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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-QSB



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|x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended September 30, 2006



| ̈ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------------

For the Transition Period From  to

COMMISSION FILE NUMBER: 000-51610



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AVICENA GROUP, INC.

(Exact Name of Small Business as Specified in its Charter)



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|                         |  |                                        
|------------------------ |  | ---------------------------------------
|Delaware                 |  | 04-3195737                             
|(State of Incorporation) |  | (I.R.S. Employer Identification Number)

228 Hamilton Avenue, 3rdFloor Palo Alto CA 94301

(Address
of Principal Executive Offices)

(415) 397-2880

(Issuers Telephone Number, including Area Code)



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Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO ̈

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

Number of shares outstanding of the registrants Common Stock as of October 31, 2006:



|                               |  |                              
|------------------------------ |  | -----------------------------
|Common Stock, par value $0.001 |  | 51,082,616 shares outstanding

Transitional small business disclosure format:    YES ̈NO  x



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Avicena Group, Inc.

Quarter Ended September 30, 2006

Table of Contents



|                                                                                                                                                                                                         |  |     
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                                                                                         |  | Page
|                                                                                                                                                                                                         | 
|PART I  FINANCIAL INFORMATION                                                                                                                                                                           |  | 3   
|Item 1. Unaudited Financial Statements                                                                                                                                                                   |  | 3   
|Condensed Balance Sheets - September 30, 2006 (unaudited) and December 31, 2005                                                                                                                          |  | 4   
|Condensed Statements of Operations  three-month periods ending September 30, 2006 and September 30, 2005 (unaudited) and nine-month periods ended September 30, 2006 and September 30, 2005
(unaudited) |  | 5   
|Condensed Statement of Cash Flows  nine-month periods ended September 30, 2006 and September 30, 2005 (unaudited)                                                                                       |  | 6   
|Condensed Statement of Changes in Stockholders Deficits  Nine-month period ending September 30, 2006 (unaudited)                                                                                       |  | 7   
|Notes to Financial Statements                                                                                                                                                                            |  | 8   
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                                            |  | 15  
|Item 3. Controls and Procedures                                                                                                                                                                          |  | 19  
|PART II  OTHER INFORMATION                                                                                                                                                                              |  | 20  
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                                      |  | 20  
|Item 6. Exhibits                                                                                                                                                                                         |  | 20  
|Signatures                                                                                                                                                                                               |  | 21  



2



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PART I  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS



3



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AVICENA GROUP, INC.

Condensed Balance Sheets



|                                                                                                        |  |                   |             |   |                   |   |            |  
|------------------------------------------------------------------------------------------------------- |  | ----------------- | ----------- | - | ----------------- | - | ---------- | -
|                                                                                                        |  | September 30,2006 |             |   | December 31, 2005 |  
|                                                                                                        |  | (unaudited)       |             |   |                   |  
|ASSETS                                                                                                  |  |                   |             |   |                   |   |            |  
|Current assets:                                                                                         |  |                   |             |   |                   |   |            |  
|Cash and cash equivalents                                                                               |  | $                 | 94,697      |   |                   | $ | 619,042    |  
|Accounts receivable                                                                                     |  |                   | 51,825      |   |                   |   | 59,036     |  
|Inventory                                                                                               |  |                   | 2,367       |   |                   |   | 2,766      |  
|Prepaid expenses                                                                                        |  |                   | 42,873      |   |                   |   | 101,357    |  
|                                                                                                        |  |                   |             |   |                   |   |            |  
|Total current assets                                                                                    |  |                   | 191,762     |   |                   |   | 782,201    |  
|                                                                                                        |  |                  
|Equipment, net                                                                                          |  |                   | 3,852       |   |                   |   | 6,129      |  
|                                                                                                        |  |                  
|Deferred financing costs, net                                                                           |  |                   | 1,938,732   |   |                   |   |           |  
|                                                                                                        |  |                  
|Deposits                                                                                                |  |                   | 12,440      |   |                   |   | 9,335      |  
|                                                                                                        |  |                   |             |   |                   |   |            |  
|Total assets                                                                                            |  | $                 | 2,146,786   |   |                   | $ | 797,665    |  
|                                                                                                        |  |                   |             |   |                   |   |            |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                   |  |                   |             |   |                   |   |            |  
|Current liabilities:                                                                                    |  |                   |             |   |                   |   |            |  
|Accounts payable                                                                                        |  | $                 | 1,699,247   |   |                   | $ | 619,948    |  
|Accrued expenses                                                                                        |  |                   | 334,280     |   |                   |   | 161,499    |  
|Note payable to a shareholder                                                                           |  |                   | 75,000      |   |                   |   | 75,000     |  
|                                                                                                        |  |                   |             |   |                   |   |            |  
|Total current liabilities                                                                               |  |                   | 2,108,527   |   |                   |   | 856,447    |  
|                                                                                                        |  |                   |             |   |                   |   |            |  
|Long term liabilities:                                                                                  |  |                   |             |   |                   |   |            |  
|Note payable                                                                                            |  |                   | 800,000     |   |                   |   |           |  
|Warrants                                                                                                |  |                   | 3,037,082   |   |                   |   |           |  
|                                                                                                        |  |                   |             |   |                   |   |            |  
|Total long term liabilities                                                                             |  |                   | 3,837,082   |   |                   |   |           |  
|                                                                                                        |  |                   |             |   |                   |   |            |  
|Total liabilities                                                                                       |  |                   | 5,945,609   |   |                   |   | 856,447    |  
|                                                                                                        |  |                   |             |   |                   |   |            |  
|Commitments                                                                                             |  |                   |             |   |                   |   |            |  
|Stockholders deficit:                                                                                  |  |                   |             |   |                   |   |            |  
|Preferred stock; $0.001 par value, 5,000,000 shares authorized; no shares issued or outstanding         |  |                   |            |   |                   |   |           |  
|Common stock; $0.001 par value, 100,000,000 shares authorized; 51,082,616 shares issued and outstanding |  |                   | 51,083      |   |                   |   | 51,083     |  
|Additional paid-in capital                                                                              |  |                   | 9,041,856   |   |                   |   | 8,435,559  |  
|Stock subscription                                                                                      |  |                   | 37,850      |   |                   |   |           |  
|Deferred compensation                                                                                   |  |                   |            |   |                   |   | (141,622   | )
|Accumulated deficit                                                                                     |  |                   | (12,929,612 | ) |                   |   | (8,403,802 | )
|                                                                                                        |  |                   |             |   |                   |   |            |  
|Total stockholders deficit                                                                             |  |                   | (3,798,823  | ) |                   |   | (58,782    | )
|                                                                                                        |  |                   |             |   |                   |   |            |  
|Total liabilities and stockholders deficit                                                             |  | $                 | 2,146,786   |   |                   | $ | 797,665    |  
|                                                                                                        |  |                   |             |   |                   |   |            |  

The accompanying notes are an integral part of these financial statements.



4



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AVICENA GROUP, INC.

Condensed Statements of Operations

Three and Nine months ended September 30, 2006 and 2005

(unaudited)



|                                                               |  |                    |            |   |                    |   |            |                    |  |   |                    |   |  |   |            |  
|-------------------------------------------------------------- |  | ------------------ | ---------- | - | ------------------ | - | ---------- | ------------------ |  | - | ------------------ | - |  | - | ---------- | -
|                                                               |  | Three months ended |            |   | Nine months ended  |  
|                                                               |  | September 30, 2006 |            |   | September 30, 2005 |   |            | September 30, 2006 |  |   | September 30, 2005 |  
|Revenues                                                       |  | $                  | 132,190    |   |                    | $ | 81,673     |                    |  | $ | 312,937            |   |  | $ | 384,920    |  
|                                                               |  |                    |            |  
|Cost of revenues                                               |  |                    | 15,969     |   |                    |   | 14,225     |                    |  |   | 43,378             |   |  |   | 45,902     |  
|                                                               |  |                    |            |   |                    |   |            |                    |  |   |                    |   |  |   |            |  
|Gross margin                                                   |  |                    | 116,221    |   |                    |   | 67,448     |                    |  |   | 269,559            |   |  |   | 339,018    |  
|                                                               |  |                    |            |  
|Research and development                                       |  |                    | 343,605    |   |                    |   | 84,310     |                    |  |   | 740,086            |   |  |   | 312,909    |  
|Selling and marketing expenses                                 |  |                    | 224,639    |   |                    |   | 201,102    |                    |  |   | 673,972            |   |  |   | 483,728    |  
|General and administrative expenses                            |  |                    | 514,472    |   |                    |   | 326,089    |                    |  |   | 1,609,352          |   |  |   | 1,445,474  |  
|                                                               |  |                    |            |   |                    |   |            |                    |  |   |                    |   |  |   |            |  
|                                                               |  |                    | 1,082,716  |   |                    |   | 611,501    |                    |  |   | 3,023,410          |   |  |   | 2,242,111  |  
|                                                               |  |                    |            |   |                    |   |            |                    |  |   |                    |   |  |   |            |  
|Loss from operations                                           |  |                    | (966,495   | ) |                    |   | (544,053   | )                  |  |   | (2,753,851         | ) |  |   | (1,903,093 | )
|                                                               |  |                    |            |  
|Loss on change in fair value of warrants                       |  |                    | (478,144   | ) |                    |   |           |                    |  |   | (745,656           | ) |  |   |           |  
|Interest expense                                               |  |                    | (609,926   | ) |                    |   | (14,350    | )                  |  |   | (1,026,303         | ) |  |   | (31,322    | )
|                                                               |  |                    |            |   |                    |   |            |                    |  |   |                    |   |  |   |            |  
|Net loss                                                       |  | $                  | (2,054,565 | ) |                    | $ | (558,403   | )                  |  | $ | (4,525,810         | ) |  | $ | (1,934,415 | )
|                                                               |  |                    |            |   |                    |   |            |                    |  |   |                    |   |  |   |            |  
|Net loss per common share-basic and diluted                    |  | $                  | (0.04      | ) |                    | $ | (0.03      | )                  |  | $ | (0.09              | ) |  | $ | (0.10      | )
|                                                               |  |                    |            |   |                    |   |            |                    |  |   |                    |   |  |   |            |  
|Weighted average common shares outstanding - basic and diluted |  |                    | 51,082,616 |   |                    |   | 21,174,333 |                    |  |   | 51,082,616         |   |  |   | 18,720,706 |  
|                                                               |  |                    |            |   |                    |   |            |                    |  |   |                    |   |  |   |            |  

The accompanying notes are an integral part of these financial statements.



5



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AVICENA GROUP, INC.

Condensed Statements of Cash Flows

(unaudited)



|                                                                            |  |                    |            |   |                    |   |            |  
|--------------------------------------------------------------------------- |  | ------------------ | ---------- | - | ------------------ | - | ---------- | -
|                                                                            |  | Nine months ending |           
|                                                                            |  | September 30, 2006 |            |   | September 30, 2005 |  
|Cash flows from operating activities:                                       |  |                    |            |   |                    |   |            |  
|Net loss                                                                    |  | $                  | (4,525,810 | ) |                    | $ | (1,934,416 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                    |            |   |                    |   |            |  
|Depreciation expense                                                        |  |                    | 2,277      |   |                    |   | 2,904      |  
|Stock-based compensation expense                                            |  |                    | 84,577     |   |                    |   | 661,981    |  
|Amortization of deferred financing cost                                     |  |                    | 344,003    |   |                    |   |           |  
|Loss on change in fair value of warrants                                    |  |                    | 745,656    |   |                    |   |           |  
|Amortization of beneficial conversion feature                               |  |                    | 663,342    |   |                    |   |           |  
|Investment banking fee to be paid in stock                                  |  |                    | 37,850     |   |                    |   |           |  
|Investment banking fee to be paid in warrants                               |  |                    | 8,691      |   |                    |   |           |  
|Changes in assets and liabilities                                           |  |                    |            |   |                    |   |            |  
|Accounts receivable                                                         |  |                    | 7,211      |   |                    |   | (30,819    | )
|Inventory                                                                   |  |                    | 399        |   |                    |   | 331        |  
|Other current assets                                                        |  |                    | 58,484     |   |                    |   | (37,231    | )
|Accounts payable                                                            |  |                    | 1,079,299  |   |                    |   | 953,083    |  
|Deposits                                                                    |  |                    | (3,105     | ) |                    |   | (4,000     | )
|Accrued expenses                                                            |  |                    | 172,781    |   |                    |   | (4,817     | )
|                                                                            |  |                    |            |   |                    |   |            |  
|Net cash used in operating activities                                       |  |                    | (1,324,345 | ) |                    |   | (392,984   | )
|                                                                            |  |                    |            |   |                    |   |            |  
|Cash flows from investing activities                                        |  |                    |            |   |                    |   |            |  
|Purchases of equipment                                                      |  |                    |           |   |                    |   | (8,667     | )
|                                                                            |  |                    |            |   |                    |   |            |  
|Net cash used in investing activities                                       |  |                    |           |   |                    |   | (8,667     | )
|                                                                            |  |                    |            |   |                    |   |            |  
|Cash flows from financing activities                                        |  |                    |            |   |                    |   |            |  
|Proceeds from issuances of common and preferred stock                       |  |                    |           |   |                    |   | 129,650    |  
|Costs related to a planned issuance of securities                           |  |                    |           |   |                    |   | (605,367   | )
|Exercise of stock options                                                   |  |                    |           |   |                    |   | 10,000     |  
|Advances from stockholder                                                   |  |                    |           |   |                    |   | 125,000    |  
|Increase in notes payable                                                   |  |                    | 800,000    |   |                    |   | 650,000    |  
|                                                                            |  |                    |            |   |                    |   |            |  
|Net cash provided by financing activities                                   |  |                    | 800,000    |   |                    |   | 309,283    |  
|                                                                            |  |                    |            |   |                    |   |            |  
|Net decrease in cash and cash equivalents                                   |  |                    | (524,345   | ) |                    |   | (92,368    | )
|                                                                            |  |                   
|Cash and cash equivalents, beginning of period                              |  |                    | 619,042    |   |                    |   | 102,423    |  
|                                                                            |  |                    |            |   |                    |   |            |  
|Cash and cash equivalents, end of period                                    |  | $                  | 94,697     |   |                    | $ | 10,055     |  
|                                                                            |  |                    |            |   |                    |   |            |  
|Supplemental disclosure of cash flow information                            |  |                    |            |   |                    |   |            |  
|Cash paid during the period for:                                            |  |                    |            |   |                    |   |            |  
|Interest                                                                    |  | $                  | 7,984      |   |                    | $ | 5,380      |  
|                                                                            |  |                    |            |   |                    |   |            |  
|Income Taxes                                                                |  | $                  |           |   |                    | $ |           |  
|                                                                            |  |                    |            |   |                    |   |            |  
|Supplemental disclosure of noncash financing activities                     |  |                    |            |   |                    |   |            |  
|Issuance of Common Stock for financial advisor fees                         |  | $                  |           |   |                    | $ | 300,000    |  
|                                                                            |  |                    |            |   |                    |   |            |  
|Commitment fee paid with warrants                                           |  | $                  | 2,282,735  |   |                    | $ |           |  
|                                                                            |  |                    |            |   |                    |   |            |  

The accompanying notes are an integral part of these financial statements.



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AVICENA GROUP, INC.

Condensed Statement of Changes in Stockholders Deficits

(Unaudited)



|                                                                                   |  |            |  |                           |        |  |                    |           |                       |  |   |                     |  |   |                            |   |  |   |             |   |  |   |            |  
|---------------------------------------------------------------------------------- |  | ---------- |  | ------------------------- | ------ |  | ------------------ | --------- | --------------------- |  | - | ------------------- |  | - | -------------------------- | - |  | - | ----------- | - |  | - | ---------- | -
|                                                                                   |  | Common     |  | AdditionalPaid In Capital |        |  | Stock Subscription |           | Deferred Compensation |  |   | Accumulated Deficit |  |   | TotalStockholders Deficit |  
|                                                                                   |  | Shares     |  | Amount                    |        |  |                    |           |                      
|Balance at December 31, 2005                                                       |  | 51,082,616 |  | $                         | 51,083 |  | $                  | 8,435,559 |                       |  | $ |                    |  | $ | (141,622                   | ) |  | $ | (8,403,802  | ) |  | $ | (58,782    | )
|Compensation expense associated with vesting of restricted stock and stock options |  |           |  |                           |       |  |                    | 84,577    |                       |  |   |                    |  |   |                           |   |  |   |            |   |  |   | 84,577     |  
|Reclassification of deferred compensation upon adoption of FAS 123(R)              |  |           |  |                           |       |  |                    | (141,622  | )                     |  |   |                    |  |   | 141,622                    |   |  |   |            |   |  |   |           |  
|Beneficial conversion feature of convertible note payable                          |  |           |  |                           |       |  |                    | 663,342   |                       |  |   |                    |  |   |                           |   |  |   |            |   |  |   | 663,342    |  
|Stock to be issued to investment banker                                            |  |           |  |                           |       |  |                    |          |                       |  |   | 37,850              |  |   |                           |   |  |   |            |   |  |   | 37,850     |  
|Net loss                                                                           |  |           |  |                           |       |  |                    |          |                       |  |   |                    |  |   |                           |   |  |   | (4,525,810  | ) |  |   | (4,525,810 | )
|                                                                                   |  |            |  |                           |        |  |                    |           |                       |  |   |                     |  |   |                            |   |  |   |             |   |  |   |            |  
|Balance at September 30, 2006                                                      |  | 51,082,616 |  | $                         | 51,083 |  | $                  | 9,041,856 |                       |  | $ | 37,850              |  | $ |                           |   |  | $ | (12,929,612 | ) |  | $ | (3,798,823 | )
|                                                                                   |  |            |  |                           |        |  |                    |           |                       |  |   |                     |  |   |                            |   |  |   |             |   |  |   |            |  

The accompanying notes are an integral part of these financial statements.



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AVICENA GROUP, INC.

NOTES TO FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying condensed
financial statements of Avicena Group, Inc. (the Company) are prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to these rules and regulations. These condensed financial statements should be read in conjunction with the audited financial
statements and footnotes related thereto for the year ended December 31, 2005. The unaudited financial statements, in our opinion, include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the
financial position of the Company as of September 30, 2006 and the results of the operations and cash flows for the three and nine months ended September 30, 2006, and 2005. The results of the operations for such interim periods are not
necessarily indicative of the results to be achieved for the full year.

The accompanying financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1 to the December 31, 2005 financial statements, the Companys significant operating losses and working capital deficit raise substantial doubt about its ability to
continue as a going concern without additional equity. The funding negotiations described in Note 1 to the December 31, 2005 financial statements were consummated as discussed more fully in Note 7, Convertible Promissory Note, below. Also, see
Notes 8 and 9 for additional financing-related developments.

Certain prior period accounts have been reclassified to conform to current
presentation.

2. Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123(R) (FAS 123(R)), Share-Based Payment. FAS 123(R) revises FASB Statement No. 123
(FAS 123), Accounting for Stock-Based Compensation. Also, FAS 123(R) supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement
No. 95, Statement of Cash Flows.

FAS 123(R) requires companies to expense the fair value of employee stock options and other
forms of stock-based compensation. Specifically, FAS 123(R) requires companies to (i) use fair value to measure stock-based compensation awards and (ii) cease using the intrinsic value method of accounting under APB 25 that resulted in no
expense for many awards of stock options for which the exercise price of the option equaled the price of the underlying stock at the grant date. In addition, FAS 123(R) retains the modified grant date model from FAS 123 in that compensation cost is
measured at the grant date fair value of the award and adjusted to reflect actual forfeitures and the outcome of certain conditions. The fair value of an award is not re-measured after its initial estimation on the grant date, except in certain
cases. FAS 123(R)s transition provisions provide a number of alternatives to address implementation issues and to increase the comparability of compensation cost.

The Company adopted the Modified Prospective Application (MPA) method, without restatement of prior interim periods, on January 1, 2006. Under the MPA method without restatement approach,
the Company recognizes compensation cost for (1) awards that were granted or modified after the fiscal year beginning after December 15, 1996, (2) any portion of awards that have not vested by January 1, 2006, and (3) any
outstanding liability awards.

Compensation cost for the portion of awards for which the requisite service has not been rendered that are
outstanding at January 1, 2006 will be recognized using the measurement data and attribution method used in the Companys FAS 123 pro forma disclosures as those services are received after January 1, 2006.

FAS 123(R) also requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash
flow, rather than as an operating cash flow as required



8



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under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in
periods after the effective date. These future amounts cannot be estimated because they depend on when the employees exercise stock options, among other things.

3. Stock-Based Compensation

The Company has a stock-based employee compensation plan. In February 2005, the Companys
Board of Directors approved a resolution offering all holders of the Companys 10,750,908 outstanding stock options at December 31, 2004, plus holders of 309,653 options issued in January 2005, the opportunity to exercise their options on
a cashless basis (that is, without the payment of the previously applicable exercise price), with 0.9 fully paid shares of common stock to be issued for each share subject to the outstanding options. Holders of 10,560,682 of the stock options chose
to exercise their options on a cashless basis in the twelve month period ended December 31, 2005. As a result of the modification made to the options, the Company recorded a non-cash charge of $313,400 related to the employee options and a
non-cash charge of $156,100 related to non-employee options during the twelve months ended December 31, 2005.

As discussed in Note 2
above, the Company adopted FAS 123(R) on January 1, 2006. Prior to the Companys adoption of FAS 123(R), the Company accounted for equity based compensation under the provisions and related interpretations of APB Opinion No. 25.

Stock Incentive Plan

The 1999 Stock Incentive Plan was adopted by the Companys Board of Directors and approved by the Company in September 1999. The purpose of the 1999 Plan is to advance the interests and enhance the value of the Company by:



| |  |  | Aligning the economic interests of the Companys employees, consultants, non-employee directors and advisors with those of the Companys stockholders;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | inducing individuals of outstanding ability and potential to join and/or remain with the Company; and
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | providing employees, consultants, non-employee directors and advisors with an additional incentive to contribute to the Companys success.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------

The Companys 1999 Plan permits grants of incentive stock options, as defined by Section 422 of the Code, and non-qualified stock options. The
Companys 1999 Plan also permits grant of shares of common stock, subject to the Companys right to repurchase all or some of the shares at their issue price or other stated or formula price in the event that conditions specified by the
Board in the award are not satisfied prior to the end of the restriction period established by the Board. As of September 30, 2006 and December 31, 2005, 3,434,067 shares remain available for future grants under the 1999 Plan.

The 1999 Plan is administered by the Board or a committee designated by the Board. The Board has discretion as to which employees, consultants,
non-employee directors and advisors will receive awards. The Board also establishes the terms, conditions and limitations of each award, including the number of shares of common stock underlying each option, the exercise price and the date or dates
upon which the option vests and becomes exercisable. The Board determines the effect of a participants disability, death, retirement, authorized leave of absence or other change in the employment or other status on an award and the extent to
which the participant, the participants legal representative, conservator, guardian or designated beneficiary may exercise rights under the award. Except as otherwise determined by the committee, all awards are nontransferable. The Board also
has full power to construe and interpret the 1999 Plan and the awards granted under the 1999 Plan, to establish rules and regulations necessary or advisable for its administration, and to determine the terms of and amend the award agreements
evidencing the grants.

The Board may amend the 1999 Plan in any respect.

The Board may terminate the 1999 Plan at any time. However, no termination or amendment will affect the rights of participants under options previously
granted without the participants consent. Unless previously terminated, the 1999 Plan will terminate on September 7, 2009 and no options will be granted after that date.



9



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As discussed in Note 2 to the financial statements above, the Company adopted the Modified
Prospective Application (MPA) method of FAS 123(R), without restatement of prior interim periods, on January 1, 2006.

As a result of adopting FAS 123(R), the Company recorded stock based compensation of $0 and $1,513 for the three and nine month periods ended September 30, 2006 for stock based awards to employees and directors. This represents an
incremental charge of $0.00 per basic and diluted share for the three and nine months ended September 30, 2006 as compared to the Companys previous method of accounting under APB 25. The calculated value of employee and director stock
options was determined using the Black-Scholes option pricing model with the following assumptions: an assumed risk-free interest rate of 4  4.23%, a volatility of 50%, an expected life of 5  10 years, and a dividend yield of 0% for the
nine months ended September 30, 2005. The Companys stock was approved for quotation on the Over-the-Counter Bulletin Board and began trading on March 24, 2006. Based on this short trading history, the Company determined the expected
volatility based on public small company capitalization stocks with significant risk (scientific or otherwise), which tend to have a relatively high volatility. The Company will re-evaluate this method as additional historical price data is
obtained. No cash dividends have been declared on the Companys common stock since the Companys inception and the Company does not anticipate paying cash dividends over the expected term of the option. The expected term represents the
weighted average period the option is expect to be outstanding. The risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero-coupon issues with maturity dates equivalent to the expected term of the option.

The weighted average fair value of options granted during the nine months ended September 30, 2005 was$0.07. No additional
options were granted during the nine months ending September 30, 2006. All options outstanding at September 30, 2006 are fully vested.

The adoption of FAS 123(R) had no effect upon cash flow from operations.

Had compensation cost for the Companys
equity-based compensation plans been determined based on the fair value at the grant dates for awards under those plans in accordance with the provisions of FAS 123, the Companys net loss and net loss per share for the nine-month period ended
September 30, 2005, would have been as follows:



|                                                            |  |                          |          |   |             |            |  
|----------------------------------------------------------- |  | ------------------------ | -------- | - | ----------- | ---------- | -
|                                                            |  | Three Months             |          |   | Nine Months |           
|                                                            |  | Ended September 30, 2005 |         
|Net loss, as reported                                       |  | $                        | (558,403 | ) |             | (1,934,416 | )
|Equity-based compensation included in net loss, as reported |  |                          | 70,962   |   |             | 661,981    |  
|Equity-based compensation under FAS 123                     |  |                          | (73,196  | ) |             | (522,401   | )
|                                                            |  |                          |          |   |             |            |  
|Pro forma net loss                                          |  | $                        | (560,637 | ) |             | (1,794,836 | )
|                                                            |  |                          |          |   |             |            |  
|Reported net loss per share:                                |  |                          |          |   |             |            |  
|Basic                                                       |  | $                        | (0.03    | ) |             | (0.10      | )
|Diluted                                                     |  | $                        | (0.03    | ) |             | (0.10      | )
|                                                            |  |                         
|Pro forma net loss per share:                               |  |                          |          |   |             |            |  
|Basic                                                       |  | $                        | (0.03    | ) |             | (0.10      | )
|Diluted                                                     |  | $                        | (0.03    | ) |             | (0.10      | )

No options were exercised during the nine month period ending September 30, 2006 or in the
comparable period in 2005.



10



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The effects of applying FAS 123(R) in this proforma disclosure are not indicative of future amounts. FAS
123(R) does not apply to awards before 1996 and additional awards in future years are anticipated.

Stock Options

A summary of the changes in stock options outstanding under the Companys equity-based compensation plans during the nine month period ended
September 30, 2006 is presented below:



|                                          |  |                 |  |                             |     |                                            |      |                         |   |          
|----------------------------------------- |  | --------------- |  | --------------------------- | --- | ------------------------------------------ | ---- | ----------------------- | - | ---------
|                                          |  | NumberofOptions |  | WeighedAverageExercisePrice |     | WeighedAverageRemainingContractTerm(Years) |      | AggregateIntrinsicValue
|Options outstanding at December 31, 2005  |  | 246,926         |  | $                           | .03 |                                            | 4.75 |                         | $ | 8,283    
|Granted                                   |  | 0               |  |                             |     |                                            |      |                         |   |          
|Exercised                                 |  | 0               |  |                             |     |                                            |      |                         |   |          
|Canceled                                  |  | 0               |  |                             |     |                                            |      |                         |   |          
|                                          |  |                 |  |                             |     |                                            |      |                         |   |          
|Options outstanding at September 30, 2006 |  | 246,926         |  | $                           | .03 |                                            | 4.0  |                         | $ | 1,470,633
|                                          |  |                 |  |                             |     |                                            |      |                         |   |          
|Options exercisable at September 30, 2006 |  | 246,926         |  | $                           | .03 |                                            | 4.0  |                         | $ | 1,470,633

There is no unrecognized compensation cost related to non-vested options, as all outstanding
options have vested.

4. Restricted Stock

In 2005, the Companys Board of Directors authorized 3,957,855 additional shares of restricted stock to be issued. These shares were issued both inside and outside the 1999 Plan. The shares were valued between $.10 and $.14 per share.



|                                                 |  |                  |  |                                     |     
|------------------------------------------------ |  | ---------------- |  | ----------------------------------- | ----
|                                                 |  | Number of Shares |  | Weightedaverage grantdate fairvalue
|Restricted stock nonvested at December 31, 2006  |  | 3,957,855        |  | $                                   | 0.14
|Granted                                          |  | 0                |  | $                                   |    
|Vested                                           |  | 2,041,427        |  | $                                   | 0.14
|Canceled                                         |  | 0                |  | $                                   |    
|                                                 |  |                  |  |                                     |     
|Restricted stock nonvested at September 30, 2006 |  | 1,916,428        |  | $                                   | 0.14
|                                                 |  |                  |  |                                     |     
|Restricted stock vested at September 30, 2006    |  | 2,139,427        |  | $                                   | 0.14

The amount of stock compensation expense related to restricted stock amortized during the nine
month period ended September 30, 2006 was $83,064. The unamortized portion, that is, the difference between the original deferred expense of $400,785 and the amortized portion recorded as an expense is now reflected on the equity section of the
balance sheet as a reduction to additional paid-in capital. It is no longer classified as unearned compensation as a result of the adoption of FAS 123(R).

During the nine months ended September 30, 2006, the Company did not issue any additional shares of restricted stock to employees, directors or consultants of the Company.



11



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5. Net Loss Per Share

The computation of basic and diluted loss per common share is based upon weighted average number of common shares outstanding and potentially dilutive securities. Potentially dilutive securities include stock options,
convertible debt and warrants.

Common stock equivalents (which during the three and nine months ended September 30, 2006 consisted of
options to purchase 246,926 common shares, debt convertible into 266,666 common shares, warrants to purchase 666,667 common shares) were not considered in the computation of dilutive net loss per share because inclusion of such shares would have an
anti-dilutive effect on net loss per share.

6. Market for Registrants Common Equity and Related Stockholder Matters

The shares of common stock of The Avicena Group, Inc. commenced trading on the Over the Counter Bulletin Board (symbol AVGO) on March 24, 2006. No
cash dividends were paid on common shares during 2005 or the nine months ending September 30, 2006.

7. Convertible Promissory Note

On April 21, 2006, the Company entered into a convertible promissory note in the amount of up to $2,000,000 dollars and a registration rights
agreement with The Biotechnology Ventures (III) Capital Trust, an accredited investor (the Investor). The Company received proceeds of $800,000 from the note as of September 30, 2006. As long as no default has occurred, the Company,
upon providing the Investor seventy two hours notice, can draw down funds in multiples of $200,000. Draw downs may only be made if the Companys cash balance is less than $300,000. However, the Investor also has the right to advance the full
remaining available balance of the facility at any time, upon its sole discretion.

The note bears interest at 8% and matures on
March 31, 2009. The Investor may, at its option, elect to convert all or any portion of outstanding principal balance into shares of common stock of the Company at a conversion rate of $3.00 per share, subject to adjustment in case of stock
dividend, stock split, any recapitalization, reorganization, reclassification, consolidation or merger. Interest on the note which is due and payable quarterly, commencing on July 1, 2006, is also convertible into common stock at the election
of the Investor. Interest has been accrued on the note. However, no interest has been paid as of September 30, 2006. The lender has informed the Company in writing that they have waived receipt of any interest due until such time as the Company
has received external financing in excess of $5,000,000.

Pursuant to the note, on the date of the first advance under the note, the
Company issued a warrant to the Investor to purchase up to 666,667 shares of common stock at an exercise price of $3.00 per share (the Warrant), subject to adjustment as described below, at any time prior to the close of business on
April 20, 2009. The exercise price and/or the number of shares of common stock issuable upon the exercise of the Warrant is subject to adjustments in case of a stock dividend, stock split, any recapitalization, reorganization, reclassification,
consolidation or merger, to which the Company is a party, or sale of all or substantially all of the Companys assets to another person or other transaction that is effected in such a way that holders of common stock are entitled to receive
stock, securities or assets with respect to or in exchange for common stock. The Company may at any time during the term of the Warrant reduce the then current exercise price to any amount and for any period of time deemed appropriate by the Board
of Directors of the Company.

Under the registration rights agreement, within 120 days after Investors conversion of an aggregate of
at least $1,500,000 in unpaid accrued interest and principal pursuant to the note, the Company is obligated to file with the SEC a shelf registration statement covering the resale of the common stock and common stock issued upon exercise of the
Warrant. The Company will use its commercially reasonable efforts to cause the registration statement to be declared effective under the Securities Act as promptly as possible after the filing thereof, but in any event not later than the earlier of
(a) the 180th calendar day following the closing date and (b) the fifth trading day following the date on which the Company is notified by the SEC that the registration statement will not be reviewed or is no longer subject to further
review and comments. The Company is also obligated to use its commercially reasonable efforts to keep such registration statement continuously effective under the Securities Act of 1933, as amended, until the date which is two years after the
closing date or such later date when all registrable securities covered by the



12



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registration statement have been sold pursuant to the registration statement or an exemption from the registration
requirements of the Securities Act or may be sold pursuant to Rule 144(k) under the Securities Act.

The Company accounted for the
convertible notes in accordance with the provisions of Emerging Issues Task Force Issue (EITF) 98-5 Accounting for Convertible Securities with Beneficial Conversion Features, (EITF 98-5), EITF 00-27
Application of EITF 98-5 to Certain Convertible Instruments, Accordingly, the Company recorded, as a discount to convertible notes, the intrinsic value of such conversion options based upon the differences between the fair value of the
underlying common stock at the commitment date and the effective conversion price embedded in the note, equal to $663,340. Debt discounts under these arrangements are recognized as interest expense though the date of earliest conversion. As the debt
is immediately convertible, the Company recorded an interest charge of $663,340 during the nine months ended September 30, 2006.

The
Company accounted for the features of the Warrant under EITF 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Companys Own Stock. Because the registration rights agreement does not
specify a settlement alternative if the Company is unable to register the underlying shares, the Company classified the Warrant as a liability. The Warrant was initially valued, using the Black-Scholes model, at $2,282,735. In accordance with EITF
00-19, the Warrant has been marked-to-market each reporting date. This mark-to-market resulted in recognition of unrealized loss of $745,656 during the nine months ended September 30, 2006.

The Warrant was issued to the Investor to secure a firm commitment to advance proceeds under the note. As a result, the fees paid were recorded as a
deferred financing cost and are being amortized over the life of the note. The company recorded additional interest expense of $344,003 during the nine months ended September 30, 2006 to amortize the deferred financing cost.

During the nine months ended September 30, 2006, the Company also recorded a $37,850 investment banking fee to be paid in stock and an $8,691
investment banking fee to be paid in warrants.

8. Additional developments

On September 6, 2006, Mr. Joseph Galda submitted his resignation as a Director of the Companys Board of Directors, effective immediately.
The Company does not intend to fill the seat vacated by Mr. Galda until its next annual meeting of stockholders. Mr. Galdas resignation was not the result of any disagreement with the registrants management. Mr. Galda
served on the Companys Audit Committee and also resigned as a member of the Audit Committee. Mr. Nasser Menhall, Chairman, has replaced Mr. Galda on the Audit Committee.

On September 22, 2006, Mr. Nasser Menhall, Chairman, loaned the Company $20,000. This non-interest bearing loan was repaid in full by the
Company on September 29, 2006.

On September 20, 2006, the Company sent a letter to all of its stockholders except those whose
shares were registered with the Securities and Exchange Commission pursuant to a registration statement on Form SB-2 which was declared effective by the Commission on November 14, 2005. This letter requested an extension of the contractual
trading restriction to which the shares of the letter recipients are subject. This trading restriction is currently scheduled to expire on November 14, 2006. The Company indicated that it was still in the early stages of discussing the terms of
a contemplated investment. Certain of those prospective investors informed the Company that, as a condition to their making the contemplated investment, those investors would require that all currently restricted shares owned by all Avicena
stockholders whose shares are subject to the Merger Lock-Up (or such lesser amount those investors would determine in their sole discretion) continue to remain subject to transfer restrictions through June 30, 2007. As a result, the Company
asked the letter recipients to agree to the extended lock-up at this time subject, however, to its possible nullification if at least a minimum $8 million amount of the contemplated investment is not received by November 10, 2006. As of the
date of filing, the investment contemplated by the September 20, 2006 letter was not consummated.



13



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9. Subsequent Events

On November 7, 2006, the Company sent a letter to those stockholders who agreed to the contractual trading restrictions requested by the companys September 20, 2006 letter. This letter required an extension
of the contractual trading restriction to which the shares of the letter recipients are subject. In the letter, the Company stated that it had been approached by prospective investors who were contemplating a cash investment in the Company. The
letter further noted that certain of the prospective investors, as condition to their investment, required that all currently restricted shares owned by all Avicena stockholders whose shares are subject to the Merger Lock-Up (or such lesser amount
those investors would determine in their sole discretion) continue to remain subject to transfer restrictions through June 30, 2007. As a result, the Company asked the letter recipients to agree to restrictions on transferring their Avicena
stock through June 30, 2007. The results of this request are not yet known.

On November 17, 2006, the Companys Board of
Directors approved the issuance of a Private Placement Memorandum. This financing authorized the issuance of up to 3,500,000 units. Each unit consists of one share of the Companys unregistered Convertible Preferred Stock, par value $0.001 per
share, and a warrant to purchase one half share of the Companys unregistered Common Stock at an exercise price of $7.00 per share. The units will be offered solely to a limited number of non-U.S. citizens in compliance with Regulation S. The
Preferred Stock is senior to Common Stock in liquidation and dividend right. At any time between June 30, 2007 and December 31, 2009, a holder of Preferred Stock may demand conversion of such Preferred Stock into Common Stock at a 1:1
ratio, subject to adjustment. At any time after December 31, 2008, the Company may require the holder of Preferred Stock to select between converting all shares of Preferred Stock into Common Stock at a 1:1 ratio, subject to adjustment, or
redeeming all shares of Preferred Stock at a price of $5.00 per share plus any accrued and unpaid dividends. Each holder of Preferred Stock is entitled to receive a stock dividend of 10% annually, payable semi-annually, for each share of Preferred
Stock, based on the value of $5.00 per share of Preferred Stock. To the extent funds are not legally available for such dividend, the dividend accumulates. During the period from January 1, 2010 to December 31, 2010, all holders of
Preferred Stock must select between converting all shares of Preferred Stock into Common Stock at a 1:1 ratio, subject to adjustment, or redeeming all shares of Preferred Stock at a price of $5.00 per share plus any accrued and unpaid dividends. The
Preferred Stock has customary antidilution adjustments in the case of stock splits, stock dividends or recapitalizations. Holders of Preferred Stock have one vote for each Share and will vote together with the Common Stock as a single class, except
to the extent that separate class voting is required by the Delaware General Corporation Law. Holders of Preferred Stock are entitled to appoint and elect one director to the Companys Board of Directors. The Warrant may be exercised at any
time until December 31, 2011. Any exercise of the Warrant must be for whole shares only, and the full exercise of $7.00 per share paid. The Warrant may not be exercised on a cashless basis. The exercise price of the Warrant and number of shares
of Common Stock issuable upon exercise of the Warrant are subject to customary adjustment for payment of stock dividends and reclassification. The Company has reserved 1,750,000 shares of Common Stock for issuance upon exercise of the Warrants.

On November 13, 2006, the Company received $2,000,000 as the gross proceeds of the Series A financing. The Company expects to issue
400,000 shares of unregistered Series A Convertible Preferred Stock to overseas investors at a price of $5.00 per share. The Company also expects to issue a warrant to the investors to purchase 200,000 shares of the Companys unregistered
common stock, par value $0.001 per share, at an exercise price of $7.00 per share. As part of the financing, the Company is obligated to pay BMG Financial Advisors, an investment advisor, the sum of $160,000 for selling commissions related to the
sale. The net proceeds to the Company from the round of financing are $1,840,000.



14



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

You should read the following discussion and analysis in conjunction with (1) our financial statements, including the notes thereto, included in this Report, and (2) the Risk Factors section of our Form 10-KSB and
our Registration Statement on Form SB-2 filed on November 14, 2005. Some of the information contained in this Report may contain forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933, as
amended (the Act) and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). This information may involve known and unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements which involve assumptions and describe our future
plans, strategies and expectations, are generally identifiable by the use of the words may, will, should, expect, anticipate, estimate, believe, intend
or project or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that the projections
included in these forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors. We undertake no obligation to update
publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Overview

We have incurred net losses since our inception and expect to incur substantial and increasing losses for the next several years as we
expand our research and development activities and move our product candidates into later stages of development. As of September 30, 2006, we had an accumulated deficit of $12,929,612. We have funded our losses to date through the sale of
equity securities, the issuance of notes payable, and advances from stockholders.

Results of Operations  Three and Nine months ended
September 30, 2006 and 2005

Our revenues increased to $132,190 in the three month period ending September 30, 2006 from
$81,673 in the corresponding 2005 period. The three month increase was $50,517, or 62% over the same 2005 period. This increase was primarily due to strong demand by Estée Lauder (EL).

Our revenues decreased to $312,937 in the nine month period ending September 30, 2006 from $384,920 in the corresponding 2005 period. The nine month
decrease was $71,983, or 19% over the same 2005 period. This decrease was primarily due to lower demand by Estée Lauder (EL) earlier in the year, a trend which was reversed during the most recent three month period.

Our cost of revenues increased to $15,969 in the three month period ending September 30, 2006 from $14,225 in the corresponding 2005 period. This
$1,744 or 12% increase occurred because many of our costs of revenue such as warehousing are semi-fixed. For the nine month period ending September 30, 2006, our cost of revenue decreased to $43,378. This represents a decrease of $2,524 or 6%
from the corresponding 2005 period figure of $45,902.

As a result of the higher revenues, our gross margin increased to 88% in the three
month period ending September 30, 2006 from 83% versus the comparable period in 2005. However, our gross margin decreased to 86% in the nine month period ending September 30, 2006 from 88% in the comparable period in 2005, as a result of
the lower revenues.

Our research and development expenses consist of costs incurred for drug development and clinical activities. These
costs include in-kind support, such as providing drugs or placebos for trials and financial support, as well as legal expenses for patents. Research and development expenses increased to $343,605 and $740,086 in the three and nine month periods,
respectively, ending September 30, 2006 from $84,310 and $312,909 in the corresponding 2005 periods. The three and nine month increases were $259,295 and $427,177, or 308% and 137% increases, respectively, over the same 2005 periods. These
increases were primarily due to increased spending on clinical trials and increased legal expenses related to keeping existing U.S. and foreign patents in force and reviewing new products for patent protection.



15



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Selling and marketing expenses increased to $224,639 and $673,972 in the three and nine month periods,
respectively, ending September 30, 2006 from $201,102 and $483,728 in the corresponding 2005 periods. The three and nine month increases were $23,537 and $190,244, or 12% and 39% increases, respectively, over the same 2005 periods. The
increases resulted mainly from increased salaries and employee benefits, as well as incremental operating costs, related to the hiring of two new marketing employees. Additional marketing costs are also attributable to engagement of a public
relations firm, and the expenses related to the development of a new product, Nurigene, a proprietary skin care line utilizing creatine that we seek to distribute on our website and through television home shopping channels.

General and administrative expenses consist mainly of salaries and benefits, consulting fees, legal and accounting fees, insurance, facilities and
utilities. Total general and administrative expenses increased to $514,472 in the three months ending September 30, 2006 from $326,089 in 2005. This represents an increase of $188,383 or 58% versus the corresponding 2005 period. The primary
reason for the increase in 2006 compared to 2005 was an increase in legal and accounting fees associated with the Company being publicly held.

Total general and administrative expenses increased to $1,609,352 in the nine months ending September 30, 2006 from $1,445,474 in the corresponding 2005 period. This represents an increase of $163,878 or 11% versus the corresponding
2005 period. The primary reason for the increase in 2006 compared to 2005 was the increased legal and accounting costs associated with the Company being publicly held.

Net interest expense increased to $609,926 and $1,026,303 in the three and nine month periods, respectively, ending September 30, 2006 from $14,350 and $31,322 in the corresponding 2005 periods. The three and
nine month increases were $595,576 and $994,981, respectively, over the same 2005 periods. The Company accounted for the features of the warrant under EITF 00-19 Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a Companys Own Stock. The company recorded Non-cash interest expense of $344,003 during the nine months ended September 30, 2006 to amortize the value of the commitment fee; an additional Non-cash interest expense charge of $663,342 to
expense the beneficial conversion feature of the Biotechnology Ventures note.

The Company also recorded a $478,144 charge during the three
months ended September 30, 2006 to mark the warrant liability associated with the convertible promissory note to market at September 30, 2006. During the nine month period ending September 30, 2006, the Company recorded a $745,656
charge for such costs.

Liquidity and Capital Resources  Nine months ended September 30, 2006 and 2005

At September 30, 2006, we had available cash of $94,697 compared to $619,042 at December 31, 2005 and $10,055 at September 30, 2005. As
further described in Note 7 to the financial statements, the Company entered into a convertible promissory note in the amount of up to $2,000,000 with The Biotechnology Ventures (III) Capital Trust on April 21, 2006. As of September 30,
2006, we have received proceeds of $800,000 from this note.

Cash used in operations was $1,324,345 for the nine months ended
September 30, 2006, compared with $392,984 for the same period in 2005. This increase in negative cash flow of $931,361 was primarily caused by a significant increase in cash operating expenses, as described above. For the nine months ended
September 30, 2006 versus the same period in 2005, research and development expenses increased by $427,177 and sales and marketing expenses increased by $190,244 and general and administrative expenses increased by $163,878.

Cash provided by financing activities for the nine months ended September 30, 2006 was $800,000 compared with $309,283 for the same period in 2005.

Working Capital.Negative working capital increased by $1,842,519 to $1,916,765 at September 30, 2006, from $74,246 at December 31, 2005.
The increase in negative working capital was primarily due to our increased cash operating expenses as described above.



16



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Our actual cash needs might vary materially from those now planned because of a number of factors,
including:



| |  |  | The scope, rate of progress and costs of our product development activities;
| | - |  | ----------------------------------------------------------------------------



| |  |  | Changes in our research and development plans;
| | - |  | ----------------------------------------------



| |  |  | Future clinical trial results;
| | - |  | ------------------------------



| |  |  | The terms and timing of any collaborative, licensing and other arrangements that we have or may establish;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | The cost and timing of regulatory approvals;
| | - |  | --------------------------------------------



| |  |  | The costs of commercializing any of other product candidates;
| | - |  | -------------------------------------------------------------



| |  |  | Costs to license-in or otherwise acquire any technology; and
| | - |  | ------------------------------------------------------------



| |  |  | The cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.
| | - |  | ------------------------------------------------------------------------------------------------------------------

In any event, we are currently seeking to raise substantial additional capital to fund research and development and operations. We expect to finance
future cash needs through the sale of equity securities and possibly strategic collaborations or debt financing or through other sources that may be dilutive to existing stockholders or require us to relinquish rights to some of our technologies,
product candidates or products under development that we would otherwise seek to develop or commercialize ourselves.

As we seek to raise
additional money to fund operations, funding may not be available on acceptable terms, or at all. If we are unable to raise additional funds when needed, we may not be able to market products as planned or continue development and regulatory
approval of products, or could be required to delay, scale back or eliminate some or all of our research and development programs. If we raise additional funds through equity sales, these sales may be highly dilutive to existing investors.

Failure to consummate additional financing such as additional draws on the Companys convertible promissory note or raise additional
capital would likely force the Company to curtail operations. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

We believe our cash and cash equivalents of $1,091,807 as of November 20, 2006 are only sufficient to fund our operations through January 31, 2007. Our
ability to continue operations after January 2007 depends on our ability to arrange additional funding or make alternative arrangements to fund our operations. As the Companys Convertible Promissory Note (as more fully described in Note 7 to
the condensed consolidated financial statements) does not allow it to draw additional advances unless the Companys cash balance is less than $300,000, we do not anticipate receiving any additional proceeds from the note in the near future.



17



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Risk Factors

Except
as set forth below, there is no material change to the risk factors included in our Annual Report on Form 10-KSB for the year ended December 31, 2005.

We will likely need additional capital to achieve our current business strategy and our inability to obtain additional financing will inhibit our ability to expand or even maintain our research, development and
commercialization efforts and administrative operations.

In addition to our current accumulated deficit, we expect to incur additional
losses during the foreseeable future. Until one or more of our drug products have obtained approval from the United States Food and Drug Administration (FDA), we are unlikely to be profitable. We believe that, upon the closing of the offering
described in the private placement memorandum discussed in Section 9 of the notes to the financial statements, we will have sufficient capital resources to fund our anticipated operational working capital requirements through at least January 31,
2007, despite being required to spend a substantial portion of the proceeds of the Private Placement to pay down our accounts payable and fund a Clinical Trial at a major CRO. Consequently, we will require substantial additional capital to develop
new product candidates, conduct clinical tests, obtain regulatory FDA approval, and commercialize our products, as well as provide working capital for 2007. We intend to seek additional capital in 2007 either through private placements or public
offerings of our equity securities. There is no assurance that we will be able to obtain additional financing through private placements and/or public offerings necessary to support our working capital requirements. To the extent that funds
generated from any private placements and/or public offerings are insufficient, we will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on acceptable terms.

If we are unable to secure adequate sources of funds, we may be forced to delay or postpone development and research expenditures and as a
result, we might be required to diminish or suspend our development strategy. These delays in development would have an adverse effect on our ability to produce timely and competitive products and could require us possibly to cease our operations.
In addition, such inability to obtain financing on reasonable terms could have a negative effect on our business, operating results or financial condition to such extent that we are forced to restructure, file for bankruptcy protection, sell assets
or cease operations, any of which could put your investment dollars at significant risk.



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Subsequent Event

On November 17, 2006, the Companys Board of Directors approved the issuance of a Private Placement Memorandum. This financing authorized the issuance of up to 3,500,000 units. Each unit consists of one share of
the Companys unregistered Convertible Preferred Stock, par value $0.001 per share, and a warrant to purchase one half share of the Companys unregistered Common Stock at an exercise price of $7.00 per share. The units will be offered
solely to a limited number of non-U.S. citizens in compliance with Regulation S. The Preferred Stock is senior to Common Stock in liquidation and dividend right. At any time between June 30, 2007 and December 31, 2009, a holder of Preferred Stock
may demand conversion of such Preferred Stock into Common Stock at a 1:1 ratio, subject to adjustment. At any time after December 31, 2008, the Company may require the holder of Preferred Stock to select between converting all shares of Preferred
Stock into Common Stock at a 1:1 ratio, subject to adjustment, or redeeming all shares of Preferred Stock at a price of $5.00 per share plus any accrued and unpaid dividends. Each holder of Preferred Stock is entitled to receive a stock dividend of
10% annually, payable semi-annually, for each share of Preferred Stock, based on the value of $5.00 per share of Preferred Stock. To the extent funds are not legally available for such dividend, the dividend accumulates. During the period from
January 1, 2010 to December 31, 2010, all holders of Preferred Stock must select between converting all shares of Preferred Stock into Common Stock at a 1:1 ratio, subject to adjustment, or redeeming all shares of Preferred Stock at a price of $5.00
per share plus any accrued and unpaid dividends. The Preferred Stock has customary antidilution adjustments in the case of stock splits, stock dividends or recapitalizations. Holders of Preferred Stock have one vote for each Share and will vote
together with the Common Stock as a single class, except to the extent that separate class voting is required by the Delaware General Corporation Law. Holders of Preferred Stock are entitled to appoint and elect one director to the Companys
Board of Directors. The Warrant may be exercised at any time until December 31, 2011. Any exercise of the Warrant must be for whole shares only, and the full exercise of $7.00 per share paid. The Warrant may not be exercised on a cashless basis. The
exercise price of the Warrant and number of shares of Common Stock issuable upon exercise of the Warrant are subject to customary adjustment for payment of stock dividends and reclassification. The Company has reserved 1,750,000 shares of Common
Stock for issuance upon exercise of the Warrants.

On November 13, 2006, the Company received $2,000,000 as the gross proceeds of the Series
A financing. The Company expects to issue 400,000 shares of unregistered Series A Convertible Preferred Stock to overseas investors at a price of $5.00 per share. The Company also expects to issue a warrant to the investors to purchase 200,000
shares of the Companys unregistered common stock, par value $0.001 per share, at an exercise price of $7.00 per share. As part of the financing, the Company is obligated to pay BMG Financial Advisors, an investment advisor, the sum of $160,000
for selling commissions related to the sale. The net proceeds to the Company from the round of financing are $1,840,000.

Material Off-Balance Sheet
Arrangements

The Company has no material commitments for capital expenditures and no off-balance sheet arrangements.

ITEM 3. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Companys Chief Executive Officer and Acting Chief Financial Officer (its principal executive
officer and principal accounting and financial officer), the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Acting Chief
Financial Officer have concluded that these disclosure controls and procedures as of September 30, 2006 are effective in controlling and reporting the financial results of the Companys operations.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

There were no changes in the Companys internal controls and procedures over financial reporting during the quarter ended September 30, 2006 that have materially affected, or are reasonably likely to materially affect, the
internal control over financial reporting.



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PART II  OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY

Upon direction from The Biotechnology Ventures (III) Capital Trust,
on July 6, 2006, the Company cancelled the warrant it issued on May 10, 2006 to such investor to purchase up to 666,667 shares of Common Stock and issued a warrant with the same terms to such investors designee, Doane, Phillips, Young LLP
(in trust).

The issuance of unregistered securities to the investors designee, was exempt from registration under Section 4(2)
of the Securities Act. The investors had access to sufficient information regarding the Company so as to make an informed investment decision. Based upon representations made by the investors, the Company had a reasonable basis to believe that each
investor was an accredited investor as defined in Regulation D of the 1933 Act and otherwise had the requisite sophistication to make an investment in the Companys securities. The Company did not engage in any advertising or
general solicitation in connection with this sale.

ITEM 6. EXHIBITS



|     |  |                                                                                                                                                                              
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     | 
|3    |  | Certificate of Designation of the Registrant filed with Delaware Secretary of State on November 17, 2006.                                                                    
|     | 
|10   |  | Form of Securities Purchase Agreement entered into by Registrant and Amana Ltd. on November 17, 2006.                                                                        
|     | 
|31.1 |  | Rule 13a-14(a) Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated November 20, 2006                                    
|     | 
|31.2 |  | Rule 13a-14(a) Certification of Acting Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated November 20, 2006.                            
|     | 
|32   |  | Rule 13a-14(b) Certification of Chief Executive Officer and Acting Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated November 20,
2006.



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SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.



|                        |  |                                             
|----------------------- |  | --------------------------------------------
|                        |  | Avicena Group, Inc.                         
|                        | 
|Date: November 20, 2006 |  | /s/ Mike Sullivan                           
|                        |  | Mike Sullivan                               
|                        |  | Acting Chief Financial Officer              
|                        |  | (Principal Financial and Accounting Officer)
|                        | 
|Date: November 20, 2006 |  | /s/ Belinda Tsao Nivaggioli                 
|                        |  | Belinda Tsao Nivaggioli                     
|                        |  | Chief Executive Officer                     
|                        |  | (Principal Executive Officer)               



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