Combating bacterial infections is critical to modern medicine. Until the advent of antibiotics, led by the introduction of penicillin in the 1940s, infections were a routine cause of death. Since that time, antibiotics have greatly reduced the risks associated with bacterial infections, have made possible the routine use of surgical procedures for non-critical purposes and have increased the probability of success of many modern complex operations.

As a result, most people in the developed world now tend to believe that bacterial infections can be readily treated with a course of antibiotic therapy; however, recent developments relating to bacterial resistance and bacterial biofilm are calling this into question.

Bacteria are becoming resistant to different classes of existing antibiotics at increasing rates. These increasing levels of resistance are principally the result of repeated exposure of bacteria to non-lethal quantities of antibiotics and the ability of certain bacteria to transmit mutant genes to other bacterial species, thus enabling different species of bacteria to survive the antibiotic to which the first species was exposed. The growth of this antibiotic resistance since 1990 has been substantial.

According to the Center for Integrative Biology and Infectious Diseases of the National Institutes of Health (2007), biofilms account for 80% of the microbial infections in humans. Bacterial biofilm is associated with diseases such as sinus infections (sinusitis), ear infections, chronic wounds and infections related to cystic fibrosis. Bacterial biofilms are also frequently found on the surfaces of medical devices, such as catheters and implants, and can cause severe chronic or acute infections.

The Company developed its Aganocide compounds through research and development based on the human body’s natural immune system and the molecules involved in combating infections. The body’s primary defense against infection is the anatomic barrier of the skin and mucous membranes. Once pathogens penetrate the primary defense, the next line of defense is provided by the white blood cells.

The primary molecule that is created in the oxidative burst is hypochlorous acid. Hypochlorous acid is highly reactive and kills bacteria in seconds. The Company has explored the properties of hypochlorous acid in a variety of animal models and has established the conditions under which it can be held stable. NVC-101 is the Company’s stable formulation of hypochlorous acid. NVC-101 can only exist in a solution. NVC-101 is extremely rapid acting and is very short-lived when applied to tissue.

As the process of the oxidative burst continues, hypochlorous acid reacts with other molecules. Two molecules result from the reaction of hypochlorous acid with taurine: N-chlorotaurine (NCT) and N,N,-dichlorotaurine (NNDCT). Both NCT and NNDCT are antimicrobial, although NNDCT is significantly more so. However, both of these molecules are chemically unstable.

The Company has succeeded in creating stable analogs of these molecules, one of which is its NVC-422 compound. NVC-422 is the Company’s lead compound and it has a number of advantages. It kills a very wide range of pathogens, including not only bacteria, but also yeasts, fungi and some viruses. NVC-422 can kill pathogens very rapidly and can do so at concentrations significantly lower than the concentrations at which it begins to harm human cells.

Research and development expenses increased 51% to $2.7 million for the nine months ended September 30, 2006 from $1.8 million for the nine months ended September 30, 2005.

General and administrative costs increased 74% to $1.7 million for the nine months ended September 30, 2006 from $1.0 million for the nine months ended September 30, 2005.

Other income (expense), net increased slightly to $97,000 for the nine months ended September 30, 2006 from $78,000 for the nine months ended September 30, 2005.