Table of Contents





UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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# FORM 10-QSB

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



For the quarterly period ended June 30, 2006



|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from _____________ to ___________

Commission file number0-29222

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AVAX TECHNOLOGIES, INC.

(Exact name of small business issuer as specified 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, Pennsylvania  19130
(Address of principal executive offices)

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

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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.

|x Yes | o No
|----- | ----



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o  Yes  x No



State the number of shares outstanding of each of the issuers classes of common equity, as of the latest practicable date:  62,545,753 as of August 9, 2006.



|Transitional Small Business Disclosure Format: | o Yes | x No
|---------------------------------------------- | ----- | ----







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AVAX TECHNOLOGIES, INC.



Table of Contents



|                               |                                                                                                                                                                                                                     | Page   
|------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------
|PART I - FINANCIAL INFORMATION
|                               |                                                                                                                                                                                                                     |        
|Item 1.                        | Financial Statements                                                                                                                                                                                                |        
|                               | Consolidated BALANCE
SHEETS  As of December 31, 2005 and June 30, 2006 (Unaudited)                                                                                                                                 | Page 3 
|                               | Consolidated
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (Unaudited)  For the Three and Six Months Ended June 30, 2006 and 2005 and
for the Period from January 12, 1990 (Incorporation) through June 30, 2006 | Page 4 
|                               | Consolidated
STATEMENTS OF CASH FLOWS (Unaudited)  For the Six Months Ended June 30, 2006 and 2005 and for the Period from
January 12, 1990 (Incorporation) through June 30, 2006                                  | Page 5 
|                               | Notes to Consolidated Financial Statements                                                                                                                                                                          | Page 7 
|                               |                                                                                                                                                                                                                     |        
|Item 2.                        | Managements Discussion and Analysis or Plan of Operation                                                                                                                                                           | Page 12
|                               |                                                                                                                                                                                                                     |        
|Item 3.                        | Controls and Procedures                                                                                                                                                                                             | Page 19
|                               |                                                                                                                                                                                                                     |        
|                               |                                                                                                                                                                                                                     |        
|PART II - OTHER INFORMATION   
|                               |                                                                                                                                                                                                                     |        
|Item 4.                        | Submission of matters to vote of shareholders                                                                                                                                                                       | Page 20
|                               |                                                                                                                                                                                                                     |        
|Item 6.                        | Exhibits and Reports on Form 8-K                                                                                                                                                                                    | Page 20
|                               |                                                                                                                                                                                                                     |        
|Signatures                     | Page 21                                                                                                                                                                                                            







Page 2

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Table of Contents

PART I - FINANCIAL INFORMATION



|Item 1. | Financial Statements.
|------- | ---------------------

AVAX Technologies, Inc. and Subsidiaries

(a development stage company)

Consolidated Balance Sheets

|                                                                                                                  |  | December 31,2005 |             | June 30,2006 |  
|----------------------------------------------------------------------------------------------------------------- |  | ---------------- | ----------- | ------------ | -
|                                                                                                                  |  |                  |             | (Unaudited)  |  
|Assets                                                                                                            |  |                  |             |              |  
|Current assets:                                                                                                   |  |                  |             |              |  
|Cash                                                                                                              |  | $                | 5,573,150   |              | $
|Accounts receivable                                                                                               |  |                  | 77,574      |              |  
|Inventory                                                                                                         |  |                  | 12,715      |              |  
|VAT receivable                                                                                                    |  |                  | 81,505      |              |  
|Prepaid expenses and other current assets                                                                         |  |                  | 243,532     |              |  
|Total current assets                                                                                              |  |                  | 5,988,476   |              |  
|Property, plant and equipment, at cost                                                                            |  |                  | 3,790,137   |              |  
|Less accumulated depreciation                                                                                     |  |                  | 2,700,046   |              |  
|Net property, plant and equipment                                                                                 |  |                  | 1,090,091   |              |  
|Research and development tax credit receivable                                                                    |  |                  | 81,087      |              |  
|Goodwill                                                                                                          |  |                  | 188,387     |              |  
|Total assets                                                                                                      |  | $                | 7,348,041   |              | $
|                                                                                                                  |  |                  |             |              |  
|Liabilities and stockholders equity                                                                              |  |                  |             |              |  
|Current liabilities:                                                                                              |  |                  |             |              |  
|Accounts payable and accrued expenses                                                                             |  | $                | 1,198,997   |              | $
|Accrued and withheld payroll taxes and liabilities                                                                |  |                  | 205,018     |              |  
|Deferred revenue                                                                                                  |  |                  | 91,884      |              |  
|ANVAR advances                                                                                                    |  |                  | 324,927     |              |  
|Total current liabilities                                                                                         |  |                  | 1,820,826   |              |  
|Stockholders equity:                                                                                             |  |                  |             |              |  
|Preferred stock, $.01 par value:                                                                                  |  |                  |             |              |  
|Authorized shares  5,000,000, including Series B  300,000 shares and Series C  120,000 shares                  |  |                  |             |              |  
|Series B convertible preferred stock:Issued and outstanding shares - 0                                            |  |                  |             |              |  
|Series C convertible preferred stock:Issued and outstanding shares  36,750 (liquidation preference - $3,675,000) |  |                  | 367         |              |  
|Common stock, $.004 par value:                                                                                    |  |                  |             |              |  
|Authorized shares  150,000,000Issued and outstanding shares  61,414,998                                         |  |                  | 245,660     |              |  
|Additional paid-in capital                                                                                        |  |                  | 77,311,610  |              |  
|Subscription receivable                                                                                           |  |                  | (422        | )            |  
|Accumulated other comprehensive income                                                                            |  |                  | 455,682     |              |  
|Deficit accumulated during the development stage                                                                  |  |                  | (72,485,682 | )            |  
|Total stockholders equity                                                                                        |  |                  | 5,527,215   |              |  
|Total liabilities and stockholders equity                                                                        |  | $                | 7,348,041   |              | $



Page 3

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Table of Contents

AVAX Technologies, Inc. and Subsidiaries

(a development stage company)

Consolidated Statements of Operations and Comprehensive Loss

(Unaudited)

|                                                                   |  | Three Months Ended June 30, |            | Six Months Ended June 30, |   | Period FromJanuary 12, 1990(Incorporation)To June 30, |  
|------------------------------------------------------------------ |  | --------------------------- | ---------- | ------------------------- | - | ----------------------------------------------------- | -
|                                                                   |  | 2005                        |            | 2006                      |   | 2005                                                  |  
|Revenue:                                                           |  |                             |            |                           |   |                                                       |  
|Gain from sale of the Product                                      |  | $                           |           |                           | $ |                                                      |  
|Product and contract service revenue                               |  |                             | 224,396    |                           |   | 279,170                                               |  
|Total revenue                                                      |  |                             | 224,396    |                           |   | 279,170                                               |  
|                                                                   |  |                             |            |                           |   |                                                       |  
|Costs and expenses:                                                |  |                             |            |                           |   |                                                       |  
|Research and development                                           |  |                             | 969,591    |                           |   | 1,070,509                                             |  
|Acquired in process research and development                       |  |                             |           |                           |   |                                                      |  
|Write down of acquired intellectual property and other intangibles |  |                             |           |                           |   |                                                      |  
|Amortization of acquired intangibles                               |  |                             |           |                           |   |                                                      |  
|Selling, general and administrative                                |  |                             | 546,833    |                           |   | 525,964                                               |  
|Total operating loss                                               |  |                             | (1,292,028 | )                         |   | (1,317,303                                            | )
|Other income (expense):                                            |  |                             |            |                           |   |                                                       |  
|Interest income                                                    |  |                             | 21,301     |                           |   | 40,613                                                |  
|Interest expense                                                   |  |                             |           |                           |   |                                                      |  
|Other, net                                                         |  |                             |           |                           |   |                                                      |  
|Total other income (expense)                                       |  |                             | 21,301     |                           |   | 40,613                                                |  
|Loss from continuing operations                                    |  |                             | (1,270,727 | )                         |   | (1,276,690                                            | )
|Loss from discontinued operations                                  |  |                             |           |                           |   |                                                      |  
|Net loss                                                           |  |                             | (1,270,727 | )                         |   | (1,276,690                                            | )
|Amount payable for liquidation preference                          |  |                             |           |                           |   |                                                      |  
|Net loss attributable to common stockholders                       |  | $                           | (1,270,727 | )                         | $ | (1,276,690                                            | )
|                                                                   |  |                             |            |                           |   |                                                       |  
|Loss per common share  basic and diluted                          |  | $                           | (.02       | )                         | $ | (.02                                                  | )
|Weighted average number of common shares outstanding               |  |                             | 57,191,093 |                           |   | 61,414,998                                            |  
|                                                                   |  |                             |            |                           |   |                                                       |  
|Net loss                                                           |  | $                           | (1,270,727 | )                         | $ | (1,276,690                                            | )
|Foreign currency translation gain                                  |  |                             | 12,193     |                           |   | 13,698                                                |  
|Net comprehensive loss                                             |  | $                           | (1,258,534 | )                         |   | (1,262,992                                            | )



See accompanying notes.



Page 4

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Table of Contents

AVAX Technologies, Inc. and Subsidiaries

(a development stage company)

Consolidated Statements of Cash Flows

(Unaudited)

|                                                                                     |  | Six Months Ended June 30, |            | Period from January12, 1990(Incorporation)To June 30, |  
|------------------------------------------------------------------------------------ |  | ------------------------- | ---------- | ----------------------------------------------------- | -
|                                                                                     |  | 2005                      |            | 2006                                                  |  
|Operating activities                                                                 |  |                           |            |                                                       |  
|Net loss                                                                             |  | $                         | (1,789,405 | )                                                     | $
|Adjustments to reconcile net loss to net cash used in operating activities:          |  |                           |            |                                                       |  
|Depreciation and amortization                                                        |  |                           | 219,431    |                                                       |  
|Stock based compensation expense                                                     |  |                           |           |                                                       |  
|Amortization of discount on convertible notes payable                                |  |                           |           |                                                       |  
|Amortization of deferred gain on joint venture                                       |  |                           |           |                                                       |  
|Equity in net loss of joint venture                                                  |  |                           |           |                                                       |  
|Extraordinary gain related to negative goodwill on consolidated subsidiary           |  |                           |           |                                                       |  
|Cumulative effect of change in accounting                                            |  |                           |           |                                                       |  
|Compensatory stock issue                                                             |  |                           |           |                                                       |  
|Minority interest in net loss of consolidated subsidiary                             |  |                           |           |                                                       |  
|Acquired in-process research and development charge                                  |  |                           |           |                                                       |  
|Write down of acquired intellectual property and other intangibles                   |  |                           |           |                                                       |  
|Gain from 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 (Gain) on sale or abandonment of furniture and equipment                        |  |                           |           |                                                       |  
|Issuance of common stock or warrants for services                                    |  |                           |           |                                                       |  
|Changes in operating assets and liabilities:                                         |  |                           |            |                                                       |  
|Accounts receivable                                                                  |  |                           | (135,403   | )                                                     |  
|Inventory                                                                            |  |                           | 371        |                                                       |  
|Prepaid expenses and other current assets                                            |  |                           | 125,271    |                                                       |  
|Accounts payable and accrued liabilities                                             |  |                           | 187,450    |                                                       |  
|Deferred revenue                                                                     |  |                           | 28,813     |                                                       |  
|Research and development tax credit receivable                                       |  |                           |           |                                                       |  
|Amount payable to former officer                                                     |  |                           |           |                                                       |  
|Net cash used in operating activities                                                |  |                           | (1,363,472 | )                                                     |  
|                                                                                     |  |                           |            |                                                       |  
|Investing activities                                                                 |  |                           |            |                                                       |  
|Purchase of marketable securities and short-term investments                         |  |                           |           |                                                       |  
|Proceeds from sale of marketable securities                                          |  |                           |           |                                                       |  
|Proceeds from sale of short-term investments                                         |  |                           |           |                                                       |  
|Purchases of furniture and equipment                                                 |  |                           | (128,650   | )                                                     |  
|Proceeds from sale of furniture and equipment                                        |  |                           |           |                                                       |  
|Organization costs incurred                                                          |  |                           |           |                                                       |  
|Cash acquired in acquisition of control of joint venture                             |  |                           |           |                                                       |  
|Net cash used in investing activities                                                |  |                           | (128,650   | )                                                     |  

See accompanying notes.



Page 5

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AVAX Technologies, Inc. and Subsidiaries

(a development stage company)

Consolidated Statements of Cash Flows (continued)

(Unaudited)



|                                                                                   |  | Six Months Ended June 30, |           | Period from January 12, 1990 (Incorporation)Through June 30, |  
|---------------------------------------------------------------------------------- |  | ------------------------- | --------- | ------------------------------------------------------------ | -
|                                                                                   |  | 2005                      |           | 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                                                           |  |                           |          |                                                              |  
|Payments received on subscription receivable                                       |  |                           |          |                                                              |  
|Shareholder capital contribution                                                   |  |                           |          |                                                              |  
|Proceeds received from exercise of stock warrants                                  |  |                           |          |                                                              |  
|Elimination of the consolidated accounting treatment for joint venture             |  |                           |          |                                                              |  
|Capital contribution through sale of interest in consolidated subsidiaries         |  |                           |          |                                                              |  
|Net proceeds received from issuance of preferred and common stock                  |  |                           | 7,986,527 |                                                              |  
|Net cash provided by financing activities                                          |  |                           | 7,986,527 |                                                              |  
|Effect of exchange rate changes on cash                                            |  |                           | (956      | )                                                            |  
|                                                                                   |  |                           |           |                                                              |  
|Net increase (decrease) in cash and cash equivalents                               |  |                           | 6,493,449 |                                                              |  
|Cash and cash equivalents at beginning of period                                   |  |                           | 1,560,761 |                                                              |  
|Cash and cash equivalents at end of period                                         |  | $                         | 8,054,210 |                                                              | $
|                                                                                   |  |                           |           |                                                              |  
|Supplemental disclosure of cash flow information                                   |  |                           |           |                                                              |  
|Interest paid                                                                      |  | $                         |          |                                                              | $
|Non-cash activity:                                                                 |  |                           |           |                                                              |  
|Conversion of accounts payable into notes payable                                  |  | $                         |          |                                                              | $
|Common stock warrants issued in conjunction with convertible notes payable         |  | $                         |          |                                                              | $
|Conversion of bridge loans into common stock                                       |  | $                         |          |                                                              | $
|Payment of interest on bridge loans with common stock                              |  | $                         |          |                                                              | $



See accompanying notes.



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AVAX Technologies, Inc. and Subsidiaries

(a development stage company)

Notes to Consolidated Financial Statements(Unaudited)

For the Six Months Ended June 30, 2006 and 2005



|1. | Organization and Summary of Significant Accounting Policies
|-- | -----------------------------------------------------------



AVAX Technologies, Inc., with 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 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 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).



In August 2000, the Company completed its acquisition of GPH, S.A. (Holdings) and Genopoietic S.A. (Genopoietic) each a French societe anonyme, with its principal operating facility in Lyon, France.  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 June 30, 2006, consolidated balance sheet includes approximately $18,869 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.



Basis of Presentation



The financial information as of June 30, 2006, and for the three- and six-month periods ended June 30, 2006 and 2005, contained herein is unaudited.  The Company believes this information has been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and Article 10 of Regulation S-X.  The Company also believes this information includes all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows for the periods then ended.  The results of operations for the three- and six-month periods ended June 30, 2006, are not necessarily indicative of the results of operations that may be expected for the entire year.



The accompanying financial statements and the related notes should be read in conjunction with the Companys audited financial statements for the year ended December 31, 2005, included in the Companys annual report on Form 10-KSB.



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.



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AVAX Technologies, Inc. and Subsidiaries

(a development stage company)





Revenue



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.  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 $122,781 received from two grants for which the services had not been provided as of June 30, 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 June 30, 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, which is a high credit quality financial institution.  Cash deposits generally are in excess of the FDIC insurance limits.  Credit limits, ongoing credit evaluations, and account monitoring procedures are utilized to minimize the risk of loss from accounts receivable.  Collateral is generally not required.



Fair Value of Financial Instruments



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



Inventories



Inventories are stated at the lower of cost or market, 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 tangible assets no longer be amortized but instead be tested at least annually for impairment and expensed against earnings when the implied fair value of a reporting unit, including goodwill, is less than its carrying amount.  The Company performed its annual goodwill impairment test in accordance with SFAS No. 142 and determined that the carrying amount of goodwill was reasonable.



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AVAX Technologies, Inc. and Subsidiaries

(a development stage company)





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 $74,958,030 and the adjusted net loss would be $76,831,908.



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.  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 123(R), Share-Based Payment.  SFAS 123(R) 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 six months ended June 30, 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.

Prior to the adoption of SFAS 123(R), 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 123(R).  However, in its pro forma disclosures, the Company accounted for option forfeitures as they occurred, rather than based on estimates of future forfeitures.



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AVAX Technologies, Inc. and Subsidiaries

(a development stage company)





The previously-disclosed pro forma impact on its earnings of adopting the fair-value-based method of accounting for stock-based compensation under SFAS 123 for the three and six-month periods ended June 30, 2006 and 2005 are as follows:



|                                                          |  | Three MonthsEnded June 30, |            | Six MonthsEnded June 30, |  
|--------------------------------------------------------- |  | -------------------------- | ---------- | ------------------------ | -
|                                                          |  | 2006                       |            | 2005                     |  
|                                                          |  |                            |            |                          |  
|Net loss as reported                                      |  | $                          | (1,276,690 | )                        | $
|Stock based compensation expense as reported              |  |                            | 35,273     |                          |  
|Stock based compensation expenses under fair value method |  |                            | (35,273    | )                        |  
|Pro forma net loss attributable to common stockholders    |  | $                          | (1,276,690 | )                        | $
|Pro forma net loss per share  basic and diluted          |  | $                          | (0.02      | )                        | $



The Company maintains two employee stock option plans, a director stock option plan and has issued non-qualified stock options to employees and directors based upon the consent of the Board of Directors of the Company.  These plans are more fully discussed in the Form 10-KSB filed for the year ended December 31, 2005.  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:



|                         |  | Three & Six MonthsEnded June 30, 2005 |   | Three & Six MonthsEnded June 30, 2006 |  
|------------------------ |  | ------------------------------------- | - | ------------------------------------- | -
|Expected term (in years) |  | 4.00                                  |   | 4.50                                  |  
|Volatility               |  | 95.0                                  | % | 79.4                                  | %
|Risk-free interest rate  |  | 2.75                                  | % | 4.30                                  | %
|Expected dividends       |  | 0                                     |   | 0                                     |  



Compensation expense of $29,850 was charged to administrative expenses and $40,696 was charged to research and development expenses related to stock options outstanding and not vested.



A summary of applicable stock option and warrant activity and related information for the six months ended June 30, 2006, is as follows:



|                                   |  | Options and Warrants |  | Weighted-Average ExercisePrice |     
|---------------------------------- |  | -------------------- |  | ------------------------------ | ----
|Outstanding at beginning of period |  | 25,849,652           |  | $                              | 0.53
|Granted                            |  | 120,000              |  |                                | 0.29
|Exercised                          |  |                     |  |                                |    
|Forfeited                          |  |                     |  |                                |    
|Outstanding at end of period       |  | 25,969,652           |  | $                              | 0.53
|Exercisable at end of period       |  | 23,795,762           |  | $                              | 0.56



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



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AVAX Technologies, Inc. and Subsidiaries

(a development stage company)





The following table shows the options and warrants outstanding by strike price with the average expected remaining term of the instruments at June 30, 2006.



|Exercise Price Range |  | Options & WarrantsOutstanding |  | Weighted-AverageRemaining Term |  | Vested Options &Warrants |  | Weighted-AverageRemaining Term | 
|-------------------- |  | ----------------------------- |  | ------------------------------ |  | ------------------------ |  | ------------------------------ | 
|$0.0 - $0.04         |  | 31,250                        |  | 0.84                           |  | 31,250                   |  | 0.84                           | 
|$0.125 - $0.17       |  | 8,798,050                     |  | 2.87                           |  | 8,122,800                |  | 2.67                           | 
|$0.29 - $0.47        |  | 15,350,240                    |  | 3.8                            |  | 14,114,052               |  | 3.62                           | 
|$0.89 - $0.91        |  | 280,000                       |  | 2.24                           |  | 280,000                  |  | 2.24                           | 
|$2.47 - $3.375       |  | 680,675                       |  | 1.56                           |  | 680,675                  |  | 1.83                           | 
|$4.22 - $5.00        |  | 654,437                       |  | 0.05                           |  | 654,437                  |  | 0.05                           | 
|$8.24 - $8.813       |  | 175,000                       |  | 3.14                           |  | 175,000                  |  | 3.14                           | 
|                     |  | 25,969,652                    |  |                                |  | 24,058,214               |  |                                | 



|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.



|3. | ANVAR Advances
|-- | --------------



The Companys French subsidiary received 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 June 30, 2006, balance of $350,611 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, $77,913 at the current exchange rate (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.



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|Item 2. | Managements Discussion and Analysis or Plan of Operation.
|------- | ----------------------------------------------------------



CAUTIONARY STATEMENT REGARDING 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 Managements Discussion and Analysis or Plan of Operation.



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



| |  | Our history of operating losses, our continuing cash requirements, our need to raise additional capital by September 30, 2006, and the uncertainty of our prospects of reaching a meaningful level of revenues.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



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



| |  | Each of the other factors discussed in our Annual Report on Form 10-KSB for the year ended December 31, 2005, under Item 1  Description of Business  Risk Factors.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 $75,074,907 as of June 30, 2006.  We incurred net losses of $2,589,225 and $1,789,405 for the six months ended June 30, 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.



The major challenge for us and others in the biopharmaceutical industry are the significant costs, time delays and uncertainties related to efforts to obtain regulatory approval to market drug products in the U.S. and foreign countries.  We have encountered a number of these challenges in our efforts to develop the AC Vaccine into marketable products including the following:



| |  | 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 a revised AC Vaccine;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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 is not likely to change unless we are able to raise substantial additional capital.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Notwithstanding these setbacks, we believe that the potential efficacy and viability of the AC Vaccine technology is still substantial and is, in many respects, of greater probability today than it was three years ago.  We base this optimism in our lead products on the following:



| |  | As a result of the FDA clinical hold, we concluded that (1) it would no longer be feasible to continue the clinical development of the original AC Vaccine using the established manufacturing format (referred to as the fresh vaccine product format), and (2) a revised product format needed to be established, tested and reviewed by the FDA.  Through these research and development activities we re-engineered the manufacturing steps for the production and distribution of the AC Vaccine, referred to as the frozen vaccine technology, which we believe has substantial advantages over the former fresh product.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | After years of frustration and lack of acceptance of the AC Vaccine technology among the oncology community in Australia, which resulted in us abandoning our efforts in Australia, we are experiencing meaningful new acceptance of the AC Vaccine technology in Europe, particularly in Spain and Belgium, among key members of the oncology community.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our continued belief in the AC Vaccine technology is, however, tempered by our continuing need to raise sufficient capital to implement an aggressive product development effort.  As a result, for the past two years, our primary focus has been on reducing costs, raising additional capital, taking the least expensive steps possible to maintain positive momentum in product development, and clinical advancement of the technology.  The infusion of additional capital would not assure success in developing a marketable product in Europe or the U.S., but it would allow us to accelerate the plan of operation described below.  Our continuing most significant challenge is the limited capital resources of the Company.



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Research and Development Expenses



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.



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.



Research and development costs incurred through June 30, 2006, were $45,565,208.  Research and development costs were $2,157,708 and $1,751,984, for the six months ended June 30, 2006 and 2005, respectively.  The majority of these costs relate to clinical research and development of our 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.



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 and ultimately an FDA Warning Letter, 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.



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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 re-engineered the manufacturing steps to create and release the vaccine technology to take
advantage of these potential product improvements.



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



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



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



On April 5, 2005, we closed a private placement of 25,343,430 shares of common stock at a purchase price of $0.34 per share with 12 accredited or institutional investors.  We received gross proceeds of approximately $8,616,000.  In connection with the private placement, we also issued to the investors warrants to purchase 3,801,515 shares of common stock at a warrant exercise price of $0.41 per share, and warrants to purchase 3,801,515 shares of common stock at a warrant exercise price of $0.48 per share.  In addition, we issued warrants to our 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.



Current 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.



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



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



| |  | Commencing a Phase I-II IND in the U.S. for Stage 3 and 4 melanoma patients.
| | - | ----------------------------------------------------------------------------



| |  | Commencing a Phase I-II IND in the U.S. for resectable non-small cell lung cancer patients.
| | - | -------------------------------------------------------------------------------------------



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



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



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



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



| |  | Continuing through completion the Phase I-II clinical trial in melanoma.
| | - | ------------------------------------------------------------------------



| |  | Continuing through completion the Phase I-II clinical trial in non-small cell lung cancer.
| | - | ------------------------------------------------------------------------------------------



| |  | Continue advanced discussions with the U. S. FDA regarding the design of the pivotal registration trial in the U.S. for the treatment of melanoma patients.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Begin discussions with the European Medical Evaluations Agency (EMEA), the FDA equivalent regulatory body for the European Union to discuss the regulatory requirements for the AC Vaccine and its continued development in Europe.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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 September 30, 2006.  The full implementation of this plan of operation beyond that time is dependent upon us obtaining additional funding or commitments for additional funding by September 30, 2006.  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 clinical activities planned, 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 cash inflows 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 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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Results of Operations



Three and Six Months Ended June 30, 2006, Compared to Three and Six Months Ended June 30, 2005.



Revenues recognized in the three and six months ended June 30, 2006 were $279,170 and $426,533, respectively, compared with revenues of $224,396 and $951,138, respectively for the same periods in 2005.  Current year revenues declined due to the termination of a contract manufacturing agreement in May 2005, which recorded revenue in the first quarter of fiscal 2005 and did not recur in fiscal 2006.



For the first six months of 2006, our research and development expenses increased to $2,157,708 from $1,751,984 for the same six months in 2005.Expenses for the periods are broken out by region as follows:



|              |  | Three Months EndedJune 30, |         | Six Months EndedJune 30, |  
|------------- |  | -------------------------- | ------- | ------------------------ | -
|              |  |                            | 2005    |                          |  
|United States |  | $                          | 400,736 |                          | $
|France        |  |                            | 568,855 |                          |  
|              |  | $                          | 969,591 |                          | $



The increase in expenses for the three and six-month periods in the U.S. are due to costs incurred in the conduct of the ongoing clinical trial and costs associated with outside consultants and advisors related to planning and preparing for the larger pivotal registration trial in melanoma.  In addition, costs were incurred in the current year for the launch of the non-small cell lung cancer study being conducted at the University of Pennsylvania.  The three and six-month costs in Europe decreased slightly from the prior year, due to consulting costs that were incurred in the first half of 2005 related to the preparing and filing of a Biologics License Application with the French authorities not recurring in the current year.



For the first six months of 2006, our selling, general and administrative expenses decreased to $947,529 from $1,014,290 for the same six months in 2005.  Expenses for the periods are broken out by region as follows:



|              |  | Three Months EndedJune 30, |         | Six Months EndedJune 30, |  
|------------- |  | -------------------------- | ------- | ------------------------ | -
|              |  |                            | 2005    |                          |  
|United States |  | $                          | 428,350 |                          | $
|France        |  |                            | 118,483 |                          |  
|              |  | $                          | 546,833 |                          |  



In the U.S., selling, general and administrative costs decreased for the three month period but increased for the six month period.  Decline in the three month period is due to bonuses that were paid in the second quarter of the 2005 that did not recur in the current year.  Six month expenses are up due to higher legal costs associated with patent activities and securities costs, as well as current year costs associated with the investor relations activities that did not occur in the prior year.



In France, selling, general and administrative expenses increased slightly for the three month period, while declining for the six month period.  Prior years administrative expenses included higher amounts for salaries with a larger allocation of the general managers salaries being allocated in 2005 than in 2006, plus an additional administrative head in the prior year that was not replaced for the current year.



We anticipate that over the next 12 months research and development expenses will increase as compared with 2005 due to planned increases in the development activities related to the AC Vaccine, assuming we are able to raise additional capital.



Liquidity and Capital Resources



We presently anticipate that our current resources should be sufficient to fund operations through September 30, 2006, depending upon how aggressively we implement our development plans discussed above.  Our current operating plan includes anticipated expenses relating to (1) continuing our clinical trials for M-Vax in the U.S., (2) planning and implementing our pivotal registration trial for melanoma in the U.S., (3) continuing our clinical trials for non-small cell lung cancer in the U.S., (4) continuing maintenance costs associated with our Philadelphia facility for future utilization in production or contract manufacturing, and (5) continuing costs associated with maintaining a cGMP-compliant facility in Lyon, France.  We will need to raise additional capital, obtain commitments for additional capital, or initiate additional contract manufacturing relationships on terms favorable to us by
September 30, 2006 to continue our operations beyond the end of 2006.  If we are unable to raise additional capital, secure additional contract manufacturing relationships or enter into strategic alliances by September 30, 2006, we will have to consider curtailing our development initiatives.



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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 full plan of operations beyond September 30, 2006, and may require us to begin restricting our activities.  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 we are unable to raise additional capital, secure additional contract manufacturing relationships or enter into strategic alliances by September 30, 2006, we will have to consider curtailing our development initiatives.



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Item 3.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-QSB for the quarter ended June 30, 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 our second quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II - OTHER INFORMATION





|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------



Our annual meeting of the stockholders was held on August 1, 2006, at which the stockholders voted on the following five initiates as set forth in our definitive proxy statement that was mailed to all stockholders of record as of June 26, 2006.  The holders of 37,816,512 shares of voting stock of the Company were present in person or were represented by proxy at the meeting, which constitutes a quorum.  The results of the voting at the annual meeting were as follows:



|Proposal 1: | Election of  the Directors of the Company
|----------- | -----------------------------------------



|Election of Directors | For        |  | Withhold
Authority
|--------------------- | ---------- |  | ------------------
|                      |            |  |                   
|John K.A. Prendergast | 37,460,129 |  | 356,383           
|Edson D. de Castro    | 37,096,906 |  | 719,606           
|Andrew W. Dahl        | 37,522,010 |  | 294,502           
|Carl Spana            | 37,519,010 |  | 297,502           



|Proposal 2: | Increase shares of authorized common stock from 150,000,000 to 500,000,000
|----------- | --------------------------------------------------------------------------



|For        | Against   | Abstain
|---------- | --------- | -------
|           |           |        
|35,043,836 | 2,585,287 | 187,389



|Proposal 3: | Authorize the Board of Directors to Implement a Reverse Stock split of up to 1 for 25
|----------- | -------------------------------------------------------------------------------------



|For        | Against | Abstain
|---------- | ------- | -------
|           |         |        
|36,852,958 | 805,239 | 158,315



|Proposal 4: | Approve the 2006 Equity Incentive Plan
|----------- | --------------------------------------



|For        | Against | Abstain | Broker
Non-Votes
|---------- | ------- | ------- | ----------------
|           |         |         |                 
|25,155,130 | 857,486 | 85,320  | 11,718,576      



|Proposal 5: | Ratify grant of non-plan stock options issued to an employee and director
|----------- | -------------------------------------------------------------------------



|For       | Against   | Abstain | Broker
Non-Votes
|--------- | --------- | ------- | ----------------
|          |           |         |                 
|2,561,703 | 2,439,733 | 96,500  | 32,718,576      



No other matters were submitted to a vote of the stockholders at the annual meeting.



|Item 6. | Exhibits and Reports on Form 8-K.
|------- | ---------------------------------



|31.1 | Certifications of Principal 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 Principal Financial Officer of the Company under Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|32.1 | Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.                                               





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Signatures



In accordance with the requirements 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: | August 14, 2006        
|      |                        



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