**UNITED
        STATES SECURITIES AND EXCHANGE COMMISSION**
 Washington,
        D.C. 20549
  
 
 **FORM
        10-KSB/A**
 Amendment
        to Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
        Act
        of 1934
 For
        the
        fiscal year ended
 **December
        31 2004**
 
 **Nanobac
        Pharmaceuticals, Incorporated**
 (Exact
        name of registrant as specified in its charter)
  **Florida**
                **0-24696**
                **59-3248917**(State
                    or Other Jurisdiction of
                    Incorporation)
                (Commission
                    File Number)
                (I.R.S.
                    Employer Identification
                    Number)
 
 **2727
        W. Dr. Martin Luther King Jr. Blvd, Suite 850, Tampa, Florida
        33607**
 (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-KSB/Aor any amendment
        to
        this Form 10-KSB/A. 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: $358,361
 
 The
        approximate aggregate market value of voting and non-voting stock held by
        non-affiliates of the registrant was $6,709,517  as
        of August
        4 ,
        2005.
        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
        August 4, 2005 there were 189,006,759 shares of the Registrant’s Common Stock
        outstanding.
  1
 **Nanobac
          Pharmaceuticals, Incorporated**
 
 **Form
          10-KSB/A**
 **For
          the Year Ended December 31, 2004**
 
 **Table
          of Contents**
 
 **Amendment
          Number 2**
 
 In
          response to the Securities and Exchange Commission's periodic review of
          our
          filings under the Securities Exchange Act of 1934, the undersigned registrant
          hereby files Amendment No. 2 to amend the following Items with respect
          to its
          Annual Report on Form 10-KSB/A for the year ended December 31,
          2004:
 
 **Item
          6**
 
 We
          have
          amended Item 6, “Selected Financial Data,” to reflect derivative loss in the
          consolidated statements of operations instead of a component of Other
          Comprehensive income (loss).
 
 **Item
          7**
 
 We
          have
          amended Item 7, "Management Discussion and Analysis of Financial Condition
          and
          Results of Operations," to: (1) exclude non-GAAP information from the section
          titled “Loss from continuing operations” and to revise the description to
          enhance the description of the components of this financial statement line
          item;
          (2) to enhance the disclosure of cash flows from operating activities in
          the
          section titled “Liquidity”; and (3) to reflect the recognition of derivative
          loss in the results of operation instead of as a component of other
          comprehensive income (loss).
  **Item
          15**
 
 We
          have
          amended our financial statements for the year ended December 31, 2004 to
          reflect
          derivative loss in the consolidated statements of operations instead of
          a
          component of Other Comprehensive income (loss).
 **Part
                      II**
                  
                  
                  **Page**Item
                      6.
                  Selected
                      Financial Data
                  3Item
                      7.
                  Management’s
                      Discussion and Analysis of
                      Financial****
                  
                  Condition
                      and Results of Operations
                  4**Part
                      IV**Item
                      15.
                  Exhibits,
                      Financial Statements, Schedules andReports
                      on Form 8-K
                  22




2


**PART
        II**
 
 **ITEM
        6.****Selected
        Financial Data**
 
 The
        following selected consolidated financial data has been derived from our
        consolidated financial statements. The information below should be read in
        conjuncture with “Management’s Discussion and Analysis of Financial Condition
        and Results of Operations” and our Consolidated Financial Statements and related
        notes. The following information is presented as of and for the period from
        February 22, 2002 (date of inception) through December 31, 2002 and as of
        and
        for the years ended December 31, 2003 and 2004.
 
 Years
                  ended December 31,2004
              
              2003
              
              2002**Consolidated
                  Balance Sheet Data:**Working
                  Capital
              
              ($
              ($1,189,310
              )
              ($
              6,763,635
              )
              ($
              340,922
              )Total
                  assets
              
              $
              9,684,307
              
              $
              6,044,090
              
              $
              5,223Total
                  liabilities
              
              $
              3,573,463
              
              $
              6,850,246
              
              $
              346,145Shareholders'
                  equity (deficit)
              
              $
              6,110,844
              
              ($
              806,156
              )
              ($
              340,922
              )Shares
                  outstanding at period end
              
              
              187,240,093
              
              
              99,968,840
              
              
              19,982,965**Consolidated
                  Statement of Operation Data:**Revenue
              
              $
              358,361
              
              $
              482,815
              
              $
              0Gross
                  profit
              
              $
              257,891
              
              $
              149,693
              
              $
              0Operating
                  loss
              
              ($
              7,600,383
              )
              ($
              2,700,211
              )
              ($
              43,621
              )Loss
                  from continuing operations
              
              ($
              8,461,140
              )
              ($
              2,761,133
              )
              ($
              43,621
              )Net
                  loss
              
              ($
              8,518,408
              )
              ($
              3,699,491
              )
              ($
              1,475,299
              )Diluted
                  earnings per share
              
              ($
              0.06
              )
              ($
              0.05
              )
              ($
              0.11
              )Cash
                  dividends
              
              $
              0
              
              $
              0
              
              $
              0Cash
                  dividends per share
              
              $
              0.00
              
              $
              0.00
              
              $
              0.00Weighted
                  average common shares
              
              
              152,903,084
              
              
              67,489,524
              
              
              13,941,197
 
 (1)
              Consolidated
                  Balance Sheet and Consolidated Statement of Operation data for
                  the years
                  ended December 31, 2004 and 2003 give effect to our acquisition
                  of
                  NanobacLabs Pharmaceuticals, Inc. in June 2003 and Nanobac OY in
                  November
                  2003.
 
 (2)
              Consolidated
                  Statement of Operation data for the years ended December 31, 2004,
                  2003
                  and 2002 give effect for the October 2003 decision to dispose of
                  the
                  HealthCentrics business Unit. Accordingly, HealthCentrics’ operations for
                  2002 and 2003 have been removed from continuing operations.
   3
  
 **Item
        7.****Management’s
        Discussion and Analysis of Financial Condition and Results of
        Operations**
 
 During
        calendar 2004, and for the foreseeable future, our primary focus is on the
        research of the role Nanobacteria plays in human diseases in which pathologic
        calcification deposits are found. Since the beginning of 2004, there have
        been
        an increasing number of studies linking Nanobacteria to serious health problems,
        including cardiovascular diseases, peripheral vascular diseases, prostatitis,
        kidney stones, and Polycystic Kidney Disease. These studies have provided
        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.
 
 Recently
        we signed a collaborative agreement with the Mayo Foundation for Medical
        Education and Research to conduct research relating to the prevalence and
        treatment of nanobacteria in specific disease populations. The parties will
        evaluate the role of nanobacteria through four studies utilizing diagnostic
        test
        kits developed by Nanobac.
 
 We
        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. We also signed a collaborative agreement with Iowa
        State University to work with the Department of Geological and Atmospheric
        Sciences to explore novel methodologies for detecting calcified nano-particles
        which may be related to nanobacteria.
 
 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.
 
 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.
 
  4
  We
        began
        direct sales of our Nanobac Supplements in June 2004. Nanobac Supplements
        are
        currently being marketed to the alternative medicine market and directly
        to the
        customer over the Internet. We anticipate that the Nanobac Supplements are
        the
        first generation of treatment therapies that we will develop and that the
        portfolio of treatments will increase as a result of our continuing research
        into the effect of Nanobacteria in numerous diseases.
 
 During
        calendar 2004, our two diagnostic tests have gained additional recognition
        for
        their ability to identify Nanobacteria. We plan to initiate marketing our
        diagnostic testing kits in Europe during the first half of 2005.
 
 During
        April 2004, we announced a name change from Nanobac Pharmaceuticals,
        Incorporated to Nanobac Life Sciences, Inc. to become effective upon approval
        by
        the shareholders.
 
 **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, 2004 and 2003.  These comparisons of financial
        results are not necessarily indicative of future results.
 
 **Year
                  ended December**2004
              
              2003
              
              %
                  ChangeRevenue
              
              $
              358,361
              
              $
              482,815
              
              
              -26
              %Cost
                  of revenue
              
              
              100,470
              
              
              333,122
              
              
              -70
              %Gross
                  Profit
              
              
              257,891
              
              
              149,693
              
              
              72
              %Gross
                  Profit percentage
              
              
              72
              %
              
              31
              %Selling,
                  general and administrative
              
              
              4,765,841
              
              
              2,128,375
              
              
              124
              %Research
                  and development
              
              
              2,375,363
              
              
              540,426
              
              
              340
              %Depreciation
                  and amortization
              
              
              717,070
              
              
              181,103
              
              
              296
              %Operating
                  loss
              
              
              (7,600,383
              )
              
              (2,700,211
              )
              
              181
              %Other
                  income (Expense)
              
              
              (860,757
              )
              
              (60,922
              )
              
              256
              %Loss
                  from continuing operations
              
              
              (8,461,140
              )
              
              (2,761,133
              )
              
              183
              %Discontinued
                  Operations
              
              
              (57,268
              )
              
              (938,358
              )
              
              -94
              %Net
                  loss
              
              
              ($8,518,408
              )
              
              ($3,699,491
              )
              
              113
              %
  5
  **2004
        Compared to 2003**
 
 **Revenue**
 
 Revenue
        for the years ended December 31, 2004 and 2003 is summarized as
        follows:
 
 2004
              
              2003Nanobac
                  Supplements
              
              $
              230,321
              
              $
              0License
                  revenue
              
              
              46,800
              
              
              0Nanobac
                  TX
              
              
              0
              
              
              407,242Diagnostic
                  Products
              
              
              81,240
              
              
              75,573$
              358,361
              
              $
              482,815
 
 During
        December 2003, we voluntarily discontinued offering NanobacTX, which accounted
        for 84% of our revenue for the year ended December 31, 2003. Accordingly,
        our
        revenue for the first half of 2004 was significantly reduced from the level
        experienced in the last half of 2003. During February 2004, we licensed a
        new
        product to an affiliated 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 Supplements. We are in the process of
        accelerating our research and developing new products for better patient
        acceptance.
 
 Revenue
        for the last quarter of 2004 averaged approximately $45,000 per month. Revenue
        for the year ended December 31, 2003 represents seven months of sales subsequent
        to our acquisition of LABS in June 2003.
 
 **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 28% for the
        year
        ended December 31, 2004 compared to 69% for the year ended December 31, 2003.
        Cost of revenue for 2003 included $150,000 of fixed lab fees for our diagnostic
        products. Without this fee, our cost of revenue would have been approximately
        38% as a percentage of revenue. This fixed lab fee was eliminated in October
        2003 and replaced with a variable cost structure, which significantly decreased
        cost of revenue.
 
 In
        addition, the lower cost of revenue in 2004 was due in part 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.
 
  6
  **2004
        Compared to 2003 (continued)**
 
 **Gross
        Profit**
 
 Gross
        profit as a percentage of revenue was 72%, for the year ended December 31,
        2004
        compared to 31% for the year ended December 31, 2003. The increase in gross
        profit percentage is attributable to the 2004 license revenue having no costs
        and the existence of $150,000 of fixed lab costs in 2003 which were not incurred
        in 2004. We anticipate gross profit as a percentage of revenue to be between
        65%
        and 70% for 2005.
 
 **Selling,
        General and Administrative**
 
 Selling,
        general and administrative (“SG&A”) expenses for the years ended December
        31, 2004 and 2003 are summarized as follows:
 
 **Year
                  ended December**2004
              
              2003Charges
                  for stock issuances
              
              $
              2,562,750
              
              $
              750,000Other
                  SG&A
              
              
              2,203,091
              
              
              1,378,375Total
                  SG&A
              
              $
              4,765,841
              
              $
              2,128,375
 
 The
        charges for stock issuances relate to stock issued as part of the Plan of
        Reorganization as confirmed by the Bankruptcy Court. There will be no further
        charges for stock issuances related to this bankruptcy.
 
 For
        2004,
        64% of the Other SG&A expenses are comprised of payroll, travel and
        professional fees. Expenses to operate as a public company (primarily
        professional fees and investor relations costs) comprise an additional 18%
        of
        the remaining SG&A expense. Other significant SG&A expenses include
        facility rental and insurance.
 
 The
        increase in SG&A for the year ended December 31, 2004 over December 31, 2003
        (net of charges for stock issuances) is primarily attributable to the timing
        of
        the acquisition of LABS in June 2003. Only seven months of SG&A for LABS is
        included in the above SG&A expenses for 2003 compared to twelve months of
        expenses in 2004.
 
 SG&A
        expenses for HealthCentrics are included in “Discontinued Operations”.
 
  7
  **2004
        Compared to 2003 (continued)**
 
 **Research
        and Development**
 
 For
        the
        year ended December 31, 2004, approximately 65% of research and development
        (“R&D“) expenses are for payroll and medical director fees and approximately
        25% of R&D expenses are for research studies. Expenses for research studies
        fluctuate from year to year as these expenses are dependent on specific
        initiatives and funding sources. Remaining R&D expenses include patents, our
        Finland lab and travel.
 
 R&D
        expenses for the year ended December 31, 2004 increased 340% compared to
        the
        year ended December 31, 2003. The increase in R&D for the year ended
        December 31, 2004 over December 31, 2003 is primarily attributable to the
        acquisitions of LABS and OY. LABS was acquired in June 2003 and OY was acquired
        in November 2003 and includes our laboratory in Koupio Finland. Accordingly,
        only seven months of R&D for LABS and one and one-half months of R&D for
        OY are included in the above expenses for the year ended December 31, 2003
        compared to twelve months for 2004. This increase also reflects our emphasis
        on
        R&D subsequent to the June 2003 acquisition of LABS. Specific increases
        include increased payroll, initiation of research studies, expansion of our
        patents and $500,000 of signing bonuses with the execution of employment
        agreements for key scientific personnel.
 
 R&D
        expenses for HealthCentrics are included in “Discontinued Operations”. We intend
        to continue to our R&D investment in the coming year.
 
 **Depreciation
        and amortization**
 
 Approximately
        95% of depreciation and amortization are related to the amortization of
        intangible assets acquired in the 2003 and 2004 acquisitions of LABS and
        OY.
 
  8
  **2004
        Compared to 2003 (continued)**
 
 **Other
        income (Expense)**
 
 Other
        income for the years ended December 31, 2004 and 2003 is summarized as
        follows:
 
 2004
              
              2003Interest
                  expenseStockholder
                  loan
              
              
              ($237,957
              )
              
              ($23,703
              )Other
              
              
              (10,096
              )
              
              (19,231
              )Derivative
                  loss
              
              
              (643,630
              )
              
              0Foreign
                  currency exchange gain
              
              
              32,021
              
              
              0Other,
                  net
              
              
              (1,095
              )
              
              (17,988
              )($860,757
              )
              
              ($60,922
              )
 
 The
        derivative loss is the difference in the derivative instruments’ value at the
        issue date compared to the value at December 31, 2004. The 2004 subscription
        agreement transactions are derivatives as the actual number of shares to
        be
        issued under these agreements is based on the future trading price of the
        Company’s shares and is therefore indeterminable at December 31, 2004.
 
 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.
 
 **Loss
        from continuing operations**
 
 Loss
        from
        continuing operations for the year ended December 31, 2004 was $8.5 million
        compared to $2.8 million for the year ended December 31, 2003. This increase
        reflects $1.8 million increase in charge for common stock issuances included
        in
        SG&A, $536,000 of additional amortization and depreciation, $1.8 million of
        additional R&D costs, $643,000 derivative loss and an additional five months
        of LABS SG&A expenses in 2004 compared to 2003.
 
 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.
 
  9
  **2004
        Compared to 2003 (continued)**
 
 **Discontinued
        Operations**
 
 During
        October 2003, we decided to divest our HealthCentrics’ business unit to focus
        exclusively on our nanobacteria business unit. We were unsuccessful in finding
        a
        buyer in 2003 for this business unit. During March 2004, this business unit
        was
        sold 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.
        The loss from discontinued operations for the years ended December 31, 2004
        and
        2003 is summarized as follows:
 
 
 2004
              
              2003Revenue
              
              $
              5,301
              
              $
              19,970Cost
                  of revenue
              
              
              9,208
              
              
              62,570Gross
                  profit (loss)
              
              
              (3,907
              )
              
              (42,600
              )Selling,
                  general & administrative
              
              
              53,361
              
              
              692,407Research
                  and development
              
              
              -
              
              
              203,351Net
                  loss
              
              
              ($57,268
              )
              
              ($938,538
              )
 
 **Liquidity
        and Capital Resources**
 
 As
        of
        December 31, 2004, we had total assets of $9.7 million of which only $115,000
        were current assets. At December 31, 2004, we had total current liabilities
        of
        $1.3 million and a working capital deficit of $1.2 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.
 
  10
  **Liquidity
        and Capital Resources (continued)**
 
 As
        discussed in Item 5, from time to time the Affiliated Entities have agreed
        to
        allow a portion of the loan balances to be converted into shares of the
        Company’s common stock. On September 30, 2004, $7,500,000 of the loan balance
        was converted into 29,999,964 shares of our common stock at a price of $.25
        per
        share. There is no obligation on the part of the Affiliated Entities to make
        additional loans to the Company. The Affiliated Entities are also under no
        obligation to convert any portion of the loan balances owed to it into
        additional shares of the Company’s stock.
 
 As
        is
        also 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.
 
 Net
        cash
        used in operations was $3.4 million for the year ended December 31, 2004.
        The
        negative cash flow from operations reflects the $8.5 million net loss for
        the
        year offset by the non-cash charge for common stock issuances of $2.6 million,
        depreciation and amortization of $717,000, interest expense added to the
        principal balance of the stockholder loan of $238,000, and an increase in
        liabilities of approximately $1.7 million ($1.0 million of current liabilities
        and $0.7 million in stock settlement liability).
 
 As
        noted
        above, the deferral of $1.0 million of current liabilities, reduced the cash
        used for operations for the year ended December 31, 2004, However, most,
        if not
        all, of these current liabilities will likely be settled with cash in future
        accounting periods.
 
 Net
        cash
        provided by investing activities was approximately $165,000 for the year
        ended
        December 31, 2004, which reflects the receipt of $200,000 from a common stock
        option exercise related to the acquisition of LABS offset by our purchase
        of
        fixed assets of approximately $37,000.
 
 Net
        cash
        provided by financing activities was $3.2 million for the year ended December
        31, 2004, which is attributable to stockholder loans of $2.1 million and
        $1.2
        million from common stock Subscription Agreements as described in the preceding
        paragraphs.
 
 We
        are
        dependent on raising additional funding necessary to implement our business
        plan
        as outlined above. Should we not be successful in raising cash from the
        Affiliated Entities and other investors, we are unlikely to continue as a
        going
        concern.
 
  11
  **Recent
        Accounting Pronouncements**
  In
        November 2004, the FASB issued SFAS No. 151, “Inventory Costs.” The
        statement amends Accounting Research Bulletin (“ARB”) No. 43, “Inventory
        Pricing,” to clarify the accounting for abnormal amounts of idle facility
        expense, freight, handling costs, and wasted material. ARB No. 43 previously
        stated that these costs must be “so abnormal as to require treatment as
        current-period charges.” SFAS No. 151 requires that those items be
        recognized as current-period charges regardless of whether they meet the
        criterion of “so abnormal.” In addition, this statement requires that allocation
        of fixed production overhead to the costs of conversion be based on the normal
        capacity of the production facilities. The statement is effective for inventory
        costs incurred during fiscal years beginning after June 15, 2005,
        with
        earlier application permitted for fiscal years beginning after the issue
        date of
        the statement. The adoption of SFAS No. 151 is not expected to have
        any
        significant impact on our current financial condition or results of operations.
 
 In
        December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
        Assets - An Amendment of APB Opinion No. 29.” APB Opinion No. 29,
“Accounting for Nonmonetary Transactions,” is based on the opinion that
        exchanges of nonmonetary assets should be measured based on the fair value
        of
        the assets exchanged. SFAS No. 153 amends Opinion No. 29 to
        eliminate
        the exception for nonmonetary exchanges of similar productive assets and
        replaces it with a general exception for exchanges of nonmonetary assets
        whose
        results are not expected to significantly change the future cash flows of
        the
        entity. The adoption of SFAS No. 153 is not expected to have any impact
        on
        our current financial condition or results of operations.
 
 In
        December 2004, the FASB revised its SFAS No. 123 (“SFAS
        No. 123R”), “Accounting for Stock Based Compensation.” The revision
        establishes standards for the accounting of transactions in which an entity
        exchanges its equity instruments for goods or services, particularly
        transactions in which an entity obtains employee services in share-based
        payment
        transactions. The revised statement requires a public entity to measure the
        cost
        of employee services received in exchange for an award of equity instruments
        based on the grant-date fair value of the award. That cost is to be recognized
        over the period during which the employee is required to provide service
        in
        exchange for the award. Changes in fair value during the requisite service
        period are to be recognized as compensation cost over that period. In addition,
        the revised statement amends SFAS No. 95, “Statement of Cash Flows,” to
        require that excess tax benefits be reported as a financing cash flow rather
        than as a reduction of taxes paid. The provisions of the revised statement
        are
        effective for financial statements issued for the first interim or annual
        reporting period beginning after June 15, 2005, with early adoption
        encouraged. We are currently evaluating the impact that this statement will
        have
        on our financial condition or results of operations.
  In
        March
        2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset
        Retirement Obligations, an interpretation of FASB Statement No. 143” (“FIN 47”),
        which requires an entity to recognize a liability for the fair value of a
        conditional asset retirement obligation when incurred if the liability’s fair
        value can be reasonably estimated. FIN 47 is effective for fiscal years ending
        after December 15, 2005. The Company is currently evaluating the effect that
        the
        adoption of FIN 47 will have on its consolidated results of operations and
        financial condition but does not expect it to have a material impact.
 
  12
  **Recent
        Accounting Pronouncements (continued)**
  In
        May
        2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections
        (“SFAS 154”), which replaces Accounting Principles Board Opinions No. 20
“Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim
        Financial Statements - An Amendment of APB Opinion No. 28.” SFAS 154 provides
        guidance on accounting for and reporting of accounting changes and error
        corrections. It establishes retrospective application, or the latest practicable
        date, as the required method for reporting a change in accounting principle
        and
        the reporting of a correction of an error. SFAS 154 is effective for accounting
        changes and corrections of errors made in fiscal years beginning after December
        15, 2005 and is required to be adopted by the Company in the first quarter
        of
        fiscal 2006. The Company is currently evaluating the effect that the adoption
        of
        SFAS 154 will have on its consolidated results of operations and financial
        condition, but does not expect it to have a material impact.
 
 **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, 2004, the Company’s contractual cash obligations, with initial or
        remaining te rms
        in
        excess of one year, were as follows:
  Amount
                  of CommitmentExpired
                  by year ending December 31,Other
              
              OperatingLiability
              
              Leases
              
              TotalLess
                  than 1 year
              
              $
              -
              
              $
              174,281
              
              $
              174,2811
                  -
                  2 years
              
              
              350,000
              
              
              287,633
              
              
              637,6333
                  -
                  4 years
              
              
              -
              
              
              112,063
              
              
              112,0635
                  -
                  7 years
              
              
              -
              
              
              27,234
              
              
              27,234Total
              
              $
              350,000
              
              $
              601,211
              
              $
              951,211
 
  13
  **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 Dr. Kajander’s 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.
  14
  **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
        2004 and 2003, 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, shareholders 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, shareholders 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.
 
  15
  **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, 2004, we have incurred aggregate losses of
        $13.0
        million. Our net loss for the year ended December 31, 2004 and 2003 was $7.9
        million and $3.7 million, respectively. There is no assurance that we will
        operate profitably or will generate positive cash flow in the future. In
        addition, our operating results in the future may be subject to significant
        fluctuations due to many factors not within our control, such as the
        unpredictability of when customers will order products, the size of customers'
        orders, the demand for our products, and the level of competition and general
        economic conditions.
 Although
        we are confident that revenues will increase, we also expect an increase
        in
        research and development costs and operating costs. 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.
 
  16
  **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.
  17
  **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.
 
 **Regulations
        may Inhibit our Ability to Sell Nanobac Supplements**
 
 Codex
        is
        a joint body comprising government representatives
        and non-governmental organizations, jointly managed by the United
        Nation's (U.N.) Food and Agriculture Organization (FAO) and the World
        Health Organization (WHO) of the U.N. The Codex Committee on Nutrition and
        Foods
        for Special Dietary Uses (CCNFSDU) has been attempting to develop international
        guidelines for vitamins and minerals since 1991. In November 2004, these
        guidelines were finalized and a vote to ratify will take place in July,
        2005.
  There
        is
        a school of thought within the dietary supplement community that
        buying vitamins and other dietary supplements will be severely limited
        by
        this CODEX. Passage of the above guidelines may inhibit our ability
        to sell
        Nanobac Supplement outside of the United States. We do not believe that the
        passage will impact United State revenue as t he
        U.S.
        draft position states that "The United States supports consumer choice and
        access to dietary supplements that are safe and are labelled in a truthful
        and
        non-misleading manner."  Further, the CODEX Draft notes that the Codex
        Guidelines for Vitamin and Mineral Supplements will not adversely affect
        the
        availability of safe and truthfully labelled supplement products in the U.S.
        marketplace or to U.S. consumers. If our interpretation is not correct passage
        of the international guidelines may inhibit the sales of Nanobac Supplement
        inside and outside of the United States
 
 **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.
  18
  **Risk
        Factors (continued)**
 
 **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.
 
 **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.
 
 19
 **Risk
        Factors (continued)**
 
 **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.
 
 **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
        shareholders 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. Shareholders have no cumulative
        voting rights.
  20
  **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.
 
  21
  **PART
        IV**
 
 **Item
        15.****Exhibits,
        Financial Statement Schedules and Reports on Form
        8-K**
 
 (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, 2004
              
              F-2·Consolidated
                  Statements of Operations for the years ended
                  December 31, 2004 and 2003
              
              F-3·Consolidated
                  Statements of Stockholders’ Equity (Deficit) for
                  the years ended December 31, 2004 and 2003
              
              F-4·Consolidated
                  Statements of Cash Flows for the years ended
                  December 31, 2004 and 2003
              
              F-5·Notes
                  to Consolidated Financial Statements
              
              F-6-F-21
  (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.
 22
 **EXHIBIT
            INDEX**
  ExhibitNumber
                  Description31.1
                  Certification
                      to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Executive
                      Officer31.2
                  Certification
                      to Section 302 of the Sarbanes-Oxley Act of 2002 - Chief Financial
                      Officer32.1
                  Certification
                      pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
                      Section 906 of
                      the Sarbanes-Oxley Act of 2002 - Chief Executive Officer32.2
                  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
  23
  **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 August 4, 2005.
  **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 August 4, 2005.
  **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/    Alexander
                      Edwards III
                    Alexander
                      Edwards III
                  
                  Director/s/   Jan
                      Egberts
                    Jan
                      Egberts, M.D.
                  
                  Director/s/    Stephan
                      Rechtschaffen
                    Stephan
                      Rechtschaffen, M.D.
                  
                  Director/s/    Michael
                      J Dean
                    Michael
                      J Dean
                  
                  Vice
                      President - Finance and Controller (Principal Accounting
                      Officer)
 
  24
 Independent
          Auditors’ Report
  Board
          of
          Directors
 Nanobac
          Pharmaceuticals, Incorporated and Subsidiaries
 Tampa,
          Florida
 
 We
          have
          audited the accompanying consolidated balance sheet of Nanobac Pharmaceuticals,
          Incorporated and Subsidiaries (F/K/A American Enterprise Corporation) (the
          “Company”), as of December 31, 2004, and the related consolidated statements of
          operations, stockholders’ 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 financial statements
          based
          on our audits.
 
 We
          conducted our audit 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, 2004, 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 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.
 
 As
          discussed in Note 10, the accompanying consolidated financial statements
          have
          been restated.
 
 /s/ Aidman, Piser & Company,
                    P.A.
  July
          29,
          2005
 Tampa,
          Florida
  F-1


**NANOBAC
                PHARMACEUTICALS INCORPORATED AND
                SUBSIDIARIES****CONSOLIDATED
                BALANCE SHEET****(Restated)**December
                31, 2004**ASSETS****CURRENT
                ASSETS**Cash
            
            $
            17,908Account
                receivable
            
            
            3,395Inventory
            
            
            70,571Prepaid
                expenses
            
            
            23,649Total
                current assets
            
            
            115,523**FIXED
                ASSETS,**less
                accumulated depreciationof$84,143
            
            
            124,995**OTHER
                ASSETS**Security
                deposits
            
            
            68,054Intangible
                assets, less accumulated amortizationof$832,701
            
            
            5,760,342Goodwill
            
            
            3,615,393**Total
                other assets**
            
            
            9,443,789**TOTAL
                ASSETS**
            
            $
            9,684,307**LIABILITIES
                AND STOCKHOLDERS' EQUITY****CURRENT
                LIABILITIES**Accounts
                payable
            
            $
            645,491Accrued
                compensation
            
            
            50,611Accrued
                expenses
            
            
            335,861Short-term
                note payable
            
            
            62,379Other
                liabilities
            
            
            16,423Stockholder
                loans
            
            
            194,068**Total
                current liabilities**
            
            
            1,304,833**LONG-TERM
                LIABILITIES**Accrued
                compensation
            
            
            350,000Stock
                settlement liability
            
            
            1,918,630**Total
                liabilities**
            
            
            3,573,463**COMMITMENTS
                AND CONTINGENCY (Notes 9, 11 and 13)**
            
            
            -**STOCKHOLDERS'
                EQUITY**Common
                stock, no par value, 250,000,000 shares authorized,187,240,093
                shares issued and outstanding
            
            
            16,296,550Preferred
                stock, no par value, 1,000,000 shares authorized,no
                shares issued and outstanding
            
            
            -Additional
                paid-in capital
            
            
            3,539,328Accumulated
                deficit (restated)
            
            
            (13,693,198
            )Accumulated
                other comprehensive loss (restated)
            
            
            (31,836
            )**Total
                stockholders' equity**
            
            
            6,110,844**TOTAL
                LIABILITIES AND STOCKHOLDERS' EQUITY**
            
            $
            9,684,307


``

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, 2004
            
            December
                31, 2003(Restated)**REVENUE**
            
            $
            358,361
            
            $
            482,815**COST
                OF REVENUE**
            
            
            100,470
            
            
            333,122**GROSS
                PROFIT**
            
            
            257,891
            
            
            149,693**OPERATING
                EXPENSES**Sales,
                general and administrative
            
            
            4,765,841
            
            
            2,128,375Research
                and development
            
            
            2,375,363
            
            
            540,426Depreciation
                and amortization
            
            
            717,070
            
            
            181,103**Total
                Operating Expenses**
            
            
            7,858,274
            
            
            2,849,904**OPERATING
                LOSS**
            
            
            (7,600,383
            )
            
            (2,700,211
            )**OTHER
                INCOME (EXPENSES)**Interest
                expense
            
            
            (248,053
            )
            
            (42,934
            )Derivative
                loss (restated)
            
            
            (643,630
            )
            
            -Foreign
                currency exchange gain
            
            
            32,021
            
            
            -Other,
                net
            
            
            (1,095
            )
            
            (17,988
            )**LOSS
                FROM CONTINUING OPERATIONS****BEFORE
                INCOME TAXES**
            
            
            (8,461,140
            )
            
            (2,761,133
            )**PROVISION
                FOR INCOME TAXES**
            
            
            -
            
            
            -**LOSS
                FROM CONTINUING OPERATIONS**
            
            
            (8,461,140
            )
            
            (2,761,133
            )**DISCONTINUED
                OPERATIONS:**Loss
                from discontinued operations (noapplicable
                income taxes)
            
            
            (57,268
            )
            
            (938,358
            )**NET
                LOSS**
            
            $
            (8,518,408
            )
            $
            (3,699,491
            )**LOSS
                PER COMMON SHARE (BASIC AND DILUTED):**Continuing
                operations
            
            $
            (0.06
            )
            $
            (0.04
            )Discontinued
                operations
            
            
            0.00
            
            
            (0.01
            )Net
                loss
            
            $
            (0.06
            )
            $
            (0.05
            )**WEIGHTED
                AVERAGE NUMBER OF****COMMON
                SHARES OUTSTANDING**Basic
                and Diluted
            
            
            152,903,084
            
            
            67,489,524




The
      accompanying notes are an integral part


of
      these
      financial statements




F-3


**NANOBAC
                  PHARMACEUTICALS INCORPORATED AND
                  SUBSIDIARIES****CONSOLIDATED
                  STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)****FOR
                  THE YEARS ENDED DECEMBER 31, 2003 AND 2004****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**(restated)
              
              (restated)December
                  31, 2002 Balance
              
              
              19,982,965
              
              $
              1,134,377
              
              
              368,815
              
              $
              -
              
              $
              -
              
              $
              -
              
              
              ($1,475,299
              )
              $
              -
              
              $
              -
              
              
              ($340,922
              )Conversion
                  of preferred stockto
                  common stock
              
              
              16,268,430
              
              
              -
              
              
              (368,815
              )
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              
              
              
              
              
              
              0Stock
                  issued in connectionwith
                  bankruptcy
              
              
              23,335,445
              
              
              399,516
              
              
              794,569
              
              
              350,484
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              750,000Stock
                  issues for services
              
              
              50,000
              
              
              30,175
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              30,175Conversion
                  of liabilities toshares
                  of common stock
              
              
              3,644,000
              
              
              728,800
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              728,800Sale
                  of common stock(see
                  Notes 1 and 10)
              
              
              1,690,000
              
              
              548,000
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              548,000Common
                  stock issued inacquisition
                  of NanobacLabsPharmaceuticals,
                  Inc.
              
              
              34,998,000
              
              
              1,392,920
              
              
              -
              
              
              -
              
              
              -
              
              
              (200,000
              )
              
              -
              
              
              -
              
              
              -
              
              
              1,192,920Comprehensive
                  loss:Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (3,699,491
              )
              
              (3,699,491
              )
              
              -
              
              
              (3,699,491
              )Foreign
                  currency translationadjustment
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (15,638
              )
              
              (15,638
              )
              
              (15,638
              )Comprehensive
                  loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,715,129
              )**Balance,
                  December 31, 2003**
              
              
              **99,968,840**
              
              **$**
              **4,233,788**
              
              
              **794,569**
              
              **$**
              **350,484**
              
              **$**
              **-**
              
              **$**
              **(200,000**
              **)**
              **$**
              **(5,174,790**
              **)**
              
              
              
              **$**
              **(15,638**
              **)**
              **$**
              **(806,156**
              **)**Conversion
                  of preferred stockto
                  common stock
              
              
              35,048,445
              
              
              350,484
              
              
              (794,569
              )
              
              (350,484
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -Cash
                  received fromoption
                  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 salesubsidiary
                  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
              
              
              10,625,000
              
              
              -
              
              
              -
              
              
              -
              
              
              (97,500
              )
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (97,500
              )Comprehensive
                  loss:Net
                  loss (restated)
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              (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**


The
      accompanying notes are an integral part


of
        these
        financial statemets
   F-4


**NANOBAC
                PHARMACEUTICALS INCORPORATED AND
                SUBSIDIARIES****CONSOLIDATED
                STATEMENTS OF CASH FLOWS****(Restated)**Year
                ended
            
            Year
                endedDecember
                31, 2004
            
            December
                31, 2003**CASH
                FLOWS FROM OPERATING ACTIVITIES**Net
                Loss
            
            $
            (8,518,408
            )
            $
            (3,699,491
            )Adjustments
                to reconcile net loss to cashflows
                from operating activities:Depreciation
                and amortization
            
            
            717,070
            
            
            181,103Loss
                on disposition of assets
            
            
            -
            
            
            7,659Derivative
                loss
            
            
            643,630
            
            
            -Charges
                from common stock issuances
            
            
            2,562,750
            
            
            780,175Minority
                interest in net loss
            
            
            -
            
            
            (3,545
            )Interest
                expense added to stockholder loan
            
            
            237,958
            
            
            -Net
                (increase) decrease in assets:Accounts
                receivable
            
            
            2,370
            
            
            9,125Inventory
            
            
            (54,360
            )
            
            67,286Other
                assets
            
            
            (8,769
            )
            
            78,383Net
                increase (decrease) in liabilities:Accounts
                payable
            
            
            530,196
            
            
            278,107Accrued
                compensation
            
            
            464,768
            
            
            46,658Accrued
                expenses
            
            
            10,628
            
            
            99,218Deferred
                revenue
            
            
            16,423
            
            
            -Total
                adjustments
            
            
            5,122,664
            
            
            1,544,169**Net
                cash flows from operating activities**
            
            
            (3,395,744
            )
            
            (2,155,322
            )**CASH
                FLOWS FROM INVESTING ACTIVITIES**Acquisition
                of fixed assets
            
            
            (36,765
            )
            
            (18,157
            )Security
                deposits
            
            
            2,500
            
            
            (2,932
            )Acquisition
                of subsidiary, net of cash received
            
            
            (901
            )
            
            (81,022
            )Cash
                received from exercise of stock option in subsidiary
            
            
            200,000
            
            
            300,000**Net
                cash flows from investing activities**
            
            
            164,834
            
            
            197,889**CASH
                FLOWS FROM FINANCING ACTIVITIES**Advances
                from line of credit, net
            
            
            -
            
            
            (36,453
            )Proceeds
                from issuance of common stock andstock
                subscription agreements, net of expenses
            
            
            1,177,500
            
            
            548,000Proceeds
                from stockholder loans, net
            
            
            2,066,091
            
            
            1,997,467Payment
                of notes payable, net
            
            
            (27,621
            )
            
            (486,188
            )**Net
                cash flows from financing activities**
            
            
            3,215,970
            
            
            2,022,826**Effect
                of exchange rate changes**
            
            
            (16,907
            )
            
            (15,638
            )Net
                change in cash
            
            
            (31,847
            )
            
            49,755Cash
                balance, beginning of period
            
            
            49,755
            
            
            -**Cash
                balance, end of period**
            
            $
            17,908
            
            $
            49,755**Supplemental
                disclosures of cash flow information:**Cash
                paid for interest expense
            
            $
            10,095
            
            $
            42,934**Supplemental
                schedule of non-cash investing and financing
                activities:**Common
                stock issued in acquisition
            
            $
            4,267,500
            
            $
            1,392,920Common
                stock issued for the conversion of debt
            
            $
            7,769,529
            
            $
            728,800Stockholder
                loan used for acquisition
            
            $
            -
            
            $
            4,071,342Capital
                contribution associated with sale of subsidiary to
                affiliateReduction
                in stockholder loan
            
            $
            250,000
            
            $
            -Assumption
                of accounts payable and accrued expenses
            
            $
            499,327
            
            $
            -




The
      accompanying notes are an integral part


of
        these
        financial statemets
   F-5
 NANOBAC
            PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
            ENDED DECEMBER 31, 2004 AND 2003
 **1** . **Nature
          of operations and summary of significant accounting
          polices**
 
 **Nature
          of business**
 
 Nanobac
          Pharmaceuticals, Incorporated and subsidiaries, ("Nanobac”, the "Company", or
          "NNBP") trades under the symbol "NNBP."
 
 NNBP’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. All material intercompany transactions and balances
          have been eliminated in consolidation. On June 4, 2003, the Company acquired
          a
          majority interest in NanobacLabs Pharmaceuticals, Inc. and on November
          11, 2003,
          the Company acquired 65% of Nanobac OY (see Note 2, “Acquisitions”). In
          accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141,
“Business Combinations”, NNBP has included the results of operations of LABS
          from June 4, 2003 and the results of operations of OY from November 11,
          2003.
 
 Where
          losses applicable to the minority interest in a subsidiary exceed the minority
          interest in the equity capital of the subsidiary, such excess and any further
          losses applicable to the minority interest shall be charged against the
          majority
          interest, as there is no obligation of the minority interest to make good
          such
          losses.
  **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, 2004. The Company
          is
          dependent on the continued financing from outside investors including additional
          shareholder 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
          shareholders. 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 is recorded
          net of
          reserves for estimated discounts and incentives.
 
  F-6
  NANOBAC
          PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
          ENDED DECEMBER 31, 2004 AND 2003
  **1.
          Nature of operations and summary of significant accounting polices
          (continued)**
 
 **Financial
          instruments**
 
 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.
 
 **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 reserves and allowances. Shipping costs are expensed as incurred
          and are included in cost of revenue.
 
 **Fixed
          Assets**
 
 Fixed
          assets consist of furniture, fixtures, computers and lab equipment and
          are
          recorded at cost. Fixed assets 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 acquired technology rights obtained in the acquisition of LABS
          and OY
          (see Note 2). Amortization of intangible assets is provided over the following
          estimated useful lives on a straight-line basis:
 Patents      12
          years
 Product
          rights     5 years
 
 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, appraised values for 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 than 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. The
          Company’s
          goodwill and intangible assets relate to the acquisition of NanobacLabs
          Pharmaceuticals, Inc. and Nanobac OY. Goodwill
          and intangible asset amortization is not deductible for income tax purposes.
  F-7
 
 NANOBAC
              PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
              ENDED DECEMBER 31, 2004 AND 2003
 **1.
          Nature of operations and summary of significant accounting polices
          (continued)**
 
 **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.
 
 **Net
          loss per share**
 
 Net
          loss
          per share represents the net 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 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, 2004 and
          2003.
 
 **Accumulated
          Other Comprehensive Loss**
 
 Accumulated
          other comprehensive loss consists of foreign currency translation adjustment
          related to our Finland operations. Accumulated other comprehensive income
          has no
          applicable income tax.
 
 **Derivative
          financial instruments**
  The
          Company accounts for derivative financial instruments indexed to and potentially
          settled in, its own stock in accordance with Emerging Issues Task Force
          00-19,
          which provides that if the number of shares deliverable in a transaction
          be
          indeterminable, that said shares be presented as a liability in the balance
          sheet.  Further, the liability is to be measured at fair value until
          such
          time as the obligation is settled.  The shares issued in connection
          with
          the 2004 Subscription Agreement transactions discussed in Note 10 are derivative
          transactions and as such have been presented in the accompanying balance
          sheets
          as liabilities and in the accompanying statements of operations as derivative
          loss.  The derivative loss represents the difference in the share
          value as
          issued and the value of said shares at the balance
          sheet date based on the trading value of the stock
          at December
          31, 2004 . 
          At settlement, accumulated derivative losses will be charged to retained
          earnings as a constructive dividend.
 
 **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, 2004 AND 2003
  **1.
          Nature of operations and summary of significant accounting polices
          (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
          November 2004, the FASB issued SFAS No. 151, “Inventory Costs.” The
          statement amends Accounting Research Bulletin (“ARB”) No. 43, “Inventory
          Pricing,” to clarify the accounting for abnormal amounts of idle facility
          expense, freight, handling costs, and wasted material. ARB No. 43 previously
          stated that these costs must be “so abnormal as to require treatment as
          current-period charges.” SFAS No. 151 requires that those items be
          recognized as current-period charges regardless of whether they meet the
          criterion of “so abnormal.” In addition, this statement requires that allocation
          of fixed production overhead to the costs of conversion be based on the
          normal
          capacity of the production facilities. The statement is effective for inventory
          costs incurred during fiscal years beginning after June 15, 2005,
          with
          earlier application permitted for fiscal years beginning after the issue
          date of
          the statement. The adoption of SFAS No. 151 is not expected to have
          any
          significant impact on the Company’s current financial condition or results of
          operations.
 
 In
          December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
          Assets - An Amendment of APB Opinion No. 29.” APB Opinion No. 29,
“Accounting For Nonmonetary Transactions,” is based on the opinion that
          exchanges of nonmonetary assets should be measured based on the fair value
          of
          the assets exchanged. SFAS No. 153 amends Opinion No. 29
          to eliminate
          the exception for nonmonetary exchanges of similar productive assets and
          replaces it with a general exception for exchanges of nonmonetary assets
          whose
          results are not expected to significantly change the future cash flows
          of the
          entity. The adoption of SFAS No. 153 is not expected to have any
          impact on
          the Company’s current financial condition or results of operations.
 
 In
          December 2004, the FASB revised its SFAS No. 123 (“SFAS
          No. 123R”), “Accounting for Stock Based Compensation.” The revision
          establishes standards for the accounting of transactions in which an entity
          exchanges its equity instruments for goods or services, particularly
          transactions in which an entity obtains employee services in share-based
          payment
          transactions. The revised statement requires a public entity to measure
          the cost
          of employee services received in exchange for an award of equity instruments
          based on the grant-date fair value of the award. That cost is to be recognized
          over the period during which the employee is required to provide service
          in
          exchange for the award. Changes in fair value during the requisite service
          period are to be recognized as compensation cost over that period. In addition,
          the revised statement amends SFAS No. 95, “Statement of Cash Flows,” to
          require that excess tax benefits be reported as a financing cash flow rather
          than as a reduction of taxes paid. The provisions of the revised statement
          are
          effective for financial statements issued for the first interim or annual
          reporting period beginning after June 15, 2005, with early adoption
          encouraged. The Company is currently evaluating the impact that this statement
          will have on its financial condition or results of operations.
  F-9
  NANOBAC
          PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
          ENDED DECEMBER 31, 2004 AND 2003
  **1.
          Nature of operations and summary of significant accounting polices
          (continued)**
 
 **Recent
          accounting pronouncements (continued)**
 
 In
          March
          2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset
          Retirement Obligations, an interpretation of FASB Statement No. 143” (“FIN 47”),
          which requires an entity to recognize a liability for the fair value of
          a
          conditional asset retirement obligation when incurred if the liability’s fair
          value can be reasonably estimated. FIN 47 is effective for fiscal years
          ending
          after December 15, 2005. The Company is currently evaluating the effect
          that the
          adoption of FIN 47 will have on its consolidated results of operations
          and
          financial condition but does not expect it to have a material impact.
 
 In
          May
          2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections
          (“SFAS 154”), which replaces Accounting Principles Board Opinions No. 20
“Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim
          Financial Statements - An Amendment of APB Opinion No. 28.” SFAS 154 provides
          guidance on accounting for and reporting of accounting changes and error
          corrections. It establishes retrospective application, or the latest practicable
          date, as the required method for reporting a change in accounting principle
          and
          the reporting of a correction of an error. SFAS 154 is effective for accounting
          changes and corrections of errors made in fiscal years beginning after
          December
          15, 2005 and is required to be adopted by the Company in the first quarter
          of
          fiscal 2006. The Company is currently evaluating the effect that the adoption
          of
          SFAS 154 will have on its consolidated results of operations and financial
          condition, but does not expect it to have a material impact.
 
 
 **Reclassifications**
 
 Certain
          prior year amounts have been reclassified to conform to the current year
          presentation.
 
  F-10
  NANOBAC
          PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
          ENDED DECEMBER 31, 2004 AND 2003
  **2.
          Acquisitions**
 
 **NanobacLabs
          Pharmaceuticals, Inc.**
 
 On
          June
          4, 2003, NNBP acquired approximately 74.4% of LABS in exchange for 24,400,000
          restricted shares of NNBP. From June 5, 2003 through December 31, 2003,
          NNBP
          acquired the remaining 25.6% of LABS from various stockholders in exchange
          for
          6,598,000 restricted shares and additional consideration (in addition,
          see Note
          10 for stock issued in connection with bridge funding for this acquisition).
 
 The
          total
          consideration for LABS was approximately $5.5 million, which included
          the
          fair value of NNBP common stock issued, as well as 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
                
                $
                895,058Investment
                    in OY
                
                
                693,778Fixed
                    assets
                
                
                113,651Identifiable
                    intangible assets
                
                
                1,350,000Goodwill
                
                
                3,615,393Other
                    assets
                
                
                62,500Current
                    liabilities
                
                
                (768,280
                )Note
                    payable
                
                
                (486,188
                )$
                5,475,912
  Acquired
          identifiable intangible assets consist of product rights for the 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.
  F-11
  NANOBAC
          PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
          ENDED DECEMBER 31, 2004 AND 2003
  **2.
          Acquisitions (continued)**
 
 **Nanobac
          OY**
 
 Nanobac
          OY is a Finnish company that performs similar research to that of the Company
          in
          nanobacteria infection. On September 25, 2002, LABS entered into an agreement
          to
          purchase 27% of Nanobac OY stock from three Finnish entities for 11,430
          Euros. A
          separate agreement also required LABS to acquire convertible promissory
          notes in
          Nanobac OY in the amount of 686,000 Euros plus interest. On November 11,
          2003,
          NNBP completed the acquisition of Nanobac OY when the final payment was
          made and
          the Company exercised the conversion option in the convertible promissory
          notes.
          Upon the conclusion of this transaction, the Company owned 65% of OY.
 
 During
          January through March 2004, NNBP acquired the remaining 35% of Nanobac
          OY from
          Dr. Kajander and Dr. Ciftcioglu (“OY Minority Shareholders”). 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.
 
 The
          total
          consideration to date for OY is $5.1 million, which included cash payments
          (made
          before and after the acquisition of LABS), the fair value of NNBP common
          stock
          issued, as well as 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
                
                $
                37,534Fixed
                    assets
                
                
                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 Shareholders
          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 long-term
          liabilities.
  F-12
  NANOBAC
          PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
          ENDED DECEMBER 31, 2004 AND 2003
 
 **2.
          Acquisitions (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, 2003. 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
          2003 or 2004 or of future operations of the combined companies under the
          ownership and management of NNBP.
 
 Year
                    ended December 31,2004
                
                2003As
                    ReportedRevenue
                
                $
                358,361
                
                $
                482,815Net
                    loss
                
                $
                (8,518,408
                )
                $
                (3,699,491
                )Basic
                    loss per share
                
                $
                (0.06
                )
                $
                (0.05
                )Diluted
                    loss per share
                
                $
                (0.06
                )
                $
                (0.05
                )ProformaRevenue
                
                $
                358,361
                
                $
                1,183,210Net
                    loss
                
                $
                (8,555,553
                )
                $
                (5,454,572
                )Basic
                    loss per share
                
                $
                (0.05
                )
                $
                (0.06
                )Diluted
                    loss per share
                
                $
                (0.05
                )
                $
                (0.06
                )
 
 
 **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 $749,326, 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 years ended December 31, 2004 and 2003
          are as
          follows:
 
 2004
                  
                  2003Revenue
                  
                  $
                  5,301
                  
                  $
                  19,970Loss
                      before income taxes
                  
                  
                  ($
                      57,268
                  )
                  
                  ($
                      938,358
                  )Provision
                      for income taxes
                  
                  
                  --
                  
                  
                  --Net
                      loss
                  
                  
                  ($
                      57,268
                  )
                  
                  ($
                      938,358
                  )
 F-13
 NANOBAC
            PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
            TO
            CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
            ENDED DECEMBER 31, 2004 AND 2003
 
 **4.
          Fixed Assets**
 
 Fixed
          assets at December 31, 2004 are summarized as follows: ****
  Dec
                    2004Computer
                    equipment
                
                $
                44,683Computer
                    software
                
                
                17,982Lab
                    equipment
                
                
                49,008Office
                    equipment
                
                
                20,769Furniture
                    and fixtures
                
                
                21,729Leasehold
                    improvements
                
                
                54,967209,138Accumulated
                    Depreciation
                
                
                (84,143
                )$
                124,995
 
 Depreciation
          expense for the years ended December 31, 2004 and 2003 was $47,295 and
          $18,177,
          respectively.
 
 **5.
          Intangible Assets**
 
 Intangible
          assets as of December 31, 2004 are summarized as follows:
 Product
                      rights
                  
                  $
                  1,350,000Patents
                  
                  
                  5,243,0436,593,043Accumulated
                      amortization
                  
                  
                  (832,701
                  )$
                  5,760,342
 Amortization
          expense for the years ended December 31, 2004 and 2003 was $669,775 and
          $162,926, respectively. Expected future amortization is summarized as
          follows:
  Year
                      ending December 31,2005
                  
                  $
                  706,9202006
                  
                  
                  706,9202007
                  
                  
                  706,9202008
                  
                  
                  549,4202009
                  
                  
                  436,920Thereafter
                  
                  
                  2,653,242$
                  5,760,342
 F-14
 NANOBAC
              PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
              ENDED DECEMBER 31, 2004 AND 2003
  **6.
          Accrued Expenses**
 
 Accrued
          expenses as of December 31, 2004 are summarized as follows:
 
 Accrued
                    professional fees
                
                $
                79,500Royalty
                
                
                150,479Employee
                    expense reports
                
                
                19,843Payroll
                    taxes and benefits
                
                
                18,507Other
                
                
                67,532$
                335,861
 
 **7.
          Segment Information**
 
 With
          the
          disposition of its HealthCentrics business unit (see Note 3), NNBP operates
          a
          single business segment. Geographic information is summarized as
          follows:
 
 Year
                    ended December 31,2004
                
                2003RevenueUnited
                    States
                
                $
                343,444
                
                $
                472,735Finland
                
                
                14,917
                
                
                10,080$
                358,361
                
                $
                482,815AssetsUnited
                    States
                
                $
                3,281,026Finland
                
                
                6,403,281$
                9,684,307
 
 The
          geographic classification of revenue was based upon the domicile of the
          entity
          from which the revenues were earned. Approximately 98% of Finland assets
          relate
          to patents recorded as a result of the acquisition of OY (see Note 2).
  F-15
 NANOBAC
              PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
              ENDED DECEMBER 31, 2004 AND 2003
  **8.
          Income taxes**
 
 There
          was
          no current or deferred provision or benefit for income taxes for the years
          ended
          December 31, 2004 and 2003. The components of deferred tax asset as of
          December
          31, 2004 and 2003 are as follows:
 2004
                  
                  2003Deferred
                      tax asset:Net
                      operating loss carryforwards
                  
                  $
                  3,690,000
                  
                  $
                  2,487,000Valuation
                      allowance
                  
                  
                  (3,690,000
                  )
                  
                  (2,487,000
                  )Deferred
                      tax asset net of valuation allowance
                  
                  $
                  -
                  
                  $
                  -
 As
          of
          December 31, 2004, the Company had approximately $9.1 million of net operating
          loss carryovers which expire between 2016 and 2024.
 
 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:
 
 2004
                
                2003Statutory
                    tax benefit
                
                $
                2,981,000
                
                $
                967,000State
                    taxes, net of federal benefit
                
                
                335,000
                
                
                72,000Nondeductible
                    expense for commonstock
                    issued for services
                
                
                (999,000
                )
                
                (292,000
                )Amortization
                    of intangible assets
                
                
                (261,000
                )
                
                (57,000
                )Nontaxable
                    income in connectionwith
                    HealthCentrics' disposition
                
                
                305,000
                
                
                -Nontaxable
                    derivative loss
                
                
                (251,000
                )
                
                -Increase
                    in valuation allowance
                
                
                (2,116,000
                )
                
                (715,000
                )Other,
                    net
                
                
                6,000
                
                
                25,000Provision
                    for taxes
                
                $
                -
                
                $
                -
 
 Changes
          in the valuation allowance during the year ended December 31, 2004 were
          as
          follows:
 
 Valuation
                    allowance, beginning of year
                
                $
                2,487,000Discontinued
                    operations
                
                
                (913,000
                )Increase
                    from continuing operations
                
                
                2,116,000Valuation
                    allowance, end of year
                
                $
                3,690,000
 
  F-16
 NANOBAC
              PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
              ENDED DECEMBER 31, 2004 AND 2003
  **9.
          Related Party Transactions**
 
 Stockholder
          Loan
 
 An
          entity
          controlled by the Chief Executive Officer (who is also the largest stockholder
          of NNBP), had loaned NNBP approximately $8.2 million from June 2003 through
          December 2004. This loan had 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. On December 13, 2004 an additional $500,000 of the
          above loan was converted into 4,166,667 shares of the of the Company’s common
          stock, which is included in the Stock Settlement Liability at December
          31, 2004
          (see Note 10). The remaining loan balance at December 31, 2004 was approximately
          $194,000.
 
 Interest
          expense for the above loans for the years ended December 31, 2004 and 2003
          was
          approximately $238,000 and $23,000, 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.
 
 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.
 
 Royalty
          Agreement
 
 The
          Company was a party to a royalty agreement with the former majority owner
          of
          LABS who, along with his spouse, own approximately 24.4 million common
          shares of
          NNBP. Under the terms of the royalty agreement, this stockholder would
          receive
          an annual fee of $50,000 plus ten percent of gross sales from applicable
          products. On March 16, 2004, the U.S. Patent Office printed Patent 6,706,290
          “Methods for Eradication of Nanobacteria”. With the approval of this patent,
          management believes that the above royalty agreement is not valid and no
          amounts
          will ultimately be due under the above royalty agreement.
 
  F-17
  NANOBAC
          PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
          ENDED DECEMBER 31, 2004 AND 2003
 **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
          32,097,808 shares of the Company’s common stock as follows:
 Shareholder
                      loan (Note 9)
                  
                  
                  29,999,964
                  
                  $
                  7,499,990Employee
                      (Note 9)
                  
                  
                  923,458
                  
                  
                  110,815Unaffiliated
                      vendors
                  
                  
                  1,174
                      385
                  
                  
                  158,72432,097,807
                  
                  $
                  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 (see Note 2). The value of these
          stock and stock equivalent issuances was $4.3 million.
 
 From
          August 2004 through November 2004, the Company entered into Subscription
          Agreements with two unaffiliated investors. Under the terms of the Subscription
          Agreements, the Company received cash of $677,500 (net of $97,500 of expenses)
          during the year ended December 31, 2004. The Company is to receive additional
          cash of $775,000 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”). These amounts are classified as Stock
          Settlement Liability at December 31, 2004. 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, 2004.
  F-18
 
 NANOBAC
              PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
              ENDED DECEMBER 31, 2004 AND 2003
 **10** **.
          Stockholders' equity (continued)**
 
 As
          a
          result of the above Subscription Agreements, at December 31, 2004, the
          Company
          has issued 10,625,000 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, 2004. 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.
          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 $1,275,000 of cash received under
          the
          Subscription Agreements through December 31, 2004 is included in long-term
          liabilities.
 
 At
          December 31, 2004, the Company measured the value of the shares to be issued
          under the Subscription Agreements through December 31, 2004 based on the
          Company’s closing bid price at December 31, 2004 compared to the actual shares
          issued. As a result of this measurement, an additional $643,630 long-term
          liability was initially recorded as of December 31, 2004 with a charge
          to Other
          Comprehensive Income. The financial statements have been restated to record
          this
          charge against current earnings.
 
 From
          May
          2001 through November 2002, the Company was in bankruptcy. Throughout the
          bankruptcy proceedings, the Chairman, Secretary and CEO (collectively “NNBP
          Officers”) funded the Company’s administrative costs and provided management to
          the Company. During January 2003, the Company’s Board of Directors authorized
          compensation to these NNBP Officers in the aggregate amount of $750,000
          for
          services rendered during the bankruptcy. Further, the Board of Directors
          authorized the issuance of stock in satisfaction of the $750,000 liability.
          The
          liability was to be settled through the issuance of up to 75 million shares
          of
          the Company’s stock ($.01 per share fair value at the date of the award). This
          obligation has been recorded at $750,000 (based on the value at the measurement
          date) although shares were issued periodically throughout 2003. Certain
          shares
          were issued as preferred shares (at an equivalent value based on the conversion
          ratio of 44.11 per share). Subsequent to December 31, 2003, the number
          of
          authorized shares was increased to 250,000,000, at which time the previously
          issued preferred stock was converted to 35,048,445 shares of Common stock.
 
 During
          January 2004, a remaining Bankruptcy obligation was satisfied when 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.
 
 During
          2003, a total of 34,998,000 shares of the Company’s common stock were issued for
          the acquisition of LABS (see Note 2) including 4.0 million common shares
          to an
          affiliate of the Company’s Chief Executive Officer in connection with the
          facilitation and bridge funding for this acquisition. The value of these
          share
          issuances was approximately $1.4 million.
 
 An
          aggregate of 3,644,000 shares of stock were issued during 2003 in connection
          with the conversion of $728,800 in related party debt to equity. Stock
          issued
          for services in 2003 aggregated 50,000 shares valued at $30,175. In addition,
          during 2003, the Company sold 1,690,000 shares of stock at prices ranging
          from
          $.20 to $.40 for aggregate proceeds of $548,000 and 368,815 shares of preferred
          stock were converted to 16,268,430 shares of common stock.
 
  F-19
  NANOBAC
          PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
          ENDED DECEMBER 31, 2004 AND 2003
  **10** **.
          Stockholders' equity (continued)**
 
 **Warrants**
 
 As
          of
          December 31, 2004, in connection with the OY acquisition, 5,000,000 warrants
          were outstanding with an exercise price of $.005 per common share and an
          expiration date of August 31, 2009 (see Note 2).
 
 At
          the
          finalization of the Subscription Agreements described above, approximately
          23.4
          million additional warrants will be issued with an estimated weighted average
          exercise price of $.16 per common share and an expiration date of five
          years
          from the date of issuance.
 
 **Stock
          Option Plan**
 
 No
          stock
          options were outstanding for the years ended December 31, 2004 and 2003.
 
 
 **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, 2004:
 
  
 Year
                  ending December 31,2005
                
                $
                174,2812006
                
                
                178,4082007
                
                
                109,2252008
                
                
                58,1632009
                
                
                53,9002010
                
                
                27,234$
                601,211
 
 Rent
          expense on operating leases for the years ended December 31, 2004 and 2003
          was
          approximately $222,000 and $167,000, respectively.
 
 **13.
          Contingency**
 
 On
          September 24, 2004 a civil action was filed in United States District Court
          -
          Southern District of California by World Health Products, LLC (“World Health”)
          broadly alleging that the Company, together with a customer of the Company
          (“Customer”), has infringed on its Patent Number 5,602,180 related to the sale
          of suppositories included in the Company’s supplement product. World Health
          alleged additional complaints against the Customer to which the Company
          is not
          liable. During February 2005, World Health dropped the Company from their
          lawsuit as their tests of the Company’s suppositories determined that World
          Health’s patents were not being infringed upon.
  F-20
 
 NANOBAC
              PHARMACEUTICALS, INCORPORATED AND SUBSIDIARIES
 NOTES
              TO
              CONSOLIDATED FINANCIAL STATEMENTS
 YEARS
              ENDED DECEMBER 31, 2004 AND 2003
  **15.
          Quarterly Data**
 
 Mar
                    31
                
                Jun
                    30
                
                Sep
                    30
                
                Dec
                    31**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
                )
                
                ($0.02
                )**2003
                    Quarter ended**Revenue
                
                $
                0
                
                $
                77,637
                
                $
                241,340
                
                $
                163,838Gross
                    profit
                
                $
                0
                
                $
                17,174
                
                $
                63,932
                
                $
                68,587Loss
                    from continuingoperations
                
                
                ($935,446
                )
                
                ($166,229
                )
                
                ($679,241
                )
                
                ($980,217
                )Net
                    loss
                
                
                ($1,234,083
                )
                
                ($468,666
                )
                
                ($929,230
                )
                
                ($1,067,512
                )Loss
                    per share:Basic
                    and Diluted
                
                
                ($0.03
                )
                
                ($0.01
                )
                
                ($0.01
                )
                
                ($0.01
                )
 
 ***Reconciliation
          of 2003 Quarterly Data to Forms 10-QSB as filed***
 
 Mar
                    31
                
                Jun
                    30
                
                Sep
                    30**Revenue**Revenue
                    as reported on Form 10Q
                
                $
                5,812
                
                $
                84,049
                
                $
                244,616Discontinued
                    operations
                
                
                (5,812
                )
                
                (6,412
                )
                
                (3,276
                )Revenue
                    per above
                
                $
                0
                
                $
                77,637
                
                $
                241,340**Gross
                    Profit**Gross
                    profit as reported on Form 10Q
                
                
                ($10,300
                )
                $
                3,034
                
                $
                38,503Discontinued
                    operations
                
                
                10,300
                
                
                14,140
                
                
                25,429Gross
                    profit per above
                
                $
                0
                
                $
                17,174
                
                $
                63,932**Net
                    loss**Net
                    loss as reported on Form 10Q
                
                
                ($595,222
                )
                
                ($449,924
                )
                
                ($913,780
                )Amortization
                    of intangible assets
                
                
                -
                
                
                (18,742
                )
                
                (90,000
                )Charge
                    or reversal thereof for stock issuances to affiliates of
                    officers
                
                
                (650,000
                )
                
                
                
                
                74,550Other
                
                
                11,139
                
                
                -
                
                
                -Net
                    loss per above
                
                
                ($1,234,083
                )
                
                ($468,666
                )
                
                ($929,230
                )
 
 
 F-21