UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION


WASHINGTON,
      D.C. 20549





**FORM
      10-KSB/A**


**(AMENDMENT
      NO. 2)**





x
            ANNUAL
                REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                ACT OF
                1934




For
      the
      fiscal year ended December 31, 2006





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





Commission
      File Number: 001-33004









**Opexa
        Therapeutics, Inc.**


(Exact
        name of small business issuer as specified in its charter)


Texas
                76-0333165(State
                    or other jurisdiction of incorporation or organization)
                (IRS
                    Employer Identification No.)
  2635
                    N Crescent Ridge Drive, The Woodlands, Texas
                77381(Address
                    of principal executive offices)
                (Zip
                    Code)


Registrant’s
      telephone number, including area code: (281)
      272-9331





Securities
      registered pursuant to Section 12(b) of the Act: None





Securities
      registered pursuant to Section 12(g) of the Act: Common Stock





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





Check
      whether the Issuer (1) has filed all reports required to be filed by Section
      13
      or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
      (or for such shorter period that the registrant was required to file such
      reports) and (2) has been subject to such filing requirements for the past
      90
      days. Yes x  No o





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B is not contained in this form, and no disclosure will be
      contained, to the best of registrant’s knowledge, in definitive proxy or
      information statements incorporated by reference in Part III of this Form 10-KSB
      or any amendment to this Form 10-KSB. x





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





Issuer’s
      revenues for the fiscal year ended December 31, 2006: $0.





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates of the Issuer as of November 27, 2007 based upon the average
      bid
      and asked price as of such date, was $13,771,592.





The
      Registrant’s common stock outstanding as of November 27, 2007, was 6,696,784
      shares.

















DOCUMENTS
      INCORPORATED BY REFERENCE:





The
      Registrant is incorporating by reference in Part III of this Form 10-KSB certain
      information contained in the Registrant’s proxy statement for its annual meeting
      of shareholders, which proxy statement will be filed by the Registrant on or
      before April 30, 2007.





Transitional
      Small Business Disclosure Format (Check One): Yes o No x











**TABLE
      OF CONTENTS**




**Item**
              **Description**
              **Page**
 Explanatory
                  Note
              1Special
                  Note about Forward-Looking Information and Stock Split
              1**Part
                  I**Item
                  1
              Description
                  of Business
              2Item
                  2
              Description
                  of Property
              19Item
                  3
              Legal
                  Proceedings
              19Item
                  4
              Submission
                  of Matters to a Vote of Security Holders
              19**Part
                  II**Item
                  5
              Market
                  for Registrant’s Common Equity, Related Stockholder Matters and Small
                  Business Issuer Purchases of Equity Securities
              19Item
                  6
              Management’s
                  Discussion and Analysis or Plan of Operation
              20Item
                  7
              Financial
                  Statements
              F-1Item
                  8
              Changes
                  in and Disagreements with Accountants on
                Accounting
                  and Financial Disclosure
              24Item
                  8A
              Controls
                  and Procedures
              24Item
                  8B
              Other
                  Information
              24**Part
                  III**Item
                  9
              Directors,
                  Executive Officers, Promoters and Control Persons;
                Compliance
                  with Section 16(a) of the Exchange Act
              24Item
                  10
              Executive
                  Compensation
              25Item
                  11
              Security
                  Ownership of Certain Beneficial Owners and Management
                and
                  Related Stockholder Matters
              25Item
                  12
              Certain
                  Relationships and Related Transactions and Director
                  IndependenceItem
                  13
              Exhibits
                  and Reports on Form 8-K
              25Item
                  14
              Principal
                  Accountant Fees and Services
              25Signatures
              27












***Explanatory
      Note***




We
      are
      amending our Annual Report on Form 10-KSB for the for the year ending December
      31, 2006 in connection with restating our consolidated financial statements
      for
      the years ending December 31, 2006, 2005 and for the period January 22, 2003
      (Inception) to December 31, 2006.  The restatement of our financial
      statements is the result of our determination that the intangible assets
      associated with the acquisition of Opexa Pharmaceuticals, Inc., the University
      of Chicago technology license and the Shanghai Institutes for Biological
      Sciences, Chinese Academy of Sciences of the Peoples Republic of China
      technology license should have been recorded as acquired in process research
      and
      development.





The
      purpose of this amendment is to restate the accompanying financial statements
      at
      and for the years ended December 31, 2006, 2005 and for the period January
      22,
      2003 (Inception) to December 31, 2006 for the reasons further described in
      Note
      2 to the financial statements included in Item 7 (Financial Statements)
      herein.





***Forward
      Looking Statement***




*The
      statements contained in this report, other than statements of historical fact,
      constitute forward-looking statements. Such statements include, without
      limitation, all statements as to expectation, belief, estimation, intent,
      anticipation, development, trial, contingency and statements as to our future
      results of operations, the progress of our research and product development
      programs, the need for, and timing of, additional capital and capital
      expenditures, partnering prospects, the need for additional intellectual
      property rights, effects of regulations, and the potential market
      opportunities.  These statements relate to events and/or future
      financial performance and involve known and unknown risks, uncertainties and
      other factors that may cause the actual results, levels of activity, performance
      or achievements of the Company or the industry in which it operates to be
      materially different from any future results, levels of activity, performance
      or
      achievements expressed or implied by the forward-looking statements. These
      risks
      and other factors include those listed under "Risk Factors" and those described
      elsewhere in this report.*




*In
      some cases, you can identify forward-looking statements by the Company's use
      of
      terms such as "may," "will," "should," "expects," "plans," "anticipates,"
      "believes," "estimates," "predicts," "potential," or the negative of these
      terms
      or other comparable terminology. These statements are only predictions. Actual
      events or results may differ materially. In evaluating these statements, you
      should specifically consider various factors, including the risks outlined
      under
      "Risk Factors." These factors may cause the Company's actual results to differ
      materially from any forward-looking statement.*




*Although
      the Company believes that the expectations reflected in the forward-looking
      statements are reasonable, it cannot guarantee future results, levels of
      activity, performance, or achievements. Moreover, neither the Company nor any
      other person assumes responsibility for the accuracy and completeness of these
      forward-looking statements. The Company does not intend to update any of the
      forward-looking statements after the date of this report to conform prior
      statements to actual results.*




***Stock
      Split***




*In
      June 2006, the Company’s shareholders approved a one for ten reverse common
      stock split.  All share, par share and par value amounts (except
      authorized shares) have been retroactively adjusted to reflect the
      split.*







1




**PART
      I**





**ITEM
      1. DESCRIPTION OF BUSINESS**





**Overview**





Opexa
      Therapeutics, Inc. (the “Company”, “we”, “Opexa” or “Opexa Therapeutics”) is a
      biopharmaceutical company developing autologous cellular therapies to treat
      several major illnesses, including multiple sclerosis (MS), rheumatoid arthritis
      (RA), diabetes, and cardiovascular disease. These therapies are based on the
      Company’s proprietary T-cell and adult stem cell technologies.




Opexa
      Therapeutics’ lead product, Tovaxin®, is a T-cell based therapeutic vaccine for
      MS licensed from the Baylor College of Medicine, which offers a unique and
      personalized approach to treating the disease by inducing an immune response
      against the autoimmune myelin peptide-reactive T-cells (MRTCs), which are
      believed to be responsible for the initiation of the disease
      process.




Tovaxin
      is
      currently in a Phase IIb clinical trial. Initial Phase I/II open-label human
      trials show that T-cell vaccination (TCV) appears to safely induce immune
      responses that deplete and regulate MRTCs. In two open-label Phase I/II clinical
      trials, the annualized relapse rates of patients were reduced by an average
      of
      approximately 90% compared to their prior history of relapses.  Some
      patients also appear to experience an improvement of their Kurtzke Expanded
      Disability Status Scale, a scoring method used to measure the disability of
      MS
      patients (EDSS).  Improvements in EDSS are not frequently observed in
      patients following treatment with other currently licensed therapies. Although
      the data from our Phase I/II trials appears to be promising, the Phase IIb
      trial
      is being conducted to confirm these results. Opexa Therapeutics believes that
      TovaxinTM could be ready for commercialization as early as 2011.




We
      also
      hold exclusive worldwide license for the intellectual property rights and
      research results of an autologous T-cell vaccine for RA from the Shanghai
      Institutes for Biological Sciences (SIBS), Chinese Academy of Sciences of the
      People's Republic of China.




Opexa’s
      RA
      T-cell vaccination (TCV) technology is conceptually similar to
      TovaxinTM.  RA is an autoimmune T-cell-mediated disease in which
      pathogenic T-cells trigger an inflammatory autoimmune response of the synovial
      joints of the wrists, shoulders, knees, ankles and feet which causes pain,
      stiffness, and swelling around the joints and erosion into cartilage and
      bone.  The RA TCV technology allows the isolation of these pathogenic
      T-cells from synovial fluid drawn from a patient.  These T-cells will
      be grown to therapeutic levels and attenuated by gamma irradiation in our
      laboratory.  The attenuated T-cells will be injected subcutaneously
      into patients thereby inducing an immune response directed at the pathogenic
      T-cells in the patient’s body.  This immune response regulates the
      level of pathogenic T-cells and potentially allows the reduction of joint
      swelling in RA patients. Human trials that have been conducted in China show
      minimal side-effects and promising efficacy measured as a reduction of joint
      swelling following the T-cell vaccination.




We
      also
      have an exclusive license from the University of Chicago, through its prime
      contractor relationship with Argonne National Laboratory, to a stem cell
      technology in which adult multipotent stem cells are derived from monocytes
      (white blood cells) obtained from the patient’s own blood. We are initially
      pursuing indications in diabetes mellitus with our stem cell therapy and are
      conducting preclinical animal studies.





The
      Company’s stem cell technology isolates novel multipotent stem cells derived
      from peripheral blood monocytes. *In vitro* experiments with
      monocyte-derived stem cells (MDSC) have shown their capacity to differentiate
      into a wide variety of
      cell types
      including pancreatic β cells.  We have demonstrated that these
      pancreatic islets clusters derived from MDSCs are composed of  three
      pancreatic cells types (a, b and
d).
      These islet
      clusters are responsive to glucose and mimics the normal pulsatile pattern
      observed in human islets.****The importance of these stem
      cells is the ability to easily isolate them from an individual’s circulating
      monocytes, expand them and administer them back into the same patient. This
      autologous approach provides a method to overcome any rejection issues and
      the
      need for immunosuppressant drugs which are often associated with current islet
      cell transplantations. This technology may lead to the formation of an unlimited
      source of pancreatic islet cells suitable for an autologous cell therapy for
      the
      treatment of diabetes mellitus.






2




An
      overview of Opexa’s technologies and pipeline is provided in the following
      chart:












**T-Cell
      Therapy**




Opexa
      Therapeutics has the exclusive worldwide license from Baylor College of Medicine
      to an individualized T-cell therapeutic vaccine, TovaxinTM, which is in U.S. FDA
      Phase IIb human clinical trials to evaluate its safety and effectiveness in
      treating MS.




TovaxinTM
      consists of
      attenuated patient-specific MRTCs against peptides from either mylen basic
      protein [MBP], proteolipid protein [PLP], myelin oligodendrocyte glycoprotein
      [MOG]) peptides or combinations therof. Patient-specific MRTCs are expanded
      in
      culture with specific peptides identified by the Company’s proprietary test of
      the patient’s peripheral blood. MS is the result of a person’s own T-cells
      attacking the myelin sheath that coats the nerve cells of the central nervous
      system (CNS). Opexa Therapeutics’ unique T-cell technology takes these
      autoreactive T-cells from the patient and expands them ex vivo (in a
      cell-culture environment outside the body), attenuates them by gamma
      irradiation, and then returns them to the patient as a subcutaneous
      injection.  Although further testing is necessary, results from our
      initial human trials appear to indicate that these attenuated T-cells cause
      an
      immune response directed at the autoreactive T-cells in the patient’s body,
      stimulating a reduction in the level of harmful T-cells.




We
      believe
      that our initial human trials show that TovaxinTM safely
      induces
      the depletion and regulation of MRTCs, possibly stabilizing the disease,
      reducing the annualized relapse rate, and potentially improving the disability
      scores of patients. In November 2006, the Company enrolled the first patient
      in
      a double blind, placebo controlled, 150 patient Phase IIb clinical trial. We
      expect to complete enrollment in mid 2007.




Our
      Rheumatoid Arthritis (RA) T-cell vaccination (TCV) technology is conceptually
      similar to TovaxinTM.  RA is an autoimmune T-cell-mediated disease in
      which pathogenic T-cells  trigger an inflammatory autoimmune response
      of the synovial joints of the wrists, shoulders, knees, ankles and feet which
      causes pain, stiffness, and swelling around the joints and erosion into
      cartilage and bone.  Our RA TCV technology allows the isolation of
      these pathogenic T-cells from synovial fluid drawn from a patient.  We
      will expand and attenuate these T-cells in our laboratory.  The
      attenuated T-cells will be injected subcutaneously into patients with the goal
      of inducing an immune response directed at the Pathogenic T-cells in the
      patient’s body.  We believe this immune response could reduce the
      level of pathogenic T-cells and potentially allow the reduction of joint
      swelling in RA patients.








3





**Stem
      Cell Therapy**





Opexa
      has
      developed a proprietary adult stem cell technology to produce novel
      monocyte-derived stem cells (MDSC) from blood.  These MDSC can be
      derived from a patient’s monocytes, expanded ex vivo, and then administered to
      the same patient.  The Company believes that because this is an
      autologous therapy, there should be no rejection issues as self-derived MDSC
      pose no immunological problems. Normally, allogenic cells are deleted by host
      immune responses and require the use of anti-rejection drugs.




Our
      novel
      multi-potent stem cell is derived from peripheral blood monocytes which when
      cultured under defined conditions are able to further differentiate into several
      cellular lineages. Molecular biology and immunohistochemical studies have shown
      that these MDSCs have specific markers that distinguish them from other stem
      cells. In addition these studies have also shown a time-dependence for the
      expression of these specific gene products during the growth and differentiation
      of MDSCs.  In vitro experiments with MDSCs have shown their capacity
      to differentiate towards hematopoietic, epithelial, endothelial, endocrine
      and
      neuronal cells. Our main focus is the further development of this
      monocyte-derived stem cell (MDCS) technology as a novel platform for the in
      vitro generation of highly specialized cells for potential application in
      autologous cell therapy for patients with diseases such diabetes mellitus and
      cardiovascular disease.




**Other
      Opportunities**




The
      Company intends to conduct basic research to determine the potential use of
      its
      stem cells and differentiated cells in other indications, such as macular
      degeneration, stroke, myocardial infarction, wound healing and Parkinson’s
      disease. Opexa Therapeutics intends to partner or sublicense some of these
      indications if they are not pursued for internal development. For those
      indications where the Company feels it can participate commercially, Opexa
      Therapeutics desires to partner in key commercial markets outside of the United
      States.




**Organizational
      History**




We
      were
      incorporated in Texas in 1991 and in May 2004, we entered the biopharmaceutical
      business by acquiring an entity that held rights to treatments using adult
      multipotent stem cells derived from adult human peripheral
      blood.  From an accounting standpoint, the subsidiary is deemed the
      acquirer in a reverse merger whereby the parent is deemed the survivor of the
      reorganization.  As such, our financial statements are those of the
      subsidiary.  In November 2004, we acquired Opexa Pharmaceuticals, Inc.
      which holds rights to technology to an individualized T-cell therapeutic
      technology for treating MS.






**The
      Company’s Products and Services**






**Our
      T-cell Platform**




***Multiple
      Sclerosis - Background***




In
      the
      United States, approximately 400,000 people suffer from multiple sclerosis,
      a
      chronic progressive autoimmune disease of the central nervous system (CNS)
      that
      is caused by myelin autoreactive T-cells progressively eroding the myelin that
      surrounds and insulates nerve fibers of the brain and spinal cord resulting
      in
      varying amounts of disability.  Globally, there are approximately 2.5
      million MS patients representing a drug market believed to be approximately
      $5
      billion in 2005.  The US markets accounted for slightly more than 50
      percent of global MS sales in 2005, approximately $2.5 billion.  MS
      remains a challenging autoimmune disease to study because the pathophysiologic
      mechanisms are diverse, and the chronic, unpredictable course of the disease
      makes it difficult to determine whether the favorable effects of short-term
      treatment will be sustained.  Therapies that can safely prevent or
      stop the progression of disease and allow reversal of the neurological damage
      and disability caused by the disease represent the greatest unmet need in
      MS.




In
      recent
      years, the understanding of MS pathogenesis has evolved to comprise an initial,
      T-cell-mediated inflammatory activity followed by selective demyelination
      (erosion of the myelin coating of the nerve fibers) and then
      neurodegeneration.  The discovery of disease-relevant immune responses
      has accelerated the development of targeted therapeutic products for the
      treatment of the early stages of MS.  Healthy individuals have been
      found to have autoreactive T-cells, which recognize a variety of self-antigens
      (e.g., myelin basic protein [MBP], proteolipid protein [PLP], and myelin
      oligodendrocyte glycoprotein [MOG]) as part of the normal T-cell repertoire
      and
      circulate naturally in the periphery without causing an autoimmune
      disease.






4




Some
      subjects unfortunately who have the appropriate genetic background have
      increased susceptibility for the in vivo activation and clonal expansion of
      myelin autoreactive T-cells.  These myelin autoreactive T-cells may
      remain dormant, but at some point they are activated in the periphery, possibly
      by molecular mimicry (i.e., recognition of epitopes that are common to
      autoantigens and microbial antigens as exogenous triggers), thus enabling them
      to cross the blood-brain barrier (BBB) and infiltrate the healthy tissue of
      the
      brain and spinal cord.  The cascade of pathogenic events leads to
      demyelination of axons, which causes nerve impulse transmissions to diffuse
      into
      the tissue.




***Current
      Therapy for Multiple Sclerosis***




Current
      MS
      disease modifying drugs on the market are mostly palliative and generally work
      through a mechanism of immunomodulation or immunosuppression.  These
      therapies for MS are dominated by three forms of interferon that require
      frequent subcutaneous or intramuscular injections (Avonex, Betaseron and
      Rebif).  Copaxone is an immunomodulator composed of a random copolymer
      of amino acids that is administered daily.  Novantrone (mitoxanthrone)
      is an immunosuppressive drug that can only be given four times per year with
      a
      life time limit of 8 to 12 doses.  All of the current therapies only
      slow the progression of MS and they have significant patient compliance
      challenges because of the dosing schedule, limited decrease in relapse rate,
      side effects profile (e.g., the interferon formulations produce severe flu-like
      symptoms, injection site reactions, infection and neutralizing antibodies
      (ranging from 5% to 45%) are developed that limits the efficacy of treatment;
      Copaxone causes significant injection site reactions; while Novantrone causes
      infections, bone marrow suppression, nausea, hair thinning, bladder infections,
      and mouth sores).  These drugs must be administered daily to weekly.
      Tysabri®, a selective adhesion molecule inhibitor (an alpha 4 integrin
      antagonist), represents another class of MS drugs which works by preventing
      immune system cells (all leukocytes carrying the alpha 4 integrin glycoprotein
      on their surface) from crossing the BBB and move into the
      CNS.  Tysabri® requires a once per month infusion and has recently
      been reintroduced to the market after being originally withdrawn in 2005 based
      on safety concerns over several patient deaths due to virally mediated brain
      inflammation – a condition called progressive multifocal leukoencephalopathy
      (PML).




***Tovaxin*TM*for
      Multiple Sclerosis***




The
      Company believes that TovaxinTM works
      selectively on the myelin autoreactive T-cells by harnessing the body’s natural
      immune defense system and feedback mechanisms to deplete these T-cells and
      induce favorable immune regulatory responses by rebalancing the immune
      system.  TovaxinTM is
      manufactured by taking the MRTCs from the blood, expanding them to a therapeutic
      dose ex-vivo, and attenuating them with gamma irradiation to prevent DNA
      replication.  These attenuated MRTCs are then injected subcutaneously
      into the body in large quantities.  The body recognizes specific
      T-cell receptor molecules of these MRTCs as foreign and mounts an immune
      response reaction against them, not only destroying the injected attenuated
      MRTCs, but also the circulating, myelin autoreactive T-cells carrying the
      peptide-specific T-cell receptor molecules.  In addition, T-cell
      activation molecules on the surface of the activated MRTCs used as vaccine
      induce favorable immune regulatory responses, which promote anti-inflammatory
      responses.  Because the therapy uses an individual’s own cells, the
      only directly identifiable side effect is injection site reaction in a small
      percentage of the patients.  These reactions clear within 24
      hours.




We
      believe
      that this technology platform will have application in other T-cell mediated
      diseases such as Crohn’s disease, psoriasis, rheumatoid arthritis and Type
      1diabetes.




***Tovaxin*TM*Intellectual Property***




The
      technology is based on discoveries made by Dr. Jingwu Zang of Baylor College
      of
      Medicine in Houston.  The Company has an exclusive, worldwide license
      from the Baylor College of Medicine to develop and commercialize three
      technology areas for MS, namely T-cell vaccination, peptides, and
      diagnostics.  Under the License Agreement with the Baylor College of
      Medicine, the Company has rights to a total of 11 patents (2 U.S. and 9 foreign)
      and 80 patent applications (6 U.S. and 74 foreign).






5




***Tovaxin*TM*Manufacturing***




Opexa
      Therapeutics’ manufactures its TCV therapy in its own Good Manufacturing
      Practice (“GMP”) facility.  The TCV technology is similar to that of
      traditional microbial vaccine technology, where the pathogen (or the attenuated
      derivative) is used to derive the protective antigens necessary to induce
      protective immune responses.  In preparing a TCV therapy, the myelin
      autoreactive T-cells causing the disease are taken from the blood, specifically
      identified, and expanded ex vivo by incubating these T-cells with selected
      peptides of MBP, PLP, and MOG in the presence of antigen-presenting cells and
      growth factors.  Myelin-peptide reactive T-cells are grown to
      therapeutic levels and cryopreserved.  Prior to use, the MRTCs are
      expanded, formulated, and attenuated (by irradiation) to render them incompetent
      to replicate but viable for therapy.  These attenuated T-cells are
      administered in a defined schedule of subcutaneous injections.  We
      expect that a single draw of a 500 ml bag of blood is sufficient to provide
      a
      full year’s therapeutic regimen of TovaxinTM.




***Clinical
      Development of Tovaxin*TM**




TovaxinTM
      is currently
      in a Phase IIb clinical trial.  Patients treated in Opexa Therapeutics
      Phase I/II open-label studies with trivalent (MBP, MOG, and PLP) formulations
      have experienced minimal side effects, an approximate 90% average reduction
      in
      annualized relapse rate and improvements in EDSS scores.




***Tovaxin*TM*Phase IIb
      Clinical Trial***




The
      Phase
      IIb trial, entitled “A Multicenter, Randomized, Double-Blind, Placebo-Controlled
      Study of Subcutaneous TovaxinTM in
      Subjects
      with Clinically Isolated Syndrome or Relapsing Remitting Multiple Sclerosis”,
      is  a multi-site double-blind, randomized, placebo-controlled 150 (100
      treated, 50 placebo) patient trial.  The primary endpoint will be
      lesion evaluation (the total number of gadolinium-enhancing lesions) via MRI
      with a secondary endpoint being annual relapse rate.  This trial is
      designed to demonstrate the safety and efficacy of TovaxinTM. The
      Company
      enrolled its first patient in November 2006 and expects to complete enrollment
      in mid 2007.




**Our
      Stem Cell Platform**





***Stem
      Cells – Background***




Stem
      cells
      are undifferentiated primary cells that have the potential to become any tissue
      or organ of the body. They hold therapeutic promise for the development of
      effective treatments and possibly cure for various diseases. The current stem
      cell research efforts have been divided between embryonic and tissue specific
      adult stem cells as potential therapeutic progenitor cells.  Recent
      experiments with Embryonic stem (ES) cells have demonstrated that these highly
      proliferative, pluripotent cells can differentiate into pancreatic-like
β-cells.  The major problem with ES cells is their pluripotency and
      risk that these cells, once transplanted, could form
      tumors.  Given that, adult tissue specific stem cells have become
      attractive as a potential cell therapeutic.  Adult tissue specific
      stem cells have advantages over ES cells; first, these cells can be isolated
      from a more manageable source such as bone marrow or other tissues; second,
      they
      proliferate in a controlled fashion and without the likelihood of
      tumorogenicity, and third, they can be used in an autologous setting and avoid
      the potential for rejection which exists for allogenic use of stem
      cells.




Hematopoietic
      stem cells (HSC’s), present in the bone marrow and precursors to all blood
      cells, are currently the only type of stem cells commonly used for
      therapy.  Doctors have been transferring HSC’s in bone marrow
      transplants for more than 40 years.  Advanced techniques for
      collecting or “harvesting” HSC’s are now used to treat leukemia, lymphoma and
      several inherited blood disorders.




The
      clinical potential of stem cells has also been demonstrated in the treatment
      of
      other human diseases, including diabetes and advanced kidney
      cancer.  However, these new therapies have been offered only to a very
      limited number of patients using adult stem cells.






6




Unfortunately
      stem cell therapies have technical, ethical and legal hurdles to overcome before
      they will be able to be used to possibly effect tissue and organ repair in
      disease states that heretofore have only treated the symptoms.  A
      significant hurdle to most uses of stem cells is that scientists do not yet
      fully understand the signals that turn specific genes on and off to influence
      the differentiation of the stem cell.  Therefore, scientists will have
      to be able to precisely control the differentiation of stem cells into the
      specific cell type to be used in therapy and drug testing. Current knowledge
      of
      the signals controlling differentiation fall well short of being able to mimic
      these conditions precisely to consistently have identical differentiated cells
      for each specified use.




To
      realize
      the promise of novel cell-based therapies for such pervasive and debilitating
      diseases, scientists must be able to easily and reproducibly manipulate stem
      cells so that they possess the necessary characteristics for successful
      differentiation, transplantation and engraftment.   To be useful
      for transplant purposes, stem cells must be reproducibly made to: proliferate
      extensively and generate sufficient quantities of tissue, differentiate into
      the
      desired cell type(s), survive in the recipient after transplant, integrate
      into
      the surrounding tissue after transplant, function appropriately for the duration
      of the recipient's life, avoid harming the recipient in any way, and avoid
      the
      problem of immune rejection.  There is no assurance that any
      commercialized cell-based therapies will ever be developed.




Although
      there are many ways to access stem cells, the Company believes that its
      autologous blood monocyte-derived stem cells offer distinct
      advantages.




***Therapies
      utilizing Our Stem Cell Platform***




Opexa
      has
      developed a proprietary adult stem cell technology to produce monocyte-derived
      stem cells (MDSC) from blood.  These MDSC can be derived from a
      patient’s monocytes, expanded ex vivo, and then administered to the same
      patient.  The Company believes that because this is an autologous
      therapy, there should be no allogenic rejection issues as self-derived MDSC
      pose
      no immunological problems.  Normally, allogenic cells are deleted by
      host immune responses and require the use of anti-rejection drugs.




Our
      novel
      multi-potent stem cell is derived from peripheral blood monocytes which when
      cultured under defined conditions are able to further differentiate into several
      cellular lineages. Molecular biology and immunohistochemical studies have shown
      that these MDSCs have specific markers that distinguish them from other stem
      cells. In addition these studies have also shown a time-dependence for the
      expression of these specific gene products during the growth and differentiation
      of MDSCs.  In vitro experiments with MDSCs have shown their capacity
      to differentiate towards hematopoietic, epithelial, endothelial, endocrine
      and
      neuronal cells. Our main focus is the further development of this
      monocyte-derived stem cell (MDCS) technology as a novel platform for the in
      vitro generation of highly specialized cells for potential application in
      autologous cell therapy for patients with diseases such diabetes mellitus and
      cardiovascular disease.




Opexa
      Therapeutics, working either by itself or in conjunction with strategic
      partners, expects to utilize these MDSC from the same patient to develop a
      therapy which may cause autologous tissue or organ repair.  The
      initial internal therapeutic target is diabetes mellitus.  Other
      therapeutic targets would be pursued through early-stage licensing or strategic
      alliances.  The diabetes program is currently in pre-clinical
      development.




***Pancreatic
      Islet Cell Development***




Diabetes
      is a
      disease characterized by the failure or loss of pancreatic β-cells to generate
      sufficient levels of the hormone insulin required to meet the body’s need to
      maintain normal nutrient homeostasis. Type 1 diabetes is caused by the complete
      loss of pancreatic β-cells when the body’s own immune system mistakenly attacks
      and destroys a person’s β-cells.  While forType
      2
      diabetes the causes are far more complicated and poorly understood, the results
      of the disease are similar in that often the β-cells fail to generate
      sufficient amounts of insulin to maintain normal homeostasis.  The
      loss of insulin results in an increase in blood glucose levels and will
      eventually lead to the development of premature cardiovascular disease, stroke,
      and kidney failure.  Currently there is no permanent cure for
      diabetes; however, recent clinical islet cell transplantations have shown good
      success in restoring long-term endogenous insulin production and glycemic
      stability in subjects who have Type 1 diabetes mellitus with unstable baseline
      control.  Persistent islet function without injected insulin
      dependence provides considerable benefit.






7




Current
      cell
      transplant therapy for the treatment of diabetes is limited by an inadequate
      supply of insulin-producing cells.  Cadaveric sources are
      limited and up to three pancreas are required to obtain clinically significant
      quantities of β-cells for one patient. The identification
      of novel adult human stem cells provides a new prospect for obtaining a
      sufficient number of insulin-producing β-cells for
      transplantation.  Using our technology a single blood draw maybe
      adequate to produce clinical quantities of β-cells for a patient.




In
      vitro
      experiments with MDSC have shown their capacity to differentiate toward a wide
      variety of cell typesincluding
      pancreatic β-like cells. These cells aggregate into clusters resembling
      pancreatic Islets of Langerhans termed Monocyte Derived Islets (MDI). The
      cluster aggregates show endocrine gene expression. Biochemical assays
      have demonstrated that MDI can synthesize and secrete significant amounts of
      insulin during their growth and respond in a glucose-dependent manner. In
      addition, MDI can be stimulated or repressed by the addition of agonists or
      antagonists of insulin in vitro.




The
      importance of these stem cells is the ability to easily and cost effectively
      derive them from an individual’s circulating monocytes, expand them and
      administer them back into the same patient. This autologous approach provides
      a
      method to overcome any rejection issues and the
      need for
      immunosuppressant drugs which are often associated with current
      transplantations. This technology may lead to the formation of an unlimited
      source of β cells suitable for an autologous cell therapy for the treatment of
      diabetes mellitus.




***Stem
      Cell Pre-Clinical and Clinical Development***




Opexa
      is
      conducting pre-clinical studies to demonstrate proof of concept and method
      of
      delivery with a planned IND (Investigational New Drug)submission
      to the FDA during 2007.  The Company is targeting a 2008 Phase I study
      for monocyte-derived islet transplantation of patients with Type 1 diabetes
      mellitus.




***Licenses,
      Patents and Proprietary Rights***




We
      believe
      that proprietary protection of our technologies is critical to the development
      of our business. We intend to continue to protect our proprietary intellectual
      property through patents and other appropriate means. We rely upon trade-secret
      protection for some confidential and proprietary information and take active
      measures to control access to that information. We currently have non-disclosure
      agreements with all of our employees, consultants, vendors, advisory board
      members and contract research organizations.




The
      Company’s intellectual property strategy includes developing proprietary
      technology for the sourcing, scale up, manufacturing, and storage of
      T cells and multipotent adult stem cells and the use of these cells in
      multiple therapeutic applications. This strategy will include expanding on
      technologies in-licensed to us as well as in-licensing additional technologies
      through collaborations with universities and biotech companies.




We
      have
      exclusive, worldwide licenses to certain patents that relate to our T-cell
      technology and our multipotent adult stem cell technology.




***T-Cell
      Therapy IP***




We
      have an
      exclusive, worldwide license from the Baylor College of Medicine to patent
      applications claiming rights to the treatment of multiple sclerosis using
      attenuated modified T-cells and to the use of the T-cell technology as a
      diagnostic.  The license was granted to the Company by Baylor in
      exchange for common stock in Opexa Pharmaceuticals which was acquired by the
      Company in November 2004.  The key terms of the agreement are:
      exclusive, worldwide, and a 2% royalty on net sales of licensed
      products.  The royalty decreases to 1% after the aggregate net sales
      exceed $500 million.  There are no other performance or payment terms
      in the license.  The Company also has a separate consulting agreement
      with the inventor, Jingwu Zang, M.D., Ph.D. which grants the Company the right
      of first refusal on all future discoveries made by Dr. Zang.




The
      Company has filed additional patent applications related to T-Cell vaccination
      for MS.







8




***Rheumatoid
      Arthritis Therapy IP***




We
      have an
      exclusive worldwide license for the intellectual property rights and research
      results of an autologous T cell vaccine for rheumatoid arthritis from the
      Shanghai Institutes for Biological Sciences (SIBS), Chinese Academy of Sciences
      of the People's Republic of China.  We made a $125,000 license payment
      and agreed to pay a 0.5% royalty on net sales of licensed products.




The
      Company has filed additional patent applications related to T-Cell vaccination
      for RA.




***Stem
      Cell Therapy IP***




We
      have an
      exclusive, worldwide license from the University of Chicago, through its prime
      contractor relationship with Argonne National Laboratory, to a patent
      application claiming rights to the development of adult multipotent stem cells
      from monocytes isolated from adult human peripheral blood. The technology was
      discovered and developed at the Argonne National Laboratory, a U.S. Department
      of Energy Laboratory.




Pursuant
      to the license we have issued a total of 53,463 shares of our common stock
      to
      the University of Chicago. We have also agreed to pay the University of Chicago
      $1.5 million and issue to them 21,623 shares of Opexa Common Stock by April
      30,
      2007.  We have agreed to pay a percentage of royalties on sales of
      products subject to the licensed patents, as well as sublicense fees. In
      addition, the University of Chicago license requires us to expend on research
      and development at least $2,000,000 within two (2) years of the execution of
      the
      license and at least an additional $4,000,000 within four (4) years of the
      execution of the license. Research and development expenditures by sublicensees
      may account for half of each amount. The license also requires us to sell a
      product or method based on the licensed technology by February
      2011.




The
      Company has filed patent applications related to the process of obtaining
      monocyte-derived stem cells and the further differentiation of the cells into
      pancreatic islet cells.




**Our
      Product Pipeline**





TovaxinTM
      is a vaccine approach to treating multiple sclerosis in that it induces the
      body’s immune system to attack the MRTCs that we believe are responsible for
      destroying the myelin sheath coating of the axons in the central nervous
      system.  We believe that the depletion and regulation of the MRTCs may
      stop progression of multiple sclerosis.  TovaxinTM is currently in a
      Phase IIb clinical trial. The Company enrolled its first patient in November
      2006 and expects to complete enrollment in mid 2007.




***Rheumatoid
      Arthritis Therapy***




Our
      Rheumatoid Arthritis (RA) T-cell vaccination (TCV) technology is conceptually
      similar to TovaxinTM.  RA is an autoimmune T-cell-mediated disease in
      which Pathogenic T-cells  trigger an inflammatory autoimmune response
      of the synovial joints of the wrists, shoulders, knees, ankles and feet which
      causes pain, stiffness, and swelling around the joints.  We are
      currently transferring the technology to our laboratory and will present data
      to
      the FDA in 2007 with the intention of filing an IND and initiating a Phase
      I
      clinical trial in 2008.




***Diabetes
      Stem Cell Therapy***




We
      believe
      that there are approximately 20.8 million people the United States who have
      diabetes. More than 1 million of these people have Type 1 diabetes mellitus.
      Among adults with diagnosed diabetes, 31% take insulin to control their disease.
      Research studies have found that improved glycemic control benefits people
      with
      either Type 1 or Type 2 diabetes.  Islet transplantation using Opexa’s
      proprietary monocyte-derived islet cell may offer the potential to improve
      glycemic control in a subgroup of patients with Type 1 and Type 2 diabetes
      mellitus who are disabled by refractory hypoglycemia. The Company is in
      preclinical development and plans to file an IND in 2007 and ititiate a Phase
      I
      clinical trial in 2008.





***Cardiac
      Stem Cell Therapy***






9




Stem
      cell
      treatment of congestive heart failure could revolutionize treatment of the
      disease because it may treat the source of the problem by replacing diseased
      cardiac muscle tissue with stem cells that grow or induce the growth of new
      healthy cardiac tissue.  Elsewhere multiple Phase I clinical studies
      encompassing more than 70 patients have been run with autologous bone marrow
      stem cells that report improved cardiac perfusion.  A recent
      (2003-2004) trial reported that injected autologous bone marrow mononuclear
      cells, using electromechanical mapping into areas of ischemic myocardium in
      patients with endstage ischemic cardiomyopathy and heart failure, showed a
      therapeutic effect with improved myocardial perfusion and exercise capacity,
      at
      6 and 12 months, as well as increased global left ventricular
      function.  Using the experience of these Phase I trials we plan to
      move through pre-clinical development and, if successful, initiate human testing
      as soon as practicable.




***Other
      Opportunities***




The
      Company intends to conduct basic research to determine the potential use of
      the
      Company’s stem cells in other indications such as macular degeneration, heart
      attack, and Parkinson’s disease.  Liver cells (hepatocytes) derived
      from our stem cells may be valuable across the biopharmaceutical industry to
      test for drug toxicity or to help cure liver diseases. The Company intends
      to
      partner or sublicense some of these indications if they are not pursued for
      internal development. For those indications where the Company feels it can
      participate commercially, the Company will possibly take partners in key
      commercial markets outside of the United States.




**Research
      Collaborations**




We
      anticipate that from time to time in the future we will enter into collaborative
      research agreements with other academic and research institutions. We will
      use
      such agreements to enhance our research capabilities. Typically, in the
      industry, such agreements provide the industry partner with rights to license
      the intellectual property created through the collaboration. We may also enter
      into collaborative research agreements with other pharmaceutical companies
      when
      we believe such collaboration will support the development and commercialization
      of our technology.




**Commercialization
      Through Third Parties**




We
      anticipate that we will possibly grant sublicenses for certain applications
      of
      our technologies. We believe that by sublicensing some of the rights to our
      technology to pharmaceutical companies and other third parties, we will be
      able
      to develop more efficiently some applications of our technologies. We currently
      do not have any sublicenses.




**Competition**




The
      development of therapeutic and diagnostic agents for human disease is intensely
      competitive. Major pharmaceutical companies currently offer a number of
      pharmaceutical products to treat heart attack, stroke, Parkinson's disease,
      diabetes, liver diseases, arthritis and other diseases for which our
      technologies may be applicable. Many pharmaceutical and biotechnology companies
      are investigating new drugs and therapeutic approaches for the same purposes,
      which may achieve new efficacy profiles, extend the therapeutic window for
      such
      products, alter the prognosis of these diseases, or prevent their onset. We
      believe that our products, when and if successfully developed, will compete
      with
      these products principally on the basis of improved and extended efficacy and
      safety and their overall economic benefit to the health care system. We expect
      competition to increase. We believe that our most significant competitors will
      be fully integrated pharmaceutical companies and more established biotechnology
      companies. Smaller companies may also be significant competitors, particularly
      through collaborative arrangements with large pharmaceutical or biotechnology
      companies. Some of our primary competitors in the current treatment of and
      in
      the development of treatments for multiple sclerosis include Biogen-Idec, Elan,
      Serono, Aventis, Teva, and Schering AG. Some of our primary competitors in
      the
      development of stem cell therapies include Aastrom Biosciences, Geron,
      Gamida-Cell Ltd, Stem Cells Inc., Cellerant Therapeutics, Viacell, and Osiris
      Therapeutics. Many of these competitors have significant products in development
      that could be competitive with our potential products.







10




**Sales
      and Marketing**




We
      intend
      to develop a sales force to market our multiple sclerosis cell therapy products
      in the U.S. Given the concentration of multiple sclerosis among a relatively
      small number of specialized neurologists, we believe that a modest size sales
      force would be sufficient to market the multiple sclerosis
      products.




We
      plan to
      partner with large biotech and pharmaceutical companies for the marketing and
      sales of our MS and RA T-cell products outside the United States and our stem
      cell therapy products.




**Government
      Regulation**




Our
      research and development activities and the future manufacturing and marketing
      of our potential products are, and will be, subject to regulation for safety
      and
      efficacy by a number of governmental authorities in the United States and other
      countries.




In
      the
      United States, pharmaceuticals, biologicals and medical devices are subject
      to
      FDA regulation. The Federal Food, Drug and Cosmetic Act, as amended, and the
      Public Health Service Act, as amended, the regulations promulgated thereunder,
      and other Federal and state statutes and regulations govern, among other things,
      the testing, manufacture, safety, efficacy, labeling, storage, export, record
      keeping, approval, marketing, advertising and promotion of our potential
      products. Product development and approval within this regulatory framework
      takes a number of years and involves significant uncertainty combined with
      the
      expenditure of substantial resources.




***FDA
      Approval***




We
      will
      need to obtain FDA approval of any therapeutic product we plan to market and
      sell. The steps required before our potential products may be marketed in the
      United States include:




1.  *Preclinical
      Laboratory and Animal Tests*. Preclinical tests include laboratory
      evaluation of the product and animal studies in specific disease models to
      assess the potential safety and efficacy of the product and our formulation
      as
      well as the quality and consistency of the manufacturing process.




2.  *Submission
      to the FDA of an Application for an Investigational New Drug Exemption, or
      IND,
      Which Must Become Effective Before U.S. Human Clinical Trials May Commence*.
      The results of the preclinical tests are submitted to the FDA as part of an
      IND,
      and the IND becomes effective 30 days following its receipt by the FDA, as
      long
      as there are no questions, requests for delay or objections from the
      FDA.




3.  *Adequate
      and Well-Controlled Human Clinical Trials to Establish the Safety and Efficacy
      of the Product.* Clinical trials involve the evaluation of the product in
      healthy volunteers or, as may be the case with our potential products, in a
      small number of patients under the supervision of a qualified physician.
      Clinical trials are conducted in accordance with protocols that detail the
      objectives of the study, the parameters to be used to monitor safety and the
      efficacy criteria to be evaluated. Any product administered in a U.S. clinical
      trial must be manufactured in accordance with GMP. Each protocol is submitted
      to
      the FDA as part of the IND.




The
      protocol for each clinical study must be approved by an independent
      Institutional Review Board, or IRB, at the institution at which the study is
      conducted and the informed consent of all participants must be obtained. The
      IRB
      will consider, among other things, the existing information on the product,
      ethical factors, the safety of human subjects, the potential benefits of the
      therapy and the possible liability of the institution.




Clinical
      development is traditionally conducted in three sequential phases, which may
      overlap:




·
            In
                Phase I, products are typically introduced into healthy human subjects
                or
                into selected patient populations to test for adverse reactions,
                dosage
                tolerance, absorption and distribution, metabolism, excretion and
                clinical
                pharmacology.




·
            Phase
                II involves studies in a limited patient population to (i) determine
                the
                efficacy of the product for specific targeted indications and populations,
                (ii) determine optimal dosage and dosage tolerance and (iii) identify
                possible adverse effects and safety risks. When a dose is chosen
                and a
                candidate product is found to be effective and to have an acceptable
                safety profile in Phase II evaluations, Phase III trials
                begin.






11




·
            Phase
                III trials are undertaken to conclusively demonstrate clinical efficacy
                and to test further for safety within an expanded patient population,
                generally at multiple study sites.




The
      FDA
      continually reviews the clinical trial plans and results and may suggest changes
      or may require discontinuance of the trials at any time if significant safety
      issues arise.




1.  *Submission
      to the FDA of Marketing Authorization Applications*. The results of the
      preclinical studies and clinical studies are submitted to the FDA in the form
      of
      marketing approval authorization applications.




2.  *FDA
      Approval of the Application(S) Prior to Any Commercial Sale or Shipment of
      the
      Drug Biologic Product Manufacturing Establishments Located in Certain States
      Also May be Subject to Separate Regulatory and Licensing Requirement*. The
      testing and approval process will require substantial time, effort and expense.
      The time for approval is affected by a number of factors, including relative
      risks and benefits demonstrated in clinical trials, the availability of
      alternative treatments and the severity of the disease. Additional animal
      studies or clinical trials may be requested during the FDA review period, which
      might add to that time.




After
      FDA
      approval for the product, the manufacturing and the initial indications, further
      clinical trials may be required to gain approval for the use of the product
      for
      additional indications. The FDA may also require unusual or restrictive
      post-marketing testing and surveillance to monitor for adverse effects, which
      could involve significant expense, or may elect to grant only conditional
      approvals.




***FDA
      Manufacturing Requirements***




Among
      the
      conditions for product licensure is the requirement that the prospective
      manufacturer's quality control and manufacturing procedures conform to the
      FDA's
      Good Manufacturing Practice, or GMP requirements. Even after product licensure
      approval, the manufacturer must comply with GMP on a continuing basis, and
      what
      constitutes GMP may change as the state of the art of manufacturing changes.
      Domestic manufacturing facilities are subject to regular FDA inspections for
      GMP
      compliance, which are normally held at least every two years. Foreign
      manufacturing facilities are subject to periodic FDA inspections or inspections
      by the foreign regulatory authorities with reciprocal inspection agreements
      with
      the FDA. Domestic manufacturing facilities may also be subject to inspection
      by
      foreign authorities.




***Fast
      Track, Priority Review and Accelerated Approval***




Fast
      Track
      refers to a process for interacting with the FDA during drug
      development.  Priority Review applies to the time frame the FDA
      targets for reviewing a completed application.  Accelerated Approval
      (Subpart H) applies to the design and content of the studies used to support
      a
      marketing claim.




**Fast
      Track** is a formal mechanism to interact with the FDA using approaches
      that are available to all applicants for marketing claims. The Fact Track
      mechanism is described in the Food and Drug Administration Modernization Act
      of
      1997. The benefits of Fast Track include scheduled meetings to seek FDA input
      into development plans, the option of submitting a New Drug Application (NDA)
      in
      sections rather than all components simultaneously, and the option of requesting
      evaluation of studies using surrogate endpoints as discussed below. The Fast
      Track designation is intended for the combination of a product and a claim
      that
      addresses an unmet medical need, but is independent of Priority Review and
      Accelerated Approval.  An applicant may use any or all of the
      components of Fast Track without the formal designation. Fast Track designation
      does not necessarily lead to a Priority Review or Accelerated
      Approval.




**Priority
      Review** is a designation for an application after it has been submitted
      to the FDA for review for approval of a marketing claim.  Under the
      Food and Drug Administration Modernization Act of 1997, reviews for NDAs are
      designated as either Standard or Priority. A Standard designation sets the
      target date for completing all aspects of a review and the FDA taking an action
      on the application (approve or not approve) at 10 months after the date it
      was
      filed.  A Priority designation sets the target date for the FDA action
      at 6 months.  A Priority designation is intended for those products
      that address unmet medical needs.






12




**Accelerated
      Approval or Subpart H Approval** is a program described in the NDA
      regulations that is intended to make promising products for life threatening
      diseases available on the market on the basis of preliminary evidence prior
      to
      formal demonstration of patient benefit. The studies are designed to measure
      and
      the FDA evaluation is performed on the basis of a surrogate marker (a
      measurement intended to substitute for the clinical measurement of interest,
      usually prolongation of survival) that is considered likely to predict patient
      benefit. The approval that is granted may be considered a provisional approval
      with a written commitment to complete clinical studies that formally demonstrate
      patient benefit. The Federal Register published a discussion of Accelerated
      Approval with comments. Absent a formal demonstration of patient benefit, a
      risk
      benefit assessment cannot be made. Accelerated Approval designation does not
      necessarily lead to a Priority Review.




***Special
      Protocol Assessment***




The
      Special Protocol Assessment (SPA) process is a procedure by which the FDA
      provides official evaluation and guidance on proposed protocols for pivotal
      Phase III clinical trials. An SPA documents the FDA's agreement that the design
      and plan analysis of the Phase III study adequately addresses objectives in
      support of a regulatory submission such as a biologics license application
      (BLA).




***Good
      Tissue Practices Regulation***




The
      FDA
      requires human cell, tissue, and cellular and tissue-based product (HCT/P)
      establishments to follow current good tissue practice, which governs the methods
      used in, and the facilities and controls used for, the manufacture of HCT/Ps;
      recordkeeping; and the establishment of a quality program. The agency has issued
      regulations pertaining to labeling, reporting, inspections, and enforcement
      that
      apply to manufacturers of those HCT/Ps regulated under the authority of the
      Public Health Service Act,   or as drugs, devices, and/or
      biological products.




As
      part of
      this approach, the FDA requires registration of establishments that engage
      in
      the recovery, screening, testing, processing, storage or distribution of human
      cells, tissues, and cellular and tissue-based products, and for the listing
      of
      such products unless such products are performed under an IND (Investigational
      New Drug). These products specifically include stem cells that are progenitors
      of blood cells; however, the FDA makes no explicit statement regarding the
      inclusion of other types of stem cells. In addition, the FDA has published
      rules
      for making suitability determinations for donors of cells and tissue and for
      current good tissue practice for manufacturers using them.




***Other
      Regulations***




In
      addition to safety regulations enforced by the FDA, we are also subject to
      regulations under the Occupational Safety and Health Act, the Environmental
      Protection Act, the Toxic Substances Control Act and other present and potential
      future foreign, Federal, state and local regulations.




Outside
      the United States, we will be subject to regulations that govern the import
      of
      drug products from the United States or other manufacturing sites and foreign
      regulatory requirements governing human clinical trials and marketing approval
      for our products. The requirements governing the conduct of clinical trials,
      product licensing, pricing and reimbursements vary widely from country to
      country. In particular, the European Union is revising its regulatory approach
      to high tech products, and representatives from the United States, Japan and
      the
      European Union are in the process of harmonizing and making more uniform the
      regulations for the registration of pharmaceutical products in these three
      markets.




**Research
      and Development**





Research
      and development expenses for the year ended December 31, 2006 were approximately
      $7.9 million, mainly reflecting the costs of the Phase I/II and Phase IIb
      clinical trials for TovaxinTM and research and development in support of
      pre-clinical diabetes stem cell therapies.  Research and development
      expenses for the year ended December 31, 2005, were approximately $5.2
      million.






13




**Risk
      Factors**





The
      following factors affect our
      business and the industry in which we operate. The risks and uncertainties
      described below are not the only ones we face. Additional risks and
      uncertainties not presently known or which we currently consider immaterial
      may
      also have an adverse effect on our business. If any of the matters discussed
      in
      the following risk factors were to occur, our business, financial condition,
      results of operations, cash flows, or prospects could be materially adversely
      affected.




***Our
      business is at an early stage of development.***




Our
      business is at an early stage of development. We do not have any products in
      late-stage clinical trials or on the market. We are still in the early stages
      of
      identifying and conducting research on potential products. Only one of our
      products has progressed to the stage of being studied in human clinical trials
      in the U.S.  Our potential products will require significant research
      and development and preclinical and clinical testing prior to regulatory
      approval in the United States and other countries. We may not be able to develop
      any products, to obtain regulatory approvals, to enter clinical trials for
      any
      of our product candidates, or to commercialize any products. Our product
      candidates may prove to have undesirable and unintended side effects or other
      characteristics adversely affecting their safety, efficacy or cost-effectiveness
      that could prevent or limit their use. Any product using any of our technology
      may fail to provide the intended therapeutic benefits, or achieve therapeutic
      benefits equal to or better than the standard of treatment at the time of
      testing or production.




***We
      have a history of operating losses and do not expect to be profitable in the
      near future.***




We
      have
      not generated any profits since our entry into the biotechnology business,
      have
      no source of revenues, and have incurred significant operating losses. We expect
      to incur additional operating losses for the foreseeable future and, as we
      increase our research and development activities, we expect our operating losses
      to increase significantly. We do not have any sources of revenues and may not
      have any in the foreseeable future.




***We
      will need additional capital to conduct our operations and develop our products
      and our ability to obtain the necessary funding is
      uncertain.***




We
      need to
      obtain significant additional capital resources from sources including equity
      and/or debt financings, license arrangements, grants and/or collaborative
      research arrangements in order to develop products and continue our
      business.  As of December 31, 2006, we had cash, cash equivalents and
      marketable securities of approximately $15 million.  Our current burn
      rate is approximately $1,000,000 per month excluding capital
      expenditures. We will need to raise additional capital to fund our working
      capital needs beyond first quarter 2008.  We must rely upon best
      efforts third-party debt or equity funding and we can provide no assurance
      that
      we will be successful in any funding effort. The failure to raise such funds
      will necessitate the curtailment of operations and impact the completion of
      the
      clinical trials.




The
      timing and degree of any future capital requirements will depend on many
      factors, including:




·
            the
                accuracy of the assumptions underlying our estimates for capital
                needs in
                2007 and beyond;




·
            scientific
                progress in our research and development
                programs;




·
            the
                magnitude and scope of our research and development
                programs;




·
            our
                ability to establish, enforce and maintain strategic arrangements
                for
                research, development, clinical testing, manufacturing and
                marketing;




·
            our
                progress with preclinical development and clinical
                trials;




·
            the
                time and costs involved in obtaining regulatory
                approvals;




·
            the
                costs involved in preparing, filing, prosecuting, maintaining, defending
                and enforcing patent claims; and






14




·
            the
                number and type of product candidates that we
                pursue.




We
      do not
      have any committed sources of capital, although we have issued and outstanding
      warrants that, if exercised, would result in an equity capital raising
      transaction.  Additional financing through strategic collaborations,
      public or private equity financings, capital lease transactions or other
      financing sources may not be available on acceptable terms, or at all.
      Additional equity financings could result in significant dilution to our
      stockholders. Further, if additional funds are obtained through arrangements
      with collaborative partners, these arrangements may require us to relinquish
      rights to some of our technologies, product candidates or products that we
      would
      otherwise seek to develop and commercialize ourselves. If sufficient capital
      is
      not available, we may be required to delay, reduce the scope of or eliminate
      one
      or more of our programs, any of which could have a material adverse effect
      on
      our financial condition or business prospects.




***Our
      financial statements include substantial non-operating gains or losses resulting
      from required quarterly revaluation under GAAP of our outstanding derivative
      instruments.***





Generally
      accepted accounting principles in the United States require that we report
      the
      value of certain derivative instruments we have issued as current liabilities
      on
      our balance sheet and report changes in the value of these derivatives as
      non-operating gains or losses on our statement of operations. The value of
      the
      derivatives is required to be recalculated (and resulting non-operating gains
      or
      losses reflected in our statement of operations and resulting adjustments to
      the
      associated liability amounts reflected on our balance sheet) on a quarterly
      basis, and is based on the market value of our common stock. Due to the nature
      of the required calculations and the large number of shares of our common stock
      involved in such calculations, changes in our common stock price may result
      in
      significant changes in the value of the derivatives and resulting gains and
      losses on our statement of operations.





***Clinical
      trials are subject to extensive regulatory requirements, very expensive,
      time-consuming and difficult to design and implement.  Our products
      may fail to achieve necessary safety and efficacy endpoints during clinical
      trials.***




Human
      clinical trials are very expensive and difficult to design and implement, in
      part because they are subject to rigorous regulatory requirements. The clinical
      trial process is also time consuming. We estimate that clinical trials of our
      product candidates will take at least several years to complete. Furthermore,
      failure can occur at any stage of the trials, and we could encounter problems
      that cause us to abandon or repeat clinical trials. The commencement and
      completion of clinical trials may be delayed by several factors,
      including:




·
            unforeseen
                safety issues;




·
            determination
                of dosing issues;




·
            lack
                of effectiveness during clinical
                trials;




·
            slower
                than expected rates of patient
                recruitment;




·
            inability
                to monitor patients adequately during or after treatment;
                and




·
            inability
                or unwillingness of medical investigators to follow our clinical
                protocols.




In
      addition, we or the FDA may suspend our clinical trials at any time if it
      appears that we are exposing participants to unacceptable health risks or if
      the
      FDA finds deficiencies in our IND submissions or the conduct of these
      trials.




***We
      are dependent upon our management team and a small number of
      employees.***




Our
      business strategy is dependent upon the skills and knowledge of our management
      team.  We believe that the special knowledge of these individuals
      gives us a competitive advantage.  If any critical employee leaves, we
      may be unable on a timely basis to hire suitable replacements to effectively
      operate our business.  We also operate with a very small number of
      employees and thus have little or no backup capability for their
      activities.  The loss of the services of any member of our management
      team or the loss of a number of other employees could have a material adverse
      effect on our business.






15




***We
      are dependent on contract research organizations and other contractors for
      clinical testing and for certain research and development activities, thus
      the
      timing and adequacy of our clinical trials and such research activities are,
      to
      a certain extent, beyond our control.***




The
      nature
      of clinical trials and our business strategy requires us to rely on contract
      research organizations, independent clinical investigators and other third
      party
      service providers to assist us with clinical testing and certain research and
      development activities. As a result, our success is dependent upon the success
      of these outside parties in performing their responsibilities. Although we
      believe our contractors are economically motivated to perform on their
      contractual obligations, we cannot directly control the adequacy and timeliness
      of the resources and expertise applied to these activities by our contractors.
      If our contractors do not perform their activities in an adequate or timely
      manner, the development and commercialization of our drug candidates could
      be
      delayed.




***Our
      current research and manufacturing facility is not large enough to manufacture
      future stem cell and T-cell therapies.***




We
      conduct
      our research and development in a 10,200 square foot facility in The Woodlands,
      Texas, which includes an approximately 800 square foot suite of three rooms
      for
      the manufacture of stem cell and T-cell therapies through Phase III
      trials.  Our current facility is not large enough to conduct
      commercial-scale manufacturing operations.  We will need to expand
      further our manufacturing staff and facility, obtain a new facility or contract
      with corporate collaborators or other third parties to assist with future drug
      production.




In
      the
      event that we decide to establish a commercial-scale manufacturing facility,
      we
      will require substantial additional funds and will be required to hire and
      train
      significant numbers of employees and comply with applicable regulations, which
      are extensive. We do not have funds available for building a manufacturing
      facility, and we may not be able to build a manufacturing facility that both
      meets regulatory requirements and is sufficient for our commercial-scale
      manufacturing.




We
      may
      arrange with third parties for the manufacture of our future products. However,
      our third-party sourcing strategy may not result in a cost-effective means
      for
      manufacturing our future products.  If we employ third-party
      manufacturers, we will not control many aspects of the manufacturing process,
      including compliance by these third parties with the FDA’s current Good
      Manufacturing Practices and other regulatory requirements. We further may not
      be
      able to obtain adequate supplies from third-party manufacturers in a timely
      fashion for development or commercialization purposes, and commercial quantities
      of products may not be available from contract manufacturers at acceptable
      costs.




***Patents
      obtained by other persons may result in infringement claims against us that
      are
      costly to defend and which may limit our ability to use the disputed
      technologies and prevent us from pursuing research and development or
      commercialization of potential products.***




A
      number
      of pharmaceutical, biotechnology and other companies, universities and research
      institutions have filed patent applications or have been issued patents relating
      to cell therapy, stem cells, T-cells, and other technologies potentially
      relevant to or required by our expected products. We cannot predict which,
      if
      any, of such applications will issue as patents or the claims that might be
      allowed. We are aware that a number of companies have filed applications
      relating to stem cells. We are also aware of a number of patent applications
      and
      patents claiming use of stem cells and other modified cells to treat disease,
      disorder or injury.




If
      third
      party patents or patent applications contain claims infringed by either our
      licensed technology or other technology required to make and use our potential
      products and such claims are ultimately determined to be valid, there can be
      no
      assurance that we would be able to obtain licenses to these patents at a
      reasonable cost, if at all, or be able to develop or obtain alternative
      technology. If we are unable to obtain such licenses at a reasonable cost,
      we
      may not be able to develop some products commercially. There can be no assurance
      that we will not be obliged to defend ourselves in court against allegations
      of
      infringement of third party patents. Patent litigation is very expensive and
      could consume substantial resources and create significant uncertainties. An
      adverse outcome in such a suit could subject us to significant liabilities
      to
      third parties, require disputed rights to be licensed from third parties, or
      require us to cease using such technology.






16




***If
      we are unable to obtain future patents and other proprietary rights our
      operations will be significantly harmed.***




Our
      ability to compete effectively is dependent in part upon obtaining patent
      protection relating to our technologies. The patent positions of pharmaceutical
      and biotechnology companies, including ours, are uncertain and involve complex
      and evolving legal and factual questions. The coverage sought in a patent
      application can be denied or significantly reduced before or after the patent
      is
      issued. Consequently, we do not know whether the patent applications for our
      technology will result in the issuance of patents, or if any future patents
      will
      provide significant protection or commercial advantage or will be circumvented
      by others. Since patent applications are secret until the applications are
      published (usually eighteen months after the earliest effective filing date),
      and since publication of discoveries in the scientific or patent literature
      often lags behind actual discoveries, we cannot be certain that the inventors
      of
      our licensed patents were the first to make the inventions covered by the patent
      applications or that the licensed patent applications were the first to be
      filed
      for such inventions. There can be no assurance that patents will issue from
      the
      patent applications or, if issued, that such patents will be of commercial
      benefit to us, afford us adequate protection from competing products, or not
      be
      challenged or declared invalid.




***Our
      competition includes fully integrated biopharmaceutical and pharmaceutical
      companies that have significant advantages over us.***




The
      markets for therapeutic stem cell products, multiple sclerosis products, and
      rheumatoid arthritis products are highly competitive. We expect that our most
      significant competitors are fully integrated pharmaceutical companies and more
      established biotechnology companies. These companies are developing stem
      cell-based products and they have significantly greater capital resources and
      expertise in research and development, manufacturing, testing, obtaining
      regulatory approvals, and marketing than we currently do. Many of these
      potential competitors are further along in the process of product development
      and also operate large, company-funded research and development programs. As
      a
      result, our competitors may develop more competitive or affordable products,
      or
      achieve earlier patent protection or product commercialization than we are
      able
      to achieve. Competitive products may render any products or product candidates
      that we develop obsolete.




***If
      we fail to meet our obligations under our license agreements, we may lose our
      rights to key technologies on which our business
      depends.***




Our
      business depends on three licenses from third parties. These third party license
      agreements impose obligations on us, such as payment obligations and obligations
      to diligently pursue development of commercial products under the licensed
      patents. If a licensor believes that we have failed to meet our obligations
      under a license agreement, the licensor could seek to limit or terminate our
      license rights, which could lead to costly and time-consuming litigation and,
      potentially, a loss of the licensed rights. During the period of any such
      litigation, our ability to carry out the development and commercialization
      of
      potential products could be significantly and negatively affected. If our
      license rights were restricted or ultimately lost, our ability to continue
      our
      business based on the affected technology platform could be severely adversely
      affected.




***Restrictive
      and extensive government regulation could slow or hinder our production of
      a
      cellular product.***




The
      research and development of stem cell therapies is subject to and restricted
      by
      extensive regulation by governmental authorities in the United States and other
      countries. The process of obtaining U.S. Food and Drug Administration, or FDA,
      and other necessary regulatory approvals is lengthy, expensive and uncertain.
      We
      may fail to obtain the necessary approvals to continue our research and
      development, which would hinder our ability to manufacture or market any future
      product.




***To
      be successful, our product candidates must be accepted by the health care
      community, which can be very slow to adopt or unreceptive to new technologies
      and products.***






17




Our
      product candidates, if approved for marketing, may not achieve market acceptance
      since hospitals, physicians, patients or the medical community in general may
      decide to not accept and utilize these products. The product candidates that
      we
      are attempting to develop represent substantial departures from established
      treatment methods and will compete with a number of more conventional drugs
      and
      therapies manufactured and marketed by major pharmaceutical companies. The
      degree of market acceptance of any of our developed products will depend on
      a
      number of factors, including:




·
            our
                establishment and demonstration to the medical community of the clinical
                efficacy and safety of our product
                candidates;




·
            our
                ability to create products that are superior to alternatives currently
                on
                the market;




·
            our
                ability to establish in the medical community the potential advantage
                of
                our treatments over alternative treatment methods;
                and




·
            reimbursement
                policies of government and third-party
                payers.




If
      the
      health care community does not accept our products for any of the foregoing
      reasons, or for any other reason, our business would be materially
      harmed.




***There
      is currently a limited market for
      our common stock, andany
      trading market that exists in our common stock may be highly illiquid and may
      not reflect the underlying value of the Company’s net assets or business
      prospects.***




Although
      our common stock is traded on the Nasdaq Global Market, there is currently
      a
      limited market for our common stock and there can be no assurance that an
      improved market will ever develop.  Investors are cautioned not to
      rely on the possibility that an active trading market may develop.




***As
      our share price is volatile, we may be or become the target of securities
      litigation, which is costly and time-consuming to
      defend.***




In
      the
      past, following periods of market volatility in the price of a company’s
      securities or the reporting of unfavorable news, security holders have often
      instituted class action litigation. If the market value of our common stock
      experiences adverse fluctuations and we become involved in this type of
      litigation, regardless of the outcome, we could incur substantial legal costs
      and our management’s attention could be diverted from the operation of our
      business, causing our business to suffer.




***Our
      "blank check" preferred stock could be issued to prevent a business combination
      not desired by management or our current majority
      shareholders.***




Our
      articles of incorporation authorize the issuance of "blank check" preferred
      stock with such designations, rights and preferences as may be determined by
      our
      board of directors without shareholder approval. Our preferred stock could
      be
      utilized as a method of discouraging, delaying, or preventing a change in our
      control and as a method of preventing shareholders from receiving a premium
      for
      their shares in connection with a change of control.




***Future
      sales of our common stock in the public market could lower our stock
      price.***




We
      may
      sell additional shares of common stock in subsequent public or private
      offerings. We may also issue additional shares of common stock to finance future
      acquisitions. We cannot predict the size of future issuances of our common
      stock
      or the effect, if any, that future issuances and sales of shares of our common
      stock will have on the market price of our common stock. Sales of substantial
      amounts of our common stock (including shares issued in connection with an
      acquisition), or the perception that such sales could occur, may adversely
      affect prevailing market prices for our common stock.




***We
      presently do not intend to pay cash
      dividends on our common stock.***




We
      currently anticipate that no cash dividends will be paid on the common stock
      in
      the foreseeable future. While our dividend policy will be based on the operating
      results and capital needs of the business, it is anticipated that all earnings,
      if any, will be retained to finance the future expansion of the our
      business.






18




***Employees***




As
      of
      December 31, 2006, we had 32 full time employees.  We believe that our
      relations with our employees are good. None of our employees is represented
      by a
      union or covered by a collective bargaining agreement.






**ITEM
      2.  DESCRIPTION OF PROPERTY**





Our
      10,200
      sq. ft. facility is located on 3 acres at 2635 North Crescent Ridge Drive in
      The
      Woodlands, Texas.  This location provides space for research and
      development and manufacturing capacity for clinical trials; a specialized Flow
      Cytometry and Microscopy lab; support of clinical trials with 800 sq. ft. of
      GMP
      (good manufacturing practice) manufacturing suites; Quality Systems management
      with Quality Control Laboratory, Regulatory Affairs, Quality Assurance; as
      well
      as administrative support space. There is 2,500 sq. ft. of space still available
      for future build-out.  The facility including the property is leased
      for a term of ten years with two options for an additional five years each
      at
      the then prevailing market rate.






**ITEM
      3.LEGAL
      PROCEEDINGS**





We
      are not
      currently a party to any material legal proceedings.






**ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF
      SECURITY HOLDERS**





None.








**PART
      II**







**ITEM
      5. MARKET FOR REGISTRANT'S COMMON EQUITY,
      RELATED STOCKHOLDERS MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
      SECURITIES**





Shares
      of
      our common stock are traded on the Nasdaq Global Market under the symbol
“OPXA”.  Our common stock trades on a limited, sporadic and volatile
      basis.




The
      following table sets forth, for the periods indicated, the range of high and
      low
      bid information for our common stock.  These quotations reflect
      inter-dealer prices, without retail mark-up, mark-down or commission, and may
      not represent actual transactions.




**Price
                Ranges****High**
            
            
            **Low****Fiscal
                Year Ended December 31, 2005**First
                Quarter
            
            $
            87.00
            
            
            $
            45.00Second
                Quarter
            
            
            55.00
            
            
            
            24.60Third
                Quarter
            
            
            14.10
            
            
            
            12.50Fourth
                Quarter
            
            
            6.30
            
            
            
            5.90**Fiscal
                Year Ended December 31, 2006**First
                Quarter
            
            $
            7.00
            
            
            $
            4.40Second
                Quarter
            
            
            10.10
            
            
            
            5.10Third
                Quarter
            
            
            9.15
            
            
            
            4.93Fourth
                Quarter
            
            
            7.03
            
            
            
            5.10





No
      cash
      dividends have been declared on the Company common stock since the Company's
      inception and it is not anticipated that dividends will be declared on our
      common stock in the foreseeable future.




As
      of
      December 31, 2006, there were approximately 358 holders of record of our Common
      Stock.






19




Equity
      Compensation Plan Information




The
      following table sets forth information, as of December 31, 2006, with respect
      to
      the Company’s compensation plans under which common stock is authorized for
      issuance.  We issue options to officers, directors, employees and
      consultants under our stockholder approved 2004 Compensatory Stock
      Plan.  We believe that the exercise price for all of the options set
      forth below reflects fair market value.




**Number
                  of Securities****Remaining
                  Available for****Number
                  of Securities**
              
              
              
              **for
                  Future Issuance****to
                  be Issued Upon**
              
              **Weighted
                  Average**
              
              **Under
                  Equity****Exercise
                  of**
              
              **Exercise
                  Price of**
              
              **Compensation
                  Plans****Outstanding
                  Options,**
              
              **Outstanding
                  Options,**
              
              **(Excluding
                  Securities****Warrants
                  and Rights**
              
              **Warrants
                  and Rights**
              
              **Reflected
                  in Column A)****Plan
                  Category**
              
              **(A)**
              
              **(B)**
              
              **(C)**Equity
                  Compensation PlansApproved
                  by Security Shareholders
              
              762,970
              
              $                            10.83
              
              437,030Equity
                  Compensation Plans NotApproved
                  by Security Shareholders
              
              -
              
              -
              
              -Total
              
              762,970
              
              $                            10.83
              
              437,030






**Recent
      Sales of Unregistered Securities and Equity Purchases by
      Company**




None**.**





**ITEM
      6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
      OPERATION**





*The
      following discussion of our financial condition and results of operations should
      be read in conjunction with the accompanying financial statements and the
      related footnotes thereto.*




**Organizational
      History**




We
      were
      incorporated in Texas in 1991 and in May 2004, we entered the biopharmaceutical
      business by acquiring an entity that held rights to treatments using adult
      multipotent stem cells derived from adult human peripheral
      blood.  From an accounting standpoint, the subsidiary is deemed the
      acquirer in a reverse merger whereby the parent is deemed the survivor of the
      reorganization.  As such, our financial statements are those of the
      subsidiary.  In November 2004, we acquired Opexa Pharmaceuticals, Inc.
      which holds rights to technology to an individualized T-cell therapeutic
      technology for treating MS.




**Critical
      Accounting Policies**




***General***




The
      Consolidated Financial Statements and Notes to Consolidated Financial Statements
      contain information that is pertinent to this management’s discussion and
      analysis.  The preparation of financial statements in conformity with
      accounting principles generally accepted in the United States requires
      management to make estimates and assumptions that affect the reported amounts
      of
      assets and liabilities and disclosure of any contingent assets and
      liabilities.  Management believes these accounting policies involve
      judgment due to the sensitivity of the methods, assumptions and estimates
      necessary in determining the related asset and liability
      amounts.  Management believes it has exercised proper judgment in
      determining these estimates based on the facts and circumstances available
      to it
      at the time the estimates were made.  The significant accounting
      policies are described in the Company's financial statements.






20




***Principles
      of Consolidation***





The
      accompanying consolidated financial statements of the Company include the
      accounts of its wholly owned subsidiary.  All significant intercompany
      accounts and transactions have been eliminated.





***Revenue***




We
      did not
      receive any revenue in 2005 and 2006 and do not expect any revenue in
      2007.




***Accounting
      for Derivative Instruments***




Statement
      of Financial Accounting Standard (“SFAS”) No. 133, “Accounting for Derivative
      Instruments and Hedging Activities,” as amended, requires all derivatives to be
      recorded on the balance sheet at fair value. These derivatives are separately
      valued and accounted for on our balance sheet. Fair values for securities traded
      in the open market and derivatives are based on quoted market prices. Where
      market prices are not readily available, fair values are determined using market
      based pricing models incorporating readily observable market data and requiring
      judgment and estimates.




The
      pricing model we use for determining fair values of our derivatives is the
      Black
      Scholes Pricing Model. Valuations derived from this model are subject to ongoing
      internal and external verification and review. The model uses market-sourced
      inputs such as interest rates, exchange rates and stock price volatilities.
      Selection of these inputs involves management's judgment and may impact net
      income.




In
      September 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-19,
      "Accounting for Derivative Financial Instruments Indexed to and Potentially
      Settled in, a Company's Own Stock," ("EITF 00-19") which requires freestanding
      contracts that are settled in a company's own stock, including common stock
      warrants, to be designated as an equity instrument, asset or a liability. Under
      the provisions of EITF 00-19, a contract designated as an asset or a liability
      must be carried at fair value on a company's balance sheet, with any changes
      in
      fair value recorded in the company's results of operations. A contract
      designated as an equity instrument must be included within equity, and no fair
      value adjustments are required. In accordance with EITF 00-19, in June 2006,
      we
      determined that certain outstanding warrants to purchase our common stock should
      be separately accounted for as liabilities. We had not classified these
      derivative liabilities as such in our historical financial statements. In order
      to reflect these changes, we restated our financial statements for the year
      ended December 31, 2005 to record the fair value of these warrants on our
      balance sheet and record unrealized changes in the values of these derivatives
      in our consolidated statement of operations as “Gain (loss) on derivative
      liabilities.”




We
      have
      evaluated the provisions of the registration rights agreement that require
      us to
      pay registration delay payments in combination with the financial instrument
      and
      concluded that the combined instrument meets the definition of a derivative
      under SFAS 133.




In
      December 2006, the FASB issued FASB Staff Position No. EITF 00-19-2, Accounting
      for Registration Payment Arrangements (EITF 00-19-2). EITF 00-19-2 addresses
      an
      issuer’s accounting for registration payment arrangements. It specifies that the
      contingent obligation to make future payments or otherwise transfer
      consideration under a registration payment arrangement, whether issued as a
      separate agreement or included as a provision of a financial instrument or
      other
      agreement, should be separately recognized and measured in accordance with
      FASB
      Statement No. 5, Accounting for Contingencies. The guidance in EITF 00-19-2
      amends FASB Statements No. 133, Accounting for Derivative Instruments and
      Hedging Activities, and No. 150, Accounting for Certain Financial
      Instruments with Characteristics of both Liabilities and Equity, and FASB
      Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements
      for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to
      include scope exceptions for registration payment arrangements. EITF 00-19-2
      also requires additional disclosure regarding the nature of any registration
      payment arrangements, alternative settlement methods, the maximum potential
      amount of consideration and the current carrying amount of the liability, if
      any. This EITF is effective immediately for registration payment arrangements
      and the financial instruments subject to those arrangements that are entered
      into or modified subsequent to the date of issue of this EITF. For registration
      payment arrangements and financial instruments subject to those arrangements
      that were entered into prior to the issuance of this EITF, this is effective
      for
      financial statements issued for fiscal years beginning after December 15, 2006,
      and interim periods within those fiscal years.  The impact of implementing
      EITF 00-19-2 in the fiscal year 2007 will result in a cumulative effect of
      a
      change in accounting principle with a credit to beginning retained earnings
      of
      $6,656,677 and a reversal of the same amount to the derivative liability
      account.






21




**Results
      of Operations and Financial Condition**




***Net
      Sales.***




We
      recorded no sales for the twelve months ended December 31, 2006 and
      2005.




***General
      and Administrative Expenses***




Our
      general and administrative expenses during the twelve months ended December
      31,
      2006, was $5,461,047 as compared to $6,259,075 for the twelve months ended
      December 31, 2005. The decrease in expenses is due to a combination of factors
      including a decrease in stock compensation expenses, professional service fees
      and overhead expenses in 2006. General and administrative expenses consist
      primarily of salaries and benefits, stock compensation expense, office expense,
      professional services fees, and other corporate overhead costs.  We
      anticipate increases in general and administrative expenses as we continue
      to
      develop and prepare for commercialization of our technology.




***Research
      and Development Expense***




Research
      and development expense was $7,850,373 for the twelve months ended December
      31,
      2006, as compared to $5,159,853 the twelve months ended December 31,
      2005.  The increase in expenses was primarily due to the costs of the
      Phase I/II and Phase IIb clinical trials for TovaxinTM and research and
      development in support of pre-clinical diabetes stem cell
      therapies.  We have made and expect to continue to make substantial
      investments in research and development in order to develop and market our
      technology.  We expense research and development costs as incurred.
      Acquired research and development that has no alternative future use is expensed
      when acquired. Property, plant and equipment for research and development that
      has an alternative future use is capitalized and the related depreciation is
      expensed as research and development costs.  We expect our research
      and development expense to increase as we continue to invest in the development
      of our technology.




***Interest
      Expense***




Interest
      expense was $984 for the twelve months ended December 31, 2006 compared to
      $7,323,851 for the twelve months ended December 31, 2005.  Interest
      expense during 2005 was due to notes payable that were outstanding during the
      second quarter of 2005 which were subsequently converted into equity in June
      2005, resulting in acceleration of the amortization of the discount related
      to
      the notes.




***Interest
      Income***




Interest
      income was $688,299 for the twelve months ended December 31, 2006 compared
      to
      $81,930 for the twelve months ended December 31, 2005.  The increase
      was due to the investment of the cash proceeds from a 2006 equity financing
      in
      short term and cash equivalent investments.




***Gain
      (Loss) on Derivative Instruments Liabilities, net.***





The
      Company recognized a gain on derivative instruments of $104,978 for the twelve
      months ended December 31, 2006 compared to $3,896,841 for the twelve months
      ended December 31, 2005. The decrease is a result of the net unrealized
      (non-cash) change in the fair value of our derivative instrument
      liabilities.





***Net
      Loss***




We
      had net
      loss for the year ended December 31, 2006, of $12,649,170 or ($2.35) per share
      (basic and diluted), compared with a net loss of $14,856,724 or ($9.49) per
      share (basic and diluted), for the twelve months ended December 31,
      2005.






22




**Liquidity
      and Capital Resources**





Historically,
      the Company has financed its operations primarily from the sale of its debt
      and
      equity securities.  As of December 31, 2006, the Company had cash, cash
      equivalents and marketable securities of approximately $15 million.




We
      used
      approximately $11.0.million of cash for operating activities for the year ended
      December 31, 2006 compared to approximately $6.2 million for the same period
      of
      2005.  The increase in use of cash is primarily due to an increase in
      research and development expenditures related to the clinical trials for our
      Tovaxin therapy for MS and the purchase of marketable securities.




Capital
      expenditures were approximately $0.6 million in 2006 and consisted primarily
      of
      laboratory equipment and leasehold improvements related to the construction
      of
      manufacturing facilities.




Our
      financing activities generated approximately $21.3 million for the year ended
      December 31, 2006 as compared to approximately $8.2 million for the same period
      of 2005.  In both periods, the cash generated from financing
      activities resulted from the sale of Common Stock in equity
      financings.




Our
      current burn rate is approximately $1 million per month excluding capital
      expenditures.  Without the proceeds of this offering, we would need to
      raise additional capital to fund our working capital needs beyond the first
      quarter of 2008.  Currently, we have determined that if we do not
      raise additional funds, there is a concern about our ability to continue our
      operations and our independent accountants have added a going concern paragraph
      to their report on the audit financial statements for the year ended December
      31, 2006.




**Contractual
      Commitments**




A
      tabular
      disclosure of contractual obligations at December 31, 2006, is as
      follows:




**Payments
                  Due by Period****Total**
              
              
              **Less
                  than**
                **1
                  year**
              
              
              **1
                  - 3 years**
              
              
              **3
                  - 5 years**
              
              
              **More
                  than**
                **5
                  years**Operating
                  Leases
              
              $
              1,274,175
              
              
              $
              117,774
              
              
              $
              276,978
              
              
              $
              295,080
              
              
              $
              584,343Consulting
                  and Research Agreements
              
              $
              142,646.5
              
              
              $
              142,147
              
              
              $
              500
              
              
              $
              -
              
              
              $
              -Total
              
              $
              1,416,822
              
              
              $
              259,921
              
              
              $
              277,478
              
              
              $
              295,080
              
              
              $
              584,343






**Off-Balance
      Sheet Arrangements**




As
      of December 31, 2006, the Company
      had no off-balance sheet arrangements.





**Recent
      Accounting Pronouncements**





Effective
      January 1, 2006, we adopted the provisions of Statement of Financial Accounting
      Standards No. 123R, “Share-Based Payment” which establishes accounting for
      equity instruments exchanged for employee service. We utilize the Black-Scholes
      option pricing model to estimate the fair value of employee stock based
      compensation at the date of grant, which requires the input of highly subjective
      assumptions, including expected volatility and expected life. Further, as
      required under SFAS 123R, we now estimate forfeitures for options granted,
      which
      are not expected to vest. Changes in these inputs and assumptions can materially
      affect the measure of estimated fair value of our share-based compensation.
      These assumptions are subjective and generally require significant analysis
      and
      judgment to develop. When estimating fair value, some of the assumptions will
      be
      based on, or determined from, external data and other assumptions may be derived
      from our historical experience with stock-based payment arrangements. The
      appropriate weight to place on historical experience is a matter of judgment,
      based on relevant facts and circumstances.






23






**ITEM
        7. FINANCIAL STATEMENTS**
  **INDEX
        TO FINANCIAL STATEMENTS**
  
 **Audited
                    Financial Statements for years ended December 31, 2006 and 2005
                    and the
                    period from January 22, 2003 (Inception) through December 31,
                    2006**Report
                    of Independent Registered Public Accounting Firm
                
                F-2Consolidated
                    Balance Sheet as of December 31, 2006 (RESTATED)
                
                F-3Consolidated
                    Statements of Expenses for the years ended December 31, 2006
                    and 2005 and
                    the period from January 22, 2003 (Inception) through December
                    31, 2006
                    (RESTATED)
                
                F-4Consolidated
                    Statement of Changes in Stockholders Equity from January 22,
                    2003
                    (Inception) through December 31, 2006 (RESTATED)
                
                F-5Consolidated
                    Statements of Cash Flows for the years ended December 31, 2006
                    and 2005
                    and the period from January 22, 2003 (Inception) through December
                    31, 2006
                    (RESTATED)
                
                F-7Notes
                    to Consolidated Financial Statements
                
                F-9
   F-1




REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
 To
        the
        Board of Directors
 Opexa
        Therapeutics, Inc.
 (formerly
        PharmaFrontiers Corp.)
 (a
        development stage company)
 The
        Woodlands, Texas
 
 We
        have
        audited the accompanying consolidated balance sheet of Opexa Therapeutics,
        Inc.
        (a development stage company), as of December 31, 2006 and the related
        consolidated statements of expenses, changes in stockholders’ equity and cash
        flows for the years ended December 31, 2006 and 2005 and the period from
        January
        22, 2003 (Inception) through December 31, 2006. These consolidated financial
        statements are the responsibility of Opexa’s management. Our responsibility is
        to express an opinion on these consolidated financial statements based on
        our
        audits.
 
 We
        conducted our audits in accordance with standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance about whether the
        consolidated financial statements are free of material misstatements. An
        audit
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the consolidated financial statements. An audit also includes
        assessing the accounting principles used and significant estimates made by
        management, as well as evaluating the overall consolidated financial statement
        presentation. We believe that our audits provide a reasonable basis for our
        opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the consolidated financial position of Opexa as
        of
        December 31, 2006 and the consolidated results of its operations and its
        cash
        flows for the periods described in conformity with accounting principles
        generally accepted in the United States of America.
 
 As
        discussed in
        Note 2 to the financial statements, the Company has restated its financial
        statements forthe years ended December 31, 2006 and 2005 and the period
        from January 22, 2003 (Inception) through December 31, 2006 as they relate
        to
        the accounting for acquired in process research and development.
 
 As
        discussed in Note 15 to the consolidated financial statements, the accompanying
        consolidated financial statements have been prepared assuming that Opexa
        will
        continue as a going concern. Opexa requires significant amount of cash in
        its
        operations and does not have sufficient cash to fund its operations for the
        next
        twelve months, which raises substantial doubt about its ability to continue
        as a
        going concern. Management’s plans regarding those matters are also described in
        Note 15. The consolidated financial statements do not include any adjustments
        that might result from the outcome of this uncertainty.
 
 
 MALONE
        & BAILEY, PC
 www.malone-bailey.com
 Houston,
        Texas
 
 March
        14,
        2007
 Except
        for
        Note 15 which is dated November 2, 2007
 Except
        for
        Notes 2, 4, 6 and 12 which are dated November 29, 2007






F-2




**OPEXA
                  THERAPEUTICS, INC.****(a
                  development stage company)****(formerly
                  PharmaFrontiers Corp.)****CONSOLIDATED
                  BALANCE SHEET (RESTATED)****Restated****December
                  31,****2006****Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              12,019,914Investment
                  in marketable securities
              
              
              2,952,096Other
                  current assets
              
              
              472,881Total
                  current assets
              
              
              15,444,891Property
                  & equipment, net accumulated depreciation of $395,284
              
              
              1,361,377Total
                  assets
              
              $
              16,806,268**Liabilities
                  and Stockholders' Equity**Current
                  liabilities:Accounts
                  payable
              
              $
              868,862Stock
                  payable
              
              
              112,440Accrued
                  expenses
              
              
              135,069Note
                  payable
              
              
              1,500,000Current
                  maturity of long term debt
              
              
              14,080Derivative
                  liability
              
              
              6,656,677Total
                  current liabilities
              
              
              9,287,128Long
                  term liabilities:Loan
                  payable
              
              
              96,242Total
                  liabilities
              
              
              9,383,370Commitments
                  and contingencies
              
              
              -Stockholders'
                  equity:Convertible
                  preferred stock, no par value, 10,000,000 shares
              
              
              -authorized,
                  none issued and outstandingCommon
                  stock, $0.50 par value, 100,000,000 shares authorized,
              
              
              3,348,3516,696,784
                  shares issued and outstandingAdditional
                  paid in capital
              
              
              63,118,180Deficit
                  accumulated during the development stage
              
              
              (59,043,633
              )Total
                  stockholders' equity
              
              
              7,422,898Total
                  liabilities and stockholders' equity
              
              $
              16,806,268






See
        accompanying summary of accounting policies and
 notes
        to
        consolidated financial statements






F-3




**OPEXA
                  THERAPEUTICS, INC.****(a
                  development stage company)****(formerly
                  PharmaFrontiers Corp.)****CONSOLIDATED
                  STATEMENTS OF EXPENSES (RESTATED)****Years
                  ended December 31, 2006 and 2005 and the****Period
                  from January 22, 2003 (Inception) to December 31,
                  2006**
 
 **Restated****Inception****Restated**
              
              
              **Restated**
              
              
              **through****2006**
              
              
              **2005**
              
              
              **2006**Research
                  and development
              
              $
              7,850,373
              
              
              $
              5,159,853
              
              
              $
              40,685,680General
                  and administrative
              
              
              5,461,047
              
              
              
              6,259,075
              
              
              
              14,206,469Depreciation
              
              
              174,117
              
              
              
              98,080
              
              
              
              285,255Loss
                  on disposal of assets
              
              
              2,376
              
              
              
              22,810
              
              
              
              482,309Operating
                  loss
              
              
              (13,487,913
              )
              
              
              (11,539,818
              )
              
              
              (55,659,713
              )Interest
                  income
              
              
              688,299
              
              
              
              81,930
              
              
              
              776,221Other
                  income
              
              
              46,450
              
              
              
              28,174
              
              
              
              77,003Gain
                  on derivative liability
              
              
              104,978
              
              
              
              3,896,841
              
              
              
              4,001,819Interest
                  expense
              
              
              (984
              )
              
              
              (7,323,851
              )
              
              
              (8,238,963
              )Net
                  loss
              
              $
              (12,649,170
              )
              
              $
              (14,856,724
              )
              
              $
              (59,043,633
              )Basic
                  and diluted loss per share
              
              $
              (2.35
              )
              
              $
              (9.49
              )
              
              N/AWeighted
                  average shares outstanding
              
              
              5,390,910
              
              
              
              1,564,837
              
              
              N/A
   See
          accompanying summary of accounting policies and
 notes
          to
          consolidated financial statements
  F-4


**OPEXA
                    THERAPEUTICS, INC****(a
                    development stage company)****(formerly
                    PharmaFrontiers Corp.)****CONSOLIDATED
                    STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                    (RESTATED)****Period
                    from January 22, 2003 (Inception) through December 31,
                    2006****Additional****Common
                    Stock**
                
                
                **Paid
                    in**
                
                
                **Accumulated****Shares**
                
                
                **Par**
                
                
                **Capital**
                
                
                **Deficit**
                
                
                **Total**Shares
                    issued for cash
                
                
                525,000
                
                
                $
                262,500
                
                
                $
                (261,500
                )
                
                $
                -
                
                
                $
                1,000Shares
                    repurchased and cancelled
                
                
                (170,625
                )
                
                
                (85,313
                )
                
                
                84,988
                
                
                
                -
                
                
                
                (325
                )Discount
                    related to:beneficial
                    conversion feature
                
                
                -
                
                
                
                -
                
                
                
                28,180
                
                
                
                -
                
                
                
                28,180warrants
                    attached to debt
                
                
                -
                
                
                
                -
                
                
                
                28,180
                
                
                
                -
                
                
                
                28,180Net
                    loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (126,003
                )
                
                
                (126,003
                )Balances
                    at December 31, 2003
                
                
                354,375
                
                
                
                177,187
                
                
                
                (120,152
                )
                
                
                (126,003
                )
                
                
                (68,968
                )Shares
                    issued for:cash
                
                
                2,250
                
                
                
                1,125
                
                
                
                7,875
                
                
                
                -
                
                
                
                9,000services
                
                
                206,500
                
                
                
                103,250
                
                
                
                745,750
                
                
                
                -
                
                
                
                849,000license
                
                
                24,269
                
                
                
                12,135
                
                
                
                414,940
                
                
                
                -
                
                
                
                427,075reverse
                    merger with Sportan
                
                
                99,740
                
                
                
                49,870
                
                
                
                (197,603
                )
                
                
                -
                
                
                
                (147,733
                )acquisition
                    of Opexa
                
                
                250,000
                
                
                
                125,000
                
                
                
                23,625,000
                
                
                
                -
                
                
                
                23,750,000additional
                    shares attached toconvertible
                    debt
                
                
                16,100
                
                
                
                8,050
                
                
                
                280,316
                
                
                
                -
                
                
                
                288,366conversion
                    of convertible notes
                
                
                60,750
                
                
                
                30,375
                
                
                
                217,995
                
                
                
                -
                
                
                
                248,370Shares
                    cancelled
                
                
                (8,000
                )
                
                
                (4,000
                )
                
                
                4,000
                
                
                
                -
                
                
                
                -Discount
                    related to:beneficial
                    conversion feature
                
                
                -
                
                
                
                -
                
                
                
                855,849
                
                
                
                -
                
                
                
                855,849warrants
                    attached to debt
                
                
                -
                
                
                
                -
                
                
                
                1,848,502
                
                
                
                -
                
                
                
                1,848,502Option
                    expense
                
                
                -
                
                
                
                -
                
                
                
                123,333
                
                
                
                -
                
                
                
                123,333Net
                    loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (31,411,736
                )
                
                
                (31,411,736
                )Balances
                    at December 31, 2004, restated
                
                
                1,005,984
                
                
                
                502,992
                
                
                
                27,805,805
                
                
                
                (31,537,739
                )
                
                
                (3,228,942
                )Shares
                    issued for:cash,
                    net of offering costs
                
                
                389,451
                
                
                
                194,725
                
                
                
                5,151,492
                
                
                
                -
                
                
                
                5,346,217convertible
                    debt
                
                
                611,026
                
                
                
                305,513
                
                
                
                7,343,933
                
                
                
                -
                
                
                
                7,649,446debt
                
                
                2,300
                
                
                
                1,150
                
                
                
                159,850
                
                
                
                -
                
                
                
                161,000license
                
                
                29,194
                
                
                
                14,597
                
                
                
                1,853,787
                
                
                
                -
                
                
                
                1,868,384services
                
                
                24,000
                
                
                
                12,000
                
                
                
                1,000,400
                
                
                
                -
                
                
                
                1,012,400
  F-5
 
 Discount
                    related to:beneficial
                    conversion feature
                
                
                -
                
                
                
                -
                
                
                
                831,944
                
                
                
                -
                
                
                
                831,944warrants
                    attached to debt
                
                
                -
                
                
                
                -
                
                
                
                1,433,108
                
                
                
                -
                
                
                
                1,433,108Option
                    expense
                
                
                -
                
                
                
                -
                
                
                
                2,487,741
                
                
                
                -
                
                
                
                2,487,741Warrant
                    expense
                
                
                -
                
                
                
                -
                
                
                
                2,373,888
                
                
                
                -
                
                
                
                2,373,888Transition
                    of warrants from equity instruments to liability
                    instruments
                
                
                -
                
                
                
                -
                
                
                
                (10,658,496
                )
                
                
                -
                
                
                
                (10,658,496
                )Net
                    loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (14,856,724
                )
                
                
                (14,856,724
                )Balances
                    at December 31, 2005, restated
                
                
                2,061,955
                
                
                
                1,030,977
                
                
                
                39,783,452
                
                
                
                (46,394,463
                )
                
                
                (5,580,034
                )Shares
                    issued for:cash,
                    net of offering costs
                
                
                4,600,000
                
                
                
                2,300,000
                
                
                
                18,853,519
                
                
                
                -
                
                
                
                21,153,519debt
                
                
                34,829
                
                
                
                17,374
                
                
                
                162,626
                
                
                
                -
                
                
                
                180,000Option
                    expense
                
                
                -
                
                
                
                -
                
                
                
                2,749,617
                
                
                
                -
                
                
                
                2,749,617Warrant
                    expense
                
                
                -
                
                
                
                -
                
                
                
                1,568,966
                
                
                
                -
                
                
                
                1,568,966Net
                    loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (12,649,170
                )
                
                
                (12,649,170
                )Balances
                    at December 31, 2006, restated
                
                
                6,696,784
                
                
                $
                3,348,351
                
                
                $
                63,118,180
                
                
                $
                (59,043,633
                )
                
                $
                7,422,898
  See
          accompanying summary of accounting policies and
 notes
          to
          consolidated financial statements
  
 F-6




**OPEXA
                  THERAPEUTICS, INC.****(a
                  development stage company)****(formerly
                  PharmaFrontiers Corp.)****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS (RESTATED)****Years
                  ended December 31, 2006 and 2005 and the****Period
                  from January 22, 2003 (Inception) to December 31,
                  2006****Restated****Inception****Restated**
              
              
              **Restated**
              
              
              **through****2006**
              
              
              **2005**
              
              
              **2006**Cash
                  flows from operating activitiesNet
                  loss
              
              $
              (12,649,170
              )
              
              $
              (14,856,724
              )
              
              $
              (59,043,633
              )Adjustments
                  to reconcile net loss to net cashused
                  in operating activitiesStock
                  payable for acquired research and development
              
              
              112,440
              
              
              
              
              
              
              
              112,440Stock
                  issued for acquired research and development
              
              
              
              1,988,897
              
              
              
              26,286,589Stock
                  issued for services
              
              
              
              
              
              
              
              
              
              
              1,861,400Stock
                  issued for debt in excess of principal
              
              
              -
              
              
              
              109,070
              
              
              
              109,070Amortization
                  of discount on notes payable dueto
                  warrants and beneficial conversion feature
              
              
              -
              
              
              
              5,516,638
              
              
              
              6,313,205Unrealized
                  gain on marketable securities
              
              
              (25,912
              )
              
              
              -
              
              
              
              (25,912
              )(Gain)
                  on derivative liability
              
              
              (104,978
              )
              
              
              (3,896,841
              )
              
              
              (4,001,819
              )Depreciation
              
              
              174,117
              
              
              
              98,080
              
              
              
              285,255Debt
                  financing costs
              
              
              -
              
              
              
              365,910
              
              
              
              365,910Option
                  and warrant expense
              
              
              4,318,583
              
              
              
              4,861,629
              
              
              
              9,303,545Loss
                  on disposition of fixed assets
              
              
              2,376
              
              
              
              22,810
              
              
              
              482,309Changes
                  in:Accounts
                  payable
              
              
              359,397
              
              
              
              26,360
              
              
              
              444,561Marketable
                  securities
              
              
              (2,926,184
              )
              
              
              -
              
              
              
              (2,926,184
              )Prepaid
                  expenses
              
              
              (340,876
              )
              
              
              (88,185
              )
              
              
              (468,011
              )Accrued
                  expenses
              
              
              (105,240
              )
              
              
              23,655
              
              
              
              (50,259
              )Other
                  assets
              
              
              -
              
              
              
              (388,210
              )
              
              
              (388,210
              )Net
                  cash used in operating activities
              
              
              (11,185,447
              )
              
              
              (6,216,911
              )
              
              
              (21,339,744
              )Cash
                  flows from investing activitiesPurchase
                  of property & equipment
              
              
              (619,147
              )
              
              
              (258,903
              )
              
              
              (1,051,054
              )Net
                  cash used in investing activities
              
              
              (619,147
              )
              
              
              (258,903
              )
              
              
              (1,051,054
              )Cash
                  flows from financing activitiesCommon
                  stock sold for cash, net of offering costs
              
              
              21,153,520
              
              
              
              5,346,217
              
              
              
              26,509,737Common
                  stock repurchased and canceled
              
              
              -
              
              
              
              -
              
              
              
              (325
              )Proceeds
                  from debt
              
              
              110,322
              
              
              
              2,896,885
              
              
              
              7,964,913Repayments
                  on notes payable
              
              
              -
              
              
              
              (58,614
              )
              
              
              (63,614
              )Net
                  cash provided by financing activities
              
              
              21,263,842
              
              
              
              8,184,488
              
              
              
              34,410,711Net
                  change in cash and cash equivalents
              
              
              9,459,248
              
              
              
              1,708,674
              
              
              
              12,019,914Cash
                  and cash equivalents at beginning of period
              
              
              2,560,666
              
              
              
              851,992
              
              
              
              -Cash
                  and cash equivalents at end of period
              
              $
              12,019,914
              
              
              $
              2,560,666
              
              
              $
              12,019,914
  F-7
  Cash
                  paid for:Income
                  tax
              
              $
              -
              
              
              $
              -
              
              
              $
              -Interest
              
              
              -
              
              
              
              -
              
              
              
              429NON-CASH
                  TRANSACTIONSIssuance
                  of common stock to Sportan shareholders
              
              
              -
              
              
              
              -
              
              
              
              147,733Issuance
                  of common stock for accrued interest
              
              
              -
              
              
              
              525,513
              
              
              
              525,513Conversion
                  of notes payable to common stock
              
              
              -
              
              
              
              6,159,610
              
              
              
              6,407,980Conversion
                  of accrued liabilities to common stock
              
              
              180,000
              
              
              
              17,176
              
              
              
              197,176Conversion
                  of accounts payable to note payable
              
              
              -
              
              
              
              -
              
              
              
              93,364Discount
                  on convertible notes relating to:-
                  warrants
              
              
              -
              
              
              
              1,433,108
              
              
              
              3,309,790-
                  beneficial conversion feature
              
              
              -
              
              
              
              831,944
              
              
              
              1,715,973-
                  stock attached to notes
              
              
              -
              
              
              
              999,074
              
              
              
              1,287,440Fair
                  value of derivative instrument
              
              
              -
              
              
              
              6,761,655
              
              
              
              6,761,655




See
        accompanying summary of accounting policies and
 notes
        to
        consolidated financial statements






F-8




**OPEXA
        THERAPEUTICS, INC.**
 **(a
        development stage company)**
 **(formerly
        PharmaFrontiers Corp.)**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 **NOTE
        1 – SUMMARY OF ACCOUNTING POLICIES**
 
 Opexa
        Therapeutics, Inc. (“Opexa”), was incorporated in Texas in March, 1991 as a
        bio-pharmaceutical company engaged in developing autologous personalized
        cell
        therapies. During the development stage, Opexa acquired the worldwide license
        to
        technology developed at Argonne National Laboratory, a U.S. Department of
        Energy
        Laboratory Operated by the University of Chicago (“Argonne”). This is an
        exclusive license to a stem cell technology in which adult multi-potent stem
        cells are derived from monocytes obtained from the patient’s own blood (the
“License”). A patent application was filed in November 2003, with the United
        States Patent and Trade Office regarding the technology involved in the
        License.
 
 On
        October
        7, 2004, Opexa acquired all of the outstanding stock of Opexa Pharmaceuticals,
        Inc., an entity that has the exclusive worldwide license from Baylor College
        of
        Medicine to an individualized T-cell therapeutic vaccine, TovaxinTM, which is in
        U.S. FDA Phase IIb human clinical trials to evaluate its safety and
        effectiveness in treating multiple sclerosis.
 
 **Development
        Stage Company.**  The Company is considered to be in the
        Development stage as defined in Statement of Financial Accounting Standards
        No.
        7. The Company has no revenues to date.
 
 **Basis
        of Presentation.**  In June 2006, the Company (i) changed its
        name to Opexa Therapeutics, Inc. from PharmaFrontiers Corp. and (ii) effected
        a
        one-for-ten reverse common stock split.  All references to number of
        shares and per share amounts reflect such split as if it occurred on the
        first
        day of the first period presented. The consolidated financial statements
        include
        the accounts of Opexa Therapeutics, Inc. and its wholly-owned subsidiary,
        Opexa
        Pharmaceuticals, Inc. Significant inter-company accounts and transactions
        have
        been eliminated.
 
 **Reclassifications.**  Certain
        prior year amounts have been reclassified to conform with the current year
        presentation**.**
 
 **Use
        of Estimates in Financial Statement Preparation.**The preparation of
        consolidated financial statements in conformity with accounting principles
        generally accepted in the United States of America requires management to
        make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities, the disclosure of contingent assets and liabilities at the date
        of
        the consolidated financial statements, and the reported amounts of revenues
        and
        expenses during the reporting period. Actual results could differ from those
        estimates.
 
 **Cash,
        Cash Equivalents and Marketable Securities.**  For purposes of
        the statements of cash flows, cash equivalents include all highly liquid
        investments with original maturities of three months or
        less.  Marketable securities include investments with maturities
        greater than three months but less than one year. The primary objectives
        for the
        fixed income investment portfolio are liquidity and safety of principal.
        Investments are made with the objective of achieving the highest rate of
        return
        consistent with these two objectives. Opexa’s investment policy limits
        investments to certain types of instruments issued by institutions primarily
        with investment grade credit ratings and places restrictions on maturities
        and
        concentration by type and issuer.
 
 **Long-lived
        Assets.**  Property and equipment are stated on the basis of
        historical cost less accumulated depreciation. Depreciation is provided using
        the straight-line method over the estimated useful lives of the assets. Major
        renewals and improvements are capitalized, while minor replacements, maintenance
        and repairs are charged to current operations. Impairment losses are recorded
        on
        long-lived assets used in operations when indicators of impairment are present
        and the undiscounted cash flows estimated to be generated by those assets
        are
        less than the assets’ carrying amount.
 
 **Income
        Taxes.**  Income tax expense is based on reported earnings
        before income taxes. Deferred income taxes reflect the impact of temporary
        differences between assets and liabilities recognized for consolidated financial
        reporting purposes and such amounts recognized for tax purposes, and are
        measured by applying enacted tax rates in effect in years in which the
        differences are expected to reverse.
 
 F-9
 **Stock-Based
        Compensation.**On January 1, 2006, Opexa began recording
        compensation expense associated with stock options and other forms of equity
        compensation in accordance with Statement of Financial Accounting Standards
        No. 123R,*Share-Based Payment,* as interpreted by SEC Staff
        Accounting Bulletin No. 107. Prior to January 1, 2006, Opexa had
        accounted for stock options according to the provisions of Accounting Principles
        Board Opinion No. 25,*Accounting for Stock Issued to Employees,* and
        related interpretations, and therefore no related compensation expense was
        recorded for awards granted with no intrinsic value. Opexa adopted the modified
        prospective transition method provided for under SFAS No. 123R, and,
        consequently, have not retroactively adjusted results from prior periods.
        Under
        this transition method, compensation cost associated with stock options
        recognized in the first quarter of fiscal 2006 includes the quarterly
        amortization related to the remaining unvested portion of all stock option
        awards granted prior to January 1, 2006, based on the grant date fair value
        estimated in accordance with the original provisions of SFAS No.
        123.
 
 The
        following table illustrates the effect on net loss and net loss per share
        if
        Opexa had applied the fair value provisions of FASB Statement No. 123 to
        stock-based employee compensation prior to January 1, 2006:
  **2005**
                
                
                **Inception
                    through 2006**Net
                    loss as reported
                
                $
                (14,856,724
                )
                
                $
                (59,043,633
                )Add:
                stock
                    based compensation determined underintrinsic
                    value based method
                
                
                2,487,741
                
                
                
                2,611,074Less:
                stock
                    based compensation determined underfair
                    value based method
                
                
                (4,264,013
                )
                
                
                (4,417,377
                )Pro
                    forma net loss
                
                $
                (16,632,996
                )
                
                $
                (60,849,936
                )Basic
                    and dilutedNet
                    loss per common share
                
                $
                (10.63
                )
                
                N/AAs
                    reported
                
                $
                (9.49
                )
                
                N/A
  
 **Research
        and Development.**  Research and development expenses include
        salaries, related employee expenses, clinical trial expenses, research expenses,
        consulting fees, and laboratory costs. All costs for research and development
        activities are expensed as incurred. Opexa expenses the costs of licenses
        of
        patents and the prosecution of patents until the issuance of such patents
        and
        the commercialization of related products is reasonably assured. Acquired
        in
        process research and development that does not have a future alternative
        use is
        expensed when acquired. Research and development expense for the year ended
        December 31, 2006 was 7,850,372, as compared to $5,159,853 for the year ended
        December 31, 2005.
 
 **Accounting
        for Derivative Instruments.**Statement of Financial Accounting Standard
        (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging
        Activities,” as amended, requires all derivatives to be recorded on the balance
        sheet at fair value. Opexa’s derivatives are separately valued and accounted for
        on our balance sheet. Fair values for securities traded in the open market
        and
        derivatives are based on quoted market prices. Where market prices are not
        readily available, fair values are determined using market based pricing
        models
        incorporating readily observable market data and requiring judgment and
        estimates.
 
 The
        pricing model Opexa used for determining fair values of its derivatives is
        the
        Black Scholes Pricing Model. Valuations derived from this model are subject
        to
        ongoing internal and external verification and review. The model uses
        market-sourced inputs such as interest rates, exchange rates and option
        volatilities. Selection of these inputs involves management's judgment and
        may
        impact net income.
 
 In
        September 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-19,
        "Accounting for Derivative Financial Instruments Indexed to and Potentially
        Settled in, a Company's Own Stock," ("EITF 00-19") which requires freestanding
        contracts that are settled in a company's own stock, including common stock
        warrants, to be designated as an equity instrument, asset or a liability.
        Under
        the provisions of EITF 00-19, a contract designated as an asset or a liability
        must be carried at fair value on a company's balance sheet, with any changes
        in
        fair value recorded in the company's results of operations. A contract
        designated as an equity instrument must be included within equity, and no
        fair
        value adjustments are required.
 
 F-10
 In
        December 2006, the FASB issued FASB Staff Position No. EITF 00-19-2, Accounting
        for Registration Payment Arrangements (EITF 00-19-2). EITF 00-19-2 addresses
        an
        issuer’s accounting for registration payment arrangements. It specifies that the
        contingent obligation to make future payments or otherwise transfer
        consideration under a registration payment arrangement, whether issued as
        a
        separate agreement or included as a provision of a financial instrument or
        other
        agreement, should be separately recognized and measured in accordance with
        FASB
        Statement No. 5, Accounting for Contingencies. The guidance in EITF 00-19-2
        amends FASB Statements No. 133, Accounting for Derivative Instruments and
        Hedging Activities, and No. 150, Accounting for Certain Financial
        Instruments with Characteristics of both Liabilities and Equity, and FASB
        Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements
        for Guarantees, Including Indirect Guarantees of Indebtedness of Others,
        to
        include scope exceptions for registration payment arrangements. EITF 00-19-2
        also requires additional disclosure regarding the nature of any registration
        payment arrangements, alternative settlement methods, the maximum potential
        amount of consideration and the current carrying amount of the liability,
        if
        any. This EITF is effective immediately for registration payment arrangements
        and the financial instruments subject to those arrangements that are entered
        into or modified subsequent to the date of issue of this EITF. For registration
        payment arrangements and financial instruments subject to those arrangements
        that were entered into prior to the issuance of this EITF, this is effective
        for
        financial statements issued for fiscal years beginning after December 15,
        2006,
        and interim periods within those fiscal years.  The impact of implementing
        EITF 00-19-2 in the fiscal year 2007 will result in a cumulative effect of
        a
        change in accounting principle with a credit to beginning retained earnings
        of
        $6,656,677 and a reversal of the same amount to the derivative liability
        account.
 
 **Recently
        Issued Accounting Pronouncements.**
  In
        February 2006, the FASB issued SFAS 155, "Accounting for Certain Hybrid
        Financial Instruments," which amends SFAS 133, "Accounting for Derivative
        Instruments and Hedging Activities" and SFAS 140, "Accounting for Transfers
        and
        Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 155
        simplifies the accounting for certain derivatives embedded in other financial
        instruments by allowing them to be accounted for as a whole if the holder
        elects
        to account for the whole instrument on a fair value basis. SFA 155 also
        clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS
        155
        is effective for all financial instruments acquired, issued or subject to a
        remeasurement event occurring in fiscal years beginning after September 15,
        2006
        and is therefore required to be adopted by the Company as of October 1, 2006.
        Management is still evaluating what effect this will have on the Company’s
        financial statements.
  In
        July
        2006, the FASB issued Interpretation No. 48 (FIN No. 48), "Accounting for
        Uncertainty in Income Taxes." This interpretation requires recognition and
        measurement of uncertain income tax positions using a "more-likely-than-not"
        approach. FIN No. 48 is effective for fiscal years beginning after December
        15,
        2006. Management is still evaluating what effect this will have on the Company’s
        financial statements.
  In
        September 2006, the FASB issued SFAS 157, “Fair Value Measurements." This
        standard defines fair value, establishes a framework for measuring fair value
        in
        generally accepted accounting principles, and expands disclosure about fair
        value measurements. This statement is effective for financial statements
        issued
        for fiscal years beginning after November 15, 2007. Early adoption is
        encouraged. The adoption of SFAS 157 is not expected to have a material impact
        on the financial statements.
 
 There
        were
        various other accounting standards and interpretations issued during 2006
        and
        2005, none of which are expected to have a material impact on the Company’s
        consolidated financial position, operations or cash flows.
 
 **NOTE
        2 – RESTATEMENT OF FINANCIAL STATEMENTS**
 
 The
        Company is restating these financial statements for the 2006, 2005 and 2004
        annual periods.
 
 Following
        is a description of the restatements to the financial statements:
 
 The
        Company acquired Opexa Pharmaceuticals in October 2004 and originally accounted
        for the acquired in process research and development of $23,991,128 as
        intangible assets.  In November 2007, the Company re-evaluated its
        accounting for acquired research and development and upon further consideration
        of Paragraph 11(c) of Statement of Financial Accounting Standards No. 2 (SFAS
        No. 2) and accounting guidance from Financial Accounting Standards Board
        Interpretation No. 4 “Applicability of FASB Statement  No. 2 to
        Business Combinations Accounted for by the Purchase Method” (FIN 4), the Company
        determined that these assets did not have an alternative future use at the
        date
        of acquisition. Thus, they had no separate economic value and should be
        accordingly expensed to research and development in the period
        acquired.
 
 F-11
 In
        February 2004, the Company obtained a license from the University of Chicago
        for
        an adult stem cell technology. Costs associated with the acquisition of this
        license were originally accounted for as an intangible asset.  The
        amounts originally capitalized as intangible assets were $3,051,706, $976,497
        and $112,440 for the years ended December 31, 2004, 2005 and 2006 respectively.
        Upon further consideration of Paragraph 11(c) of SFAS No. 2, the Company
        determined that these assets had not reached technological feasibility at
        the
        date of acquisition and had no alternative future use. Therefore, the intangible
        asset should have been expensed to in process research and development in
        the
        period acquired.
 
 In
        March
        2006, the Company obtained an exclusive worldwide license for the intellectual
        property rights and research results of an autologous T cell vaccine for
        rheumatoid arthritis from the Shanghai Institutes for Biological Sciences
        (SIBS), Chinese Academy of Sciences of the People's Republic of
        China.  The Company made a $125,000 license payment  and
        accounted for the license as an intangible asset.  Upon further
        consideration of Paragraph 11(c) of SFAS No. 2, the Company determined that
        this
        asset had not reached technological feasibility at the date of acquisition
        and
        had no alternative future use. Therefore, the intangible asset should have
        been
        expensed to in process research and development in the period
        acquired.
 
 In
        the
        Consolidated Statements of Expenses, the effect of the adjustments on operating
        expenses, loss from operations and net loss for each of the years ended December
        31, 2006 and 2005 and January 22, 2003(Inception) to December 31, 2006 was
        as
        follows:
   **Year
                    Ended December 31,****2006**
                
                
                
                
                
                
                
                
                **2005****As
                    Reported**
                
                
                **Adjustment**
                
                
                **As
                    Restated**
                
                
                **As
                    Reported**
                
                
                **Adjustment**
                
                
                **As
                    Restated**Research
                    and development
                
                $
                7,612,932
                
                
                $
                237,441
                (1)
                
                $
                7,850,373
                
                
                $
                4,183,356
                
                
                $
                976,497
                (1)
                
                $
                5,159,853General
                    and administrative
                
                
                5,461,047
                
                
                
                -
                
                
                
                5,461,047
                
                
                
                6,259,075
                
                
                
                -
                
                
                
                6,259,075Depreciation
                    and amortization
                
                
                1,818,795
                
                
                
                (1,644,678
                )(2)
                
                
                174,117
                
                
                
                1,735,209
                
                
                
                (1,637,129
                )(2)
                
                
                98,080Loss
                    on disposal of assets
                
                
                2,376
                
                
                
                -
                
                
                
                2,376
                
                
                
                22,810
                
                
                
                -
                
                
                
                22,810Operating
                    loss
                
                
                (14,895,150
                )
                
                
                1,407,237
                
                
                
                (13,487,913
                )
                
                
                (12,200,450
                )
                
                
                660,632
                
                
                
                (11,539,818
                )Interest
                    income
                
                
                688,299
                
                
                
                -
                
                
                
                688,299
                
                
                
                81,930
                
                
                
                -
                
                
                
                81,930Other
                    income
                
                
                46,450
                
                
                
                -
                
                
                
                46,450
                
                
                
                28,174
                
                
                
                -
                
                
                
                28,174Gain
                    (loss) on derivative liability
                
                
                104,978
                
                
                
                -
                
                
                
                104,978
                
                
                
                3,896,841
                
                
                
                -
                
                
                
                3,896,841Interest
                    expense
                
                
                (984
                )
                
                
                -
                
                
                
                (984
                )
                
                
                (7,323,851
                )
                
                
                -
                
                
                
                (7,323,851
                )Net
                    loss
                
                $
                (14,056,407
                )
                
                $
                1,407,237
                
                
                $
                (12,649,170
                )
                
                $
                (15,517,356
                )
                
                $
                660,632
                
                
                $
                (14,856,724
                )Basic
                    and diluted loss per share
                
                $
                (2.61
                )
                
                $
                0.26
                
                
                $
                (2.35
                )
                
                $
                (9.92
                )
                
                $
                0.42
                
                
                $
                (9.49
                )
 F-12
   **January
                    22, 2003 (Inception) to****December
                    31, 2006****As
                    Reported**
                
                
                **Adjustment**
                
                
                **As
                    Restated**Research
                    and development
                
                $
                12,428,909
                
                
                $
                28,256,771
                (1)
                
                $
                40,685,680General
                    and administrative
                
                
                14,206,469
                
                
                
                -
                
                
                
                14,206,469Depreciation
                    and amortization
                
                
                3,818,823
                
                
                
                (3,533,568
                )(2)
                
                
                285,255Loss
                    on disposal of assets
                
                
                482,309
                
                
                
                -
                
                
                
                482,309Operating
                    loss
                
                
                (30,936,510
                )
                
                
                (24,723,203
                )
                
                
                (55,659,713
                )Interest
                    income
                
                
                776,221
                
                
                
                -
                
                
                
                776,221Other
                    income
                
                
                77,003
                
                
                
                -
                
                
                
                77,003Gain
                    (loss) on derivative liability
                
                
                4,001,819
                
                
                
                -
                
                
                
                4,001,819Interest
                    expense
                
                
                (8,238,963
                )
                
                
                -
                
                
                
                (8,238,963
                )Net
                    loss
                
                $
                (34,320,430
                )
                
                $
                (24,723,203
                )
                
                $
                (59,043,633
                )Basic
                    and diluted loss per share
                
                N/A
                
                
                N/A
                
                
                N/A
  (1)
              Adjustment
                  for capitalizing acquired research and development to intangible
                  assets
                  that should have been expensed to research and development (i)
                  for the
                  year ended 12/31/2006 in the amount of $237,440, (ii) for the year
                  ended
                  12/31/2005 in the amount of $976,497 and (iii) inception to 12/31/2006
                  in
                  the amount of $28,256,771.
 (2)
              Reversal
                  of amortization of intangible assets that should have been expensed
                  to
                  research and development (i) for the year ended 12/31/2006 in the
                  amount
                  of $1,644,678, (ii) for the year ended 12/31/2005 in the amount
                  of
                  $1,637,129 and (iii) inception to 12/31/2006 in the amount of
                  $3,533,568.
 
 In
        the
        Balance Sheet, the effect of the adjustments on Intangible Assets and
        Accumulated Deficit as of December 31, 2006 was as follows:
  **As
                    Reported**
                
                
                **Adjustment**
                
                
                
                **As
                    Restated****Assets**Intangible
                    Assets
                
                $
                24,723,203
                
                
                $
                (24,723,203
                )
                (1)
                
                $
                -**Stockholders'
                    Equity**Accumulated
                    Deficit
                
                $
                (34,320,430
                )
                
                $
                (24,723,203
                )
                (1)
                
                $
                (59,043,633
                )
  
 (1)  Adjustment for capitalizing acquired research and
        development to intangible assets that should have been expensed to research
        and
        development and reversal of amortization of intangible assets that should
        have
        been expensed to research and development.  Adjustment for
        capitalizing acquired research and development to intangible assets that
        should
        have been expensed to research and development (i) for the year ended 12/31/2006
        in the amount of $237,440, (ii) for the year ended 12/31/2005 in the amount
        of
        $976,497 and (iii) inception to 12/31/2006 in the amount of $28,256,771.
        Reversal of amortization of intangible assets that should have been expensed
        to
        research and development (i) for the year ended 12/31/2006 in the amount
        of
        $1,644,678, (ii) for the year ended 12/31/2005 in the amount of $1,637,129
        and
        (iii) inception to 12/31/2006 in the amount of $3,533,568.
 
 **NOTE
        3 – MARKETABLE SECURITIES**
 
 At
        December 31, 2006, Opexa invested $10.9 million in  A-1/P-1 commercial
        paper, of which $2.9 million is invested in marketable securities, and $3.9
        million is invested in a money market account with an average market yield
        of
        5.33% and average time to maturity of 1.32 months.  Interest income of
        $688,299 was recognized for the twelve months ended December 31, 2006 in
        the
        consolidated statements of expenses.
 
 F-13
  **NOTE
        4 – LICENSE AGREEMENTS**
 
 ***University
        of Chicago License Agreement***
 In
        2004
        Opexa entered into an agreement with the University of Chicago (“University”)
        for the worldwide license to technology developed at Argonne National
        Laboratory, a U.S. Department of Energy Laboratory Operated by the University.
        In consideration for the license, Opexa paid the University $57,742 and issued
        237,188 shares valued at $1,199,706. In December 2004, the License Agreement
        was
        amended granting Opexa an exclusive, non-transferable worldwide license to
        the
        University’s stem cell technology. In consideration for the amendment, Opexa
        paid the University an additional $175,000, issued the University 5,500 shares
        of common stock valued at $352,000, agreed to pay the University $1,500,000
        on
        October 30, 2005 and agreed to issue the University shares of Opexa common
        stock, including the shares already issued, equal to 2.6% of the total
        outstanding number of shares after conversion of the 15% exchangeable
        convertible subordinated promissory notes. In June 2005, 27,484 shares of
        common
        stock were issued to the University of Chicago per the terms of a license
        agreement. These shares were recorded at $867,064. In August 2005, 1,710
        shares
        of common stock were issued to the University of Chicago per the terms of
        a
        license agreement. These shares were recorded at $109,434. In October 2006,
        the
        $1,500,000 cash payment obligation was extended until April 30, 2007 and
        (ii)
        the obligation to issue 21,623 shares of Opexa’s common stock issuable was
        extended until April 30, 2007, with $112,440 accrued at December 31,
        2006. The Company determined that these assets had not reached
        technological feasibility at the date of acquisition and had no alternative
        future use. Therefore, the costs were expensed to research and development
        in
        the period incurred.
 
 ***Shanghai
        Institute for Biological Science License Agreement***
 In
        January
        2006, Opexa acquired an exclusive worldwide license for the intellectual
        property rights and research results of an autologous T cell vaccine for
        rheumatoid arthritis from the Shanghai Institute for Biological Science,
        China
        Academy of Science of the People’s Republic of China.  In exchange for
        a payment of $125,000 and an agreed running royalty from the sale of
        commercialized products, Opexa receives all information and data related
        to all
        clinical trials on all patient controls and patients with rheumatoid arthritis
        with the T cell vaccine.  This includes all clinical, cell procurement
        and manufacturing protocols, complete patient data sheets, all laboratory
        materials, methods and results and manufacturing records and documents and
        any
        other data related to the intellectual property. The first payment under
        the
        license occurred in April 2006 upon the delivery of materials pursuant to
        the
        terms of the licensing agreement.  The Company determined that these
        assets had not reached technological feasibility at the date of acquisition
        and
        had no alternative future use. Therefore, the costs were expensed to research
        and development in the period incurred.
 
 **NOTE
        5 – PROPERTY AND EQUIPMENT**
 
 Property
        and equipment consisted of the following at December 31, 2006:
  **Description**
                **Life**
                
                **Amount**Computer
                    equipment
                3
                    years
                
                $
                134,023Office
                    furniture and equipment
                3-10
                    years
                
                
                220,113Software
                3-5
                    years
                
                
                46,089Laboratory
                    equipment
                3-10
                    years
                
                
                912,709Leasehold
                    improvements
                10
                    years
                
                
                443,727Subtotal
                
                
                
                1,756,661Less:
                    accumulated depreciation
                
                
                
                (395,284
                )Property
                    and equipment, net
                
                
                $
                1,361,377
  Property
        and equipment is carried at cost less accumulated depreciation. Depreciation
        is
        calculated by the straight-line method over the estimated useful life of
        three
        to ten years, depending upon the type of equipment, except for leasehold
        improvements which are amortized using the straight-line method over the
        remaining lease term or the life of the asset, whichever is shorter. The
        cost of
        repairs and maintenance is charged as an expense as incurred. Depreciation
        expense totaled $174,117 and $98,080 in fiscal 2006 and 2005,
        respectively.
  F-14
 
  **NOTE
        6 – INCOME TAXES**
 
 Opexa
        uses
        the liability method, where deferred tax assets and liabilities are determined
        based on the expected future tax consequences of temporary differences between
        the carrying amounts of assets and liabilities for financial and income tax
        reporting purposes.
 
 At
        December 31, 2006, for federal income tax and alternative minimum tax reporting
        purposes, the Company had approximately $56,106,251 of unused net operating
        losses available for carryforward to future years. The benefit from carryforward
        of such net operating losses will expire in various years through
        2026.  Under the provisions of Section 382 of the Internal Revenue
        Code, the benefit from utilization of approximately $5,650,429 of net operating
        losses incurred prior to October 7, 2004 was significantly limited as a result
        of the change of control that occurred in connection with the Company’s
        acquisition of Opexa. The benefit could be subject to further limitations
        if
        significant future ownership changes occur in the Company.
 
 At
        December 31, 2006, deferred tax assets consisted of the following:
  NOL
                    @ 12/31/05
                
                $
                (47,670,687
                )Net
                    loss - 2006
                
                
                (12,649,170
                )Subtotal
                
                
                (60,319,857
                )Derivative
                    (gain) loss
                
                
                (104,978
                )Option
                    expense
                
                
                2,749,617Warrant
                    expense
                
                
                1,568,966NOL
                    @ 12/31/06
                
                
                (56,106,251
                )Estimated
                    tax rate
                
                X
                    34%Deferred
                    tax asset
                
                
                (19,076,125
                )Valuation
                    allowance
                
                
                19,076,125Net
                    deferred tax asset
                
                $
                -
  
 **NOTE
        7 – THIRD PARTY CONVERTIBLE NOTES**
 
 Between
        September 2004 and February 2005, Opexa issued convertible notes to investors
        totaling $6,124,859. In March 2005, 45,169 shares of common stock with a
        relative fair value of $999,074 were issued to note holders as their additional
        shares for their subscription investment in Opexa. In June 2005, a total
        of
        $6,650,372 comprised of the principal of the notes of $6,124,859 and accumulated
        interest of $525,513, which accrued at a rate of 15% per annum, was exchanged
        for 443,360 shares of common stock, Class A and Class B warrants that expired
        in
        2006, and Class C warrants to purchase 1,110,548 shares at an exercise price
        of
        $30 per share.
 
 Opexa
        analyzed the convertible notes and the warrants for derivative accounting
        consideration under SFAS 133 and EITF 00-19. Opexa determined the embedded
        conversion option in the convertible notes met the criteria for classification
        in stockholders equity under SFAS 133 and EITF 00-19. Therefore, derivative
        accounting was not applicable for these convertible notes
        payable.  See Note 13 for a discussion of the accounting for the
        warrants.
 
 **NOTE
        8 – NOTE PAYABLE**
 
 Note
        payable consists of a note in the amount of $1,500,000 payable to the University
        of Chicago, secured by license, no interest and due April 30,
        2007.  See Note 4 for details.
 
 Loan
        payable consists of an equipment line of up to $250,000 with Wells Fargo
        of
        which $110,322 was outstanding as of December 31, 2006. This loan has an
        interest rate of 7.61% per annum, matures in May 2011 and is secured by Opexa’s
        furniture and equipment purchased with the loan proceeds.
 
 F-15
 
 **NOTE
        9 – COMMITMENTS AND CONTINGENCIES**
 
 ***Office
        Lease***
 
 In
        October
        2005, Opexa entered into a ten-year lease for its office and research
        facilities.  There is 2,500 sq. ft. of space still available for
        future build-out.  The facility including the property is leased for a
        term of ten years with two options for an additional five years each at the
        then
        prevailing market rate.  Future minimum lease payments under the
        non-cancellable operating lease are $117,774 for 2007, $137,196 for 2008,
        $139,782 for 2009, $147,540 for 2010, $147,540 for 2011 and $584,343 for
        years
        2012 to 2015. Rent expense for 2006 was $136,153 and $178,963 for
        2005.
 
 ***Contract
        Research Organization Agreement***
 
 In
        September 2006, Opexa engaged PharmaNet, LLC, a contract research organization
        focused on managing central nervous system trials to provide it with services
        in
        connection with its Phase IIb clinical trial.  An initial pre-payment of
        $400,000 was made to PharmaNet, LLC in April 2006, of which $133,334 remains
        as
        a prepaid balance as of December 31, 2006.  An additional $235,000
        payment was made in October representing an advance for investigator grant
        expenses, of which $191,329 remains a prepaid balance as of December 31,
        2006.
 
 **NOTE
        10 – EQUITY**
 
 During
        2003, equity related transactions were as follows:
 -
              525,000
                  shares of common stock were sold for
                  $1,000.
 -
              170,625
                  shares were reacquired for $325 and
                  canceled.
 -
              Additional
                  contributions to capital of $56,360 resulted from the discounted
                  value to
                  notes payable due to warrants and beneficial conversion features
                  attached
                  to convertible notes was issued in
                  2003.
 
 During
        2004, equity related transactions were as follows:
 -
              2,250
                  shares of common stock were sold for
                  $9,000.
 -
              206,500
                  shares of common stock valued at their then fair value of $849,000
                  were
                  issued to employees and consultants for their
                  services.
 -
              24,269
                  shares of common stock valued at their then fair value of $427,075
                  were
                  issued to the University of Chicago per the terms of a license
                  agreement.
                  See Note 2 for details.
 -
              99,740
                  shares of common stock were issued for net liabilities of $147,733
                  pursuant to the 2004
                  reorganization.
 -
              250,000
                  shares of common stock valued at their then fair value of $23,750,000
                  were
                  issued to Opexa Pharmaceuticals, Inc., shareholders. See Note 12
                  for
                  details.
 -
              16,100
                  shares of common stock with a relative fair value of $288,366 were
                  issued
                  to note holders as their additional shares for their subscription
                  investment.
 -
              60,750
                  shares of common stock were issued to note holders for the conversion
                  of
                  $248,370 of principal and interest from convertible
                  notes.
 -
              8,000
                  shares of common stock were cancelled pursuant to the terms of
                  an
                  employment separation agreement.
 -
              Additional
                  contributions to capital of $2,704,351 resulted from the discounted
                  value
                  to notes payable from warrants, beneficial conversion features
                  attached to
                  convertible notes.
 -
              Employee
                  stock option expense was $123,333 for
                  2004.
 
 During
        2005, equity related transactions were as follows:
 -
              389,451
                  shares of common stock with warrants to purchase 1,070,993 shares
                  were
                  sold for $5,841,769.  The relative fair value of the common
                  stock is $1,103,714 and the relative fair value of the warrants
                  is
                  $4,748,055. Offering costs of $495,552 related to shares issued
                  were
                  charged to additional paid in
                  capital.
 -
              45,168
                  shares of common stock with a relative fair value of $999,074 were
                  issued
                  to note holders as their additional shares for their subscription
                  investment.
 -
              565,858
                  shares of common stock were issued to note holders for the conversion
                  of
                  $6,124,859 of principal and $525,513 interest from convertible
                  notes.
 -
              2,300
                  shares of common stock valued at their fair value of $161,000 were
                  issued
                  to note holders for the conversion of $51,930 of principal and
                  interest
                  from the notes.
  
 F-16
 -
              29,194
                  shares of common stock were issued to the University of Chicago
                  per the
                  terms of a license agreement. These shares were recorded at
                  $1,868,384.
 -
              24,000
                  shares of common stock valued at their fair value of $1,012,400
                  were
                  issued to consultants for their
                  services.
 -
              Additional
                  contributions to capital of $2,265,052 relating to the discounted
                  value to
                  notes payable from warrants, beneficial conversion features attached
                  to
                  convertible notes.
 -
              Employee
                  stock option expense was $2,487,741 for
                  2005.
 -
              Warrant
                  expense was $2,373,888 for 2005.
 -
              Transition
                  of warrants from equity instruments to liability instruments in
                  the amount
                  of $10,658,496 was recorded. See Note 13 for
                  details.
 
 During
        2006, equity related transactions were as follows:
 -
              In
                  March 2006, 34,829 shares of common stock were issued to settle
                  an
                  outstanding accounts payable in the amount of
                  $180,000.
 -
              In
                  April 2006, Opexa sold 4,600,000 shares of its common stock and
                  warrants
                  to purchase 2,300,000 shares of Opexa’s common stock for $23,000,000.
                  Opexa paid $1,846,481 for the commissions and fees related to this
                  offering and granted to its brokers warrants to purchase 213,720
                  shares of
                  common stock at an exercise price of $5.00 per share. These warrants
                  are
                  not callable and have a cashless exercise
                  option.
 -
              Employee
                  stock option expense was $2,749,617 for
                  2006.
 -
              Warrant
                  expense was $1,568,966 for 2006.
 
 **NOTE
        11 – STOCK OPTIONS AND WARRANTS**
 
 In
        2004,
        Opexa adopted the 2004 Stock Option Plan (“the Plan”) for the granting of stock
        options to employees and consultants of Opexa.  Options granted under
        the Plan may be either incentive stock options or nonqualified stock options.
        The Board of Directors has discretion to determine the number, term, exercise
        price and vesting of all grants.
 
 ***Employee
        Stock Options:***
 
 During
        2004, options to purchase 96,500 shares were granted to employees at exercise
        prices ranging from $30.00 to $50.00. These options have terms of five years
        and
        vest from one to three years.  Fair value of $5,623,186 was recorded
        using the Black-Scholes method of calculation with a volatility  of
        75.05% and a discount rate of 2%.
 
 During
        2005, options to purchase 63,050 shares were granted to employees. at exercise
        prices of $7.00. These options have terms of ten years and vest in four
        years.  Fair value of $261,879 was recorded using the Black-Scholes
        method of calculation with a volatility range of 175.4% and a discount rate
        of
        2%.
 
 During
        2005, options to purchase 4,167 shares were forfeited and
        cancelled.
 
 During
        2006, options to purchase 389,160 shares of common stock were granted by
        Opexa
        to its employees at exercise prices ranging from $5.00 to $9.40. These options
        have terms from five to ten years, vest from one to three years and have
        a fair
        value of $3,126,168. Using the Black-Scholes method, stock compensation for
        2006
        was $1,066,451 with a volatility range of 401.34% to 429.86% and a discount
        rate
        range of 4.72% - 5.22%.
 
 Opexa
        recorded $2,749,617 stock-based compensation expense to the management and
        employees during 2006.
 
 During
        2006, options to purchase 14,133 shares were forfeited.
 
 ***Consultant
        Warrants:***
 
 During
        2004, warrants to purchase 20,000 shares were granted to consultants at exercise
        prices ranging from $30.00 to $50.00. These options have terms of five years
        and
        vest from one to three years.   Fair value of $1,011,770 was
        recorded using the Black-Scholes method with a volatility range of 75.05%
        and a
        discount rate of 2%.
 
 During
        2005, warrants to purchase 71,060 shares were granted to
        consultants.  Using the Black-Scholes method, fair value for 2005 was
        $1,552,936 with a volatility range of 175.4% and a discount rate of
        2%.
 
 F-17
 During
        2005, warrants to purchase 46,085 shares of Common Stock ere issued to several
        brokerage firms as the offering costs and commissions for Opexa’s financing
        activities at an exercise price of $1.50 per share.  These warrants
        have a fair value of $2,197,162 and vest immediately.
 
 During
        2005, warrants to purchase 9,914 shares were forfeited and
        cancelled.
 
 In
        April
        2006, warrants to purchase 213,720 shares of common stock were granted by
        Opexa
        to the brokers in connection with the $23,000,000 equity financing, at an
        exercise price of $5.20. These warrants have a term of three years, vest
        immediately and have a fair value of $1,077,778.
 
 During
        2006, warrants to purchase 156,500 shares of common stock were granted by
        Opexa
        to its consultants, directors and exiting directors at the exercise prices
        ranging from $5.20 to $9.80. These warrants have a term of ten years, vest
        from
        one to three years and have a fair value of $1,496,375. Using the Black-Scholes
        method, stock compensation for 2006 was $931,597 with a volatility range
        of
        401.34% to 429.86% and a discount rate range of 4.72% - 5.22%.
 
 Opexa
        recorded $1,568,966 stock-based compensation expense to the consultants,
        directors and exiting directors during 2006.
 
 During
        2006, warrants to purchase 5,000 shares were expired.
 
 ***Investor
        Warrants:***
 
 During
        2003, warrants to purchase 15,000 shares were granted to investors related
        to
        the convertible notes.
 
 During
        2004, warrants to purchase 142,800 shares were granted to investors related
        to
        the convertible notes.
 
 During
        2005, warrants to purchase 2,386,984 shares were granted to investors related
        to
        the convertible notes and warrants to purchase 254,363 shares were forfeited
        and
        cancelled.
 
 During
        2006, warrants to purchase 2,765,043 shares were granted to investors related
        to
        the Aril 2006 financing and warrants to purchase 1,645,002 shares were forfeited
        and cancelled.
 
 Summary
        information regarding options and warrants is as follows:
  Summary
        of
        options and warrants outstanding and exercisable as of December 31, 2006
        is as
        follows:
 
 F-18
   **Weighted**
              
              
              
              
              
              **Weighted****Average**
              
              
              
              
              
              **Average****Exercise**
              
              
              
              
              
              **Exercise****Options**
              
              
              **Price**
              
              
              **Warrants**
              
              
              **Price**Year
                  ended December 31, 2003:Granted
              
              
              -
              
              
              $
              -
              
              
              
              15,000
              
              
              $
              1.00Outstanding
                  at December 31, 2003
              
              
              -
              
              
              
              -
              
              
              
              15,000
              
              
              
              1.00Year
                  ended December 31, 2004:Granted
              
              
              96,500
              
              
              
              31.70
              
              
              
              162,800
              
              
              
              22.30Outstanding
                  at December 31, 2004
              
              
              96,500
              
              
              
              31.70
              
              
              
              177,800
              
              
              
              22.40Year
                  ended December 31, 2005:Granted
              
              
              63,050
              
              
              
              15.70
              
              
              
              2,504,129
              
              
              
              28.60Forfeited
                  and canceled
              
              
              (4,167
              )
              
              
              42.80
              
              
              
              (264,277
              )
              
              
              24.50Outstanding
                  at December 31, 2005
              
              
              155,383
              
              
              
              24.90
              
              
              
              2,417,652
              
              
              
              23.51Year
                  ended December 31, 2006:Granted
              
              
              389,160
              
              
              
              5.48
              
              
              
              3,135,264
              
              
              
              9.28Forfeited
                  and canceled
              
              
              (14,133
              )
              
              
              34.79
              
              
              
              (1,649,995
              )
              
              
              12.77Outstanding
                  at December 31, 2006
              
              
              530,410
              
              
              $
              10.38
              
              
              
              3,902,921
              
              
              $
              13.52




Summary
        of
        options and warrants outstanding and exercisable as of December 31, 2006
        is as
        follows:




**Exercise
                  Price**
              
              **Remaining
                  Life**
              
              **Options
                  Outstanding**
              
              
              **Options
                  Exercisable**
              
              
              **Warrants
                  Outstanding**
              
              
              **Warrants
                  Exercisable**$
              40.00
              
              3
                  -
                  4 years
              
              
              -
              
              
              
              -
              
              
              
              17,500
              
              
              
              8,375$
              30.00
              
              2
                  -
                  3 years
              
              
              84,500
              
              
              
              58,667
              
              
              
              5,000
              
              
              
              3,333$
              30.00
              
              3
                  -
                  4 years
              
              
              18,850
              
              
              
              8,950
              
              
              
              1,125,056
              
              
              
              1,116,389$
              15.00
              
              3
                  -
                  4 years
              
              
              -
              
              
              
              -
              
              
              
              46,895
              
              
              
              46,895$
              11.90
              
              3
                  -
                  4 years
              
              
              -
              
              
              
              -
              
              
              
              21,500
              
              
              
              3,000$
              11.50
              
              2
                  -
                  3 years
              
              
              -
              
              
              
              -
              
              
              
              16,750
              
              
              
              -$
              11.40
              
              2
                  -
                  3 years
              
              
              2,000
              
              
              
              -
              
              
              
              -
              
              
              
              -$
              9.80
              
              9
                  -
                  10 years
              
              
              -
              
              
              
              -
              
              
              
              37,000
              
              
              
              17,500$
              9.40
              
              9
                  -
                  10 years
              
              
              30,900
              
              
              
              -
              
              
              
              4,500
              
              
              
              500$
              8.25
              
              9
                  -
                  10 years
              
              
              12,500
              
              
              
              -
              
              
              
              1,500
              
              
              
              -$
              7.09
              
              9
                  -
                  10 years
              
              
              3,300
              
              
              
              -
              
              
              
              -
              
              
              
              -$
              7.00
              
              9
                  -
                  10 years
              
              
              37,000
              
              
              
              9,250
              
              
              
              -
              
              
              
              -$
              6.50
              
              4
                  -
                  5 years
              
              
              -
              
              
              
              -
              
              
              
              2,300,000
              
              
              
              2,300,000$
              5.20
              
              2
                  -
                  3 years
              
              
              -
              
              
              
              -
              
              
              
              8,500
              
              
              
              -$
              5.20
              
              9
                  -
                  10 years
              
              
              -
              
              
              
              -
              
              
              
              105,000
              
              
              
              52,500$
              5.00
              
              3
                  -
                  4 years
              
              
              -
              
              
              
              -
              
              
              
              213,720
              
              
              
              213,720$
              5.00
              
              4
                  -
                  5 years
              
              
              75,000
              
              
              
              32,100
              
              
              
              -
              
              
              
              -$
              5.00
              
              9
                  -
                  10 years
              
              
              266,360
              
              
              
              -
              
              
              
              -
              
              
              
              -530,410
              
              
              
              108,967
              
              
              
              3,902,921
              
              
              
              3,762,213




F-19
 **NOTE
        12 – PURCHASE OF OPEXA PHARMACEUTICALS**
 
 In
        October2004, Opexa
        acquired all of the outstanding stock of Opexa Pharmaceuticals, Inc. The
        acquisition was accounted for under the purchase method, where all of Opexa
        Pharmaceuticals, Inc.’s assets are restated to their fair market value on the
        acquisition date. The 250,000 shares of Opexa were valued at their then fair
        value of $23,750,000 or $95.00 per share. The results of operations for Opexa
        from November 6, 2004 through December 31, 2005 are included in the Statements
        of Operations and the Statements of Cash Flows.
  The
        following table summarizes the estimated fair values of the assets acquired
        and
        the liabilities assumed at the date of acquisition:
  Current
                    assets
                
                $
                55,387Property,
                    plant and equipment, net
                
                
                639,160Acquired
                    in process research and development
                
                
                23,991,128Current
                    liabilities assumed
                
                
                (935,675
                )Total
                    allocation of purchase price
                
                $
                23,750,000
  
 The
        estimated fair value of acquired in process research and development of
        $23,991,128 was determined by our management. Management considered a number
        of
        factors in determining the value of the acquired in process research and
        development, including the results of an independent valuation performed
        by a
        third-party valuation specialist. The purchased represents Opexa
        Pharmaceuticals’ incomplete research and development programs that had not yet
        reached technological feasibility and had no alternative future uses as of
        the
        acquisition date and, therefore, was expensed upon acquisition within our
        Consolidated Statements of Expenses.
 
 **NOTE
        13 – DERIVATIVE INSTRUMENTS**
 
 For
        the
        years ended December 31, 2006 and 2005, Opexa evaluated the application of
        SFAS
        133 and EITF 00-19 for all of its financial instruments and identified the
        following financial instruments as derivatives:
 
 (1)
                  Series A Warrants issued in conjunction with the bridge note exchange
                  and
                  private placement offerings in June and July 2005, which expired
                  on
                  February 17, 2006;
 
 (2)
                  Series B Warrants issued in conjunction with the bridge note exchange
                  and
                  private placement offerings in June and July 2005, which expired
                  on
                  October 17, 2006; and
 
 (3)
                  Series C Warrants issued in conjunction with the bridge note exchange
                  and
                  private placement offerings in June and July
                  2005.
 
 These
        three series of warrants are derivatives because the liquidated damage provision
        in the registration rights agreement covering each warrant resulted in the
        conclusion that it was more economic to issue registered shares than to issue
        unregistered shares and pay the penalty.  Because issuing registered
        shares is outside of Opexa’s control, Opexa concluded the warrants should be
        accounted for as derivative liabilities under SFAS 133 and EITF
        00-19.
 
 As
        a
        result, Opexa reports the value of these derivatives as current liabilities
        in
        its balance sheet and report changes in the value of these derivatives as
        non-operating gains or losses in its statements of operations. The value
        of the
        derivatives is required to be remeasured on a quarterly basis, and is based
        on
        the Black Scholes Pricing Model.
 
 Variables
        used in the Black-Scholes option-pricing model include (1) risk free interest
        rate, (2) expected warrant life is the actual remaining life of the warrants
        as
        of each period end, (3) expected volatility and (4) zero expected dividends
        as
        further detailed in the table as follows:
 
 F-20
  
 **As
                    of 12/31/2005**
                
                
                **As
                    of 12/31/2006**Risk-free
                    rate for termA
                    Warrant
                
                
                4.08
                %
                
                
                -B
                    Warrant
                
                
                4.37
                %
                
                
                -C
                    Warrant
                
                
                4.35
                %
                
                
                501
                %Expected
                    volatilityA
                    Warrant
                
                
                30
                %
                
                
                -B
                    Warrant
                
                
                112
                %
                
                
                -C
                    Warrant
                
                
                475
                %
                
                
                487
                %
  The
        impact
        of the application of SFAS 133 and EITF 00-19 on the balance sheets as of
        December 31, 2006 and 2005 and the statements of operations and for the years
        ended December 31, 2006 and 2005 and the period from inception through December
        31, 2006 is as follows:
 **As
                    of 12/31/2005**
                
                
                **As
                    of 12/31/2006**
                
                
                **Gain(Loss) Year
                    Ended 12/31/2005**
                
                
                **Gain(Loss) Year
                    Ended 12/31/2006**
                
                
                **Gain(Loss)
                    Inception Through 12/31/2006**Series
                    A Warrants
                
                $
                -
                
                
                $
                -
                
                
                $
                332,440
                
                
                $
                -
                
                
                $
                332,440Series
                    B Warrants
                
                
                264,957
                
                
                
                -
                
                
                
                640,882
                
                
                
                264,957
                
                
                $
                905,839Series
                    C Warrants
                
                
                6,496,698
                
                
                
                6,656,677
                
                
                
                2,923,519
                
                
                
                (159,979
                )
                
                $
                2,763,540Totals
                
                $
                6,761,655
                
                
                $
                6,656,677
                
                
                $
                3,896,841
                
                
                $
                104,978
                
                
                $
                4,001,819
  
 The
        warrants granted during the April 2006 financing were determined to qualify
        as
        for equity treatment under SFAS 133 and EITF 00-19.  Nothing in the
        warrant agreements required cash settlement or allowed for the possibility
        of
        cash settlement including the impact of the liquidated damages penalty under
        the
        registration rights agreement. It was determined on the date of grant and
        at
        December 31, 2006 that it was more economic to issue unregistered shares
        and pay
        the penalty than to issue registered shares.
 
 In
        December 2006, the FASB issued FASB Staff Position No. EITF 00-19-2, Accounting
        for Registration Payment Arrangements (EITF 00-19-2). EITF 00-19-2 addresses
        an
        issuer’s accounting for registration payment arrangements. It specifies that the
        contingent obligation to make future payments or otherwise transfer
        consideration under a registration payment arrangement, whether issued as
        a
        separate agreement or included as a provision of a financial instrument or
        other
        agreement, should be separately recognized and measured in accordance with
        FASB
        Statement No. 5, Accounting for Contingencies. The guidance in EITF 00-19-2
        amends FASB Statements No. 133, Accounting for Derivative Instruments and
        Hedging Activities, and No. 150, Accounting for Certain Financial
        Instruments with Characteristics of both Liabilities and Equity, and FASB
        Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements
        for Guarantees, Including Indirect Guarantees of Indebtedness of Others,
        to
        include scope exceptions for registration payment arrangements. EITF 00-19-2
        also requires additional disclosure regarding the nature of any registration
        payment arrangements, alternative settlement methods, the maximum potential
        amount of consideration and the current carrying amount of the liability,
        if
        any. This EITF is effective immediately for registration payment arrangements
        and the financial instruments subject to those arrangements that are entered
        into or modified subsequent to the date of issue of this EITF. For registration
        payment arrangements and financial instruments subject to those arrangements
        that were entered into prior to the issuance of this EITF, this is effective
        for
        financial statements issued for fiscal years beginning after December 15,
        2006,
        and interim periods within those fiscal years.  The impact of implementing
        EITF 00-19-2 in the fiscal year 2007 will result in a cumulative effect of
        a
        change in accounting principle with a credit to beginning retained earnings
        of
        $6,656,677 and a reversal of the same amount to the derivative liability
        account.
 
 **NOTE
        14 – STOCK PURCHASE AGREEMENT**
 
 In
        June
        2004, Pharma was acquired by Sportan United Industries, Inc. in a transaction
        accounted for as a reverse acquisition. Pharma’s shareholders were issued
        6,386,439 Sportan shares in exchange for 100 percent of the outstanding common
        shares of Pharma. Immediately following this transaction, Sportan changed
        its
        name to Pharma and 7,383,838 shares were outstanding.
 
 F-21
 
 **NOTE
        15 - GOING CONCERN**
 
 On
        November 2, 2007, Opexa filed it quarterly report for the period ended September
        30, 2007. As shown in its financial statements, Opexa has negative cash flows
        provided by its operating activities and has a cash balance of $5.8 million
        as
        of September 30, 2007 which is not sufficient to fund its operations for
        the
        next twelve months. These conditions raise substantial doubt as to Opexa’s
        ability to continue as a going concern. Management will seek to raise additional
        capital through sales of convertible debt and/or equity. The financial
        statements do not include any adjustments that might be necessary if Opexa
        is
        unable to continue as a going concern.
 
 F-22
  **ITEM
        8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
        ACCOUNTING AND FINANCIAL DISCLOSURE**
 
 None.
  **ITEM
        8A. CONTROLS AND PROCEDURES**
 
 We
        maintain disclosure controls and procedures that are designed to ensure that
        information required to be disclosed by us in the reports that we file or
        submit
        to the Securities and Exchange Commission under the Securities Exchange Act
        of
        1934, as amended, is recorded, processed, summarized, and reported within
        the
        time periods specified by the Securities and Exchange Commission’s rules and
        forms, and that information is accumulated and communicated to our management,
        including our principal executive and principal financial officers (whom
        we
        refer to in this periodic report as our Certifying Officers), as appropriate
        to
        allow timely decisions regarding required disclosure. Our management evaluated,
        with the participation of our Certifying Officers, the effectiveness of our
        disclosure controls and procedures as of December 31, 2006, pursuant to
        Rule 13a-15(b) under the Securities Exchange Act. Based upon that
        evaluation, our Certifying Officers concluded that, as of December 31, 2006,
        our
        disclosure controls and procedures were not effective as of December 31,
        2006
        for the reason described below.
  In
        connection with receiving comments from the Securities & Exchange Commission
        regarding our Annual Report on form 10-KSB filed March 16 2007, we reviewed
        the
        appropriateness of the capitalization of certain costs of acquiring various
        intellectual property rights versus treatment of such costs as a period expense
        for the period in which such rights were acquired. We identified deficiencies
        in
        our internal controls and disclosure controls related to the accounting for
        acquired research and development in accordance with Paragraph 11(c) of
        Statement of Financial Accounting Standards No. 2 (SFAS No. 2) and accounting
        guidance from Financial Accounting Standards Board Interpretation No. 4
“Applicability of FASB Statement No. 2 to Business Combinations Accounted
        for by
        the Purchase Method” (FIN 4). We restated our consolidated financial statements
        for the year ended December 31, 2006 and for the interim periods ending March
        31, 2007, June 30, 2007 and September 30, 2007, in order to correct the
        accounting in such financial statements with respect to acquired research
        and
        development that has no alternative future use. Since November 2007, we have
        undertaken improvements to our internal controls in an effort to remediate
        these
        deficiencies by improving supervision and training of our accounting staff
        to
        understand and implement the requirements of complex accounting
        issues.  We have also adopted a policy whereby financial management,
        when dealing with the reporting of transactions that involve complex and
        unusual
        accounting matters, will formally research relevant accounting literature
        relating to the issues and, if necessary, retain the services of a qualified
        certified public accountant, other than our independent auditor, to assist
        us
        with respect to accounting for the transaction(s).
 
 There
        were
        changes in our internal control over financial reporting that occurred during
        our most recently completed fiscal year that have materially affected, or
        are
        reasonably likely to materially affect, our internal control over financial
        reporting.  We will continue to evaluate the effectiveness of internal
        controls and procedures on an on-going basis.
 
  **ITEM
        8B. OTHER INFORMATION**
 
 None
  **PART
        III**
 
 
 **ITEM
                  9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
                  CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
                  ACT**
 
 The
        information required by this item with respect to the directors, executive
        officers and compliance with Section 16(a) of the Exchange Act is incorporated
        by reference from the information provided under the headings “Election of
        Directors,” “Executive Officers” and “Section 16(a) Beneficial Ownership
        Reporting Compliance,” respectively, contained in the Company’s Proxy Statement
        to be filed with the Securities and Exchange Commission in connection with
        the
        solicitation of the proxies for the Company’s Annual Meeting of
        Stockholders.
  24
 
 **ITEM
        10.  EXECUTIVE
        COMPENSATION.**
 
 The
        information required by this item
        is incorporated by reference from the information provided under the heading
        "Executive Compensation" of the Company's Proxy Statement.
 
 **ITEM
                  11.  SECURITY OWNERSHIP OF
                  CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
                  MATTERS.**
 
 The
        information required by this item is incorporated herein by reference from
        the
        information provided in the Company’s Proxy Statement.
  **ITEM
        12.   CERTAIN RELATIONSHIPS AND
        RELATED TRANSACTIONS**
 
 The
        information required by this item is incorporated herein by reference from
        the
        information provided in the Company’s Proxy Statement.
 
 **ITEM
        13.  EXHIBITS**
 
 (a)
              Exhibits.  The
                  following exhibits of the Company are included
                  herein.
 
 Exhibit
        No.                                      Description
 
 Exhibit
                  2.1
              Stock
                  Purchase Agreement (incorporated by reference to Exhibit 2.1 to
                  the
                  Company's Current Report on Form K filed June 4, 2004)Exhibit
                  2.2
              Merger
                  Agreement (incorporated by reference to Exhibit 2.1 to the Company's
                  Current Report on 8-K filed October 8, 2004)Exhibit
                  3.1
              Amended
                  and Restated Articles of Incorporation (incorporated by reference
                  to
                  Exhibit A to the Company's Definitive Information Statement filed
                  June 29,
                  2004)Exhibit
                  3.2
              By-laws
                  (incorporated by reference to Exhibit 3.1 to the Company's Registration
                  Statement on Form SB-2 filed July 19, 2005)Exhibit
                  3.3
              Amended
                  and Restated Articles of Incorporation incorporated by reference
                  to
                  Exhibit 3.1 of the Company’s Report on Form 8-K filed June 19,
                  2006)Exhibit
                  4.1
              Form
                  of Common Stock Certificate (incorporated by reference to Exhibit
                  2.3 to
                  the Company's Registration Statement on Form 10-SB (File No. 000-25513),
                  initially filed March 8, 1999Exhibit
                  10.1
              2004
                  Compensatory Stock Option Plan (incorporated by reference to Exhibit
                  B to
                  the Company's Definitive Information Statement filed June 29,
                  2004)Exhibit
                  10.2
              Employment  Agreement
                  of David McWilliams (incorporated by reference to Exhibit 10.1
                  to the
                  Company's Quarterly Report on Form 10-QSB filed November 16,
                  2004)Exhibit
                  10.3
              Second
                  Amended Employment Agreement of William Rouse (incorporated  by
                  reference to Exhibit 99.1 to the Company's Current Report on Form
                  8-K
                  filed February 4, 2005)Exhibit
                  10.4
              Director's
                  Agreement of David McWilliams (incorporated by reference to Exhibit
                  10.4
                  to the Company's Quarterly Report on Form 10-QSB filed November
                  16,
                  2004)Exhibit
                  10.5
              Director's
                  Agreement of Paul Frison (incorporated by reference to Exhibit
                  10.7 to the
                  Company's Annual Report on Form 10-KSB filed April 15,
                  2005)Exhibit
                  10.6
              Termination
                  Settlement and Release Agreement with R. Wayne Fritzsche (incorporated
                  by
                  reference to Exhibit 99.3 to the Company's Current Report on Form
                  8-K
                  filed February 4, 2005)
  25
 Exhibit
                  10.7
              Form
                  of Warrant Agreement (incorporated by reference to Exhibit 10.13
                  to the
                  Company's Annual Report on Form 10-KSB filed April 15,
                  2005)Exhibit
                  10.8
              Amended
                  and Restated License Agreement with Baylor College of Medicine
                  (incorporated by reference to Exhibit 10.14 to the Company's Annual
                  Report
                  on Form 10-KSB filed April 15, 2005)Exhibit
                  10.9
              Amended
                  and Restated License Agreement with University of Chicago (incorporated
                  by
                  reference to Exhibit 10.15 to the Company's Annual Report on Form
                  10-KSB
                  filed April 15, 2005)Exhibit
                  10.10
              Second
                  Amendment to the Amended and Restated License Agreement (incorporated
                  by
                  reference to Exhibit 10.4 of the Company’s Report on Form 8-K filed April
                  18, 2006)Exhibit
                  10.11
              Form
                  of Series A Common Stock Purchase Warrant (incorporated by reference
                  to
                  Exhibit 10.15 to the Company's Registration Statement on Form SB-2
                  filed
                  July 19, 2005)Exhibit
                  10.12
              Form
                  of Series B Common Stock Purchase Warrant(incorporated by reference
                  to
                  Exhibit 10.16 to the Company's Registration Statement on Form SB-2
                  filed
                  July 19, 2005)Exhibit
                  10.13
              Form
                  of Series C Common Stock Purchase Warrant(incorporated by reference
                  to
                  Exhibit 10.17 to the Company's Registration Statement on Form SB-2
                  filed
                  July 19, 2005)Exhibit
                  10.14
              Securities
                  Purchase Agreement dated June 17, 2005 by and among the Company
                  and the
                  Investors named therein. (incorporated by reference to Exhibit
                  10.18 to
                  the Company's Registration Statement on Form SB-2 filed July 19,
                  2005)Exhibit
                  10.15
              Registration
                  Rights Agreement dated June 17, 2005 by and among the purchasers
                  of common
                  stock named therein(incorporated by reference to Exhibit 10.19
                  to the
                  Company's Registration Statement on Form SB-2 filed July 19,
                  2005)Exhibit
                  10.16
              Securities
                  Purchase Agreement dated June 30, 2005 by and among the Company
                  and the
                  purchasers of common stock named therein(incorporated by reference
                  to
                  Exhibit 10.20 to the Company's Registration Statement on Form SB-2
                  filed
                  July 19, 2005)Exhibit
                  10.17
              Securities
                  Purchase Agreement dated July 15, 2005 by and among the Company
                  and the
                  Investors named therein. (incorporated by reference to Exhibit
                  10.21 to
                  the Company's Registration Statement on Form SB-2 filed July 19,
                  2005)Exhibit
                  10.18
              Registration
                  Rights Agreement dated July 15, 2005 by and among the Company and
                  the
                  Investors named therein. (incorporated by reference to Exhibit
                  10.22 to
                  the Company's Registration Statement on Form SB-2 filed July 19,
                  2005)Exhibit
                  10.19
              License
                  Agreement dated January 13, 2006 by the Company and Shanghai Institute
                  for
                  Biological Services. (incorporated by reference to Exhibit 10.23
                  to the
                  Post-Effective Amendment No. 1 of the Company’s Registration Statement on
                  Form SB-2 filed February 9,2006)Exhibit
                  10.20
              Lease
                  Agreement dated August 19, 2005 by the Company and Dirk D. Laukien
                  (incorporated by reference to Exhibit 10.13 to the Company's Annual
                  Report
                  on Form 10-KSB filed March 31, 2006)Exhibit
                  10.21
              Purchase
                  Agreement dated April 11, 2006 (incorporated by reference to Exhibit
                  10.1
                  to the Company’s Current Report on Form 8-K filed April 18,
                  2006)Exhibit
                  10.22
              Registration
                  Rights Agreement dated April 11, 2006 (incorporated by reference
                  to
                  Exhibit 10.2 to the Company’s Current Report on Form 8-K filed
                  April 18, 2006)Exhibit
                  10.23
              Form
                  of Warrant issued in connection with April 2006 financing (incorporated
                  by
                  reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K
                  filed April 18, 2006)
 
 26
 
  Exhibit
                      10.24
                  Form
                      of Broker Stock Purchase Warrant issued to MDB Capital Group
                      LLC
                      (incorporated by reference to Exhibit 10.5 of the Company’s Current Report
                      on Form 8-K filed April 18, 2006)Exhibit
                      10.25
                  Third
                      Amendment to the Amended and Restated License Agreement (incorporated
                      by
                      reference to Exhibit 10.1 of the Company’s Report on Form 8-K filed
                      October 31, 2006)Exhibit
                      31.1*
                  Certification
                      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                      Act of 2002Exhibit
                      31.2*
                  Certification
                      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                      Act of 2002Exhibit
                      32.1*
                  Certification
                      of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,
                      as Adopted
                      Pursuant to Section 906 of the Sarbanes-Oxley Act of
                      2002Exhibit
                      32.2*
                  Certification
                      of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350,
                      as Adopted
                      Pursuant to Section 906 of the Sarbanes-Oxley Act of
                      2002
 ***Filed
            herewith**
 
 
 **ITEM
            14.  PRINCIPAL ACCOUNTANT FEES AND
            SERVICES.**
 
 The
            information required by this item is incorporated by reference from the
            information provided in the Company's Proxy Statement under the discussion
            of
            the Company Audit Committee and under the item regarding shareholder
            ratification of the Company's independent accountants.
 
 Pursuant
            to the requirements of Section 13 or 15(d) of the
            Securities Exchange Act of 1934, the Registrant has duly caused this
            report to
            be signed on its behalf by the undersigned, thereunto duly
            authorized.
  **OPEXA
                THERAPEUTICS, INC.**By:
              /s/DAVID
                      B. MCWILLIAMSDavid
                  B. McWilliams
                President
                  and Chief Executive OfficerDate:
                  November 29, 2007
              By:
              /s/
                LYNNE
                HOHLFELDLynne
                Hohlfeld, Chief Financial Officer andPrincipal
                Accounting Officer
   27