**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549










**FORM
      10-KSB**


Annual
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934


For
      the
      fiscal year ended


**December
      31, 2005**





**Nanobac
      Pharmaceuticals, Incorporated**


(Exact
      name of registrant as specified in its charter)


**Florida**
                **0-24696**
                **59-3248917**(State
                    or Other Jurisdiction
                (Commission
                    File
                (I.R.S.
                    Employerof
                    Incorporation)
                Number)
                Identification
                    Number)




**4730
      North Habana Avenue, Suite 205, Tampa, Florida 33614**


(Address
      of Principal Executive Office) (Zip Code)





**(813)
      264-2241**


(Registrant’s
      telephone number, including area code)





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





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


**Common
      Stock, without par value**


(Title
      of
      Class)





Indicate
      by check mark whether the registrant (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 a 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 o  No x





Indicate
      by check mark if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K is not contained herein, and will not 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-KSBor any amendment to
      this Form 10-KSB. o





Indicate
      by check mark whether the Registrant is an accelerated filer (as defined in
      Rule
      12b-2 of the Act): Yes o  No
x





State
      issuer’s revenue for its most recent fiscal year: $656,802





The
      approximate aggregate market value of voting and non-voting stock held by
      non-affiliates of the registrant was $5,308,195 as of March 30, 2006. The shares
      of Common Stock held by each current executive officer and director and by
      each
      person who is known to the Company to own 5% or more of the outstanding Common
      Stock have been excluded from this computation on the basis that such persons
      may be deemed affiliates .
      The
      determination of affiliate status is not a conclusive determination for other
      purposes.





As
      of
      March 30, 2006 there were 193,506,760 shares of the Registrant’s Common Stock
      outstanding.





1


**Nanobac
      Pharmaceuticals, Incorporated**





**Form
      10-KSB**


**For
      the Year Ended December 31, 2005**





**Table
      of Contents**


******Page****Part
                    I**Item
                    1.
                Business
                3Item
                    2.
                Properties
                14Item
                    3.
                Legal
                    Proceedings
                14Item
                    4.
                Submission
                    of Matters to a Vote of Security Holders
                14**Part
                    II**Item
                    5.
                Market
                    for Registrant’s Common Stock and Related StockholderStockholder
                    Matters
                15Item
                    6.
                Management’s
                    Discussion and Analysis or Plan of Operations
                18Item
                    7.
                Financial
                    Statements
                37Item
                    8.
                Changes
                    in and Disagreements with Accountants onAccounting
                    and Financial Disclosure
                37Item
                    8A.
                Controls
                    and Procedures
                38**Part
                    III**Item
                    9.
                Directors,
                    Executive Officers, Promoters and Control Persons
                39Item
                    10.
                Executive
                    Compensation
                42Item
                    11.
                Security
                    Ownership of Certain Beneficial Owners andManagement
                      and Related Stockholder Matters
                44Item
                    12.
                Certain
                    Relationships and Related Transactions
                45Item
                    13.
                Exhibits
                46Item
                    14.
                Principal
                    Accountant Fees and Services
                51





2


**PART
      I**




**Item
      1.**  **Business**





Nanobac
      Pharmaceuticals, Incorporated and its subsidiaries (which may be referred to
      as
“Nanobac”, “the Company”, “NNBP”, “we”, “us”, or “our”) is a research-based
      bio-lifescience company formed in 1994 as a Florida corporation. The current
      business described below commenced in June 2003 with the acquisition of
      NanobacLabs Pharmaceuticals, Inc and after emergence from bankruptcy in November
      2002.




Our
      business strategy is to continue our research of Nanobacteria, also called
      Calcifying Nano-Particles (CNPs), which will ultimately lead to drug discovery
      and the development of diagnostic products. This strategy has been solidified
      during the past few months with the creation of Nanobac’s Research and
      Development Committee, which shall be responsible for prioritizing the research
      objectives. During March 2006, we decided to terminate the marketing and selling
      of dietary supplements in order for the Company to focus exclusively on the
      science related to CNPs, which we believe will lead to drug discovery and the
      development of diagnostic products for the detection and treatment of calcific
      diseases.




Our
      researchers have discovered a novel mineralized pathogen that we believe is
      responsible for numerous chronic diseases affecting humankind. The Company's
      pioneering research is establishing the pathogenic role CNPs in human disease.
      CNPs are extremely tiny, mineral forming units composed of calcium and
      phosphate, two primary components of bones and teeth. Because of the
      mineralizing properties of nanobacteria, they have also been called calcifying
      nano-particles (CNPs).





CNPs
      have
      been detected in urine and kidney stones, bile and gall bladder stones,
      atherosclerotic plaques, heart valves, Polycystic Kidney Disease cysts, liver
      cysts and human & fetal bovine serum. We believe that blood-borne CNPs form
      slow-growing calcified colonies in arteries and organs, much as coral reefs
      are
      formed. While calcification is a normal process for building healthy bones
      and
      teeth, calcification also plays a role in other conditions related to diseases.
      The medical industry has long known that calcium deposits, or pathologic
      calcifications, exist in a number of diseases including, coronary artery
      disease, kidney stones, breast cancer, prostatitis, rheumatoid arthritis, lupus,
      and Parkinson's disease to name a few. However, the cause of pathologic
      calcification has remained a mystery. At the same time, new research is
      demonstrating that inflammation is at the heart of diseases like arthritis,
      rheumatoid arthritis, heart disease, prostatitis and others. Controlling the
      inflammatory response is related to controlling the substances that start the
      inflammatory cascade. We believe that CNPs initiate the inflammatory cascade
      and
      are involved in the above mentioned diseases.





3




We
      believe that our research will lead to a better understanding of CNPs and their
      role in disease. This in turn will enable us to discover drugs or drug
      combinations to treat calcification diseases and to develop better diagnostic
      tests to detect the presence of CNPs. CNPs represent a unique and unifying
      drug
      target found in many of chronic disease. Our drug discovery and development
      efforts are focused on applying new and existing compounds that effectively
      inhibit, destroy or neutralize the particles. Our business strategy is to
      develop, license and commercialize compounds to address the unmet needs of
      patients within the cardiovascular and urological disease markets. Nanobac
      researchers are investigating compounds targeted to CNPs in a wide range of
      calcific diseases.


While
      there is still a long way to go in the study of CNPs, we are pleased with the
      results we have achieved thus far and we are optimistic about the prospects
      for
      the future development of diagnostic tests and treatments for calcification
      diseases caused by - or associated with - CNPs.




***Research***





Nanobacterial
      research is ongoing around the world. Our lead scientists Olavi Kajander and
      Neva Ciftcioglu, have formed multidisciplinary alliances with top researchers
      including: Marshall Stoller, University of California San Francisco; Rune
      Eliasson, Sweden; Hojatollah Vali, McGill University, Canada; Mayo Clinic,
      Rochester, Minnesota; University of South Florida; Iowa State University; D.
      Shoskes, Cleveland Clinic; Garcia-Cuerpo, Spain;  China Ghangsha
      group; Sommer, Univ. of Ulm;  Pretorius, South-Africa; G. Epstein/J.T.
      Salonen;  Tom & Marcia Hjelle, Univ. of Illinois; Y. Av-Gay, University
      of British Columbia; and R. Berger, Miami Heart Institute, Miami FL. We intend
      to serve as the nexus for research scientists and become the premier leader
      in
      nanobacterial research and distribution of knowledge. We generally retain the
      rights for the commercialization of intellectual property that result from
      these
      collaborative studies.




To
      date,
      these collaborations have resulted in the publishing of over 80 articles,
      numerous abstracts and book chapters. Example publications since 1998 include
      articles in Science, Nature and Nature Medicine, Proceedings of the National
      Academy of Sciences, Lancet, Urology, New Scientist, Molecular Medicine, PDA
      Journal, Kidney International, Circulation, Journal of Pathophysiology, and
      American Society for Microbiology.





In
      2004,
      we entered into a Space Act Agreement with NASA’s Johnson Space Center (“JSC”),
      Houston Texas, to collaborate on the research of nanobacterium sanguineum and
      its nature and role in pathological calcification, including the detection
      and
      treatment of the pathogen. Since Astronauts may be more prone to an increased
      rate of pathological calcification while in a zero gravity environment, the
      collaboration will support NASA’s need to better understand the effects of
      long-term space travel on humans. In addition, Nanobac’s work provides a model
      for studying mineralized organic matters that could aid NASA in the search
      for
      extraterrestrial life.





Nanobac
      co-founder and Director of Science, Neva Ciftcioglu, Ph.D. will remain at NASA
      JSC as Staff Scientist and principal researcher. Under the agreement, NASA
      will
      provide workspace at JSC for Nanobac’s personnel located at JSC. The agreement
      further provides Nanobac the opportunity to work together with a
      multidisciplinary team of NASA researchers while having access to basic
      laboratory services for CNPs science, including electron microscopy, molecular
      biology and geology-mineralogy research facilities. Projects ranging from
      searching for CNPs biosignatures in earth fossils and in Mars meteorites to
      diagnosing and treating CNPs are anticipated. Nanobac will provide JSC with
      equipment and specialty supplies for CNP research and apply its pioneering
      diagnostic and treatment experience in the field.





4


We
      own
      the rights for the commercialization of intellectual property that results
      from
      our collaborative research at NASA JSC. However, the U.S. Federal Government
      retains the right to use this intellectual property for U.S. Government purposes
      without compensation to us.





***Diagnostics***





We
      have
      developed two diagnostic assays to identify the presence of Nanobacteria in
      blood. Nanobac OY diagnostics division manufactures and markets in vitro
      diagnostic (IVD) kits and reagents for the detection of Calcifying
      Nano-Particles. Products include our NanoCaptureTM (measures levels of
      Nanobacterial antigen) and Nano-SeroTM (measures whether a patient has been
      exposed to Nanobacteria) ELISA assays and our Nano-VisionTM line of
      immunohistochemical reagents.


An
      antigen is generally defined as a substance that, when introduced into the
      body,
      stimulates the production of an antibody. An antibody is generally defined
      as
      any of various proteins in the blood that are generated in reaction to foreign
      proteins or polysaccharides, neutralize them, and thus produce immunity against
      certain microorganisms or their toxins.





Beginning
      in 2004, we contracted with Medicorp, Inc., for the production of NANO-CAPTURE
      and NANO-SERO Assays. Medicorp was Canada's largest, independent ISO
      9001-certified manufacturer and distributor of immunodiagnostic and microbiology
      products. During November 2005, Medicorp completed the initial production run
      for the above two assays. Future production will be conducted from our Nanobac
      OY research laboratory in Kuopio, Finland.





We
      have
      received notification of CE Mark status in early 2005 for our NANO-CAPTURE
      and
      NANO-SERO test kits, which is necessary for distribution of our kits in Europe.
      Also during 2005, we jointly agreed with Oxoid Ltd. (“Oxoid”) to discontinue our
      distribution agreement for territories in Europe, Brazil and Australia. Our
      goal
      is to develop diagnostic assays that will be globally distributed for a variety
      of diseases associated with nanobacterial infection and pathologic
      calcification. While we intend to market the NANO-CAPTURE and NANO-SERO test
      kits through a distributor network, we are limiting our marketing investment
      in
      order to provide greater funding to our research programs. Further, our
      diagnostic tests will facilitate further research into the cause and effect
      of
      CNPs and will allow researchers the ability to measure changes in levels of
      CNPs
      in their test patients. Because of our decision to expend our resources on
      research instead of marketing, we do not anticipate meaningful revenue from
      our
      diagnostic kits in fiscal 2006.





Nanobac
      OY Clinical Laboratory provides specialized clinical laboratory testing services
      to clinicians, hospitals, and laboratories. We specialize in providing advanced
      technologies for the detection and characterization of Calcifying Nano-Particles
      in human samples. Nanobac OY Clinical Laboratory is fully accredited by the
      Social Health Ministry of Finland. Because of our decision to expend our
      resources on research instead of marketing, we do not anticipate meaningful
      revenue from our clinical laboratory services in fiscal 2006.





5


**The
      Role of CNPs in Calcification Associated Diseases**





**Urological
      Diseases**




Researchers
      have shown a relationship between CNPs and urological diseases such as chronic
      prostatitis/chronic pelvic pain syndrome (CP/CPPS), kidney stones, and PKD.
      Until these studies, no single infection, viral or bacterial, had been
      identified that could have caused the progression of these
      diseases.





Nanobac
      has focused on investigating the relationship between CNPs and these urological
      diseases.





*Chronic
      prostatitis/chronic pelvic pain syndrome (CP/CPPS)*





Chronic
      prostatitis/chronic pelvic pain syndrome (CP/CPPS) is a disease in males defined
      by pelvic pain and/or ejaculatory and/or urinating pain/discomfort lasting
      longer than 3 months. At any time 2-10% of adult men are suffering from CP
      symptoms and 15% of men will suffer from CP symptoms at some point of their
      lives. In the United States, more than 2 million men per year will visit their
      physician for CPPS. The cause for CP/CPPS is frequently unknown and thus the
      therapies are mostly empirical and target the symptoms. Antimicrobial and
      anti-inflammatory agents and a -adrenergic
      receptor blockers are frequently used, and seem to relieve the symptoms in
      many
      patients. However, men with refractory long-standing symptoms present a
      substantial problem to general practioners, internists and urologists, as the
      current therapies have inconsistent effects on the patient’s symptoms.
      Persistent unknown cause behind the symptoms leads to a situation where no
      evidence based medicine can be used as a basis for therapeutic
      efforts.





The
      prostatitis syndromes are a group of disorders with varying symptoms and
      probably diverse etiologies. Prostatitis is divided into four types. CP/CPPS
      type III accounts for the majority of CP/CPPS patients seen in an average
      urology practice. These patients often have prostatic calcification. The
      presence of prostatic calculi in younger men is associated with both
      inflammation and symptoms of CPPS. While prostatic calcification is often
      detected in asymptomatic older men who undergo prostate biopsy, the presence
      and
      degree of calcification in younger CP/CPPS patients can be striking. One
      hypothesis is that prostatic calculi in the prostatic ducts may increase
      intraprostatic pressures and lead to pain and swelling. Furthermore, the core
      of
      prostatic calculi is typically calcium apatite, which is the hallmark of CNPs
      action. This association led researchers to postulate a role for CNPs in the
      development of CP/CPPS. Indeed, preliminary research comparing serum of men
      with
      a diagnosis of prostatitis with serum from unaffected men revealed significantly
      higher rates of CNP antigen by ELISA analysis in the prostatitis
      group.





Kajander
      and Ciftcioglu proposed a new etiology for CP/CPPS, simply because we have
      found
      that these patients very often have very high levels of CNPs in their blood.
      CNPs carry important players of inflammation and cell death on their surface.
      It
      has been shown *in
      vitro* that
      CNPs can kill cultured mammalian cells and can cause cell damage.





When
      15
      human diseases were investigated for the presence of CNPs in peripheral blood,
      CP/CPPS patients showed the highest values of CNPs. A strategy to treat CP/CPPS
      should be based upon a new understanding of the basic disease process calcific
      inflammation.





6


A
      recent
      observational study of prostatitis patients, led by Daniel A. Shoskes, M.D.,
      of
      Cleveland Clinic Florida, published in the leading peer-reviewed urology
      journal, The Journal of Urology, demonstrated a significant improvement in
      the
      symptoms of chronic prostatitis / chronic pelvic pain syndrome for those
      patients who took Nanobac Supplements for a period of three months. The treated
      group of 16 patients had prostatic stones and longstanding Chronic Pelvic Pain
      Syndrome (“CPPS”) symptoms that were not responsive to prior conventional
      therapies. Two of the patients in the test group who had been on complete
      medical disability have returned to work.





*Kidney
      Stones* :





Kidney
      stones are one of the most common disorders of the urinary tract. A kidney
      stone
      is a solid piece of material that forms in the kidney out of substances in
      the
      urine. A problem stone can block the flow of urine and cause great
      pain.





Several
      studies conducted by prominent medical researchers have collectively shown
      CNPs
      as a probable cause of kidney stone formation. Depending upon the patient
      population, researchers have found that 62% to 97% of kidney stones have CNPs.
      The presence of CNPs is independent of the type of kidney stone.





It
      is
      believed that CNPs create the calcific deposits that are physically present
      in
      the kidney stones and therefore may be the cause of kidney stone
      formation.





The
      Company has been working with scientists at NASA to research the effects of
      CNPs
      in the formation of kidney stones during space flights. Neva Ciftcioglu, the
      Company’s Director of Science, and a team of NASA scientists used multiple
      techniques to determine that CNPs multiply faster in space flight simulated
      conditions than on Earth. This determination is especially important to NASA
      as
      it indicates that astronauts on future long-term missions to the moon and Mars
      are at an increased risk for developing kidney stones.





The
      Company is continuing its collaboration with NASA. The observation that CNPs
      grow faster in conditions simulating the microgravity conditions of space also
      allows researchers to grow cultures faster. A problem facing researchers in
      studying CNPs had been in developing a sufficient amount of material. CNPs
      double about once every three days compared to typical bacteria which doubles
      about every 20 minutes.





*Polycystic
      Kidney Disease (“PKD”)* :





Polycystic
      kidney disease (“PKD”) is a genetic disorder characterized by the growth of
      numerous cysts in the kidneys. PKD cysts can slowly replace much of the mass
      of
      the kidneys, reducing kidney function and leading to kidney failure.





Studies
      have shown that 100% of kidney cyst fluids and urine were positive for
      Nanobacteria. Nanobac plans to initiate research trials that will evaluate
      the
      link between Nanobacteria and PKD.





7


**Cardiovascular
      Diseases**





The
      most
      serious and widespread of the diseases caused by calcified plaque are
      atherosclerosis (hardening of the arteries) and coronary heart disease. Coronary
      heart disease is caused by a narrowing of the coronary arteries that feed the
      heart, which may be caused by the build-up of CNPs.





Many
      cardiovascular researchers have shown that atherosclerosis might be the
      life-long result of our bodies’ various healing mechanisms and inflammatory
      responses to infection. Researchers have sought to isolate an infectious agent
      that is present in our tissues that could stimulate the development of
      atherosclerotic plaques. Until recently, no single infection, viral or
      bacterial, had been implicated.




Three
      recently published studies conducted by prominent medical researchers have
      collectively shown that CNPs might be the previously unidentified agent involved
      in the development of atherosclerotic heart disease. A group of researchers
      at
      the Mayo Clinic, led by Virginia Miller, PhD showed that CNPs are present in
      calcified atherosclerotic coronary arteries and heart valves.




Cardiovascular
      researcher Benedict Maniscalco, MD published a study that showed that patients
      with severe coronary artery disease tested positive for nanobacterial antigen.
      The study also indicated that a majority of cardiac patients that received
      the
      Nanobac Supplements had a decrease in their coronary artery calcium scores.
      Angina was decreased or ablated in 16 of 19 patients. Lipid (fats and fat like
      materials) profiles also improved in most patients. Dr. Maniscalco’s study
      concluded that the coronary artery calcium scores of most coronary artery
      disease patients decreased during the period they used the Nanobac Supplements
      inferring regression of calcified coronary artery plaque volume. The patients
      tolerated the therapy well and their angina and lipid profiles improved.





Also,
      at
      a recent American Heart Association scientific session, one of the world’s most
      prominent heart disease researchers, Stephen E. Epstein, MD, Director of the
      Cardiovascular Research Institute at Washington Hospital Medical Center in
      Washington D.C., reported that 94% of people with calcified coronary arteries
      have nanobacterial infection as measured by the Company’s Nanobacterial Antibody
      Assay, and that antibody results correlated with coronary calcification scoring.
      Therefore, the Nanobacterial Antibody Assay may be a predictor of patients
      with
      high levels of calcium in their coronary arteries. These patients are at the
      highest risk for a heart attack. Thus, the Nanobacterial Antibody Assay could
      be
      used as a biomarker that may predict which patients are at greatest risk for
      a
      heart attack.





The
      collective weight of the three studies suggests that CNPs infection may be
      the
      previously unknown infectious agent associated with atherosclerotic plaque.
      The
      physical presence of CNPs in the diseased artherosclerotic tissues and the
      correlation with heart disease calcification levels suggests that long-term
      CNP
      presence may be involved in the development of the calcification in
      atherosclerotic heart disease.




Nanobac
      is continuing its research of the relationship between CNPs and heart disease
      and has expanded its research to include other diseases involving pathological
      calcification.





8


***Other
      Opportunities***





Calcifying
      Nano-Particles expose a risk for biopharmaceuticals containing human or animal
      blood components or blood and animal tissue derived raw materials or production
      substrates.





Nanobac
      BioAnalytical Services develop and apply methods for avoiding, detecting, and
      inactivating or eliminating CNPs from raw materials or production substrates.
      Our contamination control program focuses on host cell lines, animal and human
      derived materials, raw materials, availability of diagnostic procedures and
      downstream processes capable of inactivating or removing contaminants. We are
      considering enlisting biopharmaceutical partners to further this line of
      business.




**Calcifying
      Nano-Particle (CNP) Background and Description**




CNPs
      were
      discovered in 1988 by Finnish researcher Olavi Kajander, M.D., PhD. Dr. Kajander
      was carrying out mammalian cell research when a routine mammalian cell culture
      experiment, using commercially available fetal bovine serum as the growth media,
      just wasn't getting off the ground. The cells weren't thriving and dividing
      like
      they should; the cells were sickly and died off before any study could be done.
      Strange vacuoles were forming up in many of the cells, and these cells
      subsequently died. Dr. Kajander, like all basic cell researchers, had
      encountered this problem before; sometimes their cell cultures worked, and
      sometimes they didn't. Dr. Kajander researched this further and after several
      weeks of culture, turbidity developed in one of the flasks. We believe this
      represented the first isolation of CNPs.





In
      1991
      Dr. Kajander was joined by microbiologist Neva Ciftcioglu, Ph.D. at the
      University of Kuopio, Finland. Their research established that the blood-borne
      CNPs form slow-growing calcified colonies in arteries and organs, much as coral
      reefs are formed. CNPs have been found in human and animal blood, urine and
      saliva. The name "nanobacteria" was introduced and patented by Dr. Olavi
      Kajander as the name for very small mineral-associated bacteria-like particles
      now referred to as CNPs.





We
      believe that CNPs are responsible for a large number of pathological events
      (thrombosis, autoimmune response, inflammation & cell proliferation, altered
      cell functions, pathological calcification & cell death). A recent study by
      Mayo Clinic showed that CNPs are players in cardiovascular diseases such as
      heart valve calcifications and atherosclerosis. Antibodies against CNPs are
      a
      novel risk factor for coronary artery calcification, which is known to be the
      best predictor for future myocardial infarction. CNPs have also been detected
      from cancers with calcium particles (psammoma bodies) such as ovarian cancer.
      We
      believe that many diseases, such as kidney stones, arthrosclerosis, prostatitis,
      and arthritis are local manifestations of a systemic disease. Many patients
      affected by these diseases have a blood borne initiating component that may
      affect multiple organ systems sequentially and/or concurrently.


9


**Patents**





We
      have
      filed applications for a number of patents, have been granted patents, and
      await
      prosecution of pending application in the US and International
      Stages.





Patent
            
            General
                Subject Matter
            Expiration
                DateUS
                5,135,851
            U.S.
            -Method
                for the culture and detection of nanobacteria also known as calcifying
                nanoparticles
              (issued
                in 1992)
            5/8/2010US
                6,706,290
              PCT/EP1999/004555
            U.S.
                & International Application
              (PCT)
            -Methods
                for the eradication of Nanobacteria from articles and animals using
                various novel combinations of systems, chemicals, compounds, drugs,
                prodrugs, supplements, etc.
              (issued
                in 2004)
            7/6/2018U.S.
                & PCT Applications Filed
            -Methods
                and Compositions (combinations) for treating diseases characterized
                by
                pathological calcification
              (Filed
                in 2004)U.S.
                & PCT Applications Filed
            -Methods
                and combinations of compositions including Bisphosphonates, chelators,
                and
                citrates
              (Filed
                in 2004)U.S.
            -Methods
                for the treatment of disease associated with calcification and/or
                plaque
                formation
              (Filed
                in 2004)U.S.
                & PCT Application Filed
            -Detection
                of antibodies against compositions of conformationally changed proteins
                comprising calcium binding protein hydroxy apatite complexes and
                novel in
                vitro test methods
              (Filed
                in 2005)U.S.
                & PCT Applications filed
            -Methods
                and compositions to detect calcifying nanoparticles including the
                identification and quantification of proteins thereon and correlation
                to
                diseases thereof
              (Filed
                in 2005)








10


There
      can
      be no assurance that our patents or pending applications will afford legal
      protection against competitors or provide significant proprietary protection
      or
      competitive advantage. In addition, our patents or pending applications could
      be
      held invalid or unenforceable by a court, or infringed or circumvented by
      others, or others could obtain patents that we would need to license or
      circumvent. Competitors or potential competitors may have filed patent
      applications or received patents, and may obtain additional patents and
      proprietary rights relating to proteins, small molecules, compounds, or
      processes competitive with ours. Additionally, for certain of our product
      candidates, competitors, or potential competitors may claim that their existing
      or pending patents prevent us from commercializing such product candidates
      in
      certain territories. Further, when our patents expire, other companies could
      develop new competitive products to our products.





Trade
      secret protection for our unpatented confidential and proprietary information
      is
      important to us. To protect our trade secrets, we generally require our staff
      members, material consultants, scientific advisors, and parties to collaboration
      and licensing agreements to execute confidentiality agreements upon the
      commencement of employment, the consulting relationship, or the collaboration
      or
      licensing arrangement with us. However, others could either develop
      independently the same or similar information or obtain access to our
      information.





**Competition**





The
      market for providing physicians and managed care organizations with nanobacteria
      related disease management and services is just emerging, and we believe are
      currently the only company providing a comprehensive approach to managing
      nanobacterial diseases.





The
      general market for academic researchers and clinical laboratories with In Vitro
      diagnostic test kits is highly competitive and includes diagnostic companies
      such as, Roche, Abbott, Bayer, Johnson & Johnson, and Dade
      Behring.





The
      general market for specialized clinical laboratory services for detection,
      diagnosis, prognosis and monitoring is highly competitive and dominated by
      Quest
      and Labcorp. Their competitive strength lies in their service capabilities
      and
      their ability to provide local couriers for specimen pickup and broad-based
      contracting ability with managed care organizations.





The
      general market for pharmaceuticals and dietary supplements is also highly
      competitive and includes Fortune 500 pharmaceutical companies as well as small
      to medium sized pharmaceutical and dietary supplement companies.





Nanobac
      believes that it will be able to grow and defend the specialized nanobacteria
      related disease market niche due to its expertise in the field, its disease
      management approach, and its technology leadership.





11


**Government
      Regulation**





*Clinical
      Reference Laboratory*





The
      clinical reference laboratory operations are not regulated directly by the
      FDA.
      Clinical reference laboratories in the United States are regulated under the
      federal Clinical Laboratory Improvement Act (CLIA). Our reference laboratory
      is
      located in Kuopio Finland and is regulated by European Union and Finland laws
      and is not regulated by CLIA.





*In
      Vitro Diagnostics*





The
      FDA
      regulates in vitro diagnostic kits and reagents. We intend to begin clinical
      studies to support an FDA filing for both the NANO-CAPTURE and NANO-SERO assays.
      The timing of our clinical trials and FDA approval is dependent on future
      funding. We recently received notification that our NANO-CAPTURE and NANO-SERO
      assays meet the criteria for CE Mark in Europe.





**Environmental
      Matters**





We
      have
      not been impacted financially or operationally by environmental laws.





**Geographic**





We
      will
      initially focus our dietary supplement business in North America. To date,
      over
      90% of our revenue is from the United States. We also plan to develop our
      markets in the European Union through the operations of our Finnish Subsidiary,
      Nanobac OY.





12


**Employees**





We
      have
      five employees in our corporate headquarters in Tampa, Florida, two employees
      at
      the NASA facility in Houston Texas and six employees in Finland.





**Factors
      That May Affect the Company**





We
      operate in a rapidly changing environment that involves a number of risks,
      uncertainties, and assumptions, many of which are beyond our control. For a
      discussion of some of these risks, see “—Risk Factors” in Item 6 of this report.
      Other risks are discussed elsewhere in this Form 10-KSB.




**Investor
      Information**





We
      are
      subject to the information requirements of the Securities Exchange Act of 1934
      (the “Exchange Act”). Therefore, we file periodic reports, proxy statements, and
      other information with the Securities and Exchange Commission (the “SEC”). Such
      reports, proxy statements, and other information may be obtained by visiting
      the
      Public Reference Room of the SEC at 450 Fifth Street, NW, Washington, DC 20549
      or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an
      Internet site ( http://www.sec.gov )
      that
      contains reports, proxy and information statements, and other information
      regarding issuers that file electronically.





Financial
      and other information about the Company is available on our website
      ( http://www.nanobaclabs.com ).
      We
      make available on our website, through links to the SEC website, copies of
      our
      annual report on Form 10-KSB, quarterly reports on Form 10-Q, current reports
      on
      Form 8-K, and amendments to those reports filed or furnished pursuant to Section
      13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after
      filing such material electronically or otherwise furnishing it to the SEC.


13


**Item
      2.**  **Properties**





The
      following table sets forth a description of our facilities:


Square
                  FeetLocation
              
              (Approx)
              
              Lease
                  Expiration
              
              FunctionTampa,
                  Florida
              
              1,725
              
              February
                  2007
              
              Headquarters
                  for NanobacTampa,
                  Florida
              
              4053
              
              June
                  2007
              
              Former
                  Headquarters for Nanobacoperations
                  - space is currentlyvacantTampa,
                  Florida
              
              2,121
              
              June
                  2010
              
              Office
                  space subleased to anunaffiliated
                  entityKoupio,
                  Finland
              
              1,500
              
              3
                  months notice
              
              Research
                  and laboratory facility




All
      facilities are in good condition. We expect that our current facilities will
      be
      sufficient for the foreseeable future. To the extent that we require additional
      space in the near future, we believe that we will be able to secure additional
      leased facilities at commercially reasonable rates.





**Item
      3.** **Legal
      Proceedings**





Except
      as
      described below, we know of no material, active or pending legal proceedings
      against us, nor are we involved as a plaintiff in any material proceedings
      or
      pending litigation. There are no proceedings in which any of our directors,
      officers or affiliates, or any registered or beneficial stockholders are an
      adverse party or has a material interest adverse to us.





On
      August
      10, 2004, we were served with a civil action as filed in the Superior Court
      of
      Fulton County State of Georgia by Foltz Martin LLC and Openbook Learning Club,
      Inc. (“Foltz”). This suit alleges that the Company is liable for approximately
      $67,000 of liabilities plus approximately $11,000 interest for services
      performed by the plaintiffs for HealthCentrics, Inc. in 2003 and 2004. The
      Company owned 100% of HealthCentrics from December 2003 through March 2004
      when
      HealthCentrics was sold by the Company to an affiliate. We do not believe that
      the Company is liable for the obligations of HealthCentrics.





On
      January 19, 2006, we were served with a civil action as filed in the Superior
      Court of Fulton County State of Georgia by EliteCorp Atlanta, LLC (“EliteCorp”).
      This suit alleges that the Company is liable for approximately $318,000 of
      liabilities plus approximately $110,000 interest for services performed by
      the
      plaintiffs for HealthCentrics, Inc. in 2003 and 2004. We responded to this
      action on February 17, 2006 and denied virtually all the allegations of
      EliteCorp. We do not believe that the Company is liable for the obligations
      of
      HealthCentrics.





**Item
      4.** **Submission
      of Matters to a Vote of Security Holders**





No
      matters were submitted to a vote of the Company’s stockholders during the fourth
      quarter of the year ended December 31, 2005.


14


**PART
      II**





**Item
      5.** **Market
      for Registrant’s Common Stock and Related Stockholder
      Matters**





Our
      common stock is traded under the symbol “NNBP”.





From
      October 12, 1994 through August 18, 1997, the Company's Common Shares were
      traded in the NASDAQ SmallCap Market under the symbol "NATD". Beginning August
      18, 1997 the Company's Common Shares were traded on the Over The Counter
      Bulletin Board. Effective March 27, 2000, the trade symbol was changed to
      "AMER". Effective July 21, 2003, the trade symbol was changed to "NNBP". From
      March 2001 through November 2004, our Common Shares have traded through the
      Over
      The Counter Pink Sheets. From November 2004 to present, our Common Shares have
      been traded on the Over The Counter Bulletin Board (“OTCBB”). The following
      table sets forth the high and low bid prices for Common Shares as reported
      by
      NASDAQ, OTC Pink Sheets, and OTCBB for the periods indicated. Quotations on
      NASDAQ, OTC Pink Sheets and OTCBB reflect inter-dealer prices, without retail
      mark-up, mark-down or commission and may not represent actual transactions.





**High**
            
            **Low****2004**First
                Quarter
            
            $
            0.90
            
            $
            0.41Second
                Quarter
            
            $
            0.71
            
            $
            0.22Third
                Quarter
            
            $
            0.30
            
            $
            0.16Fourth
                Quarter
            
            $
            0.30
            
            $
            0.14**2005**First
                Quarter
            
            $
            0.16
            
            $
            0.11Second
                Quarter
            
            $
            0.13
            
            $
            0.07Third
                Quarter
            
            $
            0.10
            
            $
            0.07Fourth
                Quarter
            
            $
            0.08
            
            $
            0.04





On
      March
      30, 2006, the closing bid quote for the Common Shares was $0.05 per share,
      and
      there were approximately 250 holders of record of Common Shares. Our common
      shares are issued in registered form. Continental Stock Transfer & Trust
      Company, 17 Battery Place, New York, NY 10004 is the transfer agent for our
      common shares.





We
      have
      not paid cash dividends on our Common Shares and we do not anticipate doing
      so
      in the foreseeable future. The Company intends to retain earnings, if any,
      for
      future growth and expansion opportunities. Payment of cash dividends in the
      future, as to which there can be no assurance, will be dependent upon the
      Company's earnings, financial condition, capital requirements and other factors
      determined by the Board of Directors. ****


15


**Changes
      in Securities**




From
      August 2004 through February 2005, we executed Subscription Agreements with
      three unaffiliated investors and one affiliated investor. These investors paid
      us 50% of the subscription price at execution and the remaining 50% is due
      within five days from the date that a registration statement is declared
      effective for the common shares that are being issued. In exchange for the
      cash
      consideration, we are to issue these investors shares of our common stock equal
      to the amount paid divided by the lesser of (a) $0.12 or (b) fifty-two percent
      of the average closing bid price for our common stock for the five days
      immediately prior to the date on which a registration statement is declared
      effective (“The Fixed Price”). In addition, each of these investors will receive
      an equivalent number of warrants with expiration dates of five years from the
      date of issuance. One half of these warrants will be priced at 110% of the
      Fixed
      Price and the remainder will be priced at 150% of the Fixed Price. The minimum
      number of shares and warrants that will be issued under these Subscription
      Agreements (assuming a Fixed Price of $0.12 per share) is as
      follows:




Numberof
                Shares
            
            Per
                Share
            
            ProceedsCommon
                Stock:Unaffiliated
                Investors
            
            
            16,250,000
            
            $
            0.12
            
            $
            1,950,000Affiliates
            
            
            8,333,333
            
            $
            0.12
            
            $
            1,000,00024,583,333
            
            
            
            
            $
            2,950,000Number
            
            Exerciseof
                Warrants
            
            PriceWarrants:Unaffiliated
                Investors
            
            
            8,125,000
            
            $
            0.13Unaffiliated
                Investors
            
            
            8,125,000
            
            $
            0.18Affiliates
            
            
            4,166,667
            
            $
            0.13Affiliates
            
            
            4,166,666
            
            $
            0.1824,583,333





As
      of
      December 31, 2005, proceeds of $1,475,000 have been received and 12,297,667
      unregistered shares had been issued under the above Subscription Agreements.
      The
      actual number of shares and warrants that ultimately will be issued under these
      Subscription Agreements may be substantially higher due to the variability
      of
      the Fixed Price. Based on our recent traded price of $0.04 to $0.09 per share,
      three to six times as many shares and warrants would be issued as described
      above. Further, if the Fixed Price is less than $0.09 per share, we do not
      have
      sufficient authorized shares to issue the common stock and warrants required
      under the above subscription agreements. Our stockholders need to approve any
      increase in our authorized shares.





Each
      of
      these investors received their shares in reliance upon Section 4(2) of the
      Securities Act of 1933, because each of the holders was knowledgeable,
      sophisticated and had access to comprehensive information about us. At all
      relevant times we were a reporting company under the Securities Exchange Act
      of
      1934 and there was readily available adequate current public information with
      respect to the Company.





A
      success
      fee was awarded to a broker for one of the above unaffiliated investor
      transactions in the form of 5-year warrants equal to 20% of the value of the
      transaction. These warrants have exercise prices equal to $0.16 to $0.22 per
      share for transactions completed to date. Future warrants issued under this
      agreement will have an exercise price equal to NNBP’s stock price on the date of
      closing. We estimate that 2 million warrants will be issued to this broker.





16





**Purchases
      of Equity Securities by the Small Business Issuer and Affiliated
      Purchases**





None





**Selected
      Quarterly Financial Data**





Mar
                31
            
            Jun
                30
            
            Sep
                30
            
            Dec
                31**2005
                Quarter ended**Revenue
            
            $
            151,865
            
            $
            167,988
            
            $
            130,394
            
            $
            206,555Gross
                profit
            
            $
            108,027
            
            $
            109,527
            
            $
            83,309
            
            $
            126,493Net
                loss
            
            
            ($1,505,921
            )
            
            ($984,153
            )
            
            ($645,547
            )
            
            ($551,716
            )Loss
                per share:Basic
                and Diluted
            
            
            ($0.01
            )
            
            ($0.01
            )
            $
            0.00
            
            $
            0.00**2004
                Quarter ended**Revenue
            
            $
            32,385
            
            $
            73,564
            
            $
            118,141
            
            $
            134,271Gross
                profit
            
            $
            25,196
            
            $
            42,072
            
            $
            76,037
            
            $
            114,586Loss
                from continuingoperations
            
            
            ($4,221,972
            )
            
            ($1,384,238
            )
            
            ($994,276
            )
            
            ($1,860,654
            )Net
                loss
            
            
            ($4,279,240
            )
            
            ($1,384,238
            )
            
            ($994,276
            )
            
            ($1,860,654
            )Loss
                per share:Basic
                and Diluted
            
            
            ($0.03
            )
            
            ($0.01
            )
            
            ($0.01
            )
            
            ($0.01
            )





17


**Item
      6.** **Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations**





During
      calendar 2005, and for the foreseeable future, our primary focus is on the
      research of the role Nanobacteria plays in human diseases involving pathologic
      calcification deposits for the purpose of drug discovery and the development
      of
      diagnostic tests. There have been several studies linking Nanobacteria to
      serious health problems, including cardiovascular diseases, peripheral vascular
      diseases, atherosclerosis, ostatitis, kidney stones, and Polycystic Kidney
      Disease including the following recent publications:





·
            Urological
                disease: "The role of nanobacteria in urologic disease." Drs. Wood
                and
                Shoskes, of The Cleveland Clinic, summarize in World Journal of Urology
                (Volume 24, Number 11, Pages 51-54, 2006), the history of nanobacteria's
                association in many urologic diseases. Nanobacteria have been implicated
                in the development of polycystic kidney disease, renal calculi (kidney
                stones), and chronic prostatitis. This review article investigates
                the
                current state of nanobacteria research and explores their impact
                in
                urologic diseases.





·
            Kidney
                Stones: "Lithogenesis: induction of renal calcifications by nanobacteria"
                by Shiekh, et. al. in Urological Research (Volume 34, Number 1, Pages
                53-57, 2006). As part of their experiments, rats were injected with
                nanobacteria. After 8 weeks the kidneys were found to have chronic
                inflammation and nanobacterial calcified kidney stones. These results
                confirm previous findings by Cuerpo, et al. that nanobacteria cause
                kidney
                stones. Inflammation is often seen at sites of abnormal calcification
                and
                in these experiments nanobacteria are found to be the link between
                inflammation and calcification.





·
            Atherosclerotic
                plaques: Dr. Puskas et. al., reported in Acta Biologica Hungarica
                (Volume
                56, Number 3-4, Pages 233-245, 2005), that nanobacterial antigens
                were
                identified in 9 of 14 plaque specimens, but none of the normal carotid
                or
                aortic tissue. This independent research corroborates similar findings
                published by Mayo Clinic in the American Journal of Physiology which
                showed that nanobacteria can be visualized in and cultured from human
                calcified arteries and heart
                valves.





These
      studies provide additional evidence of a relationship between Nanobacteria
      and
      these diseases in which pathological calcification is present. Our focus is
      in
      determining how Nanobacteria works and what countermeasures can be developed
      to
      better treat these diseases.





We
      also
      continue with our collaborative efforts with scientists at NASA researching
      the
      effects of Nanobacteria in the formation of kidney stones under conditions
      simulating space flight.





While
      there remains significant work ahead, we are encouraged by the progress being
      made in the study of Nanobacteria and the increasing level of acceptance in
      the
      medical community that there may be a relationship between the nano-particles
      we
      call Nanobacteria and the progression of certain diseases involving pathologic
      calcification. Our continuing research and development efforts, along with
      our
      efforts in obtaining recognition by various regulatory agencies (e.g. the FDA
      and similar agencies throughout the world), will require significant additional
      amounts of financing over the next several years.





18


**Intellectual
      Property -** We
      are
      attempting to protect the intellectual property rights to our discoveries
      including our treatment therapies and our diagnostic methods by obtaining
      patents. We currently have one issued patent and multiple patent applications
      for treatment therapies including the combination of EDTA and tetracycline
      to
      treat nanobacteria infections and the formula mix and treatment regimen for
      Nanobac Supplements. We also have one issued patent and multiple patent
      applications related to our diagnostic products. We are attempting to further
      protect our intellectual property rights by obtaining additional patents in
      unique areas of research with respect to the role of Nanobacteria in pathologic
      calcification. These efforts are ongoing and will require significant additional
      infusions of financing to complete. It is also anticipated that additional
      patents will be sought in the future as our research and development efforts
      yield new discoveries.





**Observation
      Rights -** During
      August 2005, we executed an observation rights agreement with Mission Pharmacal
      Company, a global pharmaceutical company and leading kidney stone disease
      reference laboratory, to observe a multi-center collaboration involving
      researchers from Nanobac, the University of California, San Francisco (UCSF),
      and NASA's Johnson Space Center, to study kidney stone formation. As announced
      previously, the multi-disciplinary team will apply the same type of
      instrumentation used to analyze moon rocks and particles collected from space
      to
      analyze mineralized particles and stones collected from kidney stone patients.
      The team will attempt to find early events in stone formation and to verify
      whether Calcifying Nano-Particles, also known as Nanobacteria, are the
      initiators of kidney stone formation. Terms of the agreement were not
      disclosed.





**Current
      Developments -** During
      March 2006, we decided to terminate the marketing and selling of dietary
      supplements in order for the Company to focus exclusively on the science related
      to Nanobacteria, which we plan to lead to drug discovery and the development
      of
      diagnostic products for the detection and treatment of Nanobacteria related
      diseases.





19


**Results
      of Operation**




The
      following table presents the percentage of period-over-period dollar change
      for
      the line selected items in our Consolidated Statements of Operations for the
      years ended December 31, 2005 and 2004.  These comparisons of financial
      results are not necessarily indicative of future results.





**Year
                ended Dec 31**2005
            
            2004
            
            %
                ChangeRevenue
            
            $
            656,802
            
            $
            358,361
            
            
            83
            %Cost
                of revenue
            
            
            229,446
            
            
            100,470
            
            
            128
            %Gross
                Profit
            
            
            427,356
            
            
            257,891
            
            
            66
            %Gross
                Profit percentage
            
            
            65
            %
            
            72
            %Selling,
                general and administrative
            
            
            1,311,501
            
            
            4,888,399
            
            
            -73
            %Research
                and development
            
            
            1,193,611
            
            
            2,252,805
            
            
            -47
            %Depreciation
                and amortization
            
            
            759,935
            
            
            717,070
            
            
            6
            %Operating
                loss
            
            
            (2,837,691
            )
            
            (7,600,383
            )
            
            -63
            %Other
                income (Expense)
            
            
            (849,646
            )
            
            (860,757
            )
            
            -1
            %Loss
                from continuing operations
            
            
            (3,687,337
            )
            
            (8,461,140
            )
            
            -56
            %Discontinued
                Operations
            
            
            -
            
            
            (57,268
            )
            
            -100
            %Net
                loss
            
            
            ($3,687,337
            )
            
            ($8,518,408
            )
            
            -57
            %





20


**2005
      Compared to 2004**





**Revenue**





Revenue
      for the years ended December 31, 2005 and 2004 is summarized as
      follows:





**Year
                ended Dec 31**2005
            
            2004Nanobac
                Supplement
            
            $
            498,413
            
            $
            230,321License
                revenue
            
            
            -
            
            
            46,800Observation
                Rights
            
            
            10,000
            
            
            -Diagnostic
                Products
            
            
            148,389
            
            
            81,240$
            656,802
            
            $
            358,361





During
      February 2004, we initiated the license of a new product to a third party.
      Effective June 2004, the above license agreement was cancelled and we initiated
      sales of this product directly to customers under the name of Nanobac
      Supplement. Accordingly, 2005 revenue for Nanobac Supplement represents 12
      month
      of sales compared to seven months of sales for 2004.





During
      March 2006, we discontinued the sale of our dietary supplements. Accordingly,
      we
      expect no significant revenue from this product after March 2006.





Diagnostic
      product revenue increased 83% from 2004 to 2005 primarily due to the
      introduction of new diagnostic products in our Finland subsidiary.





Revenue
      from observation rights is being recognized over the agreement’s 12-month term
      using the straight-line method.





**Cost
      of revenue**





Cost
      of
      revenue consists of direct materials, testing services (for diagnostic products)
      and shipping. As a percentage of revenue, cost of revenue was 35% for the year
      ended December 31, 2005 compared to 28% for the year ended December 31, 2004.
      The lower cost of revenue in 2004 was due primarily to the 2004 license revenue
      having no direct costs. During June 2004, this licensing agreement was
      terminated and we initiated sales of Nanobac Supplements directly to customers,
      which has resulted in higher revenue and cost of revenue.





**Gross
      Profit**





Gross
      profit as a percentage of revenue was 65%, for the year ended December 31,
      2005
      compared to 72% for the year ended December 31, 2003. The decrease in gross
      profit percentage is primarily attributable to the 2004 license revenue having
      no costs.





21


**2005
      Compared to 2004 (continued)**





**Selling,
      General and Administrative**





For
      2005,
      68% of the Other SG&A expenses are comprised of payroll and professional
      fees. Expenses to operate as a public company (primarily professional fees
      and
      investor relations costs) comprise an additional 7% of the remaining SG&A
      expense. Other significant SG&A expenses include facility rental and
      insurance.





Selling,
      general and administrative (“SG&A”) expenses for the years ended December
      31, 2005 and 2004 are summarized as follows:





**Year
                ended Dec 31**2005
            
            2004Charges
                for stock issuance for services
            
            $
            10,500
            
            $
            2,562,750Other
                SG&A
            
            
            1,301,001
            
            
            2,203,091Total
                SG&A
            
            $
            1,311,501
            
            $
            4,765,841





Charges
      for stock issuances in 2004 relate to 4.5 million common shares issued to an
      entity that is an affiliate of our CEO for services. We recognized an expense
      of
      $2.6 million in 2004 in connection with this 4.5 million stock issuance for
      services which is the approximate fair value of the stock on the issuance date.
      There was $10,500 in common shares issued in 2005 for services.





Other
      SG&A expenses decreased approximately $900,000 for the year ended December
      31, 2005 compared to the year ended December 31, 2004 as we made a significant
      effort to reduce expenses due to limited sources of funding. In particular,
      payroll expenses were reduced by approximately $110,000, professional fees
      (including public company expenses) were reduced by approximately $468,000
      and
      travel expenses were reduced approximately $238,000 for year ended December
      31,
      2005 compared to the same period in 2004.





22


**2005
      Compared to 2004 (continued)**





**Research
      and Development**





For
      the
      year ended December 31, 2005 and 2004 research and development (“R&D)
      expenses consisted of the following types of expenses:




Year
                ended December 31,2005
            
            2004U.S.
                Payroll and medical directors
            
            
            56
            %
            
            45
            %Finland
                payroll and laboratory
            
            
            36
            %
            
            14
            %Research
                studies
            
            
            4
            %
            
            23
            %Contractual
                bonuses
            
            
            0
            %
            
            16
            %Other
            
            
            4
            %
            
            4
            %100
            %
            
            100
            %





For
      the
      year ended December 31, 2005, approximately 92% of research and development
      (“R&D“) expenses are for payroll and the operation of our Finland
      laboratory. Expenses for research studies fluctuate from year to year as these
      expenses are dependent on specific initiatives and funding sources. Contractual
      signing bonuses of $350,000 were included in 2004 expenses in connection with
      the employment agreements with our lead scientists.





R&D
      expenses for the year ended December 31, 2005 decreased $1.1 million or 50%
      compared to the year ended December 31, 2004. This decrease is summarized as
      follows:


Reduction
                  in usage of outside medical directors
              
              $
              285,000Non-recurrence
                  of contractual bonuses
              
              
              350,000Reduction
                  in outside research studies
              
              
              458,000$
              1,093,000
  For
      2006
      we anticipate increasing R&D expenses as our CEO and largest stockholder
      have verbally committed to funding a number of scientific initiatives.





**Depreciation
      and amortization**





Approximately
      93% of depreciation and amortization are related to the amortization of
      intangible assets acquired in the 2003 and 2004 acquisitions of NanobacLabs
      Pharmaceuticals, Inc. and Nanobac OY.





23


**2005
      Compared to 2004 (continued)**





**Operating
      loss**





Our
      operating loss for the year ended December 31, 2005 was $2.8 million compared
      to
      $7.6 million for the year ended December 31, 2004. This decrease reflects $2.6
      million decrease associated with the 2004 charge for common stock, a decrease
      in
      Other SG&A of $900,000 and a decrease in R&D expenses of $1.1 million.





We
      are
      experiencing significant losses as we conduct research and development related
      to nanobacteria and launch our products and services. We believe it will take
      significant time before we will earn meaningful revenue to offset our expenses
      and there is no assurance that we will be able to accomplish this goal. As
      a
      result of the losses, we are dependent on affiliates of our CEO and other
      investors to provide sufficient cash sources to fund our operations.





**Other
      income (Expense)**





Other
      income for the years ended December 31, 2005 and 2004 is summarized as
      follows:





Year
                ended December 31,2005
            
            2004Interest
                expenseStockholder
                loan
            
            
            ($67,372
            )
            
            ($236,792
            )Other
            
            
            (3,513
            )
            
            (11,261
            )Loss
                on stock settlement obligation
            
            
            (717,908
            )
            
            (643,630
            )Foreign
                exchange gain (loss)
            
            
            (38,239
            )
            
            12,163Sublease
                of excess office space
            
            
            (10,276
            )
            
            (4,429
            )Other,
                net
            
            
            (12,338
            )
            
            23,192($849,646
            )
            
            ($860,757
            )





Interest
      expense decreased due to the lower average outstanding balance of related party
      loans in 2005 compared to 2004. The lower average balance was the result of
      the
      related parties converting $7.5 million of their loans to equity on September
      30, 2004.





The
      shares issued in connection with the 2005 and 2004 Subscription Agreement
      transactions are derivative transactions and as such have been presented in
      the
      accompanying consolidated balance sheets as a liability. Changes in the
      liability are recorded as charges to the statement of operations as a loss
      on
      the stock settlement obligation.





Foreign
      currency gain results from exchange rate changes between the U.S. dollar and
      the
      Euro on intercompany advances between our U.S. subsidiary and our Finland
      subsidiary.





24


**2005
      Compared to 2004 (continued)**





**Discontinued
      Operations**





During
      March 2004, we sold our HealthCentrics’ business unit to an affiliate of our CEO
      for consideration of $250,000 plus assumption of net liabilities of
      approximately $499,000. Our gain on disposal of approximately $749,000 is
      accounted for as a capital contribution given the related party nature of the
      arrangement. As a result of our decision to dispose of the HealthCentrics
      business unit, the operations of HealthCentrics were retroactively removed
      from
      continuing operations and disclosed as a single line item on the statements
      of
      operations.





**Liquidity
      and Capital Resources**





As
      of
      December 31, 2005, we had total assets of $9.0 million of which only $173,000
      were current assets. At December 31, 2005, we had total current liabilities
      of
      $3.7 million and a working capital deficit of $3.5 million.





Since
      the
      United States Bankruptcy Court confirmed a plan of reorganization that allowed
      the Company to emerge from Chapter 11 during calendar 2002, the Company has
      financed its activities primarily through loans made by entities affiliated
      with
      our current Chief Executive Officer (referred to herein as “the Affiliated
      Entities”). These loans were made as funding was needed and were extremely
      advantageous to the Company in that the amounts were funded as the Company
      needed financial infusions and allowed the Company to avoid the costs and
      distractions of attempting to raise these amounts from unrelated parties. It
      is
      unrealistic to believe that unrelated parties would have offered terms as
      generous as those obtained from the Affiliated Entities, and it is also unlikely
      that any financing could have been obtained under any terms without the
      financing of the Affiliated Entities.





As
      discussed in Item 5, since August of 2004, the Company has received $1.4 million
      (net of $125,000 of expenses) from three unaffiliated investors and one
      affiliate for shares of the Company’s stock and an equal amount of warrants to
      acquire additional shares of the Company’s stock. The exact number of shares to
      be issued is dependent upon the average closing bid price of the Company’s stock
      on the five trading days immediately prior to the date on which a registration
      statement for these shares is declared effective. The purchase price of the
      shares is equal to the lesser of (1) $.12 or (2) 52% of the average closing
      price described above. An additional $1.5 million is to be received from these
      investors within five days of registering the common shares and warrants. A
      registration statement has not yet been declared effective for these shares.
      Successful registration of the shares contemplated under the agreements
      discussed above will provide significant amounts of needed capital into the
      Company. However, there are no assurances that the SEC will declare a
      registration statement effective.


25


**Liquidity
      and Capital Resources (continued)**





Net
      cash
      used in operations was $2.4 million for the year ended December 31, 2005. The
      negative cash flow from operations reflects the $3.7 million net loss for the
      year offset by the non-cash charge for derivative loss of approximately $718,000
      and depreciation and amortization of $760,000. In addition, net payments on
      current liabilities were $215,000 in 2005.





Net
      cash
      used by investing activities for the year ended December 31, 2005 was $41,000
      for the purchase of fixed assets.





Net
      cash
      provided by financing activities for the year ended December 31, 2005 was $2.3
      million, which is attributable to related party loans of $2.2 million and
      collection of common stock subscriptions of $200,000 less expenses of $35,000.
      Because of certain terms in the subscription agreements and insufficient
      available authorized common shares, the proceeds from common stock subscriptions
      are presented as stock settlement liability in the accompanying 2005 balance
      sheet.





As
      noted
      above, cash from related party loans and capital contributions financed our
      net
      loss and reduction of current liabilities. We are dependent on raising
      additional funding necessary to implement our business plan. Should we not
      be
      successful in raising cash from our CEO and other investors, we are unlikely
      to
      continue as a going concern.





**Recent
      Accounting Pronouncements**




In
      May
      2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections"
      ("SFAS 154"). SFAS 154 replaces APB No. 20, "Accounting Changes" and SFAS No.3,
      "Reporting Accounting Changes in Interim Financial Statements" and establishes
      retrospective application as the required method for reporting a change in
      accounting principle. SFAS 154 provides guidance for determining whether
      retrospective application of a change in accounting principle is impracticable
      and for reporting a change when retrospective application is impracticable.
      The
      reporting of a correction of an error by restating previously issued financial
      statements is also addressed. SFAS 154 is effective for accounting changes
      and
      corrections of errors made in fiscal years beginning after December 15, 2005.
      We
      do not anticipate that the adoption of SFAS 154 will have a material impact
      on
      its consolidated financial statements.





26


**Recent
      Accounting Pronouncements (continued)**





In
      February 2006, the FASB issued Statement of Financial Accounting Standard (SFAS)
      No. 155 (SFAS No. 155), ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS--AN
      AMENDMENT OF FASB STATEMENTS NO. 133 AND 140, to simplify and make more
      consistent the accounting for certain financial instruments. Specifically,
      SFAS
      No. 155 amends SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
      ACTIVITIES, to permit fair value re-measurement for any hybrid financial
      instrument with an embedded derivative that otherwise would require bifurcation,
      provided that the whole instrument is accounted for on a fair value basis.
      Prior
      to fair value measurement, however, interests in securitized financial assets
      must be evaluated to identify interests containing embedded derivatives
      requiring bifurcation. The amendments to SFAS No. 133 also clarify that
      interest-only and principal-only strips are not subject to the requirements
      of
      the SFAS, and that concentrations of credit risk in the form of subordination
      are not embedded derivatives. Finally, SFAS No. 155 amends SFAS No. 140,
      ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, to allow a
      qualifying special-purpose entity (SPE) to hold a derivative financial
      instrument that pertains to a beneficial interest other than another derivative
      financial instrument. SFAS No. 155 applies to all financial instruments acquired
      or issued after the beginning of an entity's first fiscal year that begins
      after
      September 15, 2006, with earlier application allowed. We do not anticipate
      that
      the adoption of this statement to have a material impact on its consolidated
      financial statements.





**Critical
      accounting policies**





***Use
      of estimates -*** The
      preparation of 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 and disclosures of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.





**Contractual
      obligations**




At
      December 31, 2005, the Company’s contractual cash obligations, with initial or
      remaining


terms
      in
      excess of one year, were as follows:




Amount
                of CommitmentExpired
                by year ending December 31,Other
            
            OperatingLiabilities
            
            Leases
            
            TotalLess
                than 1 year
            
            
            350,000
            
            
            179,301
            
            $
            529,3011
                -
                2 years
            
            
            -
            
            
            169,698
            
            
            169,6983
                -
                4 years
            
            
            -
            
            
            89,247
            
            
            89,2475
                -
                7 years
            
            
            -
            
            
            -
            
            
            0Total
            
            $
            350,000
            
            $
            438,246
            
            $
            788,246


27


**Quantitative
      and Qualitative Risk - Foreign Currency**





While
      most of our operations are conducted in the United States, we also operate
      a
      laboratory in Kuopio Finland. We face two risks related to foreign currency
      exchange: translation risk and transaction risk. Amounts invested in our Finland
      operations are translated into US Dollars at the exchange rates in effect at
      the
      balance sheet date. Since the functional currency of our Finland subsidiary
      is
      the local currency, foreign currency translation of the balance sheet is
      reflected as a component of stockholders’ equity and does not impact operating
      results.





Our
      Finland subsidiary collects revenue and pays expenses in Euros, mitigating
      transaction risk. Revenues and expenses in Euros translate into varying amounts
      of US Dollars depending upon whether the US Dollar weakens or strengthens
      against the Euro. Therefore, changes in exchange rates may negatively affect
      the
      Company’s consolidated revenues and expenses (as expressed in US Dollars) from
      foreign operations.





Currency
      transaction gains or losses are incurred on our US Subsidiary’s intercompany
      advance to our Finland Subsidiary. We recognize a gain on the intercompany
      advance as the US Dollar weakens against the Euro and we recognize a loss when
      the US Dollar strengthens against the Euro. Our net currency loss for 2005
      was
      $38,000.





The
      Company has not entered into a material amount of foreign currency forward
      exchange contracts or other derivative financial instruments to hedge the
      effects of adverse fluctuations in foreign currency exchange rates. ****


28


**Forward
      Looking Statements**





Our
      disclosure and analysis in this 2004 Form 10-KSB/A contains some forward-looking
      statements, within the meaning of the Private Securities Litigation Reform
      Act
      of 1995 (“the Act”), that set forth anticipated results based on our plans and
      assumptions. From time to time, we also provide forward-looking statements
      in
      other materials we release to the public as well as oral forward-looking
      statements. Such statements give our current expectations or forecasts of future
      events; they do not relate strictly to historical and current facts. We have
      tried wherever possible to identify such statements by using words such as
      “anticipate”, “estimate”, “expect”, “project”, “intend”, “plan”, “believe”,
“will” and similar expressions in connection with any discussion of future
      operating or financial performance.





In
      light
      of the important factors that can materially affect results, including those
      set
      forth above and elsewhere in this report, the inclusion of forward-looking
      information herein should not be regarded as a representation by us or any
      other
      person that our objectives or plans will be achieved. We may encounter
      competitive, technological, financial and business challenges making it more
      difficult than expected to continue to market our products and services;
      competitive conditions within our industry may change adversely; we may be
      unable to retain existing key management personnel; our forecasts may not
      accurately anticipate market demand; and there may be other material adverse
      changes in our operations or business. Certain important factors affecting
      the
      forward looking statements made herein include, but are not limited to (i)
      accurately forecasting capital expenditures; (ii) obtaining new sources of
      external financing; (iii) serving as the nexus for nanobacteria research and
      (iv) conducting successful clinical trials supporting our theories that the
      human body does not recognize nanobacteria as harmful, and accordingly,
      nanobacteria could be the cause of pathological disease causing calcification
      found in multiple diseases. Assumptions relating to budgeting, marketing,
      product development and other management decisions are subjective in many
      respects and thus susceptible to interpretations and periodic revisions based
      on
      actual experience and business developments, the impact of which may cause
      the
      Company to alter its capital expenditure or other budgets, which may in turn
      affect the Company's financial position and results of operations.





**Risk
      Factors**





**Trends,
      Risks and Uncertainties**





We
      have
      sought to identify what we believe to be the most significant risks to our
      business. However, we cannot predict whether, or to what extent, any of such
      risks may be realized nor can we guarantee that we have identified all possible
      risks that might arise. You should not consider the risks and assumptions
      identified in this report to be a complete discussion of all potential risks
      and
      uncertainties affecting the Company. Investors should carefully consider all
      risk factors before making an investment decision with respect to our Common
      Stock.





**Cautionary
      Factors that may affect Future Results**





We
      provide the following cautionary discussion of risks, uncertainties and possible
      inaccurate assumptions relevant to our business and our products. These are
      factors that we think could cause our actual results to differ materially from
      expected results. Other factors besides those listed here could adversely affect
      us.


29


**Risk
      Factors (continued)**





**We
      require additional financing in order to continue in business as a going
      concern, the availability of which is uncertain. We may be forced by business
      and economic conditions to accept financing terms which will require us to
      issue
      our securities at a discount, which could result in further dilution to our
      existing stockholders.**




As
      discussed under the heading, "Management's Discussion and Analysis - Liquidity
      and Capital Resources," we require additional financing to fund our operations.
      There can be no assurance that additional financing will be available to us
      when
      needed or, if available, that it can be obtained on commercially reasonable
      terms. In addition, any additional equity financing may involve substantial
      dilution to our stockholders. If we fail to raise sufficient financing to meet
      our immediate cash needs, we will be forced to scale down or perhaps even cease
      the operation of our business, which may result in the loss of some or all
      of
      your investment in our common stock.




In
      addition, in seeking debt or equity private placement financing, we may be
      forced by business and economic conditions to accept terms which will require
      us
      to issue our securities at a discount from the prevailing market price or face
      amount, which could result in further dilution to our existing
      stockholders.





**Liquidity
      and Working Capital Risks; Need for Additional Capital to Finance** **Growth
      and Capital Requirements**





Throughout
      2005 and 2004, affiliates of our Chief Executive Officer have provided our
      capital needs through loans and capital contributions. While these affiliates
      continue to provide for the majority of our cash requirements, they are under
      no
      obligation to continue such financing and/or strategic guidance. In the event
      these affiliates should discontinue their support, we may have difficulty in
      continuing our operations. In such an event, stockholders could lose their
      investment in its entirety. Historically, these affiliates have provided capital
      to us on a demand debt basis after which they may convert debt into shares
      of
      our common stock. If, in the future we require additional capital, these
      affiliates may contribute some or all of our requirements. We anticipate that
      as
      a part of any such loan, these affiliates would have rights to convert into
      additional shares of our common stock. In such an event and to the degree of
      which we require these affiliates’ support, stockholders may experience
      dilution. At present, we do not maintain key man insurance for our CEO.





In
      addition to the financial support we may receive from affiliates of our CEO,
      we
      may continue to seek to raise capital from public or private equity or debt
      sources to provide working capital to meet our general and administrative costs
      until net revenues make the business self-sustaining. We cannot guarantee that
      we will be able to raise any such capital on terms acceptable to us or at all.
      Such financing may be upon terms that are dilutive or potentially dilutive
      to
      our stockholders. If alternative sources of financing are required, but are
      insufficient or unavailable, we will be required to modify our growth and
      operating plans in accordance with the extent of available funding.





30


**Risk
      Factors (continued)**





**We
      have a history of operating losses and fluctuating operating results, which
      raise substantial doubt about our ability to continue as a going
      concern.**




Since
      inception through December 31, 2005, we have incurred aggregate losses of $17.8
      million. Our net loss for the year ended December 31, 2005 and 2004 was $4.1
      million and $8.5 million, respectively. There is no assurance that we will
      operate profitably or will generate positive cash flow in the future. In
      addition, we anticipate incurring losses from operations over the next two
      years
      as we focus on research and development for eventual drug discovery and the
      development of diagnostic products. Consequently, we expect to incur operating
      losses and negative cash flow until our products gain market acceptance
      sufficient to generate a commercially viable and sustainable level of sales,
      and/or additional products are developed and commercially released and sales
      of
      such products made so that we are operating in a profitable manner.





**Potential
      Incorrect Conclusions on the Detection and Eradication of
      Nanobacteria**





Most
      of
      our future revenue is based on our ability to detect and eradicate Nanobacteria.
      If it is ultimately proved that our diagnostic methodologies and treatment
      regimens as covered by our patents are ineffective or based upon incorrect
      scientific conclusions, our existing patents and product lines may lose most
      or
      all of their value. Further, if we are unsuccessful in leveraging our diagnostic
      and therapeutic products to detect and treat nanobacterial diseases, we may
      not
      generate sufficient revenue to offset our expenses.





**Acceptance
      of Products in the Marketplace is Uncertain** .





Our
      future financial performance will depend, at least in part, upon the
      introduction and customer acceptance of our proposed treatments and products.
      Our treatments and products may not achieve market acceptance, and such adverse
      marketing results could materially harm the Company.





31


**Risk
      Factors (continued)**





**Limited
      Operating History Anticipated Losses; Uncertainty of Future
      Results**





We
      have a
      limited operating history upon which an evaluation of our Company and our
      prospects can be based. Our prospects must be evaluated with a view to the
      risks
      encountered by companies in early stages of development, particularly in light
      of the uncertainties relating to the new and evolving biolife science research
      which we intend to develop and market, and the acceptance of our business model.
      We will be incurring costs to: (i) perform research studies to prove the
      effectiveness of our pharmaceutical products, (ii) further develop and market
      our products; (iii) establish distribution relationships; and (iv) build an
      organization. To the extent that such expenses are not subsequently followed
      by
      commensurate revenues, our business, results of operations and financial
      condition will be materially adversely affected. We, therefore, cannot insure
      that we will be able to immediately generate sufficient revenues. We expect
      negative cash flow from operations to continue for at least the next 12 months
      as we continue to develop and market our business. If cash generated by
      operations is insufficient to satisfy our liquidity, we may be required to
      sell
      additional equity or debt securities. The sale of additional equity or
      convertible debt securities would result in additional dilution to our
      stockholders. Our initial operations may not be profitable, since time will
      be
      required to build our business to the point that our revenues will be sufficient
      to cover our total operating costs and expenses. Our reaching a sufficient
      level
      of sales revenues will depend upon a large number of factors, including
      availability of sufficient working capital, the number of customers we are
      able
      to attract and the costs of continuing development of our product
      line.





**Federal
      Food and Drug Administration**





Some
      or
      all of our products may be governed by rules and regulations established by
      the
      United States Food and Drug Administration (“FDA”). Changes
      in FDA regulations and the enforcement thereof may affect our biolife science
      business. Furthermore, we may not be successful in filing and obtaining approval
      of our 510K or PMA filings with the FDA for our Nano-Capture Antigen and
      Nano-Sero IgG ELISA assays.





**Data
      Obtained Through Clinical Trials** .





Data
      obtained from pre-clinical studies and clinical trials do not necessarily
      predict results that will be obtained from later pre-clinical studies and
      clinical trials. Moreover, pre-clinical and clinical data is susceptible to
      varying interpretations, which could delay, limit or prevent regulatory
      approval. A number of companies in the pharmaceutical industry have suffered
      significant setbacks in advanced clinical trials, even after experiencing
      promising results in earlier trials. The failure to adequately demonstrate
      the
      safety and/or effectiveness of an intended product under development could
      delay
      or prevent regulatory clearance of the potential drug or treatment, resulting
      in
      delays to commercialization, and could materially harm the
      business.


32


**Risk
      Factors (continued)**





**Competitors
      in the Pharmaceutical Industry May Develop Competing
      Technologies**





Drug
      companies and/or other health care companies may seek to develop and market
      technologies which may compete with our Company’s technology. While we believe
      that our technology regarding the prescription treatment of nanobacterial
      infections caused by nanobacterium sanguineum is unique, other competitors
      may
      develop similar or different treatments which may become more accepted by the
      marketplace.





**Risk
      of Third Party Lawsuits** .





We
      are
      exposed to potential product liability risks that are inherent in the testing,
      manufacturing and marketing of pharmaceutical products. We cannot assure
      potential investors that such claims will not be asserted against the Company.
      A
      successful liability claim or series of claims brought against us could have
      a
      material adverse effect on our financial condition. In addition, we may be
      sued
      by third parties who claim that our products and treatments infringe upon the
      intellectual property rights of others or that we have misappropriated trade
      secrets of others. This risk is exacerbated by the fact that the validity and
      breadth of claims covered in medical technology patents and the breadth and
      scope of trade secret protection involve complex legal and factual questions
      for
      which important legal principles are unresolved. Any litigation or claims
      against us, whether or not valid, could result in substantial costs, could
      place
      a significant strain on our financial resources, and could harm our
      reputation.





**Government
      Regulation**





Healthcare
      in general and the pharmaceuticals industry in particular are highly regulated
      markets, subject to both federal and a multitude of state regulations and
      guidelines. The majority of our business is still in clinical research
      applications and is governed by the medical community. There can be no assurance
      that changes to state or federal laws will not materially restrict our ability
      to sell our products or develop new product lines.





**Intellectual
      Property Rights**





We
      have a
      family of patents encompassing the detection and eradication of nanobacteria.
      There are risks inherent in any intellectual property rights in that they may
      be
      challenged as being invalid or not original. Additionally, other parties may
      abuse such intellectual rights, causing the Company to defend its rights.


33


**Risk
      Factors (continued)**





**Dependency
      upon Key Technical and Scientific Personnel Who May Terminate Employment at
      Any
      Time** . ****





Our
      success will depend to a significant degree upon the continued services of
      key
      technical and scientific personnel, including but not limited to E. Olavi
      Kajander, MD, PhD. In addition, our success may depend on our ability to attract
      and retain other highly skilled personnel. Competition for qualified personnel
      is intense, and the process of hiring and integrating such qualified personnel
      is often lengthy. We may be unable to recruit personnel on a timely basis,
      if at
      all. All of the Company’s management and other employees may voluntarily
      terminate their employment with us at any time. The loss of the services of
      key
      personnel, or the inability to attract and retain additional qualified
      personnel, could result in delays to development, loss of sales, and/or
      diversion of management resources that could have a material adverse affect
      on
      the Company.





**Competition**





The
      markets in which we compete include successful and well-capitalized competitors
      that vary in size and scope. Principal competitors include Pfizer, Merck and
      other pharmaceutical companies having unique treatments for cardiovascular
      disease. All of these competitors are more established, benefit from greater
      name recognition and have substantially greater resources than us. Moreover,
      we
      could face additional competition as other established and emerging companies
      enter the market and new products and technologies are introduced. Increased
      competition could result in price reductions, fewer customer subscriptions,
      reduced gross margins and loss of market share, any of which could materially
      adversely affect our business, financial condition and operating results. In
      addition, current and potential competitors may make strategic acquisitions
      or
      establish cooperative relationships among themselves or with third-parties,
      thereby increasing the ability of their products to address the needs of our
      prospective consumers. While we believe we can differentiate our product from
      these current and future competitors, focusing on the products' functionality,
      flexibility, adaptability and features, there can be no assurance that we will
      be able to compete successfully against current and future competitors. The
      failure to effectively compete would have a material adverse effect upon our
      business, financial condition and operating results.





**Lack
      of Independent Directors**





We
      cannot
      guarantee our Board of Directors will have a majority of independent directors
      in the future. In the absence of a majority of independent directors, our
      executive officers, who are also principal stockholders and directors, could
      establish policies and enter into transactions without independent review and
      approval thereof. This could present the potential for a conflict of interest
      between the Company’s stockholders and the controlling officers and/or
      directors.


34


**Risk
      Factors (continued)**





**Limitation
      of Liability and Indemnification of Officers and Directors**





Our
      officers and directors are required to exercise good faith and high integrity
      in
      our management affairs. Our Articles of Incorporation and By Laws provide,
      however, that our officers and directors shall have no liability to our
      stockholders for losses sustained or liabilities incurred which arise from
      any
      transaction in their respective managerial capacities unless they violated
      their
      duty of loyalty, did not act in good faith, engaged in intentional misconduct
      or
      knowingly violated the law, approved an improper dividend or stock repurchase,
      or derived an improper benefit from the transaction. Our Articles and By-Laws
      also provide for the indemnification by us of the officers and directors against
      any losses or liabilities they may incur as a result of the manner in which
      they
      operate our business or conduct the internal affairs, provided that in
      connection with these activities they act in good faith and in a manner they
      reasonably believe to be in, or not opposed to, the best interests of the
      Company, and their conduct does not constitute gross negligence, misconduct
      or
      breach of fiduciary obligations.





**Continued
      Control by Current Officers and Directors**





The
      present officers and directors control approximately 50% of the outstanding
      shares of Common Stock, and are in a position to elect all of our Directors
      and
      otherwise control the Company, including, without limitation, authorizing the
      sale of equity or debt securities of the Company, the appointment of officers,
      and the determination of officer's salaries. Stockholders have no cumulative
      voting rights.


35


**Risk
      Factors (continued)**





**Limited
      Market Due To Penny Stock**





The
      Company's stock differs from many stocks, in that it is a "penny stock." The
      Securities and Exchange Commission has adopted a number of rules to regulate
      penny stocks. These rules include, but are not limited to, Rules 3a5l-l, 15g-1,
      15g-2, 15g-3, 15g-4, 15g-5, 15g-6 and 15g-7 under the Securities and Exchange
      Act of 1934, as amended. Because our securities probably constitute penny stock
      within the meaning of the rules, the rules would apply to us and our securities.
      The rules may further affect the ability of owners of our stock to sell their
      securities in any market that may develop for them. There may be a limited
      market for penny stocks, due to the regulatory burdens on broker-dealers. The
      market among dealers may not be active. Investors in penny stock often are
      unable to sell stock back to the dealer that sold them the stock. The mark-ups
      or commissions charged by the broker-dealers may be greater than any profit
      a
      seller may make. Because of large dealer spreads, investors may be unable to
      sell the stock immediately back to the dealer at the same price the dealer
      sold
      the stock to the investor. In some cases, the stock may fall quickly in value.
      Investors may be unable to reap any profit from any sale of the stock, if they
      can sell it at all. Stockholders should be aware that, according to the
      Securities and Exchange Commission Release No. 34- 29093, the market for penny
      stocks has suffered in recent years from patterns of fraud and abuse. These
      patterns include: - Control of the market for the security by one or a few
      broker-dealers that are often related to the promoter or issuer; - Manipulation
      of prices through prearranged matching of purchases and sales and false and
      misleading press releases; - "Boiler room" practices involving high pressure
      sales tactics and unrealistic price projections by inexperienced sales persons;
      - Excessive and undisclosed bid-ask differentials and markups by selling
      broker-dealers; and - The wholesale dumping of the same securities by promoters
      and broker- dealers after prices have been manipulated to a desired level,
      along
      with the inevitable collapse of those prices with consequent investor losses.
      Furthermore, the penny stock designation may adversely affect the development
      of
      any public market for the Company's shares of common stock or, if such a market
      develops, its continuation. Broker-dealers are required to personally determine
      whether an investment in penny stock is suitable for customers. Penny stocks
      are
      securities (i) with a price of less than five dollars per share; (ii) that
      are
      not traded on a "recognized" national exchange; (iii) whose prices are not
      quoted on the NASDAQ automated quotation system (NASDAQ-listed stocks must
      still
      meet requirement (i) above); or (iv) of an issuer with net tangible assets
      less
      than $2,000,000 (if the issuer has been in continuous operation for at least
      three years) or $5,000,000 (if in continuous operation for less than three
      years), or with average annual revenues of less than $6,000,000 for the last
      three years. Section 15(g) of the Exchange Act, and Rule 15g-2 of the Commission
      require broker-dealers dealing in penny stocks to provide potential investors
      with a document disclosing the risks of penny stocks and to obtain a manually
      signed and dated written receipt of the document before effecting any
      transaction in a penny stock for the investor's account. Potential investors
      in
      the Company's common stock are urged to obtain and read such disclosure
      carefully before purchasing any shares that are deemed to be "penny stock."
      Rule
      15g-9 of the Commission requires broker-dealers in penny stocks to approve
      the
      account of any investor for transactions in such stocks before selling any
      penny
      stock to that investor. This procedure requires the broker-dealer to (i) obtain
      from the investor information concerning his or her financial situation,
      investment experience and investment objectives; (ii) reasonably determine,
      based on that information, that transactions in penny stocks are suitable for
      the investor and that the investor has sufficient knowledge and experience
      as to
      be reasonably capable of evaluating the risks of penny stock transactions;
      (iii)
      provide the investor with a written statement setting forth the basis on which
      the broker-dealer made the determination in (ii) above; and (iv) receive a
      signed and dated copy of such statement from the investor, confirming that
      it
      accurately reflects the investor's financial situation, investment experience
      and investment objectives. Compliance with these requirements may make it more
      difficult for the Company's stockholders to resell their shares to third parties
      or to otherwise dispose of them.





36





**I** **tem
      7.**  **Financial
      Statements**




The
      information required by this item is incorporated herein by reference to the
      financial statements listed in Item 13 (a) of Part III of this Form 10-KSB
      Annual Report.





**Item
      8.**  **Changes
      in and Disagreements with Independent Auditors on Accounting and Financial
      Disclosures**




There
      have been no disagreements with any of our accountants on any matter of
      accounting principles or practices, financial statement disclosure, or auditing
      scope or procedure.





37





**Item
      8(a).**  **Controls
      and Procedures**




***Disclosure
      controls and procedures***





Under
      the
      supervision and with the participation of our management, including our
      principal executive officer and principal financial officer, we have evaluated
      the effectiveness of the design and operation of our disclosure controls and
      procedures within 90 days of the filing date of this report, and, based on
      their
      evaluation, our principal executive officer and principal financial officer
      have
      concluded that these controls and procedures are effective.





Disclosure
      controls and procedures are our controls and other procedures that are designed
      to ensure that information required to be disclosed by us in the reports we
      file
      or submit under the Exchange Act is recorded, processed, summarized and
      reported, within the time periods specified in the Securities and Exchange
      Commission's rules and forms. Disclosure controls and procedures include,
      without limitation, controls and procedures designed to ensure that information
      required to be disclosed by us in the reports that we file under the Exchange
      Act is accumulated and communicated to our management, including our principal
      executive officer and principal financial officer, as appropriate to allow
      timely decisions regarding required disclosure.





***Section
      404 of the Sarbanes-Oxley Act of 2002***




Section
      404 of the Sarbanes-Oxley Act of 2002 requires our report on Form 10-KSB for
      2006 to include a report of management on internal control over financial
      reporting. Internal control over financial reporting, as defined under these
      rules, is a process designed to provide reasonable assurance regarding the
      reliability of financial reporting and the preparation of financial statements
      for external purposes in accordance with generally accepted accounting
      principles.




In
      our
      report, we will be required, among other things, to assess the effectiveness
      of
      our internal control over financial reporting. The report must also disclose
      any
      material weaknesses in internal control over financial reporting identified
      by
      management, and if there are any material weaknesses, we must conclude that
      our
      internal control over financial reporting was not effective. A material
      weakness, under the applicable rules, is a control deficiency, or combination
      of
      control deficiencies, that results in more than a remote likelihood that a
      material misstatement of the annual or interim financial statements will not
      be
      prevented or detected.




In
      conducting our ongoing assessment of its internal control over financial
      reporting to prepare for compliance with the requirements under Section 404
      of the Sarbanes-Oxley Act, we have identified a lack of segregation of duties
      to
      be a potential material weakness in internal controls. Lack of segregation
      of
      duties is inherent to our company due to the small number of employees. Our
      assessment is still in process to determine if this situation is actually a
      material weakness or if there are any other material weaknesses.





***Changes
      in internal controls***





There
      were no significant changes in our internal controls or in other factors that
      could significantly affect these controls subsequent to the date of their
      evaluation.


38


**PART
      III**





**Item
      9.**  **Directors
      and Executive Officers of the registrant**




**Name**
            **Position
                Held with the Company**
            **Age**
            **Date
                First**
              **Elected
                or Appointed**John
                Stanton
            Chief
                Executive and Financial Officer, and Chairman
            57
            November
                2000Alex
                Edwards
            Director
            41
            March
                2003 and January 2004Dr.
                Benedict Maniscalco
            Director
            64
            March
                2006Dr.
                Stephen Rechtschaffen
            Director
            56
            January
                2004




**Business
      Experience**




The
      following is a brief account of the education and business experience during
      at
      least the past five years of each director and executive officer, indicating
      the
      principal occupation during that period, and the name and principal business
      of
      the organization in which such occupation and employment were carried
      out.




**John
      Stanton - Chairman Chief Executive Officer and Chief Financial
      Officer** - **** Mr.
      Stanton has served as our Chief Executive Officer (“CEO”) July 23, 2004 to
      present and from March 2001 through January 2004. From March, 2001 through
      the
      present, Mr. Stanton has served as our Chairman of the Board of Directors and
      Chief Financial Officer. From 1987 through the present, Mr. Stanton served
      as
      the President and CEO of Florida Engineered Construction Products, Corporation.
      Mr. Stanton has served as Chairman of the Board of Directors of publicly-traded
      EarthFirst Technologies, Inc. from May 15, 2000 through the present. Mr. Stanton
      also serves on the Board of Directors of publicly traded Medical Technology
      Systems, Inc., Powercerv Corporation, Cybercare, Inc. and Online Sales
      Strategies, Incorporated. Since the early 1990's, Mr. Stanton has been, and
      continues to be, involved in turn-around management for financially distressed
      companies, providing both management guidance and financing. In 1981, Mr.
      Stanton assumed the role of Chief Financial Officer for Florida Engineered
      Construction Products, Corporation, a privately held manufacturer of residential
      and commercial construction products, located in Tampa, Florida. Mr. Stanton
      worked as an auditor with the international professional services firm that
      is
      now known as Ernst & Young, LLP from 1973 through 1981. Mr. Stanton, a
      Vietnam veteran of the United States Army, graduated from the University of
      South Florida with a Bachelors Degree in Marketing and Accounting in 1972,
      and
      with an MBA in 1973. Mr. Stanton earned the designation of Certified Public
      Accountant in 1974 and was a Sells Award winner in the CPA
      examination.





39





**Dr.
      Benedict S. Maniscalco, M.D. - Director of Clinical Research, Medical Director
      and member of the Board of Directors -** Dr.
      Maniscalco joined the Board of Directors on March 29, 2006. 2001 to present
      Dr.
      Maniscalco has been in the private practice of cardiology. He was with Tampa
      Heart Center in Tampa Florida in 2000 to 2001. Dr. Maniscalco was in private
      practice for consultive cardiology with Health Centers of Excellence, Inc.
      as
      Chief Executive Officer in Tampa Florida from March 1998 thorough January 2000.
      From 1976 through 1998, he was an officer and board member of a large multi
      specialty cardiovascular group practice. From 1979 through 1996 he was
      co-founder of St. Joseph’s Heart Institute in Tampa, Florida and served as
      Director of Cardiac Catheterization and Director of Cardiology during his
      tenure.





Over
      past
      30 years, Dr. Maniscalco has been a member of numerous local, state and national
      professional societies. He has served as President and Governor of the Florida
      Chapter of the American College of Cardiology and has been involved in numerous
      committees dealing with socioeconomic and medical policies in both the American
      College of Cardiology and the Society for Cardiac Angiography and Interventions.
      He has been a frequent lecturer at the local, state and national level, on
      both
      clinical and non-clinical matters affecting the delivery of cardiovascular
      services. Dr. Maniscalco received his medical degree from the Duke University
      School of Medicine in 1967. He interned at Grady Memorial Hospital in Atlanta
      and did his junior and senior residencies at Emory University Affiliated
      Hospitals, followed by a fellowship in Cardiovascular diseases from 1973-1975.
      He is licensed to practice in both Florida and Georgia and is certified by
      the
      American Board of Internal Medicine and the American Sub-Specialty Board in
      Cardiovascular disease.





**Alex
      Edwards - Director** -
      Mr.
      Edwards has served on our Board of Directors from January 2004 through the
      present. Mr. Edwards had previously served on our Board from March 2003 through
      May 2003. From January 2004 through July 2004, Mr. Edwards served as our CEO.
      From March 2003 through January 2004, Mr. Edwards served as our Executive Vice
      President and Chief Operating Officer. From May 2002 through December 2004,
      Mr.
      Edwards was a managing partner of 360 Partners as well as president and CEO
      of
      360 Energy, Inc. From January 1997 to May 2002, Edwards was an executive with
      SRI/Surgical Express. He served in roles that ranged from vice-president/general
      manager to spending his last year with the company as president. From February
      1993 through December 1996, he worked in sales and marketing with Dianon
      Systems, Inc. His positions included sales and sales management roles as well
      as
      field and corporate marketing. Mr. Edwards also served as an officer in the
      United States Navy with duty assignments ranging from shipboard divisional
      leadership to executive assistant for the Naval Surface Group Commander in
      Norfolk, Virginia. Mr. Edwards is a 1987 graduate of the United States Naval
      Academy.





In
      August
      2003 Mr. Edwards settled a civil enforcement action brought against him by
      the
      Securities and Exchange Commission in U.S. District Court in Tampa, Florida.
      The
      complaint alleged that Mr. Edwards, while serving as president of SRI/Surgical
      Express, Inc. (SRI), a publicly traded Florida hospital supply company, caused
      SRI to enter into two transactions that resulted in SRI overstating its Fiscal
      2001 third quarter revenue. Without admitting or denying the allegations in
      the
      complaint, Mr. Edwards consented to the entry of a Final Judgment permanently
      enjoining him from future violations of (or aiding and abetting violations
      of)
      Sections 10(b), 13(b)(5), and 13(b)(2)(A) and (B) of the Securities Exchange
      Act
      of 1934 and Exchange Act Rule 13b2-1. The Final Judgment also imposed a $50,000
      civil penalty.





40


**Dr.
      Stephan Rechtschaffen** - **Director
      -** Dr.
      Rechtschaffen joined the Board of Directors on February 2, 2004. He co-founded
      Omega Institute in 1977 and is the present CEO and Chairman of the Board. He
      was
      the developer and director of Foxhollow Wellness Spa in Lenox, MA from September
      1987 through June 1989, and director of the Rhinebeck Health Center in
      Rhinebeck, NY, from November 1983 through March1989. Dr. Rechtschaffen is the
      author of: *TimeShifting;
      Creating More Time to Enjoy Your Life* ,
      1996,
      published in the United States by Doubleday, and in England, Europe, Japan
      and
      Australia by Random House. He is co-author of *Vitality
      and Wellness* ,
      1999,
      published by Dell. Dr. Rechtschaffen received his medical degree in 1973 from
      New York Medical College in New York City. His residency was at Harkness
      Community Hospital in San Francisco.





**Family
      Relationships**





There
      are
      no family relationships between any of our company's directors or executive
      officers.





**Section
      16(a) Beneficial Ownership Reporting Compliance**





Section
      16 of the Exchange Act requires Nanobac's directors and officers and persons
      who
      own more than 10% of a registered class of Nanobac's equity securities, to
      file
      initial reports of ownership and reports of changes in ownership with the SEC.
      Such persons are required by SEC regulations to furnish Nanobac with copies
      of
      all Section 16(a) forms they file.





Specific
      due dates for such reports have been established by the Commission and the
      Company is required to disclose any failure to file reports by such
      dates.  The Company notes that John Stanton, Alexander Edwards and Gary
      Mezo have not filed any reports of ownership or changes in ownership pursuant
      to
      Section 16(a) filing requirements.




**Audit
      Committee**





We
      have
      not established a separate audit committee. Accordingly, the Board of Directors
      serves as the audit committee. The Chairman of the Board of Directors is also
      our CEO and is not considered an independent director. An audit committee
      financial expert has not been identified on the Board of Directors.





**Code
      of Ethics**





We
      have
      not adopted a Code of Ethics as of March 30, 2006. The Board of Directors is
      in
      the process of drafting a Code of Ethics specific to our Company.





41





**Item
      10.**  **Executive
      Compensation**




Particulars
      of compensation awarded to, earned by or paid to:




(a)
            our
                company's chief executive officer (the
                "CEO");


(b)
            each
                of our company's four most highly compensated executive officers
                who were
                serving as executive officers at the end of the most recently completed
                fiscal year and whose total salary and bonus exceeds $100,000 per
                year;
                and


(c)
            any
                additional individuals for whom disclosure would have been provided
                under


(d)
            but
                for the fact that the individual was not serving as an executive
                officer
                of ourcompany
                at the end of the most recently completed fiscal
                year





the
      Named
      Executive Officers are set out in the summary compensation table below.




**Annual
                Compensation**
            
            **Other
                Annual**
            
            **All
                Other****Name
                and Principal Position**
            
            **Year**
            
            **Salary**
            
            **Bonus**
            
            **Compensation**
            
            **Compensation
                (1)**John
                D. Stanton (2) (3)
            
            
            2005
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0Chairman
                of the Board and
            
            
            2004
            
            $
            0
            
            $
            0
            
            $
            0
            
            $
            0Chief
                Financial Officer
            
            
            2003
            
            $
            0
            
            $
            0
            
            $
            745,000
            
            $
            0Alex
                Edwards (4) (5)
            
            
            2005
            
            $
            6,123
            
            $
            0
            
            $
            0
            
            $
            0Chief
                Executive Officer
            
            
            2004
            
            $
            228,536
            
            $
            0
            
            $
            5,000
            
            $
            02003
            
            $
            76,920
            
            $
            0
            
            $
            0
            
            $
            0





(1)
            In
                accordance with SEC rules, other compensation in the form of perquisites
                and other personal benefits is omitted, such perquisites and other
                personal benefits constituted less than the lesser of $50,000 or
                10% of
                the total annual salary and bonus for the Named Executive Officer
                for such
                year.





(2)
            Mr.
                Stanton has served as the Chairman of the Board of Directors and
                Chief
                Financial Officer since March 2001 and served as Chief Executive
                Officer
                from March 2001 through January 2004 and July 2004 through present.





(3)
            Other
                Annual Compensation for 2003 is the value of 59,433,890 shares of
                the
                Company’s common stock or common stock equivalents issued to affiliates of
                Mr. Stanton





(4)
            Mr.
                Edwards commenced employment with Nanobac in March 2003 and was named
                Chief Executive Officer in January 2004. He relinquished the Chief
                Executive Officer role in July 2004.





**(5)**
            Other
                Annual Compensation is the value of 500,000 shares of the Company’s common
                stock issued to Mr. Edwards





42





**Employment
      and Compensation Agreement**





***John
      Stanton*** - Mr.
      Stanton does not have an employment or similar agreement with Nanobac. To date,
      Mr. Stanton has received no salary or other compensation except for the receipt
      of common and preferred shares in accordance with the Company’s bankruptcy plan.




***Alexander
      Edwards*** *-*





On
      July
      23, 2004, Mr. Edwards resigned as Chief Executive Officer. Mr. Edwards continues
      to serve as a member of the Board of Directors. As a result of his resignation
      as Chief Executive Officer, Mr. Edwards voluntarily terminated his employment
      agreement and his salary was adjusted to $23,660 for the performance of limited
      services to Nanobac from July 2004 through April 1, 2005 and from January 2006
      through present.




**Directors'
      Compensation**





Nanobac's
      directors, who are not also employees of Nanobac, receive no monetary
      compensation. Each director is entitled to receive reimbursement of
      out-of-pocket expenses for attending Board of Director or committee meetings.
      Each independent Director is to receive options to acquire 1,500,000 shares
      of
      Nanobac’s common stock. The issuance of these options is contingent upon the
      approval of a stock option plan by Nanobac’s stockholders. If a stock option
      plan is not approved, the Directors may receive 1,500,000 restricted shares
      of
      Nanobac.





**Compensation
      Committee Interlocks and Insider Participation**





The
      Company has not formed a Compensation Committee, accordingly, the Board of
      Directors acts in the Compensation Committee’s capacity. The Board of Directors
      is responsible for reviewing and recommending salaries, bonuses and other
      compensation for Nanobac's executive officers.





Mr.
      Edwards is currently on the Board of Directors and was an employee of the
      Company from September 2003 through March 2004 and January 2006 through the
      present.





**Stock
      Options**





We
      currently do not have a stock option plan.





43


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




**Principal
      Stockholders**The
      following table sets forth, as of March 30, 2006, certain information with
      respect to the beneficial ownership of our common stock by each stockholder
      known by us to be the beneficial owner of more than 5% of our common stock
      and
      by each of our current directors and executive officers. Each person has sole
      voting and investment power with respect to the shares of common stock, except
      as otherwise indicated. Beneficial ownership consists of a direct interest
      in
      the shares of common stock, except as otherwise indicated.




**Name
                and Address of Beneficial Owner**
            **Amount
                  and Nature of**
              **Beneficial
                Ownership**
            **Percentage**
              **of
                Class****(1)**Gary
                S. Mezo (3)
              11407
                  Minaret Drive
              Tampa,
                  FL 33626
            24,560,000
            12.69%John
                D. Stanton (4)
            74,442,658
            38.47%Alexander
                Edwards III
            9,166,667
            4.74%Benedict
                Maniscalco
            1,566,925
            0.81%Stephan
                Rechtschaffen
            0
            0.00%**Directors
                and Executive Officers as a Group (Four persons)**
            **85,176,250**
            **44.02%**




(1)
            Beneficial
                ownership is determined in accordance with the rules of the Securities
                and
                Exchange Commission and generally includes voting or investment power
                with
                respect to securities. For purposes of calculating the percentage
                beneficially owned, the number of shares deemed outstanding includes
                193,506,759 shares outstanding as March 30, 2006. Unless otherwise
                provided, the street address of each beneficial owner is c/o Nanobac
                Pharmaceuticals, Incorporated, 4730 N. Habana Avenue, Suite 205,
                Tampa,
                Florida 33614.





(2)
            Nanobac
                has relied upon information reported by the respective stockholder
                to the
                SEC pursuant to Section 13(d) or 13(g) of the Securities Exchange
                Act of
                1934, as amended, as of March 16,
                2006.





(3)
            Includes
                9,760,000 shares held by Mr. Mezo’s spouse, Nancy Schriewer, and 160,000
                shares held by Nancy Schriewer’s father as to which he disclaims
                beneficial ownership.





(4)
            Includes
                74,442,658 shares held by the corporate entities of Escape Velocity
                of
                Tampa Bay, Inc., White Knight SST, Inc., Stone Enclosure, Inc., Wade
                Inc.
                of Tampa Bay and Denouement Strategies, Inc. in which Mr. Stanton
                owns a
                controlling ownership.





44




**Changes
      in Control**




We
      are
      unaware of any contract or other arrangement the operation of which may at
      a
      subsequent date result in a change of control of Nanobac.





**Item
      12.**  **Certain
      Relationships and Related Transactions**




**Loans
      from Entity Affiliate with the Company’s Chief Executive
      Officer**





Since
      emerging from bankruptcy in November 2002, Nanobac has financed its activities
      primarily from advances from affiliates of the Company’s CEO (“CEO Affiliates”).
      From time to time the CEO Affiliates have converted these loans into shares
      of
      Nanobac’s common stock.


Through
      March 30, 2006, $3.7 million is due to CEO Affiliates for cash loans to Nanobac.
      These loans bear interest at the rate of 5% per annum. None of the CEO
      Affiliates’ loans were converted to shares of Nanobac’s common stock from
      January 1, 2005 through March 30, 2006.





**Subscription
      Agreement**





During
      December 2004, the Company entered into a Subscription Agreement with an entity
      affiliated with the Chief Executive Officer. Under the terms of the Subscription
      Agreement, the entity converted a $500,000 loan to equity. The Company is to
      receive additional cash of $500,000 within five days of registering the common
      shares and warrants issued as a result of the Subscription Agreements. The
      number of common shares to be issued is equal to the amount received divided
      by
      the lesser of $.12 or 52% of the average closing bid price of the Company’s
      common stock on the five trading days immediately prior to the date on which
      the
      registration statement is declared effective (“Fixed Price”). In addition, the
      Subscription Agreement provided for the issuance of warrants equal to the number
      of common shares issued. Fifty percent (50%) of the warrants are exercisable
      at
      110% of the Fixed Price and the remaining 50% of the warrants are exercisable
      at
      150% of the Fixed Price. Unexercised warrants will expire December 31, 2008.





As
      of
      March 30, 2006, the registration statement has not been declared effective
      and
      the Fixed Price has not been determined. Accordingly, the additional cash of
      $500,000 for common shares has not been received, no warrants have been issued
      and the number of shares to be issued under this subscription agreement has
      not
      been determined.





45


**Item
      13.** **Exhibits**





(a)
            The
                following documents are filed as part of this
                report:





(1)
            Financial
                Statements





The
      following Financial Statements are included herein:




**Page**
              **Number**·Report
                of Aidman Piser & Company, Independent Auditors
            
            F-1·Consolidated
                Balance Sheet at December 31, 2005
            
            F-2·Consolidated
                Statements of Operations for the years ended December 31, 2005 and
                2004
            
            F-3·Consolidated
                Statements of Stockholders’ Deficit for the years ended December 31, 2005
                and 2004
            
            F-4·Consolidated
                Statements of Cash Flows for the years ended December 31, 2005 and
                2004
            
            F-5·Notes
                to Consolidated Financial Statements
            
            F-6-F-20




(2)
            Financial
                Statement Schedules





Financial
      Statement Schedules have been omitted because they are not applicable or are
      not
      required or the information required to be set forth therein is included in
      the
      consolidated financial statements or notes thereto.





(b)
            Form
                8-K





(1)
            Reports
                on Form 8-K filed during the quarter ended December 31,
                2005:





None





(c)
            Exhibits





The
      following exhibits are filed as a part of, or are incorporated by reference
      into, this Report on Form 10-KSB:





46


**EXHIBIT
      INDEX**


Exhibit


Number
            Description





3.1
            Restated
                Articles of Incorporation (Previously filed with the SEC as an exhibit
                to
                the Registrant’s Annual Report on Form 10-KSB for the year ended December
                31, 2003 and incorporated herein by
                reference)





3.2
            By-Laws
                (Previously filed with the SEC as an exhibit to the Registrant’s Annual
                Report on Form 10-KSB fore the year ended December 31, 2002 and
                incorporated herein by reference)





10.1
            First
                Amended Plan of Reorganization of American Enterprise.com Corp.
                (Previously filed with the SEC as an exhibit to the Registrant’s Current
                Report on Form 8-K dated December 10, 2002, and incorporated herein
                by reference)





10.2
            Acquisition
                Agreement dated December 6, 2002, between American Enterprise Corporation
                and HealthCentrics, Inc. and its stockholders (Previously filed with
                the
                SEC as an exhibit to the Registrant’s Current Report on Form 8-K
                dated December 13, 2002, and incorporated herein by
                reference)





10.4
            Agreement
                and Plan of Reorganization dated June 1, 2003 between Nanobac
                Pharmaceuticals, Incorporated and NanobacLabs Pharmaceuticals, Inc.
                (Previously filed with the SEC as an exhibit to the Registrant’s Annual
                Report on Form 10-KSB for the year ended December 31, 2003 and
                incorporated herein by reference)





10.5
            Share
                Purchase Agreement dated September 25, 2002 between NanobacLabs,
                L.L.C.
                and selected stockholders of Nanobac OY (Previously filed with the
                SEC as
                an exhibit to the Registrant’s Current Report on Form 8-K dated
                November 26, 2003, and incorporated herein by
                reference)





10.6
            Convertible
                Promissory Note Loans Purchase Agreement dated September 25, 2002
                between
                NanobacLabs, L.L.C. and selected stockholders of Nanobac OY (Previously
                filed with the SEC as an exhibit to the Registrant’s Current Report on
                Form 8-K dated November 26, 2003, and incorporated herein by
                reference)





10.7
            Closing
                Agreement dated November 5, 2003 between NanobacLabs, L.L.C. and
                selected
                stockholders of Nanobac OY (Previously filed with the SEC as an exhibit
                to
                the Registrant’s Current Report on Form 8-K dated November 26, 2003,
                and incorporated herein by
                reference)





47


10.9
            Lease
                Agreement dated April 17, 2002 between NanobacLabs, L.L.C. and MLK-Tampa
                Associates, LLC regarding 5,593 square feet of office space located
                at
                2727 W. Martin Luther King Blvd. - Suite 850, Tampa, Florida and
                First
                Amendment to Lease dated September 1, 2002 between NanobacLabs, L.L.C.
                and
                MLK-Tampa Associates, LLC regarding 2,121 square feet of office space
                located at 2727 W. Martin Luther King Blvd. - Suite 101, Tampa, Florida
                (Previously filed with the SEC as an exhibit to the Registrant’s Annual
                Report on Form 10-KSB fore the year ended December 31, 2004 and
                incorporated herein by reference)





10.10
            Loan
                Agreement dated December 31, 2003 between Nanobac Pharmaceuticals,
                Incorporated and Escape Velocity, Inc. (Previously filed with the
                SEC as
                an exhibit to the Registrant’s Annual Report on Form 10-KSB for the year
                ended December 31, 2003)





10.11
            Employment
                by and between Nanobac Pharmaceuticals, Incorporated and Alex H.
                Edwards
                III dated January 26, 2004 (Previously filed with the SEC as an exhibit
                to
                the Registrant’s Annual Report on Form 10-KSB for the year ended December
                31, 2003)





10.12
            Sublease
                Agreement dated May 18, 2004 between NanobacLabs, L.L.C. and Tampa
                Bay
                Surgery Center Associates, Ltd regarding the sublease of 2,121 square
                feet
                of office space located at 2727 W. Martin Luther King Blvd. - Suite
                101,
                Tampa, Florida (Previously filed with the SEC as an exhibit to the
                Registrant’s Annual Report on Form 10-KSB fore the year ended December 31,
                2004 and incorporated herein by
                reference)





10.13
            Share
                Purchase Agreement dated March 30, 2004 between Nanobac Pharmaceuticals,
                Incorporated and Escape Velocity of Tampa Bay, Incorporated for the
                sale
                of HealthCentrics, Inc. (Previously filed with the SEC as an exhibit
                to
                the Registrant’s Current Report on Form 8-K dated March 30, 2004, and
                incorporated herein by reference)





10.14
            Executive
                Employment Agreement between Nanobac Pharmaceuticals, Incorporated,
                and E.
                Olavi Kajander, MD, PhD, an individual dated January 15, 2004 (Previously
                filed with the SEC as an exhibit to the Registrant’s Current Report on
                Form 8-K dated March 31, 2004, and incorporated herein by
                reference)





10.15
            Executive
                Employment Agreement between Nanobac Pharmaceuticals, Incorporated
                and
                Neva Ciftcioglu, PhD, an individual dated March 31, 2004 (Previously
                filed
                with the SEC as an exhibit to the Registrant’s Current Report on
                Form 8-K dated March 31, 2004, and incorporated herein by
                reference)





48


10.16
            Nonreimbursable
                Space Act Agreement between The National Aeronautics and Space
                Administration Lyndon B. Johnson Space Center and Nanobac Pharmaceuticals,
                Incorporated (Previously filed with the SEC as an exhibit to the
                Registrant’s Current Report on Form 8-K dated September 13, 2004 and
                incorporated herein by reference)





10.17
            Debt
                Cancellation Agreement dated August 30, 2004 between Nanobac
                Pharmaceuticals, Incorporated and E. Olavi Kajander (Previously filed
                with
                the SEC as an exhibit to the Registrant’s Annual Report on Form 10-KSB
                fore the year ended December 31, 2004 and incorporated herein by
                reference)





10.18
            Amendment
                to Executive Employment Agreement dated August 30, 2004 between Nanobac
                Pharmaceuticals, Incorporated and E. Olavi Kajander (Previously filed
                with
                the SEC as an exhibit to the Registrant’s Annual Report on Form 10-KSB
                fore the year ended December 31, 2004 and incorporated herein by
                reference)





10.19
            Stock
                Purchase Agreement dated August 30, 2004 between Nanobac Pharmaceuticals,
                Incorporated and E. Olavi Kajander (Previously filed with the SEC
                as an
                exhibit to the Registrant’s Annual Report on Form 10-KSB fore the year
                ended December 31, 2004 and incorporated herein by
                reference)





10.20
            Amendment
                to Executive Employment Agreement dated September 10, 2004 between
                Nanobac
                Pharmaceuticals, Incorporated and Neva Ciftcioglu (Previously filed
                with
                the SEC as an exhibit to the Registrant’s Annual Report on Form 10-KSB
                fore the year ended December 31, 2004 and incorporated herein by
                reference)





10.21
            Subscription
                Agreement, Registration Rights Agreement and Form of Warrant dated
                August
                13, 2004 between Nanobac Pharmaceuticals, Incorporated and The Nutmeg
                Group, LLC (serves as form of agreement for similar subscription
                agreements)





10.22
            Subscription
                Agreement, Registration Rights Agreement and Form of Warrant dated
                September 3, 2004 between Nanobac Pharmaceuticals, Incorporated and
                Jaytern Associates, Inc (Previously filed with the SEC as an exhibit
                to
                the Registrant’s Annual Report on Form 10-KSB fore the year ended December
                31, 2004 and incorporated herein by
                reference)





10.23
            Debt
                Cancellation Agreement dated September 20, 2004 between Nanobac
                Pharmaceutical, Incorporated and Escape Velocity, Inc. (Previously
                filed
                with the SEC as an exhibit to the Registrant’s Annual Report on Form
                10-KSB fore the year ended December 31, 2004 and incorporated herein
                by
                reference)





49


10.24
            Debt
                Cancellation Agreement dated October 18, 2004 between Nanobac
                Pharmaceutical, Incorporated and Benedict Maniscalco (Previously
                filed
                with the SEC as an exhibit to the Registrant’s Annual Report on Form
                10-KSB fore the year ended December 31, 2004 and incorporated herein
                by
                reference)





10.25
            Debt
                Cancellation Agreement dated December 14, 2004 between Nanobac
                Pharmaceutical, Incorporated and MacFarlane Ferguson & McMullen
                (Previously filed with the SEC as an exhibit to the Registrant’s Annual
                Report on Form 10-KSB fore the year ended December 31, 2004 and
                incorporated herein by reference)





10.26
            Second
                amendment to lease agreement between Nanobac Sciences, LLC and CNL
                Retirement MOP Tampa, Florida, LP regarding reduction of 5,593 square
                feet
                of office space located at 2727 W. Martin Luther King Blvd. - Suite
                850,
                Tampa, Florida to 4.053 square feet of office
                space





16.1
            Baumann,
                Raymondo & Company, P.A. letter to the Securities and Exchange
                Commission dated February 3, 2004 (Previously filed with the SEC
                as an
                exhibit to the Registrant’s Current Report on Form 8-K dated January
                30, 2004, and incorporated herein by
                reference)





21.1
            List
                of Subsidiaries





23.1
            Consent
                of Aidman, Piser & Company,
                P.A.





31.1
            Certification
                to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Executive
                Officer





31.2
            Certification
                to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Financial
                Officer





32.1
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002 - Chief Executive
                Officer





32.2
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
                906 of
                the Sarbanes-Oxley Act of 2002 - Chief Financial Officer





50


**Item
      14.**  **Principal
      Accountant Fees and Services**




The
      following summarizes the fees paid to Aidman,
      Piser & Company, P.A., Independent Auditors for the
      years ended December 31, 2005 and 2004:





2005
            
            2004Audit
            
            $
            93,405
            
            $
            63,000Audit
                related
            
            
            -
            
            
            -Tax
            
            
            -
            
            
            -Other
            
            
            -
            
            
            -Total
            
            $
            93,405
            
            $
            63,000





Aidman,
      Piser & Company, P.A. did not perform any professional services with respect
      to information systems design and implementation for the years ended December
      31, 2005 and 2004.





The
      Board
      of Directors has considered whether the Audit-Related services provided by
      Aidman, Piser & Company, P.A. are compatible with maintaining that firm’s
      independence.





From
      and
      after the effective date of the SEC rule requiring Audit Committee pre-approval
      of all audit and permissible non-audit services provided by independent
      registered public accountants, the Board of Directors has approved all audit
      and
      permissible non-audit services provided by Aidman, Piser & Company, P.A.


51


**SIGNATURES**




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, on March 30, 2006.




**Nanobac
                Pharmaceuticals, Incorporated**By:
            /s/ John
              D.
              StantonJohn
                D. StantonChief
                Executive Officer




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of Registrant and in the
      capacities indicated on March 30, 2006.




**Signature**
            
            **Title**/s/    John
                D. Stanton
              
              John
                D. Stanton
            
            Chairman
                of the Board of Directors
              Chief
                Executive Officer and Chief Financial Officer (Principal Executive
                and
                Financial Officer)/s/    Benedict
                S. Maniscalco
              Benedict
                S. Maniscalco, M.D.
            
            Director,
                Director of Clinical Research and Medical Director/s/    Alexander
                Edwards III
              Alexander
                Edwards III
            
            Director/s/    Stephan
                Rechtschaffen
              Stephan
                Rechtschaffen, M.D.
            
            Director/s/    Michael
                J Dean
              Michael
                J Dean
            
            Vice
                President - Finance and Controller (Principal Accounting
                Officer)








52




REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Board
        of
        Directors
 Nanobac
        Pharmaceuticals, Incorporated and Subsidiaries
 Tampa,
        Florida
 
 We
        have
        audited the accompanying consolidated balance sheet of Nanobac Pharmaceuticals,
        Incorporated and Subsidiaries (the “Company”), as of December 31, 2005, and the
        related consolidated statements of operations, stockholders’ equity
        (deficit) and cash flows for the two years then ended. These financial
        statements are the responsibility of the Company’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 Accounting
        Oversight Board (United States of America). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. The Company is not required
        to
        have, nor were we engaged to perform, an audit of its internal control over
        financial reporting. Our audit included consideration of internal control
        over
        financial reporting as a basis for designing audit procedures that are
        appropriate in the circumstances, but not for the purpose of expressing an
        opinion on the effectiveness of the Company’s internal control over financial
        reporting. Accordingly, we express no such opinion. An audit includes examining,
        on a test basis, evidence supporting the amounts and disclosures in the
        financial statements. An audit also includes assessing the accounting principles
        used and significant estimates made by management, as well as evaluating
        the
        overall financial statement presentation. We believe 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 Nanobac
        Pharmaceuticals, Incorporated and Subsidiaries, at December 31, 2005, and
        the
        consolidated results of their operations and their cash flows for the two
        years
        then ended in conformity with accounting principles generally accepted in
        the
        United States of America.
 
 The
        accompanying financial statements have been prepared assuming that the Company
        will continue as a going concern. As discussed in Note 1 to the consolidated
        financial statements, the Company has suffered recurring losses from operations,
        has working capital and net capital deficiencies and is dependent upon continued
        financing from stockholders and outside investors, all of which raise
        substantial doubt about its ability to continue as a going concern. Management’s
        plans in regard to these matters are also described in Note 1. The financial
        statements do not include any adjustments that might result from the outcome
        of
        this uncertainty.
   /s/ Aidman, Piser & Company,
                P.A.
 
 March
        2,
        2006
 Tampa,
        Florida




F-1




**NANOBAC
      PHARMACEUTICALS INCORPORATED AND SUBSIDIARIES**


**CONSOLIDATED
        BALANCE SHEET**


December
                  31, 2005**ASSETS****CURRENT
                  ASSETS**Cash
              
              $
              8,975Account
                  receivable
              
              
              3,283Inventory
              
              
              117,280Prepaid
                  expenses
              
              
              43,725Total
                  current assets
              
              
              173,263**FURNITURE
                  AND EQUIPMENT,**less
                  accumulated depreciationof$131,163
              
              
              106,952**OTHER
                  ASSETS**Security
                  deposits
              
              
              20,695Intangible
                  assets, less accumulated amortizationof$1,539,621
              
              
              5,053,421Goodwill
              
              
              3,615,393**Total
                  other assets**
              
              
              8,689,509**TOTAL
                  ASSETS**
              
              $
              8,969,724**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****CURRENT
                  LIABILITIES**Accounts
                  payable
              
              $
              313,932Accrued
                  compensation
              
              
              462,658Accrued
                  expenses
              
              
              376,874Short-term
                  notes payable
              
              
              50,843Other
                  liabilities
              
              
              29,425Related
                  party loans
              
              
              2,434,733**Total
                  current liabilities**
              
              
              3,668,465**LONG-TERM
                  LIABILITIES**Stock
                  settlement obligation
              
              
              2,836,538**Total
                  liabilities**
              
              
              6,505,003**COMMITMENTS
                  AND CONTINGENCIES (notes 10 and 11)**
              
              
              -**STOCKHOLDERS'
                  EQUITY**Preferred
                  stock, no par value, 1,000,000 shares authorized,no
                  shares issued and outstanding
              
              
              -Common
                  stock, no par value, 250,000,000 shares authorized,189,006,760
                  shares issued and outstanding
              
              
              16,307,050Additional
                  paid-in capital
              
              
              3,503,681Accumulated
                  deficit
              
              
              (17,380,535
              )Accumulated
                  other comprehensive loss
              
              
              34,525**Total
                  stockholders' equity**
              
              
              2,464,721**TOTAL
                  LIABILITIES AND STOCKHOLDERS' EQUITY**
              
              $
              8,969,724




The
        accompanying notes are an integral part
 of
        these
        financial statements




F-2




**NANOBAC
        PHARMACEUTICALS INCORPORATED AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS** ********


Year
              
              Yearended
              
              endedDecember
                  31, 2005
              
              December
                  31, 2004**REVENUE**
              
              $
              656,802
              
              $
              358,361**COST
                  OF REVENUE**
              
              
              229,446
              
              
              100,470**GROSS
                  PROFIT**
              
              
              427,356
              
              
              257,891**OPERATING
                  EXPENSES**Selling,
                  general and administrative
              
              
              1,311,501
              
              
              4,888,399Research
                  and development
              
              
              1,193,611
              
              
              2,252,805Depreciation
                  and amortization
              
              
              759,935
              
              
              717,070**Total
                  Operating Expenses**
              
              
              3,265,047
              
              
              7,858,274**OPERATING
                  LOSS**
              
              
              (2,837,691
              )
              
              (7,600,383
              )**OTHER
                  INCOME (EXPENSES)**Interest
                  expense
              
              
              (70,885
              )
              
              (248,053
              )Loss
                  on stock settlement obligation
              
              
              (717,908
              )
              
              (643,630
              )Other,
                  net
              
              
              (60,853
              )
              
              30,926**LOSS
                  FROM CONTINUING OPERATIONS****BEFORE
                  INCOME TAXES**
              
              
              (3,687,337
              )
              
              (8,461,140
              )**PROVISION
                  FOR INCOME TAXES**
              
              
              -
              
              
              -**LOSS
                  FROM CONTINUING OPERATIONS**
              
              
              (3,687,337
              )
              
              (8,461,140
              )**DISCONTINUED
                  OPERATIONS:**Loss
                  from discontinued operations(no
                  applicable income taxes)
              
              
              -
              
              
              (57,268
              )**NET
                  LOSS**
              
              $
              (3,687,337
              )
              $
              (8,518,408
              )**LOSS
                  PER COMMON SHARE****(BASIC
                  AND DILUTED):**Continuing
                  operations
              
              $
              (0.02
              )
              $
              (0.06
              )Discontinued
                  operations
              
              
              0.00
              
              
              0.00Net
                  loss
              
              $
              (0.02
              )
              $
              (0.06
              )**WEIGHTED
                  AVERAGE NUMBER OF****COMMON
                  SHARES OUTSTANDING**Basic
                  and Diluted
              
              
              188,858,997
              
              
              152,903,084


The
        accompanying notes are an integral part
 of
        these
        financial statements




F-3




**NANOBAC
        PHARMACEUTICALS INCORPORATED AND SUBSIDIARIES**


**CONSOLIDATED
        STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)**
 **FOR
        THE YEARS ENDED DECEMBER 31, 2004 AND 2005**
  **Accumulated****Additional**
              
              **Due
                  from**
              
              
              
              **Other**
              
              **Other****Common**
              
              **Stock**
              
              **Preferred**
              
              **Stock**
              
              **Paid-in**
              
              **Option**
              
              **Accumulated**
              
              **Comprehensive**
              
              **Comprehensive****Shares**
              
              **Value**
              
              **Shares**
              
              **Value**
              
              **Capital**
              
              **Exercise**
              
              **Deficit**
              
              **Loss**
              
              **Loss**
              
              **Total****Balance,
                  January 1, 2004**
              
              
              **99,968,846**
              
              **$**
              **4,233,788**
              
              
              **794,569**
              
              **$**
              **350,484**
              
              **$**
              **-**
              
              **$**
              **(200,000**
              **)**
              **$**
              **(5,174,790**
              **)**
              
              
              
              **$**
              **(15,638**
              **)**
              **$**
              **(806,156**
              **)**Conversion
                    of preferred stockto
                    common stock
              
              
              35,048,439
              
              
              350,484
              
              
              (794,569
              )
              
              (350,484
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Cash
                  from option exercise
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              200,000
              
              
              -
              
              
              -
              
              
              -
              
              
              200,000Stock
                  issued for services
              
              
              4,500,000
              
              
              2,562,750
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              2,562,750Common
                    stock issued inacquisition
                    of Nanobac OY
              
              
              5,000,000
              
              
              4,267,500
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              4,267,500Capital
                      contributionassociated
                      with sale ofsubsidiary
                      to affiliate
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              749,327
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              749,327Conversion
                    of liabilities toshares
                    of common stock
              
              
              32,097,808
              
              
              4,882,028
              
              
              -
              
              
              -
              
              
              2,887,501
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              7,769,529Sale
                    of common stock pursuantto
                    subscription agreement
              
              
              10,625,000
              
              
              -
              
              
              -
              
              
              -
              
              
              (97,500
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (97,500
              )Comprehensive
                  loss:Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (8,518,408
              )
              
              ($8,518,408
              )
              
              -
              
              
              (8,518,408
              )Foreign
                    currency translationadjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (16,198
              )
              
              (16,198
              )
              
              (16,198
              )Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              ($8,534,606
              )**Balance,
                  December 31, 2004**
              
              
              **187,240,093**
              
              
              **16,296,550**
              
              
              **-**
              
              
              **-**
              
              
              **3,539,328**
              
              
              **-**
              
              
              **(13,693,198**
              **)**
              
              
              
              
              **(31,836**
              **)**
              
              **6,110,844**Stock
                  issued for services
              
              
              100,000
              
              
              10,500
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              10,500Sale
                    of common stock pursuantto
                    subscription agreement
              
              
              1,666,667
              
              
              -
              
              
              -
              
              
              -
              
              
              (35,647
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (35,647
              )Comprehensive
                  loss:Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (3,687,337
              )
              
              ($3,687,337
              )
              
              
              
              
              (3,687,337
              )Foreign
                    currency translationadjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              66,361
              
              
              66,361
              
              
              66,361Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              ($3,620,976
              )**Balance,
                  December 31, 2005**
              
              
              **189,006,760**
              
              **$**
              **16,307,050**
              
              
              **-**
              
              **$**
              **-**
              
              **$**
              **3,503,681**
              
              **$**
              **-**
              
              **$**
              **(17,380,535**
              **)**
              
              
              
              **$**
              **34,525**
              
              **$**
              **2,464,721**




The
      accompanying notes are an integral part of these financial
      statements




F-4




**NANOBAC
        PHARMACEUTICALS INCORPORATED AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


Year
              
              Yearended
              
              endedDecember
                  31, 2005
              
              December
                  31, 2004**CASH
                  FLOWS FROM OPERATING ACTIVITIES**Net
                  loss
              
              $
              (3,687,337
              )
              $
              (8,518,408
              )Adjustments
                  to reconcile net loss to cashflows
                  from operating activities:Depreciation
                  and amortization
              
              
              759,935
              
              
              717,070Loss
                  on disposition of fixed assets
              
              
              1,855
              
              
              -Derivative
                  loss
              
              
              717,908
              
              
              643,630Charges
                  for common stock issued for services
              
              
              10,500
              
              
              2,562,750Interest
                  expense accrued for stockholder loan
              
              
              67,372
              
              
              237,958Net
                  (increase) decrease in assets:Accounts
                  receivable
              
              
              112
              
              
              2,370Inventory
              
              
              (46,709
              )
              
              (54,360
              )Other
                  assets
              
              
              26,551
              
              
              (8,769
              )Net
                  increase (decrease) in liabilities:Accounts
                  payable
              
              
              (331,559
              )
              
              530,196Accrued
                  compensation
              
              
              412,047
              
              
              464,768Accrued
                  expenses
              
              
              (308,987
              )
              
              10,628Deferred
                  revenue
              
              
              13,002
              
              
              16,423Total
                  adjustments
              
              
              1,322,027
              
              
              5,122,664**Net
                  cash flows from operating activities**
              
              
              (2,365,310
              )
              
              (3,395,744
              )**CASH
                  FLOWS FROM INVESTING ACTIVITIES**Acquisition
                  of furniture and equipment
              
              
              (40,632
              )
              
              (36,765
              )Security
                  deposits
              
              
              -
              
              
              2,500Acquistion
                  of subsidiary, net of cash received
              
              
              -
              
              
              (901
              )Cash
                  received from exercise of stock option in subsidiary
              
              
              -
              
              
              200,000**Net
                  cash flows from investing activities**
              
              
              (40,632
              )
              
              164,834**CASH
                  FLOWS FROM FINANCING ACTIVITIES**Proceeds
                  from issuance of common stockpursuant
                  to subscription agreements
              
              
              200,000
              
              
              1,275,000Stock
                  issuance costs
              
              
              (35,647
              )
              
              (97,500
              )Proceeds
                  from stockholder loans
              
              
              2,173,293
              
              
              2,066,091Proceeds
                  from notes payable
              
              
              11,842
              
              
              152,429Payment
                  of notes payable
              
              
              (23,378
              )
              
              (180,050
              )**Net
                  cash flows from financing activities**
              
              
              2,326,110
              
              
              3,215,970**Effect
                  of exchange rate changes**
              
              
              70,899
              
              
              (16,907
              )Net
                  change in cash
              
              
              (8,933
              )
              
              (31,847
              )Cash
                  balance, beginning of year
              
              
              17,908
              
              
              49,755**Cash
                  balance, end of year**
              
              $
              8,975
              
              $
              17,908**Supplemental
                  disclosures of cash flow information:**Cash
                  paid for interest
              
              $
              3,513
              
              $
              10,095**Supplemental
                  schedule of non-cash investing and financing
                  activities:**Common
                  stock issued in acquisition
              
              $
              -
              
              $
              4,267,500Common
                  stock issued for the conversion of debt
              
              $
              -
              
              $
              7,769,529Capital
                  contribution associated with sale of subsidiary to
                  affiliate:Reduction
                  in stockholder loan
              
              $
              -
              
              $
              250,000Assumption
                  of accounts payable and accrued expenses
              
              $
              -
              
              $
              499,327
 
 The
        accompanying notes are an integral part of these financial
        statements
  F-5


NANOBAC
        PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
        ENDED DECEMBER 31, 2005 AND 2004


**1** . **Nature
      of operations and summary of significant accounting
      policies**





**Nature
      of business**





Nanobac
      Pharmaceuticals, Incorporated and subsidiaries, ("Nanobac”, the "Company", or
      "NNBP") trades under the symbol "NNBP."





Nanobac’s
      primary business is the study and development of therapeutic and diagnostic
      technologies related to nanobacterium sanguineum (“Nanobacteria”). Nanobacteria
      are believed to be small, slowly growing nano-particles that can be found in
      human blood, kidney stones and arterial wall plaques.





**Principles
      of consolidation**





The
      consolidated financial statements include the accounts of the Company and its
      wholly-owned subsidiaries, Nanobac Sciences LLC, Nanobac OY and Nanobac Research
      Institute LLC. All material intercompany transactions and balances have been
      eliminated in consolidation.





**Liquidity
      and management plans**





The
      accompanying consolidated financial statements have been prepared assuming
      that
      NNBP will continue as a going concern. The Company has incurred recurring losses
      and has a working capital deficiency at December 31, 2005. The Company is
      dependent on the continued financing from outside investors including additional
      stockholder loans. All of these matters raise substantial doubt about the
      ability of the Company to continue as a going concern. Management believes
      that
      NNBP will need to raise additional capital in order to launch new clinical
      trials, fund research and development for new treatment areas, and general
      working capital requirements. Capital may be raised through further sales of
      equity securities, which may result in dilution of the position of current
      stockholders. At this time, there are no firm commitments to invest in NNBP.
      If
      NNBP is unable to obtain such financing, the business might not attain
      profitability.





There
      can
      be no assurances that NNBP will be successful in obtaining debt or equity
      financing in order to achieve its financial objectives and continue as a going
      concern. The financial statements do not include any adjustments to the carrying
      amount of assets and the amounts and classifications of liabilities that might
      result from the outcome of this uncertainty.





**Revenue
      recognition**





Revenue
      is recognized when the Company’s products are shipped and title has passed or
      when diagnostic results are provided to the customer. Revenue from the Company’s
      observation rights’ agreement is being recognized over the agreement’s 12-month
      term using the straight-line method. Revenue is recorded net of allowances
      for
      estimated discounts and incentives.





**Inventory**





Inventory
      is stated at the lower of cost or market. Cost is determined in a manner which
      approximates the first-in, first-out (FIFO) method. Inventory consists of raw
      materials for currently marketed products and materials and processing costs
      for
      antibodies and antigens used in our Finland laboratory. Inventory is shown
      net
      of applicable allowances. Shipping costs are expensed as incurred and are
      included in cost of revenue.


F-6




NANOBAC
        PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
        ENDED DECEMBER 31, 2005 AND 2004


**1.
      Nature of operations and summary of significant accounting policies
      (continued)**





**Furniture
      and equipment**





Furniture
      and equipment consist of furniture, fixtures, computers and lab equipment and
      are recorded at cost. Furniture and equipment are depreciated using the
      straight-line method over the estimated useful lives of three to seven
      years.





**Intangible
      assets and goodwill**





Intangible
      assets are recorded at cost, less accumulated amortization. Intangible assets
      consist of patents, product rights and goodwill obtained in the acquisition
      of NanobacLabs
      Pharmaceuticals, Inc. and Nanobac OY .
      Amortization of intangible assets is provided over the following estimated
      useful lives on a straight-line basis:





Patents
            12
                yearsProduct
                rights
            5
                years





Goodwill
      and intangible asset amortization is not deductible for income tax purposes.





**Impairment
      of long-lived assets and intangible assets**





In
      accordance with Statement of Financial Accounting Standards No. 142, “Goodwill
      and Other Intangible Assets” (“SFAS No. 142”), and Statement of Financial
      Accounting Standards, No. 144, “Accounting for the Impairment or Disposal of
      Long-Lived Assets” (“SFAS No. 144”), the Company reviews its non-amortizable
      long-lived assets, including intangible assets and goodwill for impairment
      annually, or sooner whenever events or changes in circumstances indicate the
      carrying amounts of such assets may not be recoverable. Other depreciable or
      amortizable assets are reviewed when indications of impairment exist. Upon
      such
      an occurrence, recoverability of these assets is determined as follows. For
      long-lived assets that are held for use, the Company compares the forecasted
      undiscounted net cash flows to the carrying amount. If it is determined that
      the
      long-lived asset will be unable to recover its carrying amount, then it is
      written down to fair value. For long-lived assets held for sale, assets are
      written down to fair value. Fair value is determined based on discounted cash
      flows oR appraised values from management’s estimates, depending upon the nature
      or the assets. Impairment within goodwill is tested using a two step method.
      The
      first step is to compare the fair value of the reporting unit to its book value,
      including goodwill. If the fair value of the unit is less than its book value,
      the Company then determines the implied fair value of goodwill by deducting
      the
      fair value of the reporting unit’s net assets from the fair value of the
      reporting unit. If the book value of goodwill is greater than its implied fair
      value, the Company writes down goodwill to its implied fair value. There were
      no
      impairment adjustments recorded in 2005 and 2004.





**Use
      of estimates**





The
      preparation of 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 and disclosures of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those
      estimates.





F-7




NANOBAC
        PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
        ENDED DECEMBER 31, 2005 AND 2004





**1.
      Nature of operations and summary of significant accounting policies
      (continued)**





**Loss
      per share**





Loss
      per
      share represents the loss attributable to common stockholders divided by the
      weighted average number of common shares outstanding during the period. The
      effect of incremental shares from common stock equivalents (warrants - see
      Note
      10) is not included in the calculation of net loss per share as the inclusion
      of
      such common stock equivalents would be anti-dilutive. Accordingly, fully
      dilutive shares outstanding equal basic shares outstanding as of December 31,
      2005 and 2004.





**Accumulated
      other comprehensive loss**





Accumulated
      other comprehensive loss consists of foreign currency translation adjustments
      related to our Finland operations. Accumulated other comprehensive income has
      no
      applicable income tax.





**Financial
      Instruments**





The
      Company accounts, classifies and measures certain financial instruments with
      characteristics of both liabilities and equity in accordance with Financial
      Accounting Standards Board Statement No. 150, “Accounting for certain Financial
      Instruments with Characteristics of both Liabilities and Equity” (“FAS 150”).
      Pursuant to FAS 150, a financial instrument that embodies an unconditional
      obligation, or a financial instrument other than an outstanding share that
      embodies a conditional obligation, that the issuer must or may settle by issuing
      a variable number of its equity shares, if, at inception, the monetary value
      of
      the obligation is based solely or predominantly on a fixed monetary amount
      known
      at inception requires the issuer to classify the financial instrument as a
      liability. Further, the liability is to be measured initially and subsequently
      at the fair value that the financial instrument obligates the issuer to convey
      to the holder at the settlement date. The shares issued in connection with
      the
      2005 and 2004 Subscription Agreement transactions discussed in Note 11 are
      derivative transactions and as such have been presented in the accompanying
      consolidated balance sheets as a liability and in the accompanying statements
      of
      operations as a loss on the stock settlement obligation.





The
      carrying value of NNBP’s financial instruments, including cash, accounts
      receivable, accounts payable, short-term note payable and stockholder loans
      approximate their fair market values.





**Research
      and development expenses**





Research
      and development expenses are comprised of the following types of costs incurred
      in performing R&D activities: salaries and benefits, occupancy costs of our
      Finland laboratory, professional fees, clinical trial and related clinical
      manufacturing costs. Research and development costs are expensed as incurred.





F-8


NANOBAC
        PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
        ENDED DECEMBER 31, 2005 AND 2004





**1.
      Nature of operations and summary of significant accounting policies
      (continued)**





**Income
      taxes**





NNBP
      records its federal and state tax liability in accordance with Financial
      Accounting Standards Board Statement No. 109 “Accounting for Income Taxes”. The
      deferred taxes are recorded for temporary differences between the recognition
      of
      income and expenses for tax and financial reporting purposes, using current
      tax
      rates. Deferred assets and liabilities represent the future tax consequences
      of
      those differences, which will either be taxable or deductible when the assets
      and liabilities are recovered or settled.





**Recent
      accounting pronouncements**





In
      May
      2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections"
      ("SFAS 154"). SFAS 154 replaces APB No. 20, "Accounting Changes" and SFAS No.3,
      "Reporting Accounting Changes in Interim Financial Statements" and establishes
      retrospective application as the required method for reporting a change in
      accounting principle. SFAS 154 provides guidance for determining whether
      retrospective application of a change in accounting principle is impracticable
      and for reporting a change when retrospective application is impracticable.
      The
      reporting of a correction of an error by restating previously issued financial
      statements is also addressed. SFAS 154 is effective for accounting changes
      and
      corrections of errors made in fiscal years beginning after December 15, 2005.
      The Company does not anticipate that the adoption of SFAS 154 will have a
      material impact on its consolidated financial statements.





In
      February 2006, the FASB issued Statement of Financial Accounting Standard (SFAS)
      No. 155 (SFAS No. 155), ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS--AN
      AMENDMENT OF FASB STATEMENTS NO. 133 AND 140, to simplify and make more
      consistent the accounting for certain financial instruments. Specifically,
      SFAS
      No. 155 amends SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
      ACTIVITIES, to permit fair value remeasurement for any hybrid financial
      instrument with an embedded derivative that otherwise would require bifurcation,
      provided that the whole instrument is accounted for on a fair value basis.
      Prior
      to fair value measurement, however, interests in securitized financial assets
      must be evaluated to identify interests containing embedded derivatives
      requiring bifurcation. The amendments to SFAS No. 133 also clarify that
      interest-only and principal-only strips are not subject to the requirements
      of
      the SFAS, and that concentrations of credit risk in the form of subordination
      are not embedded derivatives. Finally, SFAS No. 155 amends SFAS No. 140,
      ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, to allow a
      qualifying special-purpose entity (SPE) to hold a derivative financial
      instrument that pertains to a beneficial interest other than another derivative
      financial instrument. SFAS No. 155 applies to all financial instruments acquired
      or issued after the beginning of an entity's first fiscal year that begins
      after
      September 15, 2006, with earlier application allowed. The Company does not
      anticipate that the adoption of this statement to have a material impact on
      its
      consolidated financial statements.





**Reclassifications**





Certain
      prior year amounts have been reclassified to conform to the current year
      presentation.





F-9


NANOBAC
        PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
        ENDED DECEMBER 31, 2005 AND 2004





**2.
      Acquisition**





**Nanobac
      OY**





During
      January through March 2004, NNBP acquired 35% of Nanobac OY from OY Minority
      Stockholders. The purchase price was (a) 5 million shares of NNBP’s common
      stock, (b) 5 million warrants convertible into NNBP’s common stock at $.005 per
      share and (c) cash consideration of 15,000 Euros. Total consideration to the
      OY
      Minority Stockholders is valued at $4.3 million. After this acquisition, the
      Company owned 100% of Nanobac OY.





The
      total
      consideration to date for OY is $5.1 million, which included cash payments
      (made
      prior to 2004), the fair value of NNBP’s common stock, and direct transaction
      costs. The
      following table summarizes the estimated fair values of the assets acquired
      and
      liabilities assumed as of the acquisition date:




Current
                assets
            
            $
            37,534Furniture
                and equipment
            
            
            29,286Identifiable
                intangible assets
            
            
            5,243,048Other
                assets
            
            
            4,731Current
                liabilities
            
            
            (11,884
            )Advances
                from Nanobac
            
            
            (228,119
            )$
            5,074,596





Acquired
      identifiable intangible assets consist of patents for the detection and
      treatment of Nanobacteria. The
      allocation of the purchase price was based, in part, on third-party valuations
      of the fair values of identifiable intangible assets. Amortization
      of this asset commenced as of the acquisition date.





In
      addition, as part of the above agreement, the OY Minority Stockholders agreed
      to
      employment agreements with NNBP. These agreements included $500,000 of signing
      bonuses of which $150,000 was paid in 2004 and the remaining $350,000 (earned
      upon certain triggering events that occurred in 2004) is payable two years
      from
      the agreement dates (January and March 2006) and is included in current
      liabilities at December 31, 2005. As of March 30, 2006, the above obligations
      have not been paid and ongoing discussions are being conducted with the Minority
      Stockholders regarding these obligations.





F-10


NANOBAC
        PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
        ENDED DECEMBER 31, 2005 AND 2004





**2.
      Acquisition (continued)**





The
      following unaudited table compares NNBP’s reported operating results to pro
      forma information prepared on the basis that the above acquisitions had taken
      place at January 1, 2004. In management’s opinion, the unaudited pro forma
      combined results of operations are not indicative of the actual results that
      would have occurred had the acquisitions been consummated at the beginning
      of
      2004 or of future operations of the combined companies under the ownership
      and
      management of NNBP.





Year
                ended Dec 31,2004As
                ReportedRevenue
            
            $
            358,361Net
                loss
            
            $
            (8,518,408
            )Basic
                loss per share
            
            $
            (0.06
            )Diluted
                loss per share
            
            $
            (0.06
            )Proforma
                (unaudited)Revenue
            
            $
            358,361Net
                loss
            
            $
            (8,555,553
            )Basic
                loss per share
            
            $
            (0.05
            )Diluted
                loss per share
            
            $
            (0.05
            )





**3.
      Discontinued Operations**





During
      October 2003, NNBP decided to divest its HealthCentrics business unit to focus
      exclusively on its nanobacteria business unit. NNBP was unsuccessful in finding
      a non-affiliated buyer for this business unit. During March 2004, this business
      unit was sold to an affiliate of the current CEO for consideration of $250,000
      (a reduction in amounts otherwise owed to the affiliate). NNBP’s gain on
      disposal was $749,327, which is accounted for as a capital contribution given
      the related party nature of the arrangement. Summary operating results for
      the
      discontinued operations for the year ended December 31, 2004 are as
      follows:





2004Revenue
            
            $
            5,301Loss
                before income taxes
            
            
            ($
                57,268
            )Provision
                for income taxes
            
            
            --Net
                loss
            
            
            ($
                57,268
            )





F-11
 
 NANOBAC
          PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
          ENDED DECEMBER 31, 2005 AND 2004





**4.
      Inventory**





Inventory
      at December 31, 2005 is summarized as follows:





Raw
                materials for products held for resale
            
            $
            12,620Antibodies,
                antigens and laboratory supplies
            
            
            104,660$
            117,280




**5.
      Furniture and equipment**





Furniture
      and equipment at December 31, 2005 is summarized as follows: ****





Computer
                equipment
            
            $
            44,710Computer
                software
            
            
            17,982Lab
                equipment
            
            
            83,329Office
                equipment
            
            
            19,507Furniture
                and fixtures
            
            
            17,620Leasehold
                improvements
            
            
            54,967238,115Accumulated
                Depreciation
            
            
            (131,163
            )$
            106,952





Depreciation
      expense for the years ended December 31, 2005 and 2004 was $53,015 and $47,295,
      respectively.





**6.
      Intangible Assets**





Intangible
      assets as of December 31, 2005 are summarized as follows:





Product
                rights
            
            $
            1,350,000Patents
            
            
            5,243,0426,593,042Accumulated
                amortization
            
            
            (1,539,621
            )$
            5,053,421





F-12


NANOBAC
        PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
        ENDED DECEMBER 31, 2005 AND 2004





**6.
      Intangible Assets (continued)**





Amortization
      expense for the years ended December 31, 2005 and 2004 was $706,920 and
      $669,775, respectively. Expected future amortization is summarized as
      follows:





Year
                ending December 31,2006
            
            $
            706,9202007
            
            
            706,9202008
            
            
            549,4202009
            
            
            436,9202010
            
            
            436,920Thereafter
            
            
            2,216,321$
            5,053,421





**7.
      Geographic Information**





The
      Company operates in a single business segment. Geographic information is
      summarized as follows:





Year
                ended December 31,2005
            
            2004RevenueUnited
                States
            
            $
            608,445
            
            $
            343,444Finland
            
            
            48,357
            
            
            14,917$
            656,802
            
            $
            358,361AssetsUnited
                States
            
            $
            8,628,971Finland
            
            
            340,753$
            8,969,724





The
      geographic classification of revenue was based upon the domicile of the entity
      from which the revenues were earned.





F-13


NANOBAC
        PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
        ENDED DECEMBER 31, 2005 AND 2004




**8.
      Income taxes**





There
      was
      no current or deferred provision or benefit for income taxes for the years
      ended
      December 31, 2005 and 2004. The components of deferred tax asset as of December
      31, 2005 and 2004 are as follows:




2005
            
            2004Deferred
                tax asset:Net
                operating loss carryforwards
            
            $
            4,333,000
            
            $
            3,495,000Accrued
                expenses
            
            
            242,000
            
            
            195,000Valuation
                allowance
            
            
            (4,575,000
            )
            
            (3,690,000
            )Deferred
                tax asset net of valuation allowance
            
            $
            -
            
            $
            -





As
      of
      December 31, 2005, the Company had approximately $11 million of net operating
      loss carryforwards which expire between 2016 and 2025.





The
      following table accounts for the differences between the actual tax provision
      and the amounts obtained by applying the statutory U.S. federal income tax
      rates
      of 34% to the loss from continuing operations before income taxes and minority
      interest:





2005
            
            2004Statutory
                tax benefit
            
            $
            1,291,000
            
            $
            2,981,000State
                taxes, net of federal benefit
            
            
            131,000
            
            
            335,000Nondeductible
                expense for commonstock
                issued for services
            
            
            -
            
            
            (999,000
            )Amortization
                of intangible assets
            
            
            (276,000
            )
            
            (261,000
            )Discontinued
                operations
            
            
            -
            
            
            305,000Nontaxable
                derivative loss
            
            
            (280,000
            )
            
            (251,000
            )Increase
                in valuation allowance
            
            
            (885,000
            )
            
            (2,116,000
            )Other,
                net
            
            
            19,000
            
            
            6,000Provision
                for taxes
            
            $
            -
            
            $
            -





Changes
      in the valuation allowance during the year ended December 31, 2005 were as
      follows:





Valuation
                allowance, beginning of year
            
            $
            3,690,000Increase
                from continuing operations
            
            
            885,000Valuation
                allowance, end of year
            
            $
            4,575,000





F-14


NANOBAC
        PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
        ENDED DECEMBER 31, 2005 AND 2004





**9.
      Related party transactions**





**Related
      party loan**





An
      entity
      controlled by the Chief Executive Officer (who is also the largest stockholder
      of NNBP), has loaned NNBP approximately $10.4 million from June 2003 through
      December 2005. This loan bears interest at 5% and is due on demand. On September
      30, 2004, $7.5 million of the above loan was converted into 29,999,964 shares
      of
      the Company’s common stock at $0.25 per share, which exceeded the trading price
      of the stock at that date. The excess of the debt conversion over the trading
      price per share is included in additional paid-in capital. On December 13,
      2004
      an additional $500,000 of the above loan was converted into 4,166,667 shares
      of
      the Company’s common stock at the approximate fair market value of $0.12 per
      share, which is included in the Stock Settlement Liability at December 31,
      2005
      (see Note 10). The remaining loan balance at December 31, 2005 was approximately
      $2.4 million.





Interest
      expense for the above loans for the years ended December 31, 2005 and 2004
      was
      approximately $67,000 and $238,000, respectively.





**Short-term
      notes payable**





Short-term
      notes payable consist of unsecured advances from employees of the Company.
      These
      notes bear interest at 5% and are due on demand.





**Conversion
      of debt into equity**





During
      August 2004, an employee and minority stockholder (less than 5% ownership of
      the
      Company) converted an $111,000 liability due from the Company into 923,458
      shares of the Company’s common stock at the approximate fair market value of
      $0.12 per share.





**License
      agreement**





During
      February 2004, NNBP entered into a licensing agreement with Pegasus Worldwide,
      Inc. (“Pegasus”) to market one of NNBP's over the counter products. NNBP’s Chief
      Executive Officer is a director of Pegasus. Under the terms of the license
      agreement, NNBP was due $75 for each unit of product sold. For the year ended
      December 31, 2004, NNBP recognized revenue of $46,800 under this license
      agreement. Effective June 1, 2004, this license agreement was cancelled and
      NNBP
      is selling this product directly to customers.





F-15


NANOBAC
        PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
        ENDED DECEMBER 31, 2005 AND 2004





**10.
      Stockholders' equity**





**Preferred
      stock**





The
      holder(s) of preferred shares are entitled to receive non-cumulative dividends
      not to exceed $.10 per share when and as declared by the Board of Directors.
      In
      the event of any liquidation, dissolution or winding down of the company, either
      voluntary or involuntary, the holder(s) of each preferred share shall be
      entitled to be paid on an amount equal to $4.00 per share. In the event that
      the
      Company authorizes the redemption of all or any preferred shares, the redemption
      price shall be $4.30 per share. The preferred shares are convertible at any
      time
      into common at the ratio of 44.11 common shares to one preferred share. Holders
      of preferred shares have a right to cast eight votes per preferred share and
      the
      right to elect 50% of the authorized members of the board of
      directors.





**Common
      stock, preferred stock and warrant issuances**





During
      2004, creditors of the Company converted $7.8 million of liabilities into 32,1
      million shares of the Company’s common stock as follows:




Common
                Shares
            
            ValueStockholder
                loan (Note 9)
            
            
            29,999,964
            
            $
            7,499,990Employee
                (Note 9)
            
            
            923,458
            
            
            110,815Unaffiliated
                vendors
            
            
            1,174
                386
            
            
            158,72432,097,808
            
            $
            7,769,529




During
      2004, the Company issued 5.0 million shares of its common stock and 5.0 million
      warrants with an exercise price of $0.005 per share in connection with the
      acquisition of the minority interest in OY (Note 2). The value of these stock
      and stock equivalent issuances was $4.3 million.





From
      August 2004 through February 2005, the Company entered into Subscription
      Agreements with three unaffiliated investors. Under the terms of the
      Subscription Agreements, the Company received cash of $852,500 (net of $122,500
      of expenses) through September 30, 2005. The Company is to receive additional
      cash of approximately $800,000 (net of expenses) within five days of registering
      the common shares and warrants issued as a result of the Subscription
      Agreements. The number of common shares to be issued is equal to the amount
      received divided by the lesser of $.12 or 52% of the average closing bid price
      of the Company’s common stock on the five trading days immediately prior to the
      date on which the registration statement is declared effective (“Fixed Price”).
      These amounts are classified as Stock Settlement Liability at December 31,
      2005.
      In addition, the Subscription Agreements provide for the issuance of warrants
      equal to the number of common shares issued. Fifty percent (50%) of the warrants
      are exercisable at 110% of the Fixed Price and the remaining 50% of the warrants
      are exercisable at 150% of the Fixed Price. Unexercised warrants will expire
      December 31, 2008. The Company has agreed to use its best efforts to promptly
      register the common shares and warrants.





During
      December 2004, the Company entered into a Subscription Agreement with an
      affiliate of the Company’s Chief Executive Officer. Under the terms of the
      Subscription Agreement, the Company received cash of $500,000 during the year
      ended December 31, 2004. The Company is to receive additional cash of $500,000
      within five days of registering the common shares and warrants issued as a
      result of the Subscription Agreement. All other terms of the Subscription
      Agreement are substantially the same as the Subscription Agreements to the
      unaffiliated investors described in the preceding paragraph. This amount is
      classified as Stock Settlement Liability at December 31, 2005.





F-16


NANOBAC
        PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
        ENDED DECEMBER 31, 2005 AND 2004





**10
      Stockholders' equity (continued)**





As
      a
      result of the above Subscription Agreements, at December 31, 2005, the Company
      has issued 12,291,667 shares of common shares, which represents the minimum
      number of shares to be issued under the Subscription Agreements in exchange
      for
      cash received through December 31, 2005. If the price of the Company’s stock is
      less than $0.23 per share when the Company’s registration statement is declared
      effective, the Company will be required to issue additional shares under the
      above Subscription Agreements equal to a price of 52% of the average closing
      bid
      price of the Company’s common stock on the five trading days immediately prior
      to the date on which the registration statement is declared effective. As of
      December 31, 2005, the registration statement had not been declared effective.
      The ultimate number of shares to be issued is indeterminate as the number of
      shares is dependent on NNBP’s closing bid price when a registration statement is
      declared effective. As a result, the $1.5 million of cash received under the
      Subscription Agreements through December 31, 2005 is included in long-term
      liabilities.





At
      December 31, 2005, the Company measured the value of the variable number of
      shares to be issued under the Subscription Agreements at the fair value that
      the
      financial instrument obligates the Company to convey to the holder at the
      settlement date. As a result of this measurement, an additional $1.3 long-term
      liability has been recorded as of December 31, 2005 with a charge to current
      earnings of approximately $718,000 and $644,000 for the years ended December
      31,
      2005 and 2004, respectively.





During
      January 2004 the Company issued 4.5 million common shares to an entity that
      is
      an affiliate of the Company’s CEO. The Company recognized an expense of $2.6
      million in 2004 in connection with this 4.5 million stock issuance which is
      the
      approximate fair value of the stock on the issuance date.





**Warrants**





As
      of
      December 31, 2005, 5,000,000 warrants were outstanding with an exercise price
      of
      $.005 per common share and an expiration date of August 31, 2009. These warrants
      were issued in connection with the OY acquisition (see Note 2).





At
      the
      finalization of the Subscription Agreements described above, approximately
      72
      million additional warrants will be issued with an estimated weighted average
      exercise price of $.03 per common share and an expiration date of five years
      from the date of issuance based on the Company’s stock price at December 31,
      2005. The warrants have not been issued at December 31, 2005 as the registration
      statement has not been declared effective.





**Stock
      Option Plan**





No
      stock
      options were outstanding for the years ended December 31, 2005 and 2004.





F-17


NANOBAC
        PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
        ENDED DECEMBER 31, 2005 AND 2004





**11
      Commitments**





The
      Company leases administrative and laboratory facilities and office equipment
      under cancelable and non-cancelable operating leases that expire through June
      2010. The following table summarizes the minimum future rental commitments
      under
      non-cancelable operating leases at December 31, 2005:





Year
                ending December 31,2006
            
            
            179,3012007
            
            
            106,2132008
            
            
            63,4852009
            
            
            59,2902010
            
            
            29,957$
            438,246





Rent
      expense on operating leases for the years ended December 31, 2005 and 2004
      was
      approximately $186,000 and $222,000, respectively.





As
      described in Note 2, the Company entered into five-year employment agreements
      with certain former minority stockholders of Nanobac OY. Under the terms of
      these employment agreements, Nanobac is obligated to pay $500,000 annually
      in
      compensation through March 2009. In addition, $350,000 is included in accrued
      liabilities for unpaid signing bonuses under these employment agreements.





**12
      Contingencies**





Nanobac
      owned 100% of HealthCentrics from December 2003 through March 2004 when
      HealthCentrics was sold by the Company to an affiliate.





On
      August
      10, 2004, Nanobac was served with a civil action as filed in the Superior Court
      of Fulton County State of Georgia by Foltz Martin LLC and Openbook Learning
      Club, Inc. (“Foltz”). This suit alleges that the Company is liable for
      approximately $67,000 of liabilities plus approximately $11,000 interest for
      services performed by the plaintiffs for HealthCentrics, Inc. in 2003 and 2004.
      A judgment was awarded to Foltz of approximately $78,000 in October 2005 when
      the Company did not defend itself in this lawsuit. The Company anticipates
      that
      the affiliate that owns HealthCentrics will reimburse the Company for any
      judgment actually paid. No liability has been included in the accompanying
      balance sheet for this matter.





On
      January 19, 2006, Nanobac was served with a civil action as filed in the
      Superior Court of Fulton County State of Georgia by EliteCorp Atlanta, LLC
      (“EliteCorp”). This suit alleges that the Company is liable for approximately
      $318,000 of liabilities plus approximately $110,000 interest for services
      performed by the plaintiffs for HealthCentrics, Inc. in 2003 and 2004. The
      Company responded to this action on February 17, 2006 and denied virtually
      all
      the allegations of EliteCorp. The Company’s management believes that Nanobac is
      not responsible for the liabilities of HealthCentrics and that the Company
      will
      ultimately prevail in this legal action. No liability has been included in
      the
      accompanying balance sheet for this matter.





F-18


NANOBAC
        PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
        ENDED DECEMBER 31, 2005 AND 2004




**13
      Subsequent Events**





During
      March 2006, Nanobac’s management decided that Nanobac would not sell dietary
      supplements and the Company’s focus will be exclusively on the science that will
      ultimately lead to drug discovery and the development of diagnostic products.
      As
      a result of the above decision, a charge to earnings of approximately $600,000
      will be recognized for the write-off of the unamortized portion of product
      rights intangible asset at the date of the above decision. Furniture and
      equipment related to the dietary supplements’ business were sold at book value
      to an entity controlled by the Company’s Chief Executive Officer and largest
      shareholder. The above assets are included as held and used as furniture and
      equipment and intangible assets in the accompanying financial statements as
      the
      planned disposition date is March 2006.





During
      March 2006, the Company ceased occupying leased office space in Tampa, Florida.
      As a result of the early abandonment of this office lease, a charge to earnings
      of approximately $120,000 for the write-off of leasehold improvements and the
      acceleration of lease payments associated with the abandoned lease will be
      recorded in March 2006.





**14
      Quarterly Data**


Mar
                31
            
            Jun
                30
            
            Sep
                30
            
            Dec
                31(Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)
            
            
            (Unaudited)**2005
                Quarter ended**Revenue
            
            $
            151,865
            
            $
            167,988
            
            $
            130,394
            
            $
            206,555Gross
                profit
            
            $
            108,027
            
            $
            109,527
            
            $
            83,309
            
            $
            126,493Net
                loss
            
            
            ($1,505,921
            )
            
            ($984,153
            )
            
            ($645,547
            )
            
            ($551,716
            )Loss
                per share:Basic
                and Diluted
            
            
            ($0.01
            )
            
            ($0.01
            )
            $
            0.00
            
            $
            0.00**2004
                Quarter ended**Revenue
            
            $
            32,385
            
            $
            73,564
            
            $
            118,141
            
            $
            134,271Gross
                profit
            
            $
            25,196
            
            $
            42,072
            
            $
            76,037
            
            $
            114,586Loss
                from continuingoperations
            
            
            ($4,221,972
            )
            
            ($1,384,238
            )
            
            ($994,276
            )
            
            ($1,860,654
            )Net
                loss
            
            
            ($4,279,240
            )
            
            ($1,384,238
            )
            
            ($994,276
            )
            
            ($1,860,654
            )Loss
                per share:Basic
                and Diluted
            
            
            ($0.03
            )
            
            ($0.01
            )
            
            ($0.01
            )
            
            ($0.01
            )





**15
      Restatements of previously reported quarterly financial
      information**





During
      the fourth quarter of 2005, the Company reevaluated its accounting for the
      stock
      settlement obligation related to the common stock subscription agreements
      discussed in Note 10. During the three, six and nine months ended March 31,
      June
      30 and September 30, 2005, the Company accounted for the stock settlement
      obligation based on an incorrect fair value calculation. During the fourth
      quarter of 2005, management determined that this obligation should be recorded
      at the transaction’s initial fair value and thereafter adjusted to the fair
      value at each subsequent reporting period until settlement at which time such
      liabilities are reclassified into equity. As such, the unaudited quarterly
      financial information as previously reported has been restated as
      follows:





F-19
 
 NANOBAC
          PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
          ENDED DECEMBER 31, 2005 AND 2004


**15.
      Restatements of previously reported quarterly financial information
      (continued)**





**Quarter
                Ended March 31, 2005 (Unaudited)****As
                Previously Reported**
            
            **Adjustment**
            
            **As
                Restated**Total
                assets
            
            $
            9,545,974
            
            $
            -
            
            $
            9,545,974Stock
                settlement obligation
            
            $
            2,496,154
            
            $
            340,384
            
            $
            2,836,538Total
                liabilities
            
            $
            4,606,821
            
            $
            340,384
            
            $
            4,947,205Total
                equity
            
            $
            4,939,153
            
            $
            (340,384
            )
            $
            4,598,769Operating
                loss
            
            $
            (767,305
            )
            $
            -
            
            $
            (767,305
            )Loss
                on stock settlement obligation
            
            $
            -
            
            $
            (717,908
            )
            $
            (717,908
            )Net
                loss
            
            $
            (788,013
            )
            $
            (717,908
            )
            $
            (1,505,921
            )Loss
                per share
            
            $
            0.00
            
            $
            0.00
            
            $
            (0.01
            )




**Quarter
                Ended June 30, 2005 (Unaudited)****As
                Previously Reported**
            
            **Adjustment**
            
            **As
                Restated**Total
                assets
            
            $
            9,314,916
            
            $
            -
            
            $
            9,314,916Stock
                settlement obligation
            
            $
            2,864,904
            
            $
            (28,366
            )
            $
            2,836,538Total
                liabilities
            
            $
            5,375,967
            
            $
            (28,366
            )
            $
            5,347,601Total
                equity
            
            $
            3,938,949
            
            $
            28,366
            
            $
            3,967,315Operating
                loss
            
            $
            (597,646
            )
            $
            -
            
            $
            (597,646
            )Loss
                on stock settlement obligation
            
            $
            (368,750
            )
            $
            368,750
            
            $
            -Net
                loss
            
            $
            (1,012,519
            )
            $
            368,750
            
            $
            (643,769
            )Loss
                per share
            
            $
            (0.01
            )
            $
            0.00
            
            $
            0.00




**Quarter
                Ended September 30, 2005 (Unaudited)****As
                Previously Reported**
            
            **Adjustment**
            
            **As
                Restated**Total
                assets
            
            $
            9,134,803
            
            $
            -
            
            $
            9,134,803Stock
                settlement obligation
            
            $
            2,910,998
            
            $
            (74,460
            )
            $
            2,836,538Total
                liabilities
            
            $
            5,914,046
            
            $
            (74,460
            )
            $
            5,839,586Total
                equity
            
            $
            3,220,757
            
            $
            74,460
            
            $
            3,295,217Operating
                loss
            
            $
            (648,855
            )
            $
            -
            
            $
            (648,855
            )Loss
                on stock settlement obligation
            
            $
            (46,094
            )
            $
            46,094
            
            $
            -Net
                loss
            
            $
            (720,007
            )
            $
            46,094
            
            $
            (673,913
            )Loss
                per share
            
            $
            0.00
            
            $
            0.00
            
            $
            0.00







F-20