trials. Moreover, pre-clinical and clinical data are 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 promising results in earlier trials. The failure to adequately demonstrate the safety and effectiveness of an intended product under development could delay or prevent regulatory clearance of the potential drug, resulting in delays to commercialization, and could materially harm our business. Our clinical trials may not demonstrate sufficient levels of safety and efficacy necessary to obtain the requisite regulatory approvals for our drugs, and our proposed drugs may not be approved for marketing.

We may encounter delays or rejections based upon additional government regulation from future legislation or administrative action or changes in FDA policy during the period of development, clinical trials and FDA regulatory review. We may encounter similar delays in foreign countries. Sales of our products outside the U.S. would be subject to foreign regulatory approvals that vary from country to country. The time required to obtain approvals from foreign countries may be shorter or longer than that required for FDA approval, and requirements for foreign licensing may differ from FDA requirements. We may be unable to obtain requisite approvals from the FDA and foreign regulatory authorities, and even if obtained, such approvals may not be on a timely basis, or they may not cover the uses that we request.

Even if we do ultimately receive FDA approval for any of our products, it will be subject to extensive ongoing regulation. This includes regulations governing manufacturing, labeling, packaging, testing, dispensing, prescription and procurement quotas, record keeping, reporting, handling, shipment and disposal of any such drug. Failure to obtain and maintain required registrations or comply with any applicable regulations could further delay or preclude us from developing and commercializing our drugs and subject us to enforcement action.

Our drugs or technology may not gain FDA approval in clinical trials or be effective as a therapeutic agent, which could affect our future profitability and prospects.

In order to obtain regulatory approvals, we must demonstrate that each drug is safe and effective for use in humans and functions as a therapeutic against the effects of a disease or other physiological response. To date, studies conducted in Russia involving our NOV-002 and NOV-205 products have shown what we believe to be promising results and, in fact, NOV-002 has been approved for use there as an immunostimulant in combination with chemotherapy and antimicrobial therapy in indications such as tuberculosis, and NOV-205 has been approved there as a monotherapy agent for the treatment of hepatitis B and C. However, Russian regulatory approval is not equivalent to FDA approval. Pivotal Phase 3 studies with a large number of patients, typically required for FDA approval, were not conducted for NOV-002 and NOV-205 in Russia. Further, all of our Russian clinical studies were completed prior to 2000 and may not have been conducted in accordance with current guidelines either in Russia or the United States.

A U.S.-based Phase 1/2 clinical study involving 44 non-small cell lung cancer patients provided what we believe to be a favorable outcome. As a result, we anticipate commencing a Phase 3 study of NOV-002 for non-small cell lung cancer in 2006. We also anticipate completing a Phase 2 clinical study for NOV-002 for chemotherapy-resistant ovarian cancer and a Phase 1b clinical study for NOV-205 for chronic hepatitis C in early 2007. There can be no assurance, however, that we can demonstrate that these products are safe or effective in advanced clinical trials. We are also not able to give assurances that the results of the tests already conducted can be repeated or that further testing will support our applications for regulatory approval. As a result, our drug and technology research program may be curtailed, redirected or eliminated at any time.

There is no guarantee that we will ever generate substantial revenue or become profitable even if one or more of our drugs are approved for commercialization.

We expect to incur increasing operating losses over the next several years as we incur increasing costs for research and development and clinical trials. Our ability to generate revenue and achieve profitability depends upon our ability, alone or with others, to complete the development of our proposed products, obtain the required regulatory approvals and manufacture, market and sell our

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proposed products. Development is costly and requires significant investment. In addition, if we choose to license or obtain the assignment of rights to additional drugs, the license fees for such drugs may increase our costs.

To date, we have not generated any revenue from the commercial sale of our proposed products or any drugs and do not expect to receive such revenue in the near future. Our primary activity to date has been research and development. A substantial portion of the research results and observations on which we rely were performed by third-parties at those parties' sole or shared cost and expense. We cannot be certain as to when or whether to anticipate commercializing and marketing our proposed products in development, and do not expect to generate sufficient revenues from proposed product sales to cover our expenses or achieve profitability in the near future.

We rely solely on research and manufacturing facilities at various universities, hospitals, contract research organizations and contract manufacturers for all of our research, development, and manufacturing, which could be materially delayed should we lose access to those facilities.

At the present time, we have no research, development or manufacturing facilities of our own. We are entirely dependent on contracting with third parties to use their facilities to conduct research, development and manufacturing. Our inability to have the facilities to conduct research, development and manufacturing may delay or impair our ability to gain FDA approval and commercialization of our drug delivery technology and products.

We currently maintain a good working relationship with such contractors. Should the situation change and we are required to relocate these activities on short notice, we do not currently have an alternate facility where we could relocate our research, development and/or manufacturing activities. The cost and time to establish or locate an alternative research, development and manufacturing facility to develop our technology would be substantial and would delay gaining FDA approval and commercializing our products.

We are dependent on our collaborative agreements for the development of our technologies and business development, which exposes us to the risk of reliance on the viability of third parties.

In conducting our research, development and manufacturing activities, we rely and expect to continue to rely on numerous collaborative agreements with universities, hospitals, governmental agencies, charitable foundations, manufacturers and others. The loss of or failure to perform under any of these arrangements, by any of these entities, may substantially disrupt or delay our research, development and manufacturing activities including our anticipated clinical trials.

We may rely on third-party contract research organizations, service providers and suppliers to support development and clinical testing of our products. Failure of any of these contractors to provide the required services in a timely manner or on reasonable commercial terms could materially delay the development and approval of our products, increase our expenses and materially harm our business, financial condition and results of operations.

We are exposed to product liability, clinical and preclinical liability risks which could create a substantial financial burden should we be sued because we do not currently have product liability insurance above and beyond our general insurance coverage.

Our business exposes us to potential product liability and other liability risks that are inherent in the testing, manufacturing and marketing of pharmaceutical products. We cannot assure that such potential claims will not be asserted against us. In addition, the use in our clinical trials of pharmaceutical products that we may develop and then subsequently sell or our potential collaborators may develop and then subsequently sell may cause us to bear a portion of or all product liability risks. A successful liability claim or series of claims brought against us could have a material adverse effect on our business, financial condition and results of operations.

Although we maintained product liability insurance coverage during the time of the NOV-002 Phase 1/2 clinical study, we do not currently have any product liability insurance or other liability insurance relating to clinical trials or any products or compounds. Currently, no clinical trials are ongoing, but we expect to be starting clinical trials in the second quarter of 2006. It is our intention to

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secure such insurance once new clinical trials are initiated. We cannot give assurances that we will be able to obtain or maintain adequate product liability insurance on acceptable terms, if at all, or that such insurance will provide adequate coverage against our potential liabilities. Furthermore, our current and potential partners with whom we have collaborative agreements or our future licensees may not be willing to indemnify us against these types of liabilities and may not themselves be sufficiently insured or have a net worth sufficient to satisfy any product liability claims. Claims or losses in excess of any product liability insurance coverage that may be obtained by us could have a material adverse effect on our business, financial condition and results of operations.

Acceptance of our products in the marketplace is uncertain and failure to achieve market acceptance will prevent or delay our ability to generate revenues.

Our future financial performance will depend, at least in part, upon the introduction and customer acceptance of our proposed products. Even if approved for marketing by the necessary regulatory authorities, our products may not achieve market acceptance. The degree of market acceptance will depend upon a number of factors including:

•	the receipt of regulatory clearance of marketing claims for the uses that we are developing;

•	the establishment and demonstration of the advantages, safety and efficacy of our technologies;

•	pricing and reimbursement policies of government and third-party payers such as insurance companies, health maintenance organizations and other health plan administrators;

•	our ability to attract corporate partners, including pharmaceutical companies, to assist in commercializing our intended products; and

•	our ability to market our products.

Physicians, patients, payers or the medical community in general may be unwilling to accept, utilize or recommend any of our products. If we are unable to obtain regulatory approval or commercialize and market our proposed products when planned, we may not achieve any market acceptance or generate revenue.

We may face litigation from third parties who claim that our products infringe on their intellectual property rights, particularly because there is often substantial uncertainty about the validity and breadth of medical patents.

We may be exposed to future litigation by third parties based on claims that our technologies, products or activities infringe the intellectual property rights of others or that we have misappropriated the 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 and managerial resources and could harm our reputation. Most of our license agreements would likely require that we pay the costs associated with defending this type of litigation. In addition, intellectual property litigation or claims could force us to do one or more of the following:

•	cease selling, incorporating or using any of our technologies and/or products that incorporate the challenged intellectual property, which would adversely affect our future revenue;

•	obtain a license from the holder of the infringed intellectual property right, which license may be costly or may not be available on reasonable terms, if at all; or

•	redesign our products, which would be costly and time-consuming.

If we are unable to adequately protect or enforce our rights to intellectual property or secure rights to third-party patents, we may lose valuable rights, experience reduced market share, assuming any, or incur costly litigation to protect such rights.

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Our ability to obtain licenses to patents, maintain trade secret protection and operate without infringing the proprietary rights of others will be important to our commercializing any products under development. Therefore, any disruption in access to the technology could substantially delay the development of our technology.

The patent positions of biotechnology and pharmaceutical companies, including us, that involve licensing agreements, are frequently uncertain and involve complex legal and factual questions. In addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued or in subsequent legal proceedings. Consequently, our patent applications and any issued and licensed patents may not provide protection against competitive technologies or may be held invalid if challenged or circumvented. Our competitors may also independently develop products similar to ours or design around or otherwise circumvent patents issued or licensed to us. In addition, the laws of some foreign countries may not protect our proprietary rights to the same extent as U.S. law.

We also rely upon trade secrets, technical know-how and continuing technological innovation to develop and maintain our competitive position. We generally require our employees, consultants, advisors and collaborators to execute appropriate confidentiality and assignment-of-inventions agreements. Our competitors may independently develop substantially equivalent proprietary information and techniques, reverse engineer our information and techniques, or otherwise gain access to our proprietary technology. We may be unable to meaningfully protect our rights in trade secrets, technical know-how and other non-patented technology.

Although our trade secrets and technical know-how are important, our continued access to the patents is a significant factor in the development and commercialization of our products. Aside from the general body of scientific knowledge from other drug delivery processes and technology, these patents, to the best of our knowledge and based upon our current scientific data, are the only intellectual property necessary to develop our products, including NOV-002 and NOV-205. We do not believe that we are or will be violating any patents in developing our technology.

We may have to resort to litigation to protect our rights for certain intellectual property, or to determine their scope, validity or enforceability. Enforcing or defending our rights is expensive, could cause diversion of our resources and may not prove successful. Any failure to enforce or protect our rights could cause us to lose the ability to exclude others from using our technology to develop or sell competing products.

We have limited manufacturing experience and if our products are approved we may not be able to manufacture sufficient quantities at an acceptable cost, or may be subject to risk that contract manufacturers could experience shut-downs or delays.

We remain in the research and development and clinical and pre-clinical trial phase of product commercialization. Accordingly, if our products are approved for commercial sale, we will need to establish the capability to commercially manufacture our product(s) in accordance with FDA and other regulatory requirements. We have limited experience in establishing, supervising and conducting commercial manufacturing. If we fail to adequately establish, supervise and conduct all aspects of the manufacturing processes, we may not be able to commercialize our products.

We presently plan to rely on third-party contractors to manufacture our products. This may expose us to the risk of not being able to directly oversee the production and quality of the manufacturing process. Furthermore, these contractors, whether foreign or domestic, may experience regulatory compliance difficulties, mechanical shutdowns, employee strikes or other unforeseeable acts that may delay production.

Due to our limited marketing, sales and distribution experience, we may be unsuccessful in our efforts to sell our products, enter into relationships with third parties or develop a direct sales organization.

We have not yet had to establish marketing, sales or distribution capabilities for our proposed products. Until such time as our products are further along in the regulatory process, we will not devote any meaningful time and resources to this effort. At the appropriate time, we intend to enter into agreements with third parties to sell our products or we may develop our own sales and

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marketing force. We may be unable to establish or maintain third-party relationships on a commercially reasonable basis, if at all. In addition, these third parties may have similar or more established relationships with our competitors.

If we do not enter into relationships with third parties for the sale and marketing of our products, we will need to develop our own sales and marketing capabilities. We have limited experience in developing, training or managing a sales force. If we choose to establish a direct sales force, we may incur substantial additional expenses in developing, training and managing such an organization. We may be unable to build a sales force on a cost-effective basis or at all. Any such direct marketing and sales efforts may prove to be unsuccessful. In addition, we will compete with many other companies that currently have extensive marketing and sales operations. Our marketing and sales efforts may be unable to compete against these other companies. We may be unable to establish a sufficient sales and marketing organization on a timely basis, if at all.

We may be unable to engage qualified distributors. Even if engaged, these distributors may:

•	fail to satisfy financial or contractual obligations to us;

•	fail to adequately market our products;

•	cease operations with little or no notice; or

•	offer, design, manufacture or promote competing products.

If we fail to develop sales, marketing and distribution channels, we would experience delays in product sales and incur increased costs, which would harm our financial results.

If we are unable to convince physicians as to the benefits of our intended products, we may incur delays or additional expense in our attempt to establish market acceptance.

Broad use of our products may require physicians to be informed regarding these products and their intended benefits. The time and cost of such an educational process may be substantial. Inability to successfully carry out this physician education process may adversely affect market acceptance of our products. We may be unable to timely educate physicians regarding our intended products in sufficient numbers to achieve our marketing plans or to achieve product acceptance. Any delay in physician education may materially delay or reduce demand for our products. In addition, we may expend significant funds towards physician education before any acceptance or demand for our products is created, if at all.

We may have difficulty raising needed capital in the future because of our limited operating history and business risks associated with us.

We currently generate no revenue from our proposed products or otherwise. We do not know when this will change. We have expended and will continue to expend substantial funds in the research, development and clinical and pre-clinical testing of our drug compounds. We will require additional funds to conduct research and development, establish and conduct clinical and pre-clinical trials, establish commercial-scale manufacturing arrangements and provide for the marketing and distribution of our products. Additional funds may not be available on acceptable terms, if at all. If adequate funds are unavailable from any available source, we may have to delay, reduce the scope of or eliminate one or more of our research or development programs or product launches or marketing efforts, which may materially harm our business, financial condition and results of operations.

Our long-term capital requirements are expected to depend on many factors, including:

•	the number of potential products and technologies in development;

•	continued progress and cost of our research and development programs;

•	progress with pre-clinical studies and clinical trials;

•	the time and costs involved in obtaining regulatory clearance;

•	costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;

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•	costs of developing sales, marketing and distribution channels and our ability to sell our drugs;

•	costs involved in establishing manufacturing capabilities for clinical trial and commercial quantities of our drugs;

•	competing technological and market developments;

•	market acceptance of our products;

•	costs for recruiting and retaining management, employees and consultants; and

•	costs for training physicians.

We may consume available resources more rapidly than currently anticipated, resulting in the need for additional funding. We may seek to raise any necessary additional funds through the issuance of warrants, equity or debt financings or executing collaborative arrangements with corporate partners or other sources, which may be dilutive to existing stockholders or otherwise have a material effect on our current or future business prospects. In addition, in the event that additional funds are obtained through arrangements with collaborative partners or other sources, we may have to relinquish economic and/or proprietary rights to some of our technologies or products under development that we would otherwise seek to develop or commercialize by ourselves. If adequate funds are not available, we may be required to significantly reduce or refocus our development efforts with regard to our drug compounds.

The market for our products is rapidly changing and competitive, and new therapeutics, new drugs and new treatments which may be developed by others could impair our ability to maintain and grow our business and remain competitive.

The pharmaceutical and biotechnology industries are subject to rapid and substantial technological change. Developments by others may render our technologies and intended products noncompetitive or obsolete, or we may be unable to keep pace with technological developments or other market factors. Technological competition from pharmaceutical and biotechnology companies, universities, governmental entities and others diversifying into the field is intense and is expected to increase. Many of these entities have significantly greater research and development capabilities and budgets than we do, as well as substantially more marketing, manufacturing, financial and managerial resources. These entities represent significant competition for us. Acquisitions of, or investments in, competing pharmaceutical or biotechnology companies by large corporations could increase such competitors' financial, marketing, manufacturing and other resources.

We are an early stage enterprise that has heretofore operated with limited day-to-day business management, operating as a vehicle to hold certain technology for possible future exploration, and has been and will continue to be engaged in the development of new drugs and therapeutic technologies. As a result, our resources are limited and we may experience management, operational or technical challenges inherent in such activities and novel technologies. Competitors have developed or are in the process of developing technologies that are, or in the future may be, the basis for competition. Some of these technologies may have an entirely different approach or means of accomplishing similar therapeutic effects compared to our technology. Our competitors may develop drugs and drug delivery technologies that are more effective than our intended products and, therefore, present a serious competitive threat to us.

The potential widespread acceptance of therapies that are alternatives to ours may limit market acceptance of our products even if commercialized. Many of our targeted diseases and conditions can also be treated by other medication or drug delivery technologies. These treatments may be widely accepted in medical communities and have a longer history of use. The established use of these competitive drugs may limit the potential for our technologies and products to receive widespread acceptance if commercialized.

If users of our products are unable to obtain adequate reimbursement from third-party payers, or if new restrictive legislation is adopted, market acceptance of our products may be limited and we may not achieve anticipated revenues.

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The continuing efforts of government and insurance companies, health maintenance organizations and other payers of healthcare costs to contain or reduce costs of health care may affect our future revenues and profitability, and the future revenues and profitability of our potential customers, suppliers and collaborative partners and the availability of capital. For example, in certain foreign markets, pricing or profitability of prescription pharmaceuticals is subject to government control. In the United States, given recent federal and state government initiatives directed at lowering the total cost of health care, the U.S. Congress and state legislatures will likely continue to focus on health care reform, the cost of prescription pharmaceuticals and on the reform of the Medicare and Medicaid systems. While we cannot predict whether any such legislative or regulatory proposals will be adopted, the announcement or adoption of such proposals could materially harm our business, financial condition and results of operations.

Our ability to commercialize our products will depend in part on the extent to which appropriate reimbursement levels for the cost of our products and related treatment are obtained by governmental authorities, private health insurers and other organizations, such as health maintenance organizations. Third-party payers are increasingly challenging the prices charged for medical drugs and services. Also, the trend toward managed health care in the United States and the concurrent growth of organizations such as health maintenance organizations, which could control or significantly influence the purchase of health care services and drugs, as well as legislative proposals to reform health care or reduce government insurance programs, may all result in lower prices for or rejection of our drugs. The cost containment measures that health care payers and providers are instituting and the effect of any health care reform could materially harm our ability to operate profitably.

We depend upon key personnel who may terminate their employment with us at any time, and we would need to hire additional qualified personnel.

Our success will depend to a significant degree upon the continued services of key management and advisors to us. There can be no assurance that these individuals will continue to provide service to us. In addition, our success will depend on our ability to attract and retain other highly skilled personnel. We may be unable to recruit such personnel on a timely basis, if at all. Our management and other employees may voluntarily terminate their employment with us at any time. The loss of services of key personnel, or the inability to attract and retain additional qualified personnel, could result in delays in development or approval of our products, loss of sales and diversion of management resources.

Compliance with changing corporate governance and public disclosure regulations may result in additional expense.

Keeping abreast of, and in compliance with, changing laws, regulations and standards relating to corporate governance, public disclosure and internal controls, including the Sarbanes-Oxley Act of 2002, new SEC regulations and, in the event we seek and are approved for listing on a registered national securities exchange, the stock exchange rules will require an increased amount of management attention and external resources. We intend to continue to invest all reasonably necessary resources to comply with evolving standards, which may result in increased general and administrative expense and a diversion of management time and attention from revenue-generating activities to compliance activities.

Our executive officers, directors and principal stockholders have substantial holdings, which could delay or prevent a change in corporate control favored by our other stockholders.

Our directors, officers and 5% stockholders beneficially own, in the aggregate, approximately 32% of our outstanding voting stock. They have the ability to determine our direction and decisions. The interests of our current officers and directors may differ from the interests of other stockholders. As a result, our current officers and directors would have the ability to exercise control over all corporate actions requiring stockholder approval, irrespective of how the other stockholders may vote, including the following actions:

•	the election of directors;

•	the amendment of charter documents;

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•	issuance of blank check preferred or convertible stock, notes or instruments of indebtedness, which may have conversion, liquidation and similar features and other financing arrangements; or

•	the approval of certain mergers and other significant corporate transactions, including a sale of substantially all of our assets, or merger with a publicly-traded shell or other company.

Our common stock could be further diluted as the result of our issuing convertible securities, warrants or options.

In the past, we have issued convertible securities, such as our Series A preferred stock, and warrants in order to raise money. We have also issued options and warrants as compensation for services and incentive compensation for our employees and directors. We have a substantial number of shares of common stock reserved for issuance upon the conversion and exercise of these securities. Our issuing additional convertible securities, options and warrants could affect the rights of our stockholders, and could reduce the market price of our common stock.

We sold shares of our Series A preferred stock and common stock purchase warrants in violation of certain provisions of our securities purchase agreement and registration rights agreement executed in connection with our private placement of units. While we have received waivers from such investors representing approximately 96% of the outstanding units as of March 21, 2006 (83% as of December 31, 2005), other investors who do not waive such rights could sue us seeking damages arising from the breach of such agreements.

On May 27, 2005, June 29, 2005, July 29, 2005 and August 9, 2005, we sold units, consisting of shares of our common stock and common stock purchase warrants pursuant to a securities purchase agreement and registration rights agreement.

The registration rights agreement required that:

•	We file a registration statement with the SEC to register the shares of common stock and the shares of common stock issuable upon the exercise of the warrants.

•

Each of these investors was entitled to liquidated damages in an amount equal to two percent (2%) of the purchase price of the shares of common stock and the common stock purchase warrants if we failed to file a registration statement with the SEC on or before October 8, 2005 and if we failed to pay any partial liquidated damages within seven days after the date payable, we were required to pay interest thereon at a rate of fifteen percent (15%) per annum to such investors until such amounts are paid in full.

•	Neither we nor any of our security holders include our securities in a registration statement other than the shares of common stock and shares of common stock issuable upon exercise of the warrants.

The securities purchase agreement required that:

•	From the date of the purchase agreement until February 13, 2006, we were generally prohibited from issuing shares of common stock or common stock equivalents.

•	From the date of the purchase agreement until the two year anniversary of such agreement, we were prohibited from effecting or entering into an agreement to effect any financing involving a variable rate transaction.

We filed a registration statement on Form SB-2 with the SEC on November 16, 2005 to register for resale the shares of common stock and shares of common stock issuable upon exercise of the warrants, which became effective on December 15, 2005. We have recorded an accrued liability of $33,000 as of December 31, 2005 for payments in connection with this late filing.

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ITEM 7.    FINANCIAL STATEMENTS

INDEX TO FINANCIAL STATEMENTS

			Page
FINANCIAL STATEMENTS FOR NOVELOS THERAPEUTICS, INC.
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
Report of Independent Registered Public Accounting Firm					26
Balance Sheets at December 31, 2005 and 2004					27
Statements of Operations for the Years Ended December 31, 2005 and 2004					28
Statements of Stockholders' Deficit for the Years Ended December 31, 2005 and 2004					29
Statements of Cash Flows for the Years Ended December 31, 2005 and 2004					30
Notes to Financial Statements					31

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors
Novelos Therapeutics, Inc.
Newton, Massachusetts

We have audited the accompanying balance sheets of Novelos Therapeutics, Inc. as of December 31, 2005 and 2004, and the related statements of operations, stockholders' deficiency and cash flows for the 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 audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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.

As discussed in Note 13, the financial statements have been restated for changes to the Company's accounting for the beneficial conversion feature associated with its Series A 8% Cumulative Convertible Preferred Stock and to correct the calculation of Net Loss Attributable to Common Stockholders and Basic and Diluted Net Loss Attributable to Common Stockholders Per Common Share.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Novelos Therapeutics, Inc. as of December 31, 2005 and 2004 and the results of its operations, changes in stockholders' deficiency and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.

/s/ Stowe & Degon
Worcester, Massachusetts
March 22, 2006 except for Notes 5 and 13 for which the date is November 1, 2006

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NOVELOS THERAPEUTICS, INC.
BALANCE SHEETS
DECEMBER 31, 2005 and 2004

ASSETS			2005						2004
CURRENT ASSETS:
Cash and equivalents				$	4,267,115					$	10,356
Restricted cash					196,908						—
Accounts receivable					—						12,584
Prepaid expenses and other current assets					337,902						79,631
Total current assets					4,801,925						102,571
FIXED ASSETS, net					22,610						—
DEFERRED FINANCING COSTS					24,612						—
PREPAID EXPENSES					79,896
DEPOSITS					9,656						6,000
TOTAL ASSETS				$	4,938,699					$	108,571
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable and accrued liabilities				$	211,456					$	2,026,421
Accrued interest					5,700						397,612
Notes payable to stockholders					—						2,017,931
Current portion of long-term debt					—						1,840
Total current liabilities					217,156						4,443,804
DEPOSIT ON CONVERTIBLE PREFERRED STOCK, SERIES B					—						1,142
DEFERRED REVENUE					—						12,584
Total liabilities					217,156						4,457,530
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY):
Series A 8% convertible preferred stock; $0.00001 par value; 7,000 shares authorized; 3,264 and 0 shares issued and outstanding in 2005 and 2004, respectively					—						—
Common stock; $0.00001 par value; 100,000,000 shares authorized; 27,921,199 and 4,426,126 shares issued and outstanding in 2005 and 2004, respectively					279						44
Additional paid-in capital					20,119,820						7,998,110
Accumulated deficit					(15,398,556	)					(12,345,157	)
Treasury stock (195,672 shares), at cost					—						(1,956	)
Total stockholders' equity (deficiency)					4,721,543						(4,348,959	)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)				$	4,938,699					$	108,571

See notes to financial statements.

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NOVELOS THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2005 AND 2004

			2005						2004
			Restated (Note 13)
REVENUES:
Sales of samples				$	12,584					$	4,962
COSTS AND EXPENSES:
Research and development					1,136,217						261,768
General and administrative					1,442,749						368,413
Total costs and expenses					2,578,966						630,181
OTHER INCOME (EXPENSE):
Consulting revenue					—						13,374
Interest income					49,876						95
Interest expense					(109,102	)					(208,741	)
Miscellaneous					5,796						5,206
Gain on forgiveness of debt					2,087,531						—
Restructuring expense					(2,521,118	)					—
Total other expense					(487,017	)					(190,066	)
NET LOSS					(3,053,399	)					(815,285	)
PREFERRED STOCK DIVIDEND					(64,000	)					—
PREFERRED STOCK DEEMED DIVIDEND					(2,077,321	)					—
ACCRETION ON CONVERTIBLE PREFERRED STOCK, SERIES A					—						(69,541	)
ACCRETION ON CONVERTIBLE PREFERRED STOCK SERIES B					—						(67,267	)
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS				$	(5,194,720	)				$	(952,093	)
BASIC AND DILUTED NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS PER COMMON SHARE				$	(0.24	)				$	(0.28	)
SHARES USED IN COMPUTING BASIC AND DILUTED NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS PER COMMON SHARE					21,757,424						3,455,238

See notes to financial statements.

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NOVELOS THERAPEUTICS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)

			Common Stock												Series A Cumulative Convertible Preferred Stock												Convertible Preferred Stock, Series A												Convertible Preferred Stock, Series B												Additional Paid-in Capital						Accumulated Deficit						Treasury Stock						Total Stockholders' Equity (Deficiency)
			Shares						Amount						Shares						Amount						Shares						Amount						Shares						Amount
																																																			Restated (Note 13)
BALANCE AT JANUARY 1, 2004					20,000					$	200						—					$	—						2,783					$	4,078,764						2,201					$	3,687,905					$	82,696					$	(11,393,064	)				$	—					$	(3,543,499	)
Recapitalization					4,014,782						(160	)					—						—						(2,783	)					(4,148,305	)					(2,201	)					(3,755,172	)					7,903,637						—						—						—
Accretion on Series A					—						—						—						—						—						69,541						—						—						—						(69,541	)					—						—
Accretion on Series B					—						—						—						—						—						—						—						67,267						—						(67,267	)					—						—
Shares issued in consideration of cancellation of escrow agreement					391,344						4						—						—						—						—						—						—						3,909						—						—						3,913
Stock based compensation					—						—						—						—						—						—						—						—						7,868						—						—						7,868
Treasury stock acquired (195,672 shares)					—						—						—						—						—						—						—						—						—						—						(1,956	)					(1,956	)
Net loss					—						—						—						—						—						—						—						—						—						(815,285	)					—						(815,285	)
BALANCE AT DECEMBER 31, 2004					4,426,126						44						—						—						—						—						—						—						7,998,110						(12,345,157	)					(1,956	)					(4,348,959	)
Issuance of common stock for financing commitment					10,500,000						105						—						—						—						—						—						—						—						—						—						105
Issuance of common stock upon conversion of convertible debt					1,760,000						18						—						—						—						—						—						—						1,099,982						—						—						1,100,000
Issuance of common stock in settlement of unsecured debt					586,351						6						—						—						—						—						—						—						732,935						—						—						732,941
Issuance of common stock in restructuring of royalty arrangement					2,016,894						20						—						—						—						—						—						—						2,521,098						—						—						2,521,118
Issuance of common stock in merger					4,500,000						45						—						—						—						—						—						—						(45	)					—						—						—
Retirement of treasury stock in merger					(195,672	)					(2	)					—						—						—						—						—						—						(1,954	)					—						1,956						—
Issuance of common stock in private placement, net of issuance costs of $891,383					4,000,000						40						—						—						—						—						—						—						4,108,577						—						—						4,108,617
Issuance of common stock for placement agent services					125,000						1						—						—						—						—						—						—						156,249						—						—						156,250
Issuance of common stock for services					202,500						2						—						—						—						—						—						—						527,798						—						—						527,800
Compensation expense associated with options issued to non-employees					—						—						—						—						—						—						—						—						113,070						—						—						113,070
Issuance of cumulative convertible preferred stock, net of issuance costs of $336,000					—						—						3,200						—						—						—						—						—						—						—						—						—
Issuance of warrants in connection with preferred stock					—						—						—						—						—						—						—						—						786,679						—						—						786,679
Deemed dividend to preferred stockholders					—						—						—						—						—						—						—						—						2,077,321						—						—						2,077,321
Issuance of cumulative convertible preferred stock in payment of dividends					—						—						64						—						—						—						—						—						—						—						—						—
Net loss					—						—						—						—						—						—						—						—						—						(3,053,399	)					—						(3,053,399	)
BALANCE AT DECEMBER 31, 2005					27,921,199					$	279						3,264					$	—						—					$	—						—					$	—					$	20,119,820					$	(15,398,556	)				$	—					$	4,721,543

See notes to financial statements.

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NOVELOS THERAPEUTICS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2005 AND 2004

			2005						2004
			Restated (Note 13)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss				$	(3,053,399	)				$	(815,285	)
Adjustments to reconcile net loss to cash used for operating activities:
Depreciation and amortization					3,244						2,538
Stock-based compensation					399,461						7,868
Gain on forgiveness of debt					(2,087,531	)					—
Loss on cancellation of escrow agreement					—						1,957
Common stock issued for restructuring expense					2,521,118						—
Increase (decrease) in cash from:
Accounts receivable					12,584						100
Prepaid expenses and other current assets					(96,653	)					(75,219	)
Accounts payable and accrued expenses					(136,538	)					314,194
Accrued interest					51,451						174,520
Deferred revenue					(12,584	)					(100	)
Deferred rent					(250	)					250
Cash used in operating activities					(2,399,097	)					(389,177	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment					(25,854	)					—
Increase in restricted cash					(196,908	)					—
Deferred financing costs					(24,612	)					—
Deposits					(4,798	)					—
Cash used in investing activities					(252,172	)					—
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net					3,714,868						—
Proceeds from issuance of Series A 8% cumulative convertible preferred stock, net					2,864,000						—
Payments of long-term debt					(1,840	)					(2,832	)
Proceeds from issuance of promissory notes					850,000						219,000
Payment of promissory notes					(519,000	)					—
Cash provided by financing activities					6,908,028						216,168
INCREASE (DECREASE) IN CASH AND EQUIVALENTS					4,256,759						(173,009	)
CASH AND EQUIVALENTS AT BEGINNING OF YEAR					10,356						183,365
CASH AND EQUIVALENTS AT END OF YEAR				$	4,267,115					$	10,356
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest				$	57,461					$	33,750
SUPPLEMENTAL DISCLOSURES OF NON-CASH ACTIVITIES
Deemed dividend on preferred stock				$	2,077,321					$	—
Preferred stock issued in payment of dividends				$	64,000					$	—
Common stock issued for placement agent services				$	156,250					$	—
Common stock issued on conversion of promissory notes				$	1,100,000					$	—
Common stock issued to repay notes payable				$	638,719					$	—
Common stock issued in exchange for accounts payable				$	544,221					$	—
Common stock issued for accrued interest				$	100,000					$	—
Common stock issued for prepaid expenses				$	426,450					$	—
Demand notes payable forgiven				$	610,212					$	—
Accounts payable forgiven				$	773,599					$	—
Accrued compensation forgiven				$	360,357					$	—
Accrued interest forgiven				$	343,363					$	—

See notes to financial statements.

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Novelos Therapeutics, Inc.

Notes to Financial Statements

1.    NATURE OF BUSINESS

Novelos Therapeutics, Inc. (‘‘Novelos’’ or on or after June 13, 2005, the ‘‘Company’’) was incorporated on June 21, 1996 as AVAM International, Inc. (‘‘AVAM’’). On October 6, 1998, Novelos Therapeutics, Inc., a newly incorporated entity, merged into AVAM, and the name of AVAM was changed to Novelos Therapeutics, Inc. See Note 3 regarding the merger and restructuring that occurred during 2005. Novelos owns exclusive worldwide intellectual property rights (excluding Russia and other states of the former Soviet Union) related to certain clinical compounds and other pre-clinical compounds based on oxidized glutathione. Novelos focuses on therapeutics for the treatment of various cancers and infectious diseases.

The Company is subject to a number of risks similar to those of other companies in an early stage of development. Principal among these risks are dependence on key individuals, competition from substitute products and larger companies, the successful development and marketing of its products in a highly regulated environment, and the need to obtain additional financing necessary to fund future operations.

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Cash Equivalents — The Company considers all short-term investments purchased with original maturities of three months or less to be cash equivalents.

Restricted Cash — Restricted cash represents cash placed in escrow as contractually required under an employment agreement with an officer.

Property and Equipment — Property and equipment are stated at cost. Depreciation on property and equipment is provided using the straight-line method over the estimated useful lives of the assets, which range from three to five years. Leasehold improvements are depreciated over the lesser of the estimated useful lives of the assets or the remaining lease term.

Revenue Recognition — Revenue from sales of samples is recognized when persuasive evidence of an arrangement exists, the price is fixed and determinable, delivery has occurred, and there is reasonable assurance of collection.

Research under collaborative research and development agreements will be recognized as research is performed under the terms of the agreements, when there is an obligation to pay, and when no future performance obligations exist. Consideration received in advance, whether cash, equity securities or other instruments, is initially recorded as deferred revenue and recognized when earned. Revenue earned upon the attainment of research or product development milestones will be recognized over the terms of the related agreements, once all contingencies are eliminated, after taking into consideration the cost to date and the estimated total cost of the research activities.

Research and Development — Research and development costs are expensed as incurred.

Income Taxes — The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (‘‘SFAS’’) No. 109, Accounting for Income Taxes (‘‘SFAS 109’’). SFAS 109 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse.

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Earnings (Loss) Per Share — Basic earnings (loss) per share is computed by dividing income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed by dividing income attributable to common stockholders by the weighted average number of common shares outstanding during the period plus the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. Dilutive securities include stock options, convertible preferred stock and warrants. The Company's outstanding stock options and warrants are not included in the calculation of loss per share because their inclusion would be antidilutive.

Stock-Based Compensation — The Company accounts for stock option awards granted to directors and employees (collectively, employees) under the recognition and measurement principles of Accounting Principles Board Opinion (‘‘APB’’) No. 25, Accounting for Stock Issued to Employees, (APB 25). Under this method compensation cost is recognized for the amount by which the market price of the stock on the date of grant exceeds the exercise price of the option. For the years ended December 31, 2005 and 2004, there was no stock-based employee compensation cost recorded for options granted to employees under the plan as none have been granted at exercise prices below the fair market value of the underlying stock. For those options granted at exercise prices equal to or greater than the fair market value of the underlying stock on the date of the grant, the Company applies the disclosure only provision of SFAS No. 123, Accounting for Stock-based Compensation (‘‘SFAS 123’’). The fair value of the Company's stock options used to compute pro forma net loss below is the estimated fair value at the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions for the year ended December 31, 2005:

Risk-free interest rate			3.95% - - 4.81%
Expected volatility			0% - 80%
Expected lives			2 - 10 years
Expected dividend			0

The per share, weighted-average grant date fair value of options granted during the years ended December 31, 2005 and 2004 was $0.50 and $0.01, respectively.

For purposes of pro forma disclosures, the estimated fair value of the stock options is amortized over the stock options' vesting periods. Had compensation expense for the Company's stock-based compensation plans been determined based on the fair market value on the grant dates for awards under those plans consistent with the method of SFAS 123, the Company's net loss attributable to common stockholders and net loss per share attributable to common stockholders would have been as follows:

			Year Ended December 31,
			2005						2004
			Restated (Note 13)
Net loss attributable to common stockholders as reported				$	(5,194,720	)				$	(952,093	)
Stock-based employee compensation expense determined under fair-value-based method					(111,082	)					(5,272	)
Pro forma net loss attributable to common stockholders				$	(5,305,802	)				$	(957,365	)
Basic and diluted net loss attributable to common stockholders per share:
As reported				$	(0.24	)				$	(0.28	)
Pro forma				$	(0.24	)				$	(0.28	)

In December 2004, the Financial Accounting Standards Board issued SFAS No. 123(R), Share-Based Payment, (‘‘SFAS 123R’’), which is effective for public entities that file as small business issuers as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. SFAS 123R requires a public entity to measure the cost of employee services received in

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exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award, the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service.

The Company will be required to apply SFAS 123R during the quarter ending March 31, 2006. SFAS 123R allows two methods for accounting for the effects of the transition: the modified prospective transition method and the modified retrospective method of transition. The Company has determined that it will implement SFAS 123R using the modified prospective method. Under the modified prospective transition method, the Company will use the fair value-based accounting method for all employee awards granted, modified, or settled after the effective date. As of the effective date, compensation cost related to the nonvested portion of awards outstanding as of that date will be based on the grant-date fair value of those awards as calculated under the original provisions of SFAS 123. The Company will not remeasure the grant-date fair value estimate of the unvested portion of awards granted prior to the effective date.

Stock or other equity-based compensation for non-employees is accounted for under the fair-value method as required by SFAS 123 and Emerging Issues Task Force (‘‘EITF’’) No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction With Selling, Goods or Services. Under this method, the equity-based instrument is valued at either the fair value of the consideration received or the equity instrument issued on the date of vesting. The resulting compensation cost is recognized and charged to operations over the service period. The measurement date is generally the issuance date for employees and the vesting date for consultants. The resulting non-cash expense is being recorded in the statements of operations over the vesting period of the stock option.

Comprehensive Income (Loss) — The Company had no components of comprehensive income other than net loss in all of the periods presented.

Concentration of Credit Risk — The Company maintains deposits in financial institutions, which occasionally exceed federally insured limits. Senior management continually reviews the financial stability of these institutions.

Impairment of Long-Lived Assets — At each balance sheet date, the Company assesses whether there has been an impairment in the value of long-lived assets by determining whether projected undiscounted cash flows generated by the applicable asset exceed its net book value as of the assessment date. There were no impairments of the Company's assets at the end of each period presented.

New Accounting Pronouncements — In May 2005, the Financial Accounting Standards Board issued SFAS No. 154, Reporting Accounting Changes in Interim Financial Statements (‘‘SFAS 154’’), which replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. SFAS 154 will be effective for the Company beginning January 1, 2006 and is not expected to have a material impact on the Company's financial position or results of operations.

Reclassifications — Certain accounts previously reported in the 2004 financial statements have been reclassified to facilitate comparability with the current year presentation. These reclassifications had no effect on 2004 net loss as previously reported.

3.    MERGER AND RESTRUCTURING

On May 26, 2005, indebtedness of Novelos in the amount of $3,139,185 was exchanged for 586,351 shares of common stock of Novelos with an aggregate deemed value of $732,941 and cash in the amount of $318,714, which resulted in forgiveness of debt income of $2,087,531. Also on May 26,

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2005, holders of convertible notes of Novelos in the principal amount of $1,100,000 converted their notes into 1,760,000 shares of common stock of Novelos at a price of $0.625 per share. In addition, Novelos amended an arrangement for future royalty payments to a related party (see Note 11), which resulted in the issuance of 2,016,894 shares of its common stock with an aggregate deemed value of $2,521,118. These amounts have been reflected in Novelos' Statements of Operations as ‘‘Gain on forgiveness of debt’’ and ‘‘Restructuring expense.’’

On May 26, 2005, Nove Acquisition, Inc., a wholly-owned subsidiary of Common Horizons, Inc., a Nevada corporation (‘‘Common Horizons’’), merged with and into Novelos such that Novelos was the surviving corporation and became a wholly-owned subsidiary of Common Horizons. All outstanding shares of common stock of Novelos were converted into an equal number of shares of common stock of Common Horizons. In addition, each option and warrant to acquire shares of common stock of Novelos was converted into the right to acquire an equal number of shares of common stock of Common Horizons at the exercise price stated in the original option or warrant. All treasury stock (195,672 shares) was retired.

On May 27, 2005, Common Horizons sold 87 units, each unit consisting of 20,000 shares of common stock and warrants expiring on August 9, 2008 to purchase 10,000 shares of common stock at a purchase price of $2.25 per share (a ‘‘Unit’’), in a private placement transaction to accredited investors. As a result of the sale of these units, Common Horizons issued 1,740,000 shares of common stock and warrants to purchase 870,000 shares of common stock. Common Horizons received $1,725,000 in cash as a result of such sale of Units. Holders of convertible debt of Common Horizons in the amount of $450,000 converted the debt into 18 of the 87 Units. In connection with the closing, Common Horizons paid commissions and finders fees consisting of $217,500 in cash and issued warrants expiring August 9, 2010 to purchase 152,000 shares of common stock of Common Horizons at a price of $2.00 per share.

On May 27, 2005, as a result of the transactions described above, there were approximately 25,458,700 shares of common stock of Common Horizons issued and outstanding and options and warrants to purchase up to 2,202,651 and 1,764,000 shares, respectively, of common stock of Common Horizons issued and outstanding.

On June 13, 2005, Common Horizons merged with and into its wholly-owned subsidiary, Novelos. Each stockholder of Common Horizons received one share of common stock, par value $0.00001 per share, of Novelos for each share of common stock, par value $0.001 per share, of Common Horizons which resulted in the issuance of 4,500,000 shares of Novelos common stock. In addition, each option and warrant to acquire shares of common stock of Common Horizons was converted into the right to acquire an equal number of shares of common stock of Novelos at the exercise price stated in the original option or warrant.

On June 29, 2005, the Company completed a second closing of its private placement of Units. The Company sold 33 Units for aggregate gross proceeds of $825,000. The Company issued to the accredited investors an aggregate of 660,000 shares of its common stock and warrants to purchase an aggregate of 330,000 shares of its common stock. In connection with this second closing, the Company paid commissions and finders fees consisting of $80,500 and issued warrants expiring August 9, 2010 to purchase 64,000 shares of common stock of the Company at an exercise price of $2.00 per share.

On July 29, 2005, the Company completed a third closing of its private placement of Units. The Company sold 46 Units, which resulted in aggregate gross proceeds to the Company of $1,150,000. The Company issued to the accredited investors an aggregate of 920,000 shares of its common stock and warrants to purchase an aggregate of 460,000 shares of its common stock. In connection with this closing, the Company paid commissions and finders fees consisting of $105,000 and issued warrants expiring August 9, 2010 to purchase 82,000 shares of common stock of the Company at a price of $2.00 per share.

On August 9, 2005, the Company completed a fourth closing of its private placement of Units. The Company sold 34 Units, receiving $750,000 in cash as a result of such sale, and converted accrued interest of $100,000 into Units. The Company issued to the accredited investors an aggregate of

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680,000 shares of its common stock and warrants to purchase an aggregate of 340,000 shares of its common stock. In connection with this closing, the Company paid finders fees consisting of $58,000 and issued warrants expiring August 9, 2010 to purchase 42,000 shares of common stock of the Company at a price of $2.00 per share.

On August 9, 2005, the Company repaid certain stockholder loans in the principal amount of $500,000 advanced in December 2004 and January 2005 and more fully described in Note 7 with proceeds from the private placement of Units.

In connection with the private placement of Units, vFinance Investments, Inc. and Mercer Capital, Ltd. acted as placement agents, on a best efforts basis. The placement agent agreement provided that the placement agents receive 8% of the gross proceeds of the Units sold by or through the efforts of the placement agents, a nonaccountable expense allowance of 2% of the gross proceeds of all Units sold in the offering, and reimbursement for additional expenses of up to $40,000 to cover their due diligence investigation of the Company and their legal fees and expenses. In addition, the placement agents received warrants to purchase 218,000 shares of common stock of the Company representing 10% of the total number of shares of common stock of the Company sold by or through the efforts of the placement agents, all of which are included in the amounts described as warrants issued for commissions and finders fees for each closing above. These warrants have an exercise price of $2.00 per share and expire on August 9, 2010. The placement agents also received 125,000 shares of common stock of Common Horizons upon the initial sale of Units. The Company also paid similar fees (cash and warrants) to finders who introduced the Company to certain investors.

The Company was obligated to file a registration statement covering the shares of common stock and common stock issuable in these private placements of Units by October 8, 2005 and to cause the registration statement to be declared effective by February 5, 2006. The Company is obligated to pay the investors an amount equal to two percent (2%) of the purchase price of the Units purchased by them for each 30-day period following such date that the registration statement has not been filed or declared effective, as the case may be. The Company has obtained waivers of this requirement from unit holders representing approximately 83% of the shares of common stock sold in the private placement of Units and has recorded an accrued liability of $33,000 as of December 31, 2005 for such payments. If the Company fails to pay any partial liquidated damages in full within seven days after the date payable, the Company will pay interest thereon at a rate of 15% per annum. The registration statement was filed on November 16, 2005 and was declared effective on December 15, 2005.

The sale of the Series A preferred stock and warrants described in Note 5, resulted in an anti-dilution adjustment to the exercise price of the outstanding warrants described above. Such adjustment reduced the exercise price of such warrants from $2.00 and $2.25 to $1.65 per share of common stock.

The sale of common stock and warrants described in Note 12, resulted in a further anti-dilution adjustment to the exercise price of the outstanding warrants described above. Such adjustment reduced the exercise price of such warrants from $1.65 to $1.35 per share of common stock.

4.    FIXED ASSETS

Fixed assets consisted of the following at December 31:

			2005						2004
Office equipment				$	49,717					$	26,364
Leasehold improvements					2,500						—
Total fixed assets					52,217						26,364
Less accumulated depreciation and amortization					(29,607	)					(26,364	)
Fixed assets, net				$	22,610					$	—

Included in fixed assets is equipment under capital lease with a cost of $13,061. Accumulated depreciation on such equipment was $13,061 at both December 31, 2005 and 2004.

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5.    STOCKHOLDERS' EQUITY (Restated, see Note 13)

The Company's authorized capital stock consists of 100,000,000 shares of common stock, $0.00001 par value per share, and 7,000 shares of preferred stock, $0.00001 par value per share. As of December 31, 2005, 27,921,199 shares of common stock were issued and outstanding.

The Company is authorized to issue shares of preferred stock from time to time in one or more series without stockholder approval. As of December 31, 2005, the Company had designated 6,000 shares as Series A 8% cumulative convertible preferred stock, 3,264 of which were issued and outstanding.

All outstanding shares of common stock and preferred stock were duly authorized, validly issued, fully-paid and non-assessable.

Common Stock

On March 26, 2004, in accordance with the consent of Novelos's stockholders, Novelos effected a 71.3064 for 1 stock split in the form of a stock dividend of 70.3064 shares for stockholders of record on that date. In addition each then outstanding share of Series A preferred stock was converted into 473.33 shares of common stock and each outstanding share of Series B preferred stock was converted into 586.7233 shares of common stock. All shares of Series A and Series B preferred stock, and accrued dividends thereon, were cancelled upon exchange for common shares. Concurrent with the stock dividend and conversion of Series A and Series B preferred stock, the par value of Novelos's common stock was changed from $.01 to $.00001.

Voting.    Holders of common stock are entitled to one vote per share held of record on all matters to be voted upon by stockholders. The common stock does not have cumulative voting rights. Persons who hold a majority of the outstanding common stock entitled to vote on the election of directors can elect all of the directors who are eligible for election.

Dividends.    Subject to preferences that may be applicable to the holders of any outstanding shares of preferred stock, the holders of common stock are entitled to receive such lawful dividends as may be declared by the Company's board of directors.

Liquidation and Dissolution.    In the event of the Company's liquidation, dissolution or winding up, and subject to the rights of the holders of any outstanding shares of preferred stock, the holders of shares of common stock will be entitled to receive pro rata all of the remaining assets available for distribution to the Company's stockholders.

Other Rights and Restrictions.    The Company's charter prohibits the granting of preemptive rights to any of the stockholders. All outstanding shares are fully paid and nonassessable.

Listing.    The Company's common stock is traded on the over-the-counter bulletin board.

Series A 8% Cumulative Convertible Preferred Stock (Restated, see Note 13)

On September 30, 2005 and October 3, 2005, the Company sold 3,000 and 200 units, respectively, each unit consisting of a share of its Series A 8% cumulative convertible preferred stock, par value $0.00001 per share, and warrants to purchase 303.03 shares of its common stock for a purchase price of $1,000 per unit. As a result of these transactions, the Company issued 3,000 and 200 shares, respectively, of its Series A preferred stock and warrants to purchase 909,090 and 60,606 shares, respectively, of its common stock. The warrants expire in five years and have an exercise price of $2.00 per share. The units were sold to four institutional investors, one of which was a previous investor in the Company, for aggregate net proceeds of $2,864,000.

The fair value of the 969,696 warrants, determined on a relative fair value basis, was $786,679, which is included in additional paid-in capital. Since the initial $1.65 conversion price of the preferred stock was less than the market value at the time of the closings, the Company determined that this represents a beneficial conversion feature. After allocating the value of the warrants, the intrinsic value of the beneficial conversion feature was determined to be $4,344,252. However, there were not

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sufficient net proceeds remaining to allocate the full intrinsic value to the beneficial conversion feature. Therefore, the remaining net proceeds of $2,077,321 were allocated to the beneficial conversion feature and that amount was recorded as a deemed dividend in the year ended December 31, 2005.

Voting Rights:    The Series A preferred stock do not have voting rights. The holders of a majority of the Series A preferred stock, as a class, have the right to nominate one member for election to the Company's board of directors for so long as any shares of Series A preferred stock is outstanding. The preferred stockholders nominated Michael J. Doyle and he has been elected to the Company's board of directors.

Dividends:    The Series A preferred stock has a dividend rate of 8% per annum, payable quarterly, which rate increases to 20% per annum on the second anniversary of the date of issuance and upon the occurrence of certain events of default specified in the certificate of incorporation. Such dividends may be paid in cash or in additional shares of the Company's Series A preferred stock. The dividend due for the quarter ended December 31, 2005 in the amount of $64,000 was paid by the issuance of 64 shares of Series A preferred stock with a deemed value of $1,000 per share.

Conversion:    Each share of Series A preferred stock is convertible into 606 shares of common stock. The Series A preferred stock can be converted only to the extent that the Series A stockholder will not, as a result of the conversion, hold in excess of 4.99% of the total outstanding shares of the Company's common stock.

Antidilution:    Upon the occurrence of a stock split, stock dividend, combination of the Company's common stock into a smaller number of shares, issuance of any of the Company's shares or other securities by reclassification of the Company's common stock, merger or sale of substantially all of the Company's assets, the conversion rate shall be adjusted so that the conversion rights of the Series A preferred stock stockholders will be equivalent to the conversion rights of the Series A preferred stock stockholders prior to such event.

Redemption:    The Series A preferred stock is not redeemable at the option of the holder. However, the Company may redeem the Series A preferred stock for $1,200 per share plus any accrued but unpaid dividends upon 30 days' (during which time the Series A preferred stock may be converted) prior written notice if a registration statement has been filed with and declared effective by the Securities and Exchange Commission covering the shares of the Company's common stock issuable upon conversion of the Series A preferred stock.

Dissolution:    In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company's affairs, the Series A preferred stock will be treated as senior to the Company's common stock. The Series A preferred stockholders will be entitled to receive first, $1,000 per share and all accrued and unpaid dividends. If, upon any winding up of the Company's affairs, the Company's assets available to pay the holders of Series A preferred stock are not sufficient to permit the payment in full, then all the Company's assets will be distributed to the holders of the Company's Series A preferred stock on a pro rata basis.

The Company agreed to file a registration statement with the SEC to register 175% of the shares of common stock issuable upon conversion of the Series A preferred stock and 100% of the common stock issuable upon exercise of the warrants within 30 days of the date of issuance of the Series A preferred stock and cause it to become effective within 120 days of the date of such issuance. The Company is obligated to pay such investors two percent (2%) in cash of the purchase price of any Series A preferred stock not yet converted and the purchase price of shares issued upon conversion of the Series A preferred stock for each month or portion of a month during which the Company is delinquent with respect to these registration obligations. The Company obtained a waiver of this requirement provided that the required registration statement was filed on or before November 16, 2005. The registration statement was filed on November 16, 2005 and was declared effective on December 15, 2005.

In connection with the sale of the Series A preferred stock and warrants, a stockholder, Ms. Margie Chassman, provided a financial enhancement to the investors in the form of an escrow of

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2,133,000 shares of her common stock, to be drawn upon by the investors if their investment in the equity securities of the Company fails to provide a specified yield. In addition, the Company paid $166,000 to Ms. Chassman and her designee, for providing such financial enhancement. This amount is included in the $366,000 of issuance costs netted against the proceeds from the issuance of Series A preferred stock as reported in the Statement of Stockholders' Equity (Deficiency).

The sale of the Series A preferred stock and warrants led to an anti-dilution adjustment to the exercise price of the outstanding warrants of the Company. The exercise price per share was reduced from $2.00 and $2.25 to $1.65 per share.

The sale of common stock and warrants described in Note 12, resulted in a further anti-dilution adjustment to the exercise price of the outstanding warrants of the Company. Such adjustment reduced the exercise price of such warrants from $1.65 to $1.35 per share of common stock. This sale also resulted in an anti-dilution adjustment to the conversion price of the Company's Series A preferred stock from $1.65 to $1.35.

Private Placement Registration — The Company was obligated to file a registration statement covering the shares of common stock issued and issuable in the private placement described in Note 3 within 60 days (October 8, 2005) and to cause the registration statement to be declared effective within 180 days (February 5, 2006) following the last closing date of such sale of Units. The Company is obligated to pay the investors an amount equal to two percent (2%) of the purchase price of the Units purchased by them for each 30-day period following such date that the registration statement has not been filed or declared effective, as the case may be. The Company has obtained waivers of this requirement from approximately 96% of the unit holders and has recorded a liability of $33,000 as of December 31, 2005 for such payments. If the Company fails to pay any partial liquidated damages in full within seven days after the date payable, the Company will pay interest thereon at a rate of 15% per annum. The registration statement was filed on November 16, 2005 and was declared effective on December 15, 2005.

Stock Options — During 2005 and 2004, the Company issued stock options to employees, directors and consultants outside of any formalized plan. These options, of which none have been exercised as of December 31, 2005, are exercisable within a ten-year period from the date of the grant, and vest at various intervals with all options being fully vested within three years of the grant date. The options are not transferable except by will or domestic relations order. The option price per share is not less than the fair market value of the shares on the date of the grant. The options granted in 2005 consist of 1,250,000 at an exercise price of $0.01 per share and 525,000 with exercise price ranging from $2.20 to $3.22 per share and a weighted average exercise price of $2.63 per share. At December 31, 2005, the weighted average remaining contractual life of the options granted with an exercise price of $0.01 per share is 8.8 years and the weighted average remaining contractual life of the options granted with exercise prices ranging from $2.20 to $3.22 is 9.3 years.

Stock option activity for employees, directors and consultants outside of any formalized plan for the two-year period ended December 31, 2005 is as follows:

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			Number of Options						Weighted- Average Exercise Price						Weighted- Average Fair Value
Balance at January 1, 2004					—					$	—
Options granted					1,286,000						0.01					$	0.003
Options forfeited					(407,222	)					0.01
Balance at December 31, 2004					878,778						0.01
Options granted					1,775,000						0.78					$	0.500
Options forfeited					0						—
Balance at December 31, 2005					2,653,778					$	0.53
Exercisable at $0.01 at December 31, 2005					1,855,172					$	0.01
Exercisable at $2.20 to $3.22 at December 31, 2005					25,000					$	3.22

Total non-cash compensation expense related to the above-mentioned option grants included in research and development expense was $67,215 and $0 for the years ended December 31, 2005 and 2004, respectively. Total non-cash compensation expense related to the above-mentioned option grants included in general and administrative expense was $45,854 and $7,868 for the years ended December 31, 2005 and 2004, respectively.

Stock Option Plan — The Company's incentive stock option plan (the ‘‘Plan’’), established in August 2000, provides for grants of options to purchase up to 73,873 post split shares of common stock. Grants may be in the form of incentive stock options or nonqualified options. The board of directors determines exercise prices and vesting periods on the date of grant. Options generally vest annually over three years and expire on the tenth anniversary of the grant date. No options were exercised or cancelled during 2005 or 2004.

There was no stock option activity for the 2000 Stock Option Plan for the two-year period ended December 31, 2005. Options issued and outstanding under this plan are as follows:

			Number of Options						Exercise Prices Range							Weighted- Average Exercise Price						Weighted- Average Remaining Life
Balance December 31, 2004					73,873					$	.707.01	- $					$	3.16
Balance December 31, 2005					73,873					$	.707.01	- $					$	3.16				7 Years
Exercisable at $0.70 to $1.70 at December 31, 2005					30,942												$	0.75
Exercisable at $7.01 at December 31, 2005					27,240												$	7.01

Warrants — In connection with the sale of units described in Note 3, Novelos issued warrants to purchase 340,000 shares of common stock at $2.00 per share to finders as compensation. The warrants expire on August 9, 2010, and had a weighted average fair value of $1.94 per share. All of the warrants are exercisable at December 31, 2005.

The fair value of the warrants is the estimated fair value at the grant date using the Black-Scholes option-pricing model with the following assumptions:

Risk-free interest rate			3.77% - - 4.25%
Expected volatility			80%
Expected lives			5 years
Expected dividend			0

The sale of the Series A preferred stock and warrants described in Note 5, resulted in an anti-dilution adjustment to the exercise price of the outstanding warrants described above. Such adjustment reduced the exercise price of such warrants from $2.00 to $1.65 per share of common stock and increased the number of common shares that can be purchased to 412,112.

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The sale of common stock and warrants described in Note 12, resulted in a further anti-dilution adjustment to the exercise price of the outstanding warrants described above. Such adjustment reduced the exercise price of such warrants from $1.65 to $1.35 per share of common stock and increased the number of common shares that can be purchased to 503,692.

Reserved Shares — At December 31, 2005, 73,873 shares of common stock were reserved for issuance upon exercise of options granted under the 2000 plan; 7,482,786 shares of common stock were reserved for issuance upon exercise of other outstanding options and warrants; and up to 3,393,938 shares of common stock were reserved for issuance pursuant to outstanding convertible preferred stock.

6.    INCOME TAXES

The Company's deferred tax assets consisted of the following at December 31:

			2005						2004
Net operating loss carryforwards				$	4,723,000					$	2,068,000
Depreciation and amortization					—						8,000
License fee					—						99,000
Research and development expenses					164,000						—
Accrued compensation					—						360,000
Accrued interest					—						320,000
Tax credits					282,000						380,000
Capital loss carryforward					403,000						380,000
Gross deferred tax asset					5,572,000						3,615,000
Valuation allowance					(5,572,000	)					(3,615,000	)
Net deferred tax asset				$	—					$	—

Because of the Company's limited operating history, management has provided a 100% reserve against the Company's net deferred tax assets for all periods. Management provided a valuation allowance due to the uncertainty associated with the utilization of the net operating loss carryforwards in the future. The valuation allowance was $5,272,000 and $3,615,000 at December 31, 2005 and 2004, respectively. As of December 31, 2005, the Company had net operating loss carryforwards of approximately $10,400,000, which begin to expire in 2011 for federal purposes. The Company's research and development credits are available to offset future federal income tax, subject to limitations for alternative minimum tax. The research and development credit carryforwards begin to expire in 2011.

The capital loss carryforward relates to the loss recorded in prior years for Novelos' investment in an unrelated company.

Under the provisions of the Internal Revenue Code, certain substantial changes in the Company's ownership may have limited, or may limit in the future, the amount of net operating loss carryforwards which could be utilized annually to offset future taxable income and income tax liabilities. The amount of any limitation is determined based on the Company's value and the long-term tax-exempt rate on the date of an ownership change.

7.    NOTES PAYABLE TO STOCKHOLDERS

Since inception, Novelos has relied on private investors to fund its operations. Periodically, these investors have advanced monies to Novelos evidenced by notes payable or other written agreements.

Novelos had outstanding unsecured demand notes in the principal amount of $817,931 at December 31, 2004. These notes bore interest at 6%. At December 31, 2004, these notes included $521,931 of converted accrued compensation owed to officers, $100,000 of converted accrued consulting expense owed to a stockholder of Novelos and $196,000 in cash advances from

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stockholders. The notes related to converted compensation totaling $621,931 were forgiven by the stockholders. The remaining notes were repaid through the issuance of stock with a deemed value of $177,000 and cash of $19,000. Therefore, there were no unsecured demand notes outstanding at December 31, 2005.

On May 25, 2004, Novelos obtained a bridge loan in the amount of $100,000 from a stockholder. This loan bore interest at 15% and became due and payable on May 25, 2005. On November 25, 2003, Novelos received $900,000 from certain stockholders in new secured debt financing through the issuance of ‘‘bridge loans,’’ bearing interest at 15% and maturing on May 25, 2005. Novelos also converted an existing $100,000 secured demand note payable into a bridge loan under the same terms. Under the terms of the loan agreements, the principal amount of the notes could be converted to common stock at $1.00 per share, at the note holder's option. If the market value of the stock fell below $2.00 per share, the conversion price would be adjusted downward to a price equal to one half of the market value of the stock, with a minimum conversion price of $.38 per common share. In May 2005 these bridge loans were converted into 1,760,000 shares of common stock in accordance with the loan agreements. Therefore, there were no bridge loans outstanding at December 31, 2005.

In January 2005 Novelos received $400,000 in the form of a loan from an individual stockholder. This loan bore interest at 6% per annum and was repayable following the closing of one or more equity financings that resulted in aggregate gross proceeds of at least $5,000,000 to the Company. In December 2004 the Company had received a $100,000 loan from the same individual stockholder. This loan bore interest at 6% per annum and was repayable upon the successful completion of a proposed ‘‘recapitalization’’ that raised at least $3 million. In exchange for both of these loans and the individual's commitment to provide additional financing of up to $500,000 through August 2005, this individual received in January 2005 10,000,000 shares of common stock of Novelos. These loans allowed Novelos to sustain its operations until permanent equity, as described in Note 3, was obtained. The Company closed equity financings by means of the private placements described in Note 3, which resulted in $5,000,000 in aggregate gross proceeds to the Company. The Company repaid these loans on August 9, 2005 with proceeds from these equity financings. Therefore, there were no loans from stockholders outstanding at December 31, 2005.

8.    COMPREHENSIVE INCOME (LOSS)

The Company had no components of comprehensive income (loss) other than net loss in each of the periods presented.

9.    NET LOSS PER SHARE

The following table is the computation of basic and diluted net loss attributable to common stockholders per common share computed in the manner described in Note 2 for the years ended December 31:

			2005						2004
			Restated (Note 13)
Net loss attributable to common stockholders				$	(5,194,720	)				$	(952,093	)
Weighted average basic and diluted common shares outstanding					21,757,424						3,455,238
Basic and diluted net loss attributable to common stockholders per common share				$	(0.24	)				$	(0.28	)

For the years ended December 31, 2005 and 2004, options to purchase 2,727,651 and 952,651 shares of common stock, respectively, were not included in the computation of diluted net loss per share since their inclusion would be antidilutive. At December 31, 2005 and 2004, warrants to purchase 4,829,008 and 0 shares of common stock, respectively, were not included in the computation of diluted net loss per share since their inclusion would be antidilutive. At December 31, 2005, 1,939,393 shares of common stock issuable upon conversion of preferred stock were not included in the computation of diluted net loss per share since their inclusion would be antidilutive.

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10.    COMMITMENTS

On May 11, 2005, the Company entered into a one-year lease for office space, commencing September 1, 2005, at an annual rent of $58,000. As of December 31, 2004 and through August 31, 2005, the Company was a tenant-at-will under a prior sublease agreement with a third party. Monthly rent under this agreement was $3,000. Rent expense was $45,355 and $36,100 for the years ended December 31, 2005 and 2004, respectively.

In connection with the restructuring of Novelos' debt described in Note 3, on May 6, 2005, Novelos agreed to reimburse a vendor, after the expiration of the 18-month holding period and the sale of its 50,000 shares of common stock of Novelos, the difference, if any, between the amount realized upon the sale of these shares and $79,000.

On July 15, 2005, the Company entered into an employment agreement with Christopher J. Pazoles, Ph.D, whereby he agreed to serve as the Company's vice president of research and development for an initial term of two years. His annual salary is $192,000 for the first year and $195,000 for the second year. Dr. Pazoles is also entitled to a minimum cash bonus of $16,000 at the end of the first year and $25,000 at the end of the second year. Dr. Pazoles' agreement provides that he is entitled to participate in the Company's employee fringe benefit plans or programs generally available to the Company's senior executives. The agreement further provides that in the event that the Company terminates Dr. Pazoles without cause or he resigns for good reason (as defined), the Company will (i) pay Dr. Pazoles his base salary through the remainder of the term of his employment agreement in monthly installments; (ii) continue to provide him benefits for 12 months after the date of termination; and (iii) pay, on a prorated basis, any minimum bonus or other payments earned.

11.    RELATED-PARTY TRANSACTIONS AND COMMITMENTS

Novelos engaged a contract research organization that is a stockholder of the Company to perform research and development services. During the years ended December 31, 2005 and 2004, $200,611 and $39,340 of expenses, respectively, were incurred under this arrangement. No amount was payable to the stockholder at December 31, 2005. At December 31, 2004, $1,185,321 was payable to the stockholder and was included in accounts payable. The amount payable at December 31, 2004 was repaid through the issuance of common stock with a deemed value of $450,000 and the remaining balance was forgiven by the stockholder.

The Company is obligated to ZAO BAM, a related party, under a royalty and technology transfer agreement. One of the Company's directors is the majority shareholder of ZAO BAM. Pursuant to the royalty and technology transfer agreement between the Company and ZAO BAM, the Company is required to make royalty payments of 1.2% of net sales of oxidized glutathione-based products. The Company is also required to pay ZAO BAM $2 million for each new oxidized glutathione-based drug within eighteen months following FDA approval of such drug.

The Company has also agreed to pay ZAO BAM 12% of all license revenues, as defined, in excess of the Company's expenditures associated therewith, including but not limited to, preclinical and clinical studies, testing, FDA and other regulatory agency submission and approval costs, general and administrative costs, and patent expenses, provided however that such payment be no less than 3% of all license revenues.

Pursuant to an agreement that became effective on May 26, 2005, the Company revised its arrangement with Oxford Group, Ltd. and is required to pay Oxford Group, Ltd. a royalty in the amount of 0.8% of the Company's net sales of oxidized glutathione-based products. The Company's Chairman of the Board of Directors is president of Oxford Group, Ltd. As described in Note 3, the Company revised the arrangement for future royalty payments, which resulted in the issuance of 2,016,894 shares of common stock, including 907,602 shares to each of two directors of the Company, with an aggregate deemed value of $2,521,118.

The obligations to ZAO Bam and Oxford Group resulted from their assignment of the exclusive intellectual property and marketing rights to a drug development platform technology, worldwide,

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excluding Russia and the Commonwealth of Independent States. The royalty payments will be recorded as royalty expense when the obligations are incurred. The payment for any new technologies will be accounted for as purchased technology and either capitalized or expensed at the time of payment, depending on the stage of completion of the related products.

See Notes 5 and 7 in regard to transactions with certain stockholders.

12.    SUBSEQUENT EVENTS

On January 31, 2006, the Company entered into an employment agreement with Harry Palmin effective January 1, 2006, whereby he agreed to serve as the Company's president and chief executive officer for an initial term of two years at an annual salary of $225,000. He is eligible to receive an annual cash bonus at the discretion of the compensation committee and he is entitled to participate in the Company's employee fringe benefit plans or programs generally available to the Company's senior executives. The agreement provides that in the event that the Company terminates Mr. Palmin without cause or he resigns for good reason (as defined), the Company will (i) pay Mr. Palmin his pro rata share of the average of his annual bonus paid during the two fiscal years preceding his termination; (ii) pay Mr. Palmin his base salary for 11 months after the date of termination; (ii) continue to provide him benefits for 11 months after the date of termination; and (iii) fifty percent of his unvested stock options will vest. The agreement also contains a non-compete provision, which prohibits Mr. Palmin from competing with the Company for one year after termination of his employment with the Company.

On March 7, 2006, the Company issued 11,154,073 shares of its common stock and warrants to purchase 8,365,542 shares of its common stock pursuant to a securities purchase agreement dated March 2, 2006 with 39 accredited investors for aggregate gross proceeds of $15,058,005. The warrants are exercisable until March 7, 2011 at an exercise price of $2.50 per share.

The Company is required to register the resale of the shares of common stock sold in the offering and issuable upon exercise of the warrants. The Company is required to file the registration statement with the Securities and Exchange Commission within 30 days after the closing and use its best efforts to cause the registration statement to be declared effective under the Securities Act of 1933, as amended, within 120 days after the closing of the offering. The Company is required to use its best efforts to keep the registration statement continuously effective under the Securities Act until the earlier of the date when all the registerable securities covered by the registration statement have been sold or the second anniversary of the closing. In the event that the registration statement is not filed or declared effective when due, the Company is obligated to pay the investors liquidated damages in the amount of 1% of the purchase price for each month in which the Company is in default.

Oppenheimer & Co., Inc. acted as the placement agent and Rodman & Renshaw, LLC acted as the sub-placement agent in connection with the offering. The aggregate commissions payable to Oppenheimer and Rodman & Renshaw in connection with the private placement were approximately $1,000,000. In addition, the Company issued them warrants to purchase 669,244 shares of common stock identical to those sold to the investors.

The sale of common stock and warrants described above resulted in an anti-dilution adjustment to the exercise price of the outstanding warrants of the Company. Such adjustment reduced the exercise price of such warrants from $1.65 to $1.35 per share of common stock. This sale also resulted in an anti-dilution adjustment to the conversion price of the Company's Series A preferred stock from $1.65 to $1.35.

13.    RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

Subsequent to the initial filing of the Company's annual report on Form 10-KSB for the year ended December 31, 2005 and in connection with an internal review of the terms associated with the Company's historical financing transactions, the Company determined that the intrinsic value associated with the beneficial conversion feature (‘‘BCF’’) of the Company's Series A 8% Cumulative Convertible Preferred Stock had not been properly presented as a deemed (non-cash) dividend nor

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deducted from net loss in determining net loss attributable to common stockholders in the year ended December 31, 2005. In accordance with Emerging Issues Task Force Issue (‘‘EITF’’) No. 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios, and EITF No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, a conversion feature that is ‘‘in-the-money’’ based on the market price of a company's common stock at the commitment date is considered a BCF. As the terms of the Series A 8% Cumulative Convertible Preferred Stock allowed immediate conversion, the deemed (non-cash) dividend related to the BCF should have been recorded upon issuance.

The following table sets forth the effects of the restatement on certain line items within the Company's Statements of Operations for the year ended December 31, 2005:

			As Previously Reported						Revision						As Restated
Year Ended December 31, 2005:
Net Loss				$	(3,053,399	)				$	—					$	(3,053,399	)
Preferred Stock (Non-cash) Dividend (1)					—						(64,000	)					(64,000	)
Preferred Stock Deemed (Non-cash) Dividend					—						(2,077,321	)					(2,077,321	)
Net Loss Attributable to Common Stockholders				$	(3,053,399	)				$	(2,141,321	)				$	(5,194,720	)
Basic and Diluted Net Loss Attributable to Common Stockholders Per Common Share				$	(0.14	)				$	(0.10	)				$	(0.24	)

(1)

Represents a quarterly dividend paid to preferred stockholders in the quarter ended December 31, 2005 in the form of additional shares of preferred stock, as permitted pursuant to the terms of the related agreement. This amount was inadvertently not previously included as an adjustment in arriving at net loss attributable to common stockholders. The amount was not material in relation to net loss attributable to common stockholders and would not have changed the basic and diluted net loss attributable to common stockholders per common share as reported.

Item 8. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

Not applicable.

Item 8a.    Controls and Procedures

In October 2006, our current management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2005. Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information is accumulated and communicated to our management, including our principal executive and financial officers, to allow timely decisions regarding required disclosures.

Based on our current evaluation of our disclosure controls and procedures as of December 31, 2005 our Chief Executive Officer and our Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective because of the material weakness discussed below.

Identification of a Material Weakness.     A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.

In August 2006, our recently hired Director of Finance and Controller began an internal review of the terms associated with our historical private placements of securities, during which the Director of Finance and Controller, in consultation with management, determined that the intrinsic value associated with the beneficial conversion feature (‘‘BCF’’) of the Company's Series A 8% Cumulative

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Convertible Preferred Stock issued on September 30, 2005 and October 3, 2005 had not been properly presented as a deemed (non-cash) dividend nor deducted from net loss in determining net loss attributable to common stockholders for the three- and nine-month periods ended September 30, 2005 and the fiscal year ended December 31, 2005 (the ‘‘Relevant Periods’’) in our Statements of Operations in accordance with generally accepted accounting principles. Based on the results of this internal review, on October 18, 2006, our management concluded that our audited financial statements and our unaudited financial statements and financial information for the Relevant Periods should be restated in order to reflect a deemed (non-cash) dividend associated with the BCF of the Series A 8% Cumulative Convertible Preferred Stock. As a result of the restatement described above, our management has determined that a material weakness existed in the Company's internal controls over financial reporting with respect to the identification of and accounting for the beneficial conversion feature of the preferred stock financing transaction. Due to this material weakness in internal control over financial reporting, our Chief Executive Officer and our Chief Financial Officer concluded that, as of December 31, 2005, our disclosure controls and procedures were not effective.

Remediation of Material Weakness in Internal Control over Financial Reporting.     In the fourth quarter of 2005 we identified the need to establish the full-time position of Director of Finance. At that time, we began discussions regarding permanent employment with a consultant who had provided part-time finance and accounting services to us for several years. Over the course of the next two months, this individual worked to complete outstanding consulting engagements with a view to becoming a full-time Novelos employee during the first quarter of 2006. In February 2006 it became apparent to us that this individual would be unable to accept this full-time role. We then renewed our search and upgraded the required qualifications for a suitable candidate. In April 2006 we identified a candidate who is a CPA with extensive experience at a ‘‘big four’’ public accounting firm as well as substantial public company experience at the management level in the areas of finance and accounting, including the accounting for and reporting of complex financial transactions. In May 2006, the candidate began performing consulting services for us on a part-time basis and in June 2006 the candidate accepted the position of Director of Finance and Controller. Shortly after beginning employment, this individual began an internal review of our historical financing transactions. It was during the course of this review that the error requiring the restatement was discovered. The Director of Finance and Controller is performing a major role in ensuring the accuracy and completeness of our financial reporting and the effectiveness of our disclosure controls and procedures. We believe that the addition of this individual in this key position has remediated the material weakness in internal control over financial reporting described above.

Changes in Internal Control.     There were no changes in our internal control over financial reporting during the fourth quarter ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The change described above occurred during 2006.

Limitations on Effectiveness of Controls.     In designing and evaluating our disclosure controls and procedures, our management recognizes that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Item 8b.    Other Information

None.

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Part III

ITEM 9.    DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.

Our current directors and executive officers are:

Name			Age						Position
Simyon Palmin					61				Chairman of the Board
Harry S. Palmin					36				President, Chief Executive Officer, Director
George R. Vaughn					52				Chief Financial Officer and Chief Accounting Officer
M. Taylor Burtis					55				Vice President of Regulatory, Quality and Compliance
Christopher J. Pazoles, Ph.D.					55				Vice President of Research and Development
Mark Balazovsky					68				Director
Michael J. Doyle (1) (2) (3)					47				Director
Sim Fass, Ph.D. (1) (2) (3)					63				Director
David B. McWilliams (2) (3)					62				Director
Howard M. Schneider (1) (3)					62				Director

(1)	Member of the audit committee.

(2)	Member of the compensation committee.

(3)	Member of the nominating and corporate governance committee.

Our executive officers are appointed by, and serve at the discretion of, our board of directors. Simyon Palmin is the father of Harry Palmin.

Simyon Palmin.    Mr. Palmin founded us in 1996. He has served as our chairman of the board and director of Russian relations since 1996. From 1996 to February 2004, he served as our chief executive officer. From 1984 to 1998, Mr. Palmin served as vice president of strategic planning and vice president of new product development of Design Components Inc. Mr. Palmin received a B.S. in naval instrumentation from St. Petersburg Navy Institute, St. Petersburg, Russia and a M.A. in aviation instrumentation from the Institute of Aviation Instrumentation, St. Petersburg, Russia. He also completed studies for a Ph.D. in electrical engineering.

Harry S. Palmin.    Mr. Palmin has served as our president and a director since 1998 and our chief executive officer since January 2005. From 1998 to September 2005, he served as our acting chief financial officer. From 1996 to 1998, he was a vice president at Lehman Brothers and from 1993 to 1996, he was an associate at Morgan Stanley & Co. Mr. Palmin earned a B.A. in economics and business, magna cum laude, and a M.A. in international economics and finance from the International Business School at Brandeis University. He has also studied at the London School of Economics and the Copenhagen Business School.

George R. Vaughn.    Mr. Vaughn has served as our chief financial officer and chief accounting officer since September 2005. Since April 2001, Mr. Vaughn has been President of Vaughn & Associates, P.C., a professional services organization he founded in 1995 that provides interim and part-time chief financial officer, outsourced financial management, and tax advisory services for emerging and established businesses, including Novelos. From 1990 to 1995, Mr. Vaughn served as chief financial officer of XRL, Inc. Mr. Vaughn is a certified public accountant and is a member of the American Institute of Certified Public Accountants and the Massachusetts Society of Certified Public Accountants. He holds a B.S. in business administration from Stonehill College.

Christopher J. Pazoles, Ph.D.    Dr. Pazoles has served as our vice president of research and development since July 2005. From May 2004 to June 2005, he held a senior research and development position at the Abbott Bioresearch Center, a division of Abbott Laboratories. From October 2002 to January 2004, he served as chief operating officer and head of research and development at ALS Therapy Development Foundation. From 1994 to October 2002, Dr. Pazoles

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served as vice president of research for Phytera, Inc. From 1981 to 1994, he served as a researcher and senior manager with Pfizer. Dr. Pazoles holds a Ph.D. in microbiology from the University of Notre Dame.

M. Taylor Burtis.    Ms. Burtis has served as our vice president of regulatory, quality and compliance since July 2005. From October 2004 to June 2005, she served as a senior director of regulatory affairs at Therion Biologics. From November 2003 to September 2004, she served as a senior director of regulatory affairs at Antigenics. From May 2000 to October 2003, Ms. Burtis served as an associate director for worldwide regulatory affairs at Wyeth BioPharma. From 1996 to April 2000, she served as a senior manager of regulatory affairs at Genentech. From 1992 to 1996, Ms. Burtis was an FDA consumer safety officer in the Office of Compliance at the Center for Biologics Evaluation and Research. From 1991 to 1992, Ms. Burtis served as a medical research manager at Boston Veterans Administration Center. From 1987 to 1991, she served as a research lab manager at Children's Hospital, from 1985 to 1987, she served as a laboratory director at Brigham & Women's Hospital and from 1980 to 1985, she served as a technical specialist international liaison with the American Red Cross. Ms. Burtis earned a B.S. in biology from Framingham State College and a M.B.A. in operations and strategy from Simmons College.

Mark B. Balazovsky.    Mr. Balazovsky has served as one of our directors since 1996. In 1992, Mr. Balazovsky founded ZAO BAM, a Russian pharmaceutical company carrying out research, development and commercialization of drugs derived from oxidized glutathione, and has served as its general director since then. Since 1993, Mr. Balazovsky has also served as president of the Foundation for Medical-Pharmaceutical Programs. From 1965 to 1975, Mr. Balazovsky served as an engineer and deputy chief designer of the Radio-Technical Research and Development Facility. From 1960 to 1965, he served as an engineer at the Research and Development Facility of long-range communications. Mr. Balazovsky is also chairman of the board of Uyut, a private company. Mr. Balazovsky holds a B.S. and M.S. in radiocommunications and radiobroadcasting from the Institute of Communications, St. Petersburg, Russia.

Michael J. Doyle.    Mr. Doyle has served as one of our directors since October 2005. Since January 2005, he has served as chief executive officer of Windward Advisors. From March 2000 to December 2004, Mr. Doyle served as chairman and chief executive officer of Salesnet. From 1989 to 1997, he served as chairman and chief executive officer of Standish Care/Carematrix, a company he founded. He received a B.S. in biology from Tufts University and a M.B.A. with a concentration in finance and health care from the University of Chicago, where he was a Kaiser Fellow.

Sim Fass, Ph.D.    Dr. Fass has served as one of our directors since February 2005. Dr. Fass served as chief executive officer and chairman of Savient Pharmaceuticals from 1997 to 2004, its president and chief executive officer from 1984 to 1997, and its chief operating officer from 1983 to 1984. From 1980 to 1983, Dr. Fass served as vice president and general manager of Wampole Laboratories. From 1969 to 1980, he held a number of marketing, sales and senior management positions at Pfizer, Inc in both pharmaceuticals and diagnostics. He received a B.S. in biology and chemistry from Yeshiva College and a doctoral degree in developmental biology/biochemistry from the Massachusetts Institute of Technology.

David B. McWilliams.    Mr. McWilliams has served as one of our directors since March 2004. From February 2004 to December 2004, Mr. McWilliams performed chief executive officer services for us. Since August 2004, Mr. McWilliams has served as chief executive officer of PharmaFrontiers Corp. From 1992 to March 2002, he served as president, chief executive officer and a director of Encysive Pharmaceuticals (formerly Texas Biotech). From 1989 to 1992, Mr. McWilliams served as president, chief executive officer and director of Zonagen. From 1984 to 1988, he served as president and chief executive officer of Kallestad Diagnostics. From 1980 to 1984, he served as president of Harleco Diagnostics Division. From 1972 to 1980, he was an executive at Abbott Laboratories, rising to general manager for South Africa. From 1969 to 1972, he was a management consultant at McKinsey & Co. Mr. McWilliams is also a director of Fairway Medical Technologies, Houston Technology Center and Texas Healthcare and Bioscience Institute. Mr. McWilliams received a M.B.A. in finance from the University of Chicago and a B.A. in chemistry, Phi Beta Kappa, from Washington and Jefferson College.

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Howard M. Schneider.    Mr. Schneider has served as one of our directors since February 2005. From January to December 2003, he served as chief executive officer of Metrosoft, Inc., and had been an advisor to such company from July 2002 to January 2003. From May 2000 to May 2001, he served as president of Wofex Brokerage, Inc. and from 1965 to 1999, he served as an executive at Bankers Trust Company holding a variety of positions in the commercial banking and investment banking businesses. Mr. Schneider received a B.A., magna cum laude, in economics from Harvard College and a M.B.A. with distinction from New York University.

Employment Agreements

On January 31, 2006, we entered into an employment agreement with Harry Palmin effective January 1, 2006, whereby he agreed to serve as our president and chief executive officer for an initial term of two years at an annual salary of $225,000. He is eligible to receive an annual cash bonus at the discretion of the compensation committee and he is entitled to participate in our employee fringe benefit plans or programs generally available to our senior executives. The agreement provides that in the event that we terminate Mr. Palmin without cause or he resigns for good reason (as defined below), we will (i) pay Mr. Palmin his pro rata share of the average of his annual bonus paid during the two fiscal years preceding his termination; (ii) pay Mr. Palmin his base salary for 11 months after the date of termination; (ii) continue to provide him benefits for 11 months after the date of termination; and (iii) fifty percent of his unvested stock options will vest. The agreement also contains a non-compete provision, which prohibits Mr. Palmin from competing with us for one year after termination of his employment with us.

Cause’’ means (i) gross neglect of duties for which employed; (ii) committing fraud, misappropriation or embezzlement in the performance of duties as our employee; (iii) conviction or guilty or nolo plea of a felony or misdemeanor involving moral turpitude; or (iv) willfully engaging in conduct materially injurious to us or violating a covenant contained in the employment agreement.

Good Reason’’ means (i) the failure of our board of directors to elect Mr. Palmin to the offices of president and chief executive officer; (ii) the failure by our stockholders to continue to elect Mr. Palmin to our board of directors; (iii) our failure to pay Mr. Palmin the compensation provided for in the employment agreement, except for across the board cuts applicable to all of our officers on an equal percentage basis; provided that such reduction is approved by our board of directors; (iv) relocation of Mr. Palmin's principal place of employment to a location beyond 50 miles of Newton, Massachusetts; (v) a reduction of base salary or material reduction in other benefits or any material change by us to Mr. Palmin's function, duties, authority, or responsibilities, which change would cause Mr. Palmin's position with us to become one of lesser responsibility, importance, or scope; and (vi) our material breach of any of the other provisions of the employment agreement.

On July 15, 2005, we entered into an employment agreement with Christopher J. Pazoles, Ph.D, whereby he agreed to serve as our vice president of research and development for an initial term of two years. His annual salary is $192,000 for the first year and $195,000 for the second year. Dr. Pazoles is also entitled to a minimum cash bonus of $16,000 at the end of the first year and $25,000 at the end of the second year. Dr. Pazoles' agreement provides that he is entitled to participate in our employee fringe benefit plans or programs generally available to our senior executives. The agreement further provides that in the event that we terminate Dr. Pazoles without cause or he resigns for good reason (as defined below), we will (i) pay Dr. Pazoles his base salary through the remainder of the term of his employment agreement in monthly installments; (ii) continue to provide him benefits for 12 months after the date of termination; and (iii) pay, on a prorated basis, any minimum bonus or other payments earned.

Dr. Pazoles also entered into a nondisclosure and development agreement with us, which prohibits him from competing with us and soliciting our employees or customers during the term of his employment and for two years thereafter. However, if we terminate his employment without cause, this prohibition will only extend for six months after his termination.

‘‘Cause’’ means Dr. Pazoles (i) has willfully failed, neglected, or refused to perform his duties under the employment agreement; (ii) has been convicted of or pled guilty or no contest to a crime involving a felony; or (iii) has committed any act of dishonesty resulting in material harm to us.

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‘‘Good Reason’’ means that Dr. Pazoles has resigned due to our failure to meet any of our material obligations to him under the employment agreement.

On March 21, 2006, our board of directors approved a 5% increase in Dr. Pazoles' base salary. This increase will become effective on April 1, 2006.

Audit Committee

The board of directors has an audit committee. Mr. Schneider, Mr. Doyle and Mr. Fass serve as members of the audit committee.

Audit Committee Financial Expert

The board of directors has determined that Mr. Schneider is an ‘‘audit committee financial expert.’’ The audit committee financial expert is independent as defined by NASDAQ listing standards.

Code of Conduct

The board of directors has adopted a code of ethics applicable to all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer

ITEM 10.    EXECUTIVE COMPENSATION

Director Compensation

As of January 1, 2006, we pay our non-employee directors a cash fee of $4,000 per quarter. The non-employee directors also receive a fee of $1,000 for any board or committee meeting attended or $500 for each telephonic board or committee meeting in which the director participated. We also pay each non-employee director who serves as the chair of the audit committee an additional annual fee of $5,000 and each non-employee director who serves as the chairman of the compensation and nominating and corporate governance committees an additional annual fee of $3,000. We will also reimburse directors for reasonable out-of-pocket expenses incurred in attending board and committee meetings and undertaking certain matters on our behalf. Directors who are our employees will not receive separate fees for their services as directors. For the year ended December 31, 2005, the chairman of our audit committee was paid $5,000 in fees. No other director received a cash fee during 2005.

Non-employee directors also receive stock option grants under our option plan. Commencing January 1, 2006, options to purchase 5,000 shares of our common stock are granted to each non-employee director per quarter at the closing price of our common stock on the day immediately prior to the board meeting date. These options vest on a quarterly basis over a two year period.

Mr. Schneider and Mr. Fass each received a non-qualified stock option to purchase 100,000 shares of our common stock in February 2005. Michael J. Doyle received a non-qualified stock option to purchase 100,000 shares of our common stock in October 2005. All options were granted at the fair market value on the date of grant.

Executive Officer Compensation

Summary Compensation:    The following table sets forth certain information about the compensation we paid or accrued with respect to our chief executive officer and our most highly compensated officers (other than our chief executive officer) who served as executive officers during the year ended December 31, 2005 and whose annual compensation exceeded $100,000 for the year ended December 31, 2005.

Other annual compensation in the form of perquisites and other personal benefits has been omitted as the aggregate amount of those perquisites and other personal benefits was less than $50,000 in the aggregate and constituted less than ten percent of the executive officers' respective total annual salary and bonus.

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Summary Compensation Table

									Annual Compensation						Long-Term Compensation
Name and Principal Position			Year						Salary ($)						Securities Underlying Options (#)
Harry S. Palmin					2005					$	148,000				400,000
President, Chief Executive Officer					2004					$	155,000	(1)			330,000
Christopher J. Pazoles, Ph.D.					2005					$	118,500	(2)			200,000
Vice President of research and Development					2004					$	26,000				16,667

(1)	Mr. H. Palmin earned $155,000; however, he forgave $119,167 of this salary.

(2)	On March 21, 2006, our board of directors approved a 5% increase in Dr. Pazoles' base salary. This increase will become effective on April 1, 2006.

Option grants in last fiscal year.   The following table sets forth certain information about stock options granted during the year ended December 31, 2005 by us to the executive officers named in the summary compensation table.

Option grants in last fiscal year

			Individual Grants
Name			Number of securities underlying options granted (#) (1)						% of total options granted to employees in fiscal year						Exercise or base price ($/share)						Expiration date
Harry S. Palmin					250,000	(1)					14	%				$	0.01						1/31/2015
					150,000	(1)					8	%				$	0.01						3/31/2015
Christopher J. Pazoles, Ph.D.					200,000	(2)					11	%				$	0.01						4/08/2015

(1)	These shares initially vested over a two-year period. However, pursuant to their terms, the shares fully vested upon the completion of a non-bridge loan financing, which occurred in the second quarter of 2005.

(2)	These shares vest 25% each six-month period over two years from date of grant.

Fiscal year-end option table.    The following table sets forth certain information regarding stock options held as of December 31, 2005 by the executive officers named in the summary compensation table.

The value of unexercised in-the-money options is based on a price of $2.00 per share, the fair market value of our stock on December 30, 2005, minus the per share exercise price, multiplied by the number of shares underlying the option. Actual gains, if any, will depend on the value of the common stock on the date of the sale of the shares.

Aggregated option exercises in last fiscal year and fiscal year-end option values

Name			Shares acquired on exercise (#)						Value realized ($)						Number of securities underlying unexercised options at fiscal year-end												Value of unexercised in-the-money options at fiscal year-end
															Exercisable (#)						Unexercisable (#)						Exercisable ($)						Unexercisable ($)
Harry S. Palmin					—						—						734,752						2,378					$	1,458,878					$	3,091
Christopher J. Pazoles, Ph.D.					—						—						66,667						150,000						132,667						298,500

Equity compensation plans

The following table provides information as of December 31, 2005 regarding shares authorized for issuance under our equity compensation plans, including individual compensation arrangements.

The equity compensation plan approved by our stockholders is our 2000 stock option and incentive plan. We issued options to our directors and consultants that were not approved by our

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stockholders. These options are exercisable within a ten-year period from the date of the grant and vest at various intervals with all options being fully vested within three years of the date of grant. The option price per share is not less than the fair market value of our common stock on the date of grant.

Equity compensation plan information

Plan category			Number of shares to be issued upon exercise of outstanding options, warrants and rights (#)						Weighted-average exercise price of outstanding options, warrants and rights ($)						Number of shares remaining available for future issuance under equity compensation plans (excluding shares reflected in column (a)) (#)
			(a)						(b)						(c)
Equity compensation plans approved by stockholders					73,873					$	3.16						0
Equity compensation plans not approved by stockholders					2,653,778					$	0.53						0
Total					2,727,651					$	0.60						0

ITEM 11.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

At the close of business on March 21, 2006, there were issued and outstanding 39,130,272 shares of our common stock. The following table provides information regarding beneficial ownership of our common stock as of March 21, 2006 by:

•	Each person known by us to be the beneficial owner of more than five percent of our common stock;

•	Each of our directors;

•	Each executive officer named in the summary compensation table; and

•	All of our current directors and executive officers as a group.

The address of each executive officer and director is c/o Novelos Therapeutics, Inc., One Gateway Center, Suite 504, Newton, Massachusetts 02458. The persons named in this table have sole voting and investment power with respect to the shares listed, except as otherwise indicated. The inclusion of shares listed as beneficially owned does not constitute an admission of beneficial ownership. Shares included in the ‘‘Right to acquire’’ column consist of shares that may be purchased through the exercise of options and warrants that vest within 60 days of March 21, 2006.

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Name and Address of Beneficial Owner			Shares Beneficially Owned
			Outstanding						Right to Acquire						Total						Percentage
Margie Chassman 445 West 23rd Street, Apt. 16E New York, NY 10011					4,012,376						66,666						4,079,042						10.4	%
Wood River Trust c/o Michael C. Doyle, co-trustee Stewart Management Company 1410 Nemours Building 1007 Orange Street Wilmington, DE 19801					3,850,000						0						3,850,000						9.8	%
Harry S. Palmin					263,818						737,130						1,000,948						2.5	%
Simyon Palmin					1,738,939						487,826						2,226,765						5.6	%
Christopher J. Pazoles, Ph.D.					0						116,667						116,667							*
Mark Balazovsky					1,452,871						13,334						1,466,205						3.7	%
Michael J. Doyle					0						25,000						25,000							*
David McWilliams					0						152,778						152,778							*
Sim Fass					0						100,000						100,000							*
Howard Schneider					0						100,000						100,000							*
All directors and officers as a group (8 persons)					3,455,628						1,732,735						5,188,363						12.7	%

*	Less than one percent.

Item 12.    Certain Relationships and Related Transactions

In connection with our private placements of units on May 27, 2005, June 29, 2005, July 29, 2005 and August 9, 2005, we paid Margie Chassman, one of the beneficial owners of in excess of 5% of our common stock, an aggregate of $52,000 as finders fees.

In connection with our private placement of Series A preferred stock and common stock purchase warrants on September 30, 2005 and October 3, 2005, Ms. Chassman provided a financial enhancement to the investors in the form of an escrow of 2,133,000 share of her common stock, to be drawn upon by the investors if their investment in our equity securities fails to provide a specified yield. We paid Ms. Chassman and her brother $166,000 for providing such financial enhancement.

In May 2005, we issued The Oxford Group 2,016,894 shares of our common stock in exchange for its forgiveness of our obligation to pay The Oxford Group an amount not to exceed $20 million, limited to 10% of our earnings before interest and taxes. This obligation resulted from the assignment of the exclusive intellectual property and marketing rights to the oxidized glutathione drug development platform technology, worldwide, excluding Russia and other countries comprising the former Soviet Union in 2000. The shares were issued to two of our directors, Simyon Palmin and Mark Balazovsky, and to one of our shareholders. Simyon Palmin is the president of The Oxford Group.

We are obligated to pay The Oxford Group a royalty of 0.8% of our revenue derived from our oxidized glutathione products during the patent life of the products. All or a portion of these payments may be distributed to Simyon Palmin and Mark Balazovsky, two of our directors.

In August 2000, Simyon Palmin loaned us $271,890 and Harry Palmin loaned us $250,041. In May 2005, Simyon Palmin forgave this loan plus accrued interest of $79,618 and Harry Palmin forgave this loan plus accrued interest of $74,505.

From October 1996 to October 1998, Simyon Palmin loaned us $99,000. In May 2005, he forgave the accrued interest of $24,362 related to this loan.

We were indebted to Simyon Palmin in the principal amount of $300,000 and Harry Palmin in the principal amount of $100,000. In May 2005, Simyon Palmin converted this debt into 480,000 shares of

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our common stock and Harry Palmin converted this debt into 160,000 shares of our common stock. We also paid Messrs. Palmin an aggregate of $23,976 and $11,250 in accrued interest on the debt during 2005 and 2004, respectively.

We acquired our rights to the oxidized glutathione technology from ZAO Bam, a company controlled by one of our directors, Mark Balazovsky. We are required to pay ZAO Bam a 1.2% royalty on our revenue from the oxidized glutathione products during the patent life of the products and $2 million for each of our products utilizing such technology approved by the FDA 18 months following such approval. Further, if we license any such products to third parties, we are required to pay ZAO Bam 3% of all licensing revenue and an additional 9% of such revenue to the extent it exceeds our developmental costs of the licensed products. However, we are not required to make this payment if we are paying the 1.2% royalty. ZAO Bam also granted us an exclusive right of first option and right of first refusal with respect to all future developments, discoveries or inventions of ZAO Bam.

In January 2005, we entered into an agreement with David Blech (the husband of Margie Chassman), which provided that he or his designees would lend us $500,000 (inclusive of $100,000 previously advanced to us in December 2004 by Ms. Chassman) for operating capital pending our debt restructuring and completion of our private placements of units, and up to an additional $500,000 on the same terms if the private placement was delayed. Mr. Blech did not lend us any money. The two loans, both of which were made by Ms. Chassman, totaled $500,000 and bore interest at 6% per annum. We repaid Ms. Chassman the entire $500,000 out of proceeds of our private placements of units on August 9, 2005. According to the agreement, we also issued the following individuals the following number of shares of our common stock:

Investor			Number of Shares of Common stock
Margie Chassman					2,475,000
Wood River Trust					3,850,000
Esther Blech					1,225,000
Milton Chassman					1,225,000
Aaron Eiger					1,225,000
Mark Germain					500,000

Wood River Trust is a trust formed for the benefit of Evan Blech, the son of Ms. Chassman and Mr. Blech. The trustees of the trust are Harvey Kesner and Michael C. Doyle (no relation to our director, Michael J. Doyle). Esther Blech is the mother-in-law of Ms. Chassman. Milton Chassman is the brother of Ms. Chassman. These investors have agreed not to publicly sell their shares of common stock until November 2006 and if they sell their shares in a private transaction, the buyer must also agree not to sell their shares publicly until November 2006.

In 1990, Mr. Blech founded D. Blech & Company, which, until it ceased doing business in September 1994, was a registered broker-dealer involved in underwriting biotechnology issues. In May 1998, David Blech pled guilty to two counts of criminal securities fraud, and, in September 1999, he was sentenced by the U.S. District Court for the Southern District of New York to five years' probation, which was completed in September 2004. Mr. Blech also settled administrative charges by the Commission in December 2000 arising out of the collapse in 1994 of D. Blech & Co., of which Mr. Blech was president and sole stockholder. The settlement prohibits Mr. Blech from engaging in future violations of the federal securities laws and from association with any broker-dealer. In addition, the District Business Conduct Committee for District No. 10 of NASD Regulation, Inc. reached a decision, dated December 3, 1996, in a matter styled District Business Conduct Committee for District No. 10 v. David Blech, regarding the alleged failure of Mr. Blech to respond to requests by the staff of the NASD for documents and information in connection with seven customer complaints against various registered representatives of D. Blech & Co. The decision found that Mr. Blech failed to respond to such requests in violation of NASD rules and that Mr. Blech should, therefore, be censured, fined $20,000 and barred from associating with any member firm in any capacity.

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Furthermore, Mr. Blech was discharged in bankruptcy in the United States Bankruptcy Court for the Southern District of New York in March 2000.

In November and December 2004, Simyon Palmin loaned us $19,000. In April and June 2005, we repaid the principal amount and Mr. Palmin forgave the interest of $465.

In February 2004, we entered into a consulting agreement with David McWilliams, one of our directors, whereby he performed interim chief executive officer services for us. We mutually terminated this consulting agreement in December 2004. As compensation for his services and for joining our board of directors, we granted Mr. McWilliams an option to purchase 152,778 shares of our common stock in April 2004.

During various time periods in 2003 and 2004, payroll and associated payroll taxes were accrued for Simyon Palmin and Harry Palmin in the amounts of $207,518 and $152,839, respectively. In May 2005, Messrs. Palmin forgave these amounts.

Item 13.    Exhibits

Exhibit No.

Description

Filed with this Form 10-KSB/A

Incorporated by Reference

Form

Filing Date

Exhibit No.

2.1

Agreement and plan of merger among Common Horizons, Inc., Nove Acquisition, Inc. and Novelos Therapeutics, Inc. dated May 26, 2005

8-K

June 2, 2005

99.2

2.2

Agreement and plan of merger between Common Horizons and Novelos Therapeutics, Inc. dated June 7, 2005

10-QSB

August 15, 2005

2.2

3.1

Certificate of Incorporation

8-K

June 17, 2005

1

3.3

Certificate of Designations of Series A cumulative convertible preferred stock

8-K

October 3, 2005

99.2

3.2

By-Laws

8-K

June 17, 2005

2

10.1**

Employment agreement with Christopher J. Pazoles dated July 15, 2005

10-QSB

August 15, 2005

10.4

10.2**

Employment agreement with Harry Palmin dated January 31, 2006

8-K

February 6, 2006

99.1

10.3**

Compensation for independent directors

8-K

December 22, 2005

99.1

10.4**

2000 Stock Option and Incentive Plan

SB-2

November 16, 2005

10.2

10.5**

Form of 2004 non-plan non-qualified stock option

SB-2

November 16, 2005

10.3

10.6**

Form of non-plan non-qualified stock option used from February to May 2005

SB-2

November 16, 2005

10.4

10.7**

Form of non-plan non-qualified stock option used after May 2005

SB-2

November 16, 2005

10.5

10.8

Form of common stock purchase warrant issued in March 2005

SB-2

November 16, 2005

10.6

10.9

Form of securities purchase agreement dated May 2005

8-K

June 2, 2005

99.1

10.10

Form of subscription agreement dated September 30, 2005

8-K

October 3, 2005

99.1

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Exhibit No.

Description

Filed with this Form 10-KSB/A

Incorporated by Reference

Form

Filing Date

Exhibit No.

10.11

Form of Class A common stock purchase warrant dated September 30, 2005

8-K

October 3, 2005

99.3

10.12

Form of share escrow agreement

8-K

November 3, 2005

10.3

10.13

Consideration and new technology agreement dated April 1, 2005 with ZAO BAM

10-QSB

August 15, 2005

10.2

10.14

Letter agreement dated March 31, 2005 with The Oxford Group, Ltd.

10-QSB

August 15, 2005

10.3

10.15

Form of securities purchase agreement dated March 2, 2006

8-K

March 3, 2006

99.2

10.16

Form of common stock purchase warrant dated March 2006

8-K

March 3, 2006

99.3

10.17

Placement Agent Agreement with Oppenheimer & Co. Inc. dated December 19, 2005

8-K

March 3, 2006

99.4

31.1

Certification of chief executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

X

31.2

Certification of chief financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

X

32.1

Certification of chief executive officer and chief financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

X

**	Management contract or compensatory plan.

Item 14.    Principal Accountant Fees and Services

Aggregate fees for professional services by Stowe & Degon for the years ended December 31, 2005 and December 31, 2004 were:

			2005						2004
Audit				$	80,775					$	—
Audit Related					9,700						—
Tax					—						—
All Other					—						—
Total				$	90,475					$	—

Audit Fees:   Audit fees were for professional services rendered for the audit of our annual financial statements, the review of quarterly financial statements and the preparation of statutory and regulatory filings. Stowe & Degon was not engaged to audit the Company's 2004 financial statements until 2005. The Audit fees noted above for the year ended December 31, 2005 were for professional services rendered for the audits of the financial statements of the Company and statutory audits and reviews for 2005 ($50,000) and 2004 ($30,775).

Audit-Related Fees:   Audit-related fees were for professional services rendered in connection with consents and assistance with review of registration statements filed with the SEC, for consultations concerning financial accounting and reporting standards, and audits of business combinations.

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Tax Fees:   Tax fees consist of fees billed for professional services for tax compliance, tax planning and tax advice. These services include assistance regarding federal, state and international tax compliance and planning, tax audit defense, and mergers and acquisitions.

All Other Fees:   All other fees includes assistance with miscellaneous reporting requirements and interpretation of technical issues.

The audit committee considered and determined that the provision of non-audit services provided by Stowe & Degon is compatible with maintaining the firm's independence. In 2005 and 2004, there were no non-audit services provided by Stowe & Degon.

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Registered Public Accounting Firm

At present, our audit committee approves each engagement for audit and non-audit services before we engage Stowe & Degon to provide those services.

Our audit committee has not established any pre-approval policies or procedures that would allow our management to engage Stowe & Degon to provide any specified services with only an obligation to notify the audit committee of the engagement for those services. None of the services provided by Stowe & Degon for 2005 was obtained in reliance on the waiver of the pre-approval requirement afforded in SEC regulations.

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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

NOVELOS THERAPEUTICS, INC.

By: /s/ Harry S. Palmin                                     Harry S. Palmin Title: President, Chief Executive Officer

Date: November 1, 2006

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