net loss                                                                                                  |                                    |  |                                    |           |                                    |  |            
|                                                                                                          |                                    |  |                                    |            |                                    |  |             
|Balance at December 31, 1998                                                                              |                                    |  |                                    |           |                                    |  |            

[TABLE CONTINUES]

|                                                                                                          | AdditionalPaid-InCapital |  | SubscriptionReceivable |            | DeferredCompensation |  | UnrealizedLoss onMarketableSecurities |   | AccumulatedOtherComprehensiveIncome |            | DeficitAccumulatedDuring theDevelopmentStage |  | TotalStockholders'Equity(Deficit)
|--------------------------------------------------------------------------------------------------------- | ------------------------ |  | ---------------------- | ---------- | -------------------- |  | ------------------------------------- | - | ----------------------------------- | ---------- | -------------------------------------------- |  | ---------------------------------
|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     |                      |  |                                      |   |                                     |           |                                              |  |                                 
|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   | )                                            |  |                                 

F-5

---

Table of Contents

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

|                                                                                                               | Series AConvertiblePreferred Stock |  | Series BConvertiblePreferred Stock |   | Series CConvertiblePreferred Stock |  | Common Stock
|-------------------------------------------------------------------------------------------------------------- | ---------------------------------- |  | ---------------------------------- | - | ---------------------------------- |  | ------------
|
|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 |                                    |  |                                    |  |                                    |  |            
|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                                                                                   |                                    |  |                                    |  |                                    |  |            

[TABLE CONTINUES]

|                                                                                                               | AdditionalPaid-InCapital |  | SubscriptionReceivable |            | DeferredCompensation |  | UnrealizedLoss onMarketableSecurities |   | AccumulatedOtherComprehensiveIncome |          | DeficitAccumulatedDuring theDevelopmentStage |  | TotalStockholders'Equity(Deficit)
|-------------------------------------------------------------------------------------------------------------- | ------------------------ |  | ---------------------- | ---------- | -------------------- |  | ------------------------------------- | - | ----------------------------------- | -------- | -------------------------------------------- |  | ---------------------------------
|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  |                      |  |                                      |   |                                     |         |                                              |  |                                 
|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                                  | ) |                                     |         |                                              |  |                                 

F-7

---

Table of Contents

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

|                                           | Series AConvertiblePreferred Stock |  | Series BConvertiblePreferred Stock |   | Series CConvertiblePreferred Stock |   | Common Stock
|------------------------------------------ | ---------------------------------- |  | ---------------------------------- | - | ---------------------------------- | - | ------------
|
|Exercise of warrants                       |                                    |  |                                    |  |                                    |   |            
|Conversion of bridge notes to common stock |                                    |  |                                    |  |                                    |   |            
|Private placement of common stock          |                                    |  |                                    |  |                                    |   |            
|Issuance of warrants                       |                                    |  |                                    |   |                                    |   |             
|Foreign currency translation adjustment    |                                    |  |                                    |  |                                    |   |            
|Net loss                                   |                                    |  |                                    |  |                                    |   |            
|                                           |                                    |  |                                    |   |                                    |   |             
|Balance at December 31, 2004               |                                    |  |                                    |  |                                    | $ |            
|Private placement of common stock          |                                    |  |                                    |  |                                    |   |            
|Issuance of warrants                       |                                    |  |                                    |  |                                    |   |            
|Foreign currency translation adjustment    |                                    |  |                                    |  |                                    |   |            
|Net loss                                   |                                    |  |                                    |  |                                    |   |            
|                                           |                                    |  |                                    |   |                                    |   |             
|Balance at December 31, 2005               |                                    |  |                                    |  |                                    | $ |            
|Stock based compensation expense           |                                    |  |                                    |  |                                    |   |            
|Foreign currency translation adjustment    |                                    |  |                                    |  |                                    |   |            
|Net loss                                   |                                    |  |                                    |  |                                    |   |            
|                                           |                                    |  |                                    |   |                                    |   |             
|Balance at December 31, 2006               |                                    |  |                                    |  |                                    | $ |            
|                                           |                                    |  |                                    |   |                                    |   |             

[TABLE CONTINUES]

|                                           | AdditionalPaid-InCapital |  | SubscriptionReceivable |            | DeferredCompensation |   | UnrealizedLoss onMarketableSecurities |   | AccumulatedOtherComprehensiveIncome |   | DeficitAccumulatedDuring theDevelopmentStage |   | TotalStockholders'Equity(Deficit)
|------------------------------------------ | ------------------------ |  | ---------------------- | ---------- | -------------------- | - | ------------------------------------- | - | ----------------------------------- | - | -------------------------------------------- | - | ---------------------------------
|Exercise of warrants                       |                          |  |                        | 47,037     |                      |   |                                      |   |                                     |  |                                              |   |                                 
|Conversion of bridge notes to common stock |                          |  |                        | 943,330    |                      |   |                                      |   |                                     |  |                                              |   |                                 
|Private placement of common stock          |                          |  |                        | 2,737,190  |                      |   |                                      |   |                                     |  |                                              |   |                                 
|Issuance of warrants                       |                          |  |                        | 115,466    |                      |   |                                       |   |                                     |   |                                              |   |                                  
|Foreign currency translation adjustment    |                          |  |                        |           |                      |   |                                      |   |                                     |  |                                              |   |                                 
|Net loss                                   |                          |  |                        |           |                      |   |                                      |   |                                     |  |                                              |   |                                 
|                                           |                          |  |                        |            |                      |   |                                       |   |                                     |   |                                              |   |                                  
|Balance at December 31, 2004               |                          |  | $                      | 69,426,457 |                      | $ | (422                                  | ) | $                                   |  |                                              | $ |                                 
|Private placement of common stock          |                          |  |                        | 7,449,448  |                      |   |                                      |   |                                     |  |                                              |   |                                 
|Issuance of warrants                       |                          |  |                        | 435,705    |                      |   |                                      |   |                                     |  |                                              |   |                                 
|Foreign currency translation adjustment    |                          |  |                        |           |                      |   |                                      |   |                                     |  |                                              |   |                                 
|Net loss                                   |                          |  |                        |           |                      |   |                                      |   |                                     |  |                                              |   |                                 
|                                           |                          |  |                        |            |                      |   |                                       |   |                                     |   |                                              |   |                                  
|Balance at December 31, 2005               |                          |  | $                      | 77,311,610 |                      | $ | (422                                  | ) | $                                   |  |                                              | $ |                                 
|Stock based compensation expense           |                          |  |                        | 148,548    |                      |   |                                      |   |                                     |  |                                              |   |                                 
|Foreign currency translation adjustment    |                          |  |                        |           |                      |   |                                      |   |                                     |  |                                              |   |                                 
|Net loss                                   |                          |  |                        |           |                      |   |                                      |   |                                     |  |                                              |   |                                 
|                                           |                          |  |                        |            |                      |   |                                       |   |                                     |   |                                              |   |                                  
|Balance at December 31, 2006               |                          |  | $                      | 77,460,158 |                      | $ | (422                                  | ) | $                                   |  |                                              | $ |                                 
|                                           |                          |  |                        |            |                      |   |                                       |   |                                     |   |                                              |   |                                  

See accompanying notes.

F-7

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Table of Contents

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

|                                                                                     | Year endedDecember 31, |  | Period fromJanuary 12, 1990(Incorporation) toDecember 31,2006
|------------------------------------------------------------------------------------ | ---------------------- |  | -------------------------------------------------------------
|
|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                                                  |                        |  |                                                              
|Employee Stock Option Expense                                                        |                        |  |                                                              
|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 used in investing activities                                                |                        |  | $                                                            

F-8

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Table of Contents

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

|                                                                                   | Year endedDecember 31, |  | Period fromJanuary 12, 1990(Incorporation) toDecember 31,2006
|---------------------------------------------------------------------------------- | ---------------------- |  | -------------------------------------------------------------
|
|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                                                    |                        |  |                                                              
|Cash at beginning                                                                  |                        | 
|of period                                                                          |                        |  |                                                              
|                                                                                   |                        |  |                                                              
|Cash at end of period                                                              |                        |  | $                                                            
|                                                                                   |                        |  |                                                              
|                                                                                  
|Supplemental disclosure of cash flow information                                   |                        | 
|Interest Paid                                                                      |                        |  | $                                                            
|                                                                                   |                        |  |                                                              
|Non-cash activity:                                                                 |                        | 
|Issuance of restricted stock compensation                                          |                        |  | $                                                            
|                                                                                   |                        |  |                                                              
|Common stock warrants issued with convertible notes                                |                        |  | $                                                            
|                                                                                   |                        |  |                                                              
|Conversion of bridge loan into common stock                                        |                        |  | $                                                            
|                                                                                   |                        |  |                                                              
|Payment of interest with common stock                                              |                        |  | $                                                            
|                                                                                   |                        |  |                                                              

See accompanying notes.

F-9

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Table of Contents

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

Notes to Consolidated Financial Statements

December 31, 2006 and 2005

# 1.   Description of Business and Significant Accounting Policies

# Description of Business

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

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

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

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

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

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

In August 2000, the Company completed its acquisition of GPH, S.A. (Holdings)
and Genopoietic S.A. (Genopoietic) each a French societe anonyme based in Paris, France with principal its operating facility in
Lyon, France. Holdings and Genopoietic were organized in 1993 to develop gene therapy applications and market gene therapy
treatments for cancer. The Company has designated the Lyon, France operations facility as its primary source facility for the
production of vaccines to be used in clinical trials. In addition, the Company currently performs contract manufacturing and
research activities at its facilities located in Lyon. The Companys December 31, 2006 consolidated balance sheet includes
approximately $(17,398) in net assets related to these subsidiaries.

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

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Table of Contents

# 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, 2006, the Company incurred a net loss of $5,355,500 and
a use of cash in operating activities of $4,093,847. The Companys cash requirements were satisfied through a private
placement of common stock in April 2005 (see Note 4), maintaining balances in accounts payable and accrued expenses on
terms in excess of those afforded in commercial practice and customer agreements and through the use of available cash. However,
the Company does not have sufficient resources to maintain its existing plan of operations throughout 2007. These conditions raise
substantial doubt about the Companys ability to continue as a going concern. Management anticipates that additional debt or
equity financing will be required to fund ongoing operations in 2007. The Company is currently negotiating to raise additional
capital or secure revenue sources to fund current operations. However, there is no assurance that the Company will successfully
obtain the required capital or revenues or, if obtained, the amounts will be sufficient to fund ongoing operations in 2007. The
inability to secure additional capital could have a material adverse effect on the Company, including the possibility that the
Company could have to cease operations.

# Principles of Consolidation

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

# Foreign Currency Translation

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

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

# Use of Estimates

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

# Revenue Recognition

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

The Company records as deferred revenue amounts received in advance of the
provision of services in accordance with contracts or grants. Deferred revenue consisted of $160,678 received from a grant for
which the services had not been provided as of December 31, 2006.

# Accounts Receivable

Accounts receivable are stated at the amount management expects to collect
from outstanding balances. Management provides for probable uncollectible accounts through a charge to earnings and a credit to a
valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding
after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit
to accounts receivable. There was no valuation allowance at December 31, 2006. The Company generally does not charge interest on
accounts receivable.

# Concentrations of Credit Risk

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

F-11

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Table of Contents

# Fair Value of Financial Instruments

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

# Inventories

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

# Accrued Expenses

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

# Depreciation

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

# Goodwill

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

Prior to the adoption of SFAS No. 142, the company had recorded cumulative
amortization of $113,032. If SFAS No. 142 had been applied to earlier periods the adjusted loss from continuing operations would
be $77,950,369 and the adjusted net loss would be $77,954,214.

# Research and Development Costs

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

# Stock-Based Compensation

Effective January 1, 2006, the Company has adopted SFAS 123R,
Share-Based Payment. SFAS 123R establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services and requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements, measured by the fair value of the equity or liability instruments issued,
adjusted for estimated forfeitures. We transitioned to SFAS 123R using the modified-prospective method, under which prior periods
have not been revised for comparative purposes. The valuation provisions of SFAS 123R apply to new grants and to grants that were
outstanding as of the effective date and are subsequently modified. Estimated compensation for grants that were outstanding as of
the effective date will be recognized over the remaining service period using the compensation cost previously estimated for our
SFAS 123 pro forma disclosures. Recognized stock-based compensation expense for the year ended December 31, 2006 includes
compensation expense for share-based payment awards granted prior to, but not yet vested as of December 31, 2005, based on
the grant date fair value estimated in accordance with the pro forma provisions of SFAS 123 and compensation expense for the
share-based payment awards granted subsequent to December 31, 2005 based on the grant date fair value estimated in accordance
with the provisions of SFAS 123R.

F-12

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Table of Contents

Prior to the adoption of SFAS 123R, the Company applied the
intrinsic-value-based method of accounting prescribed by Accounting Principles Board Opinion (APB) 25,
Accounting for Stock Issued to Employees, and related interpretations, to account for its fixed-plan stock options to
employees. Under this method, compensation cost was recorded only if the market price of the underlying stock on the date of grant
exceeded the exercise price. SFAS 123, Accounting for Stock-Based Compensation, established accounting and disclosure
requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As permitted by SFAS 123,
the Company elected to continue to apply the intrinsic-value-based method of accounting described above, and adopted only the
disclosure requirements of SFAS 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation, Transition and
Disclosure. The fair-value-based method used to determine historical pro forma amounts under SFAS 123 was similar in most
respects to the method used to determine stock-based compensation expense under SFAS 123R. However, in its pro forma disclosures,
the Company accounted for option forfeitures as they occurred, rather than based on estimates of future forfeitures.

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

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

The Company maintains two employee stock option plans, a director stock
option plan and has issued non-qualified stock options to an executive officer and a director outside of the existing stock option
plans, which non-plan option grants have been approved by the Board of Directors and the stockholders of the Company. These plans
are more fully discussed in the Form 10-KSB filed for the year ended December 31, 2006. In addition, the Company issues warrants
to consultants at the discretion of the Board of Directors of the Company. The Company accounts for warrants granted to
consultants in accordance with Emerging Issues Task Force Issue 96-18, Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. The Company determines the value of
stock warrants utilizing the Black-Scholes option-pricing model.

Compensation costs for fixed awards with pro rata vesting are allocated to
periods on the straight-line basis. The estimated weighted average fair value of options granted was calculated based on the
following assumptions:

|                         | Tweleve Months EndedDecember 31, 2005 |  | Twelve Months EndedDecember 31, 2006
|------------------------ | ------------------------------------- |  | ------------------------------------
|Expected term (in years) |                                       |  |                                     
|Volatility               |                                       |  |                                     
|Risk-free interest rate  |                                       |  |                                     
|Expected dividends       |                                       |  |                                     

For the twelve months ended December 31, 2006, compensation expense of
$81,578 was charged to administrative expenses and $66,970 was charged to research and development expenses related to stock
options outstanding and not vested. As of December 31, 2006, total compensation cost related to non-vested stock options not
yet recognized was $255,572, which is expected to be allocated to expenses over a weighted-average period of 14 months.

The fair value of option grants is estimated at the date of grant using the
Black-Scholes model.

F-13

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Table of Contents

The following table shows the options and warrants outstanding by strike
price with the average expected remaining term of the instruments at December 31, 2006.

|Exercise Price Range |  |  | Options & Warrants Outstanding |            | Weighted-AverageRemaining Term |      |  | Vested Options &Warrants |  | Weighted-AverageRemaining Term
|-------------------- |  |  | ------------------------------ | ---------- | ------------------------------ | ---- |  | ------------------------ |  | ------------------------------
|$0.0  $0.04         |  |  |                                | 31,250     |                                | 0.33 |  |                          |  | 31,250                        
|                    
|$0.125  $0.17       |  |  |                                | 8,798,050  |                                | 2.37 |  |                          |  | 8,243,050                     
|                    
|$0.29  $0.47        |  |  |                                | 15,620,240 |                                | 3.35 |  |                          |  | 14,233,943                    
|                    
|$0.89  $0.91        |  |  |                                | 280,000    |                                | 1.73 |  |                          |  | 280,000                       
|                    
|$2.47  $3.375       |  |  |                                | 265,000    |                                | 1.66 |  |                          |  | 265,000                       
|                    
|$8.25                |  |  |                                | 125,000    |                                | 4.84 |  |                          |  | 125,000                       
|                    
|$8.813               |  |  |                                | 50,000     |                                | 0.44 |  |                          |  | 50,000                        
|                     |  |  |                                |            |                               
|                     |  |  |                                | 25,169,540 |                                |      |  |                          |  | 23,228,243                    
|                     |  |  |                                |            |                               

# 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 February 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits all entities to choose to
elect, at specified election dates, to measure eligible financial instruments at fair value. An entity shall report unrealized
gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date and
recognize upfront costs and fees related to those items in earnings as incurred and not deferred. SFAS No. 159 applies to fiscal
years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions
of SFAS No. 157, Fair Value Measurements. We are currently evaluating the impact, if any, the adoption of SFAS No. 159 may have on
our financial statements.

In September 2006, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements. SAB No. 108 provides interpretive guidance on the consideration of the effects of prior year
misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 is effective for
fiscal years ending after November 15, 2006. The Company has reviewed the guidance of SAB 108 and has determined that the
adoption of SAB No. 108 did not have any impact on our financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with
accounting principles generally accepted in the United States of America and expands disclosures about fair value measurements.
SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, this
pronouncement does not require any new fair value measurements. We are required to adopt SFAS No. 157 beginning January
1, 2008. We are currently evaluating the impact, if any, the adoption of SFAS No. 157 may have on our financial
statements.

In September 2006, the FASB issued SFAS No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R). SFAS No. 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the changes occur through comprehensive income. In addition, with
limited exceptions, this pronouncement requires an employer to measure the funded status of a plan as of the date of its year-end
statement of financial position. SFAS No. 158 is effective for fiscal years ending after December 15, 2006. As we do not have
any defined benefit pension plans or other postretirement plans, the adoption of this standard did not have any impact on our
financial statements.

F-14

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Table of Contents

In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting
for Uncertainty in Income Taxes. FIN 48 prescribes detailed guidance for the financial statement recognition, measurement and
disclosure of uncertain tax positions recognized in an enterprises financial statements in accordance with FASB Statement
No. 109, Accounting for Income Taxes. Tax positions must meet a more-likely-than-not recognition threshold at the effective date
to be recognized upon the adoption of FIN 48 and in subsequent periods. FIN 48 will be effective for fiscal years beginning after
December 15, 2006 and the provisions of FIN 48 will be applied to all tax positions upon initial adoption of the Interpretation.
The cumulative effect of applying the provisions of this Interpretation will be reported as an adjustment to the opening balance
of retained earnings for that fiscal year. As we have provided a full valuation allowance to reserve for our net deferred tax
assets at December 31, 2006, the adoption of this standard will not have a material impact on our results of operations, financial
condition, or cash flows.

Effective January 1, 2006, we adopted the fair value recognition
provisions of SFAS 123R, Share-Based Payment, using the modified prospective transition method and therefore did not restate
results for prior periods. Prior to January 1, 2006 we accounted for share-based compensation arrangements in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees and complied with the disclosure provisions of SFAS 123, Accounting for
Stock-Based Compensation. Under the modified prospective method, new awards are valued and accounted for prospectively upon
adoption. Outstanding prior awards that are unvested as of January 1, 2006 are recognized as compensation cost over the remaining
requisite service periods, as prior periods may not be restated. The adoption of SFAS 123R increased our expenses and reported net
loss for 2006 by $148,548.

# 2.   License and Research Agreements

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

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

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

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

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

F-15

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Table of Contents

# 3.   Contractual Joint Manufacturing Alliance

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

# 4.   Equity Transactions

# Common and Preferred Stock

In May 1996, the Companys authorized capital was increased to
50,000,000 shares of common stock, par value $.004, and 5,000,000 shares (of which 2,500,000 shares were designated as Series A
preferred stock, 300,000 shares were designated as Series B preferred stock and 120,000 shares were designated as Series C
preferred stock) of preferred stock, par value $.01. In June 1998, the Companys authorized common stock, par value $.004,
was decreased to 30,000,000 shares. In January 2004, the Companys authorized common stock, par value $.004, was increased to
150,000,000 shares. As of June 2006, no shares of the Series B preferred stock were issued or outstanding, and the Certificate of
Designation for the Series B preferred stock was cancelled.

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 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, 2006, is convertible into 1,130,755 shares of common stock excluding the effect of
any fractional shares.

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

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

F-16

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Table of Contents

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

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

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

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

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

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

# Stock Options  1992 Stock Option Plan

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

F-17

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Table of Contents

The following summarizes activity in the 1992 Plan:

|                                            | Number ofOptions
|------------------------------------------- | ----------------
|                                           
|Granted                                     |                 
|Canceled                                    |                 
|                                            |                 
|Balance at December 31, 1995, 1996 and 1997 |                 
|Granted                                     |                 
|                                            |                 
|Balance at December 31, 1998                |                 
|Granted                                     |                 
|Expired                                     |                 
|                                            |                 
|Balance at December 31, 1999                |                 
|Granted                                     |                 
|Expired                                     |                 
|Exercised                                   |                 
|                                            |                 
|Balance at December 31, 2000                |                 
|Granted                                     |                 
|Expired                                     |                 
|                                            |                 
|Balance at December 31, 2001                |                 
|Expired                                     |                 
|                                            |                 
|Balance at December 31, 2002                |                 
|Expired                                     |                 
|                                            |                 
|Balance at December 31, 2003                |                 
|Expired                                     |                 
|                                            |                 
|Balance at December 31, 2004                |                 
|Expired                                     |                 
|                                            |                 
|Balance at December 31, 2005                |                 
|Expired                                     |                 
|                                            |                 
|Balance at December 31, 2006                |                 
|                                            |                 

# 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.

The following summarizes activity in the 2001 Plan:

|Granted                             |  |  |  | 175,108   |  
|----------------------------------- |  |  |  | --------- | -
|                                    |  | 
|Balance at December 31, 2001        |  |  |  | 175,108   |  
|Expired                             |  |  |  | (59,435   | )
|                                    |  | 
|Balance at December 31, 2002        |  |  |  | 115,673   |  
|Expired                             |  |  |  | (90,688   | )
|                                    |  | 
|Balance at December 31, 2003        |  |  |  | 24,985    |  
|Granted                             |  |  |  | 1,155,000 |  
|Expired                             |  |  |  | (379      | )
|                                    |  | 
|Balance at December 31, 2004        |  |  |  | 1,179,606 |  
|Granted                             |  |  |  | 873,250   |  
|Expired                             |  |  |  |          |  
|                                    |  | 
|Balance at December 31, 2005 & 2006 |  |  |  | 2,052,856 |  
|                                    |  | 

F-18

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Table of Contents

# 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 per director were issued as of January 1, 2004, vesting over
a four-year period. Pursuant to a change in the plan an additional 30,000 options per director were issued on January 1, 2006,
vesting over a one-year period. The Company will obtain shareholder approval to increase the authorized number of shares under the
option plan.

The following summarizes activity in the Director Option Plan:

|Granted                                   |  |  |  | 240,000 | 
|----------------------------------------- |  |  |  | ------- | 
|                                          |  | 
|Balance at December 31, 2001, 2002 & 2003 |  |  |  | 240,000 | 
|Granted                                   |  |  |  | 160,000 | 
|                                          |  | 
|Balance at December 31, 2004 & 2005       |  |  |  | 400,000 | 
|Granted                                   |  |  |  | 120,000 | 
|                                          |  | 
|Balance at December 31, 2006              |  |  |  | 520,000 | 
|                                          |  | 

# Stock Options  Other

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

The following summarizes other stock option grants:

|Granted                      |  |  |  | 571,373   |  
|---------------------------- |  |  |  | --------- | -
|                             |  | 
|Balance at December 31, 1996 |  |  |  | 571,373   |  
|                             | 
|Granted                      |  |  |  | 580,644   |  
|                             |  | 
|Balance at December 31, 1997 |  |  |  | 1,152,017 |  
|                             | 
|Granted                      |  |  |  | 103,404   |  
|                             |  | 
|Balance at December 31, 1998 |  |  |  | 1,255,421 |  
|                             | 
|Granted                      |  |  |  | 20,000    |  
|                             |  | 
|Balance at December 31, 1999 |  |  |  | 1,275,421 |  
|                             | 
|Granted                      |  |  |  | 27,382    |  
|Exercised                    |  |  |  | (9,688    | )
|                             |  | 
|Balance at December 31, 2000 |  |  |  | 1,293,115 |  
|                             |  | 
|Issued                       |  |  |  | 135,000   |  
|                             | 
|Expired                      |  |  |  | (280,000  | )
|                             |  | 
|Balance at December 31, 2001 |  |  |  | 1,148,115 |  
|                             | 
|Expired                      |  |  |  | (53,000   | )
|                             |  | 
|Balance at December 31, 2002 |  |  |  | 1,095,115 |  
|                             | 
|Expired                      |  |  |  | (501,685  | )
|                             |  | 
|Balance at December 31, 2003 |  |  |  | 593,430   |  
|                             | 
|Expired                      |  |  |  | (360,644  | )
|                             |  | 
|Balance at December 31, 2004 |  |  |  | 232,786   |  
|Granted                      |  |  |  | 775,000   |  
|                             | 
|Expired                      |  |  |  | (71,000   | )
|                             |  | 
|Balance at December 31, 2005 |  |  |  | 936,786   |  
|Expired                      |  |  |  | (61,786   | )
|                             |  | 
|Balance at December 31, 2006 |  |  |  | 875,000   |  
|                             |  | 

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

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Table of Contents

# Warrants

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

The following summarizes warrant grants:

|Granted                                   |  |  |  | 7,750      |  
|----------------------------------------- |  |  |  | ---------- | -
|                                          |  | 
|Balance at December 31, 1993, 1994        |  |  |  | 7,750      |  
|Granted                                   |  |  |  | 165,612    |  
|                                          |  | 
|Balance at December 31, 1995              |  |  |  | 173,362    |  
|Granted                                   |  |  |  | 931,152    |  
|Exercised                                 |  |  |  | (156,250   | )
|                                          |  | 
|Balance at December 31, 1996              |  |  |  | 948,264    |  
|Granted                                   |  |  |  | 418,569    |  
|Exercised                                 |  |  |  | (88,769    | )
|Expired                                   |  |  |  | (25,000    | )
|                                          |  | 
|Balance at December 31, 1997              |  |  |  | 1,253,064  |  
|Granted                                   |  |  |  | 115,000    |  
|Expired                                   |  |  |  | (7,750     | )
|                                          |  | 
|Balance at December 31, 1998              |  |  |  | 1,360,314  |  
|                                          | 
|Granted                                   |  |  |  | 997,801    |  
|Exercised                                 |  |  |  | (75,000    | )
|                                          |  | 
|Balance at December 31, 1999              |  |  |  | 2,283,115  |  
|Granted                                   |  |  |  | 444,710    |  
|                                          | 
|Exercised                                 |  |  |  | (27,588    | )
|Expired                                   |  |  |  | (250,654   | )
|                                          |  | 
|Balance at December 31, 2000, 2001 & 2002 |  |  |  | 2,449,583  |  
|Granted                                   |  |  |  | 7,308,000  |  
|Expired                                   |  |  |  | (84,000    | )
|                                          |  | 
|Balance at December 31, 2003              |  |  |  | 9,673,583  |  
|Granted                                   |  |  |  | 4,371,783  |  
|Exercised                                 |  |  |  | (338,400   | )
|Expired                                   |  |  |  | (1,110,185 | )
|                                          |  | 
|Balance at December 31, 2004              |  |  |  | 12,596,781 |  
|Granted                                   |  |  |  | 9,723,657  |  
|Expired                                   |  |  |  | (444,710   | )
|                                          |  | 
|Balance at December 31, 2005              |  |  |  | 21,875,728 |  
|                                          |  | 
|Granted                                   |  |  |  | 270,000    |  
|Expired                                   |  |  |  | (654,438   | )
|                                          |  | 
|Balance at December 31, 2006              |  |  |  | 21,491,290 |  
|                                          |  | 

Authorized but unissued shares of common stock were reserved for issuance at
December 31, 2006 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                                              |  |  |  | 520,000    | 
|Non plan options                                                        |  |  |  | 875,000    | 
|Warrants to purchase common stock                                       |  |  |  | 3,868,660  | 
|Warrants to purchase common stock pursuant to the 2003 Bridge Financing |  |  |  | 6,969,600  | 
|2004 Series A Warrants                                                  |  |  |  | 1,525,000  | 
|2004 Series B Warrants                                                  |  |  |  | 1,525,000  | 
|2005 Series A Warrants                                                  |  |  |  | 3,801,515  | 
|2005 Series B Warrants                                                  |  |  |  | 3,801,515  | 
|                                                                        |  | 
|                                                                        |  |  |  | 29,017,045 | 
|                                                                        |  | 

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Table of Contents

A summary of applicable stock option and warrant activity and related
information for the years ended December 31, 2006 and 2005 is as follows:

|                                 | 2006 |  | 2005
|-------------------------------- | ---- |  | ----
|
|Outstanding at beginning of year |      |  |     
|Granted                          |      |  |     
|Exercised                        |      |  |     
|Forfeited                        |      |  |     
|                                 |      |  |     
|Outstanding at end of year       |      |  |     
|                                 |      |  |     
|Exercisable at end of year       |      |  |     
|                                 |      |  |     

Exercise prices for options and warrants outstanding range from $0.13 to
$8.24. The option and warrant contracts expire at various times through January 2016. The weighted-average grant date fair value
of options granted during the years 2006 and 2005 were $0.18 and $0.20, respectively.

# 6.   ANVAR Advances

The Companys French subsidiary receives financial support from a French
governmental agency (ANVAR). These advances, which are subject to conditions specifying that non-compliance with such conditions
could result in the forfeiture of all or a portion of the future amounts to be received, as well as the repayment of all or a
portion of amounts received to date. If certain products are commercialized, the December 31, 2006 balance of $362,109 (1,800,000
French Francs) is repayable based on an annual royalty equal to 47% of the revenue related to the project. As such, the total
amount of advances received are recorded as a liability in the accompanying consolidated balance sheet. In case of failure or
partial success, as defined in the agreement, $75,121 (400,000 French Francs) is payable. The due date for the obligation has past
but the grantor agency has not demanded repayment of the obligation. Due to the uncertainty regarding the amount that will be
required to be returned to ANVAR, the Company maintains the full amount of the obligation as a current liability.

# 7.   Income Taxes

At December 31, 2006, the Company has net operating loss carryforwards of
$75,911,918 for income tax purposes. U. S. and state tax losses of $67,995,650 expire in varying amounts between 2007 and 2024, if
not utilized. Foreign losses of $7,916,268 continue indefinitely and may be applied against future income.

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 31,2006
|------------------------- | ----------------
|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, 2005 was $27,793,000.

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Table of Contents

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. The first months rent was payable upon signing of the lease along with a security deposit
equivalent to two months rental. This lease is secured by a one-year irrevocable standby letter of credit whereby the lessor is
the named beneficiary. This letter of credit automatically renews each December and will be reduced by the amortized reduction of
the landlord investment each year. A certificate of deposit in the amount of $57,049 at December 31, 2006 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 2009.

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

Rent expense under these agreements was approximately $343,043 and $331,832
for the years ended December 31, 2006 and 2005, 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, 2006 are $329,189 in 2007, $176,793 in
2008 and $88,397 in 2009.

# Consulting Agreements

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

# Other

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

# 9.   Property, Plant and Equipment

The following shows the composition of the assets included in property, plant
and equipment at December 31, 2006:

|                                             | Cost |  | AccumulatedDepreciation |           | Net
|-------------------------------------------- | ---- |  | ----------------------- | --------- | ---
|Office furniture and equipment               |      |  | $                       | 312,452   |    
|Manufacturing facility and related equipment |      |  |                         | 3,655,476 |    
|                                             |      |  |                         |           |    
|Total                                        |      |  | $                       | 3,967,928 |    
|                                             |      |  |                         |           |    

Depreciation expense was $290,434 and $315,039 for the years ended December
31, 2006 and 2005, respectively.

F-22

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Table of Contents

# 10.   Employee Benefit Plan

During 1996, the Company established a discretionary 401(k) plan for all U.S.
employees over the age of 21. Employee contributions are subject to normal 401(k) plan limitations. The Company was not required
to make a contribution in 2006 or 2005.

# 11.   Related Party Transactions

During 2006 and 2005 the Company paid additional cash compensation of
$126,000 per year to one of its Board Members who took a more active role in assisting existing management of the Company. It is
anticipated that this role will continue until such time as additional management personnel are hired. The compensation was voted
upon and approved by the Compensation Committee of the Board of Directors.

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

# 12.   Subsequent Events

On August 1, 2006, the stockholders of the Company approved an increase in
the authorized common stock from 150,000,000 to 500,000,000. Effective February 20, 2007, the Company increased the aggregate
number of shares that the Company has authority to issue to 505,000,000, of which 5,000,000, par value $0.01 per share, are
designated as preferred stock, and 500,000,000, par value $0.004 per share, are designated common stock.

On April 13, 2007, the Company closed a private placement of 80,060,000
shares of common stock at a purchase price of $0.125 per share with 25 accredited and institutional investors. The Company
received gross proceeds of approximately $10,007,500, and incurred offering-related expenses of $589,350 payable to advisors
related to the fundraising. In connection with the private placement, the Company also issued to the investors warrants to
purchase 80,060,000 shares of common stock at a warrant exercise price of $0.15 per share. All warrants issued in this private
placement expire on April 13, 2012.

F-23

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