Imunon, Inc. - Annual Report: 2006 (Form 10-K)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006

or

For the transition period from              to             

Commission file number 000-14242

CELSION CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

(410) 290-5390

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Not Applicable

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act     YES  ¨    NO  x

Indicate by check mark if the Registrant is not required to file pursuant to Section 13 or Section 15(d) of the Act.    YES  ¨    No  x

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one)

Large Accelerated Filer  ¨    Accelerated Filer  ¨    Non-accelerated Filer  x

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

As of March 23, 2007, 10,827,643 shares of the Registrant’s Common Stock were issued and outstanding.

As of June 30, 2006, the aggregate market value of voting common stock held by non-affiliates of the Registrant was approximately $26,837,000 based on the closing price for the Registrant’s Common Stock on that date as quoted on The American Stock Exchange.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Definitive Proxy Statement in connection with its 2007 Annual Meeting of Stockholders, which is expected to be held on June 13, 2007, are incorporated by reference into Part III hereof, as indicated herein.

Table of Contents

CELSION CORPORATION

FORM 10-K

TABLE OF CONTENTS

Table of Contents

Table of Contents

PART I

FORWARD-LOOKING STATEMENTS

Certain of the statements contained in this Annual Report on Form 10-K are forward-looking and constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, from time to time we may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and other aspects of our present and future business operations and similar matters that also constitute such forward-looking statements. These statements involve known and unknown risks, uncertainties, and other factors that may cause our or our industry’s actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Such factors include, among other things, unforeseen changes in the course of research and development activities and in clinical trials; possible changes in cost and timing of development and testing, capital structure, and other financial items; changes in approaches to medical treatment; introduction of new products by others; possible acquisitions of other technologies, assets or businesses; possible actions by customers, suppliers, strategic partners, potential strategic partners, competitors and regulatory authorities, as well as those listed under “Risk Factors” below and elsewhere in this Annual Report on Form 10-K. In some cases, you can identify forward-looking statements by terminology such as “expect”, “anticipate”, “estimate”, “plan”, “believe” and words of similar import regarding the Company’s expectations. Forward-looking statements are only predictions. Actual events or results may differ materially. Although we believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our industry, business and operations, we cannot guarantee that actual results will not differ materially from our expectations. In evaluating such forward-looking statements, you should specifically consider various factors, including the risks outlined under “Risk Factors.” The discussion of risks and uncertainties set forth in this Annual Report on Form 10-K is not necessarily a complete or exhaustive list of all risks facing the Company at any particular point in time. We operate in a highly competitive, highly regulated and rapidly changing environment and our business is in a state of evolution. Therefore, it is likely that new risks will emerge, and that the nature and elements of existing risks will change, over time. It is not possible for management to predict all such risk factors or changes therein, or to assess either the impact of all such risk factors on our business or the extent to which any individual risk factor, combination of factors, or new or altered factors, may cause results to differ materially from those contained in any forward-looking statement. We disclaim any obligation to revise or update any forward-looking statement that may be made from time to time by us or on our behalf.

GENERAL

Founded in 1982 as Cheung Laboratories, with a vision of using thermotherapy to treat cancer and other diseases, Celsion Corporation (“Celsion” or the “Company” or “we”) is a biotechnology company. The Company initially focused research efforts on the treatment of breast cancer. Celsion’s core business activity is the development of products to treat cancer and other diseases and to commercialize those products to generate a return on investment for its stockholders through one of several means including (a) selling products directly to end users; (b) selling products through a distributor (as is the case with its Prolieve product); and (c) licensing its technology to third parties and generating income through royalties and milestone payments.

In 2001, the Company narrowed its focus and concentrated its resources on commercializing a second generation treatment system for Benign Prostatic Hyperplasia (BPH) with the ultimate goal of using the funds generated from that product to develop cancer treatment drugs based on a heat activated liposome technology licensed from Duke University.

1

Table of Contents

The Prolieve Thermodilatation system for the treatment of BPH was approved by the Food and Drug Administration (“FDA”) in 2004 and is being marketed by Celsion’s exclusive distributor Boston Scientific Corporation (“Boston Scientific”, “BSC”) Boston Scientific also has a five year (expiring in February 2009) option to purchase the Prolieve assets and technology for $60 million. The funds generated to date from sales of Prolieve have been used in the development of the Company’s first drug, ThermoDox. Celsion is currently engaged in three Phase I, dose escalation studies, in the treatment of primary liver cancer and in the treatment of recurrent chest wall breast cancer.

In 2005, the Company made a strategic decision to discontinue the development of new thermotherapy devices and has since disposed of its device development business. In November 2005, the Company reached an agreement to sell its heat activated gene technology to TCT, Inc, and in January 2006, the Company sold its breast cancer treatment device to its founder and former Chief Executive Officer, Dr. Augustine Cheung.

The Company intends to focus on developing drugs for the treatment of various cancer indications. The first of these development projects involves ThermoDox, our proprietary heat activated liposome containing doxorubicin. The Company plans to develop ThermoDox for multiple cancer indications where it believes that ThermoDox may enhance the therapeutic benefit offered by existing thermotherapy devices. For certain indications the Company may seek licensing partners to share in the development and commercialization costs. The Company will also evaluate licensing products from third parties for cancer treatments involving novel drugs or drug-delivery systems to expand its development pipeline.

Our principal offices are located at 10220-L Old Columbia Road, Columbia, Maryland and our telephone numbers are (410) 290-5490 and (800) 262-0394. The Company’s website id www.celsion.com

The Company makes available free of charge through its website, www.celsion.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. In addition, copies of our annual report on Form 10-K will be made available free of charge upon written request. The SEC also maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file periodic and other reports electronically with the Securities and Exchange Commission. The address of that site is www.sec.gov. The material on our website is not a part of this Annual Report on Form 10-K.

THERMODOX (DOXORUBICIN ENCAPSULATED IN HEAT-ACTIVATED LIPOSOME)

Conventional liposomes are manufactured lipid spheres that can carry drugs and delay their elimination by the body, allowing the drugs to remain in the bloodstream for extended periods of time. However, the currently available liposome drug delivery products used to treat cancer do not provide for active targeting of organ specific tumors.

A team of Duke University scientists has developed heat-sensitive liposomes comprised of lipid molecules that rapidly change structure when heated to a specific temperature (40º to 42º C), creating openings in the liposome allowing it to release its drug rapidly.

In 1999, Celsion obtained an exclusive commercialization license from Duke University to this proprietary heat-sensitive liposome technology for the delivery of a wide range of drugs. In partnership with Duke University, Celsion has encapsulated doxorubicin, an approved and frequently used cancer drug, in its investigational heat-activated liposome product, ThermoDox. Celsion intends to use various available focused-heat technologies to provide localized heating of tumors to trigger the release of doxorubicin from ThermoDox after intravenous administration. As these liposomes circulate within the tumor tissue and tumor vasculature, the locally applied heat causes the rapid release of doxorubicin within the targeted tumor. Celsion believes that this approach can deliver greater concentrations of drug directly to the tumor, while having the potential to improve conventional chemotherapy.

2

Table of Contents

Animal studies have demonstrated that the intravenous administration of ThermoDox in combination with targeted heat to the tumor can produce tumor tissue concentrations higher than that achieved in the same experiments with traditional or non-heat sensitive liposomal doxorubicin formulations when given at the same dose as ThermoDox. Celsion is pursuing primary liver cancer as its lead indication for ThermoDox. The Company is also evaluating the possibility of using ThermoDox or other chemotherapeutic agents encapsulated in its heat activated liposome to treat other cancers.

Liver Cancer Overview

Primary liver cancer (hepatocellular carcinoma or HCC) is one of the most common and deadliest forms of cancer worldwide. It is estimated that up to 90% of liver cancer patients will die within five years of diagnosis. There are approximately 20,000 new cases per year of HCC in the U.S. With the inclusion of liver metastases from other cancers (e.g. colon, lung, breast, etc) the total number of cases of liver cancer in the U.S. increases significantly.

Although the standard treatment for liver cancer is surgical excision of the tumor, 80 to 90% of patients are ineligible for surgery at time of diagnosis as early stage liver cancer generally has few symptoms and when finally detected the tumor frequently is too large for surgery. There are few alternative treatments, since radiation therapy and chemotherapy are largely ineffective. For tumors generally up to about two inches in diameter, radiofrequency ablation (RFA) is a commonly utilized treatment approach which directly destroys the tumor tissue through the application of high temperatures by a probe inserted into the core of the tumor.

Celsion’s Approach

While RFA uses extremely high temperatures (80º-100º C) to ablate the tumor, it may fail to treat micrometasteses in the outer margins of ablated tumors because temperatures in the periphery may not be high enough to destroy the cancer cells. Local recurrence can be a problem especially for tumors greater than about one inch in diameter. Celsion’s ThermoDox treatment approach is designed to utilize the ability of RFA devices to ablate the center of the tumor while simultaneously thermally activating the ThermoDox liposome to release its encapsulated doxorubicin to kill remaining viable cancer cells throughout the heated region, including the tumor ablation margins. This treatment is intended to deliver the drug directly to those cancer cells that survive RFA. This approach will also increase the delivery of the drug at the desired tumor site while potentially reducing drug exposure distant to the tumor site.

Liver Cancer Phase I Trial

A Phase I single dose escalation study is underway which is investigating ThermoDox in combination with RFA for the treatment of liver cancer. The study is currently being performed at the National Cancer Institute (NCI), which is part of the National Institutes of Health (NIH) and Queen Mary’s Hospital in Hong Kong. The Company treated its first patient on February 14, 2005, and expects to complete treatment of all patients in the Phase I study by the middle of 2007. The Company is currently working with the FDA to finalize plans for a Phase III study for the treatment of primary liver cancer which it hopes to initiate in late 2007.

In February 2007, the Company initiated a Phase I dose escalation study designed to investigate simplification of the current RFA/ThermoDox treatment regimen including a single vial formulation of ThermoDox and reducing the pre-treatment prophylactic dosing. The study also allows multiple dosing in liver cancer patients. The study is currently being performed at the Cleveland Clinic Foundation and at North Shore Long Island Jewish Health System. The first patient in this study was treated during February 2007. This study is not expected to impact the timing of the Phase III liver study discussed above[CC1].

Recurrent Chest Wall Breast Cancer Overview

Studies at Duke University and other centers have indicated that heat may improve the therapeutic action of non temperature sensitive liposomal doxorubicin formulations in advanced loco-regional breast cancer. Celsion, in collaboration with Duke University, has decided to explore the potential of ThermoDox to treat a population of advanced breast cancer patients with loco-regional chest wall disease or recurrent chest wall breast cancer (RCW).

RCW cancer is a condition which afflicts patients that have undergone a mastectomy, surgery to remove a cancerous breast, and occurs in about 15,000 patients annually in the United States. There is currently no generally effective therapeutic approach for this condition with the result that many of these patients die within two years of the local recurrence of their breast cancer.

3

Table of Contents

As in the liver cancer program, we are using a commercially available thermotherapy device to activate ThermoDox at the desired target site. In the case of RCW tumors, the heat source will be a microwave thermotherapy device which is designed to heat the target tissue to a temperature adequate to activate ThermoDox but not ablate the tissue as with RFA.

Breast Cancer Phase I Trial

Celsion has provided a research grant to Duke University and will provide clinical supplies of ThermoDox to support a Phase I multiple dose, open label study of the safety and pharmacokinetics in RCW patients. Duke enrolled the first patient in May 2006 and expects to complete enrollment in the study by the third quarter of 2007.

PROLIEVE THERMODILATATION SYSTEM

Focused Heat Treatment

Celsion’s minimally invasive transurethral microwave system, the Prolieve Thermodilatation system, combines heat transmitted through a transurethral microwave thermotherapy device with pressure applied by a unique balloon catheter to produce a natural stent to reopen the urethra. At the same time, the microwave applied heat kills prostate cells outside the wall of the urethra, creating space for the enlarged natural opening.

It is a relatively painless, rapid outpatient procedure, requiring no sedation, generally no post-operative catheterization, and delivering rapid symptomatic relief.

The procedure is eligible for Medicare/Medicaid and insurance reimbursement averaging $3,600. The market for minimally invasive procedures is currently approximately $75 million and growing rapidly. Management believes the potential for Prolieve could be greater than $125 million.

As mentioned above, Celsion has granted Boston Scientific exclusive marketing rights to the Prolieve Thermodilatation System. In addition, Celsion has also granted Boston Scientific the option to purchase the assets and technology relating to Prolieve for a period of five years from its launch (February 2004) for a price of $60 million. Boston Scientific has also loaned Celsion $15,000,000 ($16,277,698 including accrued interest at December 31, 2006), which can be applied against the option purchase price for the Prolieve Thermodilatation System.

Marketing, Distribution and Supply

Celsion markets the Prolieve system through an exclusive Distribution Agreement with Boston Scientific Corporation, pursuant to which Celsion granted Boston Scientific exclusive rights to market and distribute Prolieve and its component parts for the treatment of BPH. Under the terms of this agreement Boston Scientific markets and distributes Prolieve in the United States and has a license to market and distribute the product worldwide, with the exception of Greater China, Mexico and Central and South America. Boston Scientific, through its urology sales force, launched the product in the United States in February 2004 targeting urology practices throughout the country. Trial of the system is generated through the placement of control units in physician’s offices for an evaluation period at the end of which the physician either acquires the machine or returns it to Boston Scientific. Since approval in February 2004, Prolieve has been sold exclusively in the United States generating revenues of approximately $11,251,000, $12,320,000 and $2,506,000 in the years ended December 31, 2006, 2005 and 2004, respectively.

4

Table of Contents

Under the terms of the Distribution Agreement, Celsion is responsible for supplying control units and disposables to Boston Scientific. Celsion supplies an inventory of control units to Boston Scientific. Boston Scientific places these machines as evaluation units for eventual sale or sells the units directly to physicians. Celsion records a sale when Boston Scientific ultimately sells control units to end users. Celsion sells control units to Boston Scientific at its fully loaded cost plus half of any profit generated on the sale. Celsion sells disposable kits, which each contain a catheter, a heat exchanger, a tubing set and a bag of sterile water, to Boston Scientific at 50% of the average selling price generated by sales of the disposable kits during the preceding six month period ending on December 31 and June 30 of each year. Boston Scientific is responsible for maintaining an inventory of disposable kits.

Celsion has contracted out the manufacturing of both the control units and the catheter kits. Prolieve Control units are manufactured by Sanmina-SCI under a Medical Product Manufacturing Services Agreement. During 2005 we purchased disposable catheter kits from Catheter Research, Inc., pursuant to a Development and Supply Agreement. Beginning in October 2005, we initiated supply from an additional manufacturer, Accellant (formerly Venusa) Corporation, for the production of catheters and disposables under a Medical Product Manufacturing Services Agreement.

RESEARCH AND DEVELOPMENT

Celsion engages in a limited amount of research and development in its own facilities, and instead sponsors the majority of its research programs in partnership with various research institutions, including Duke University. Our expenditures for research and development were approximately $9,345,000 $10,081,000 and $11,533,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

CONDUCT OF CLINICAL TRIALS

Celsion monitors its clinical trials using contract research organizations, or CROs, to monitor its trials. Use of CROs enables Celsion to perform high quality clinical trials without the need to hire staff and build infrastructure to support such trials and to retain all rights to, and control over, its product candidates. We have instituted a formal process for requesting and reviewing proposals from, and interviewing, prospective CROs in advance of the initiation of each of our clinical trials. Following such process, in December 2004 we retained Theradex^® as our CRO in connection with the ThermoDox/RFA Phase I liver cancer study, and in February 2005, we retained INC Research, Inc. in connection with the Prolieve post-market study.

FDA REGULATION

Research and Development

Our research and development activities, pre-clinical tests and clinical trials and, ultimately, the manufacturing, marketing and labeling of our products, are subject to extensive regulation by the FDA. The Federal Food, Drug and Cosmetic Act, the Public Health Service Act and the regulations promulgated by the FDA govern, among other things, the testing, manufacture, safety, efficacy, labeling, storage, record keeping, approval, advertising, promotion, import and export of our products.

Under these statutes, our Prolieve system is regulated as a class III medical device, our heat-activated liposomes may be regulated as a new drug. The steps ordinarily required before such products can be marketed in the U.S. include (a) pre-clinical and clinical studies; (b) the submission to the FDA of an application for an Investigational Device Exemption (IDE) or approval as an Investigational New Drug (IND) which must become effective before human clinical trials may commence; (c) adequate and well-controlled human clinical trials to establish the safety and efficacy of the product; (d) the submission to the FDA of an application for premarketing approval (PMA), a New Drug Application (NDA), and (e) FDA approval of the application, including approval of all product labeling.

5

Table of Contents

Pre-clinical tests include laboratory evaluation of product chemistry, formulation and stability, as well as animal studies to assess the potential safety and efficacy of the product. Pre-clinical safety tests must be conducted by laboratories that comply with FDA regulations regarding Good Laboratory Practice. The results of pre-clinical tests are submitted to the FDA as part of an IDE or IND and are reviewed by the FDA before the commencement of human clinical trials. Submission of an IDE or IND will not necessarily result in FDA authorization to commence clinical trials and the absence of FDA objection to an IDE or IND does not necessarily mean that the FDA will ultimately approve a PMA or that a product candidate otherwise will come to market.

Clinical trials involve the administration of therapy to humans under the supervision of a qualified principal investigator. Clinical trials must be conducted in accordance with Good Clinical Practices under protocols submitted to the FDA as part of an IDE or IND. Also, each clinical trial must be approved and conducted under the auspices of an internal review board, or IRB, and with patient informed consent. An IRB will consider, among other things, ethical factors, and the safety of human subjects and the possible liability of the institution conducting the clinical trials.

Clinical trials are typically conducted in two or three sequential phases, but the phases may overlap. Phase I clinical trials involve the initial introduction of the therapy to a small number of subjects. Phase II trials are generally larger trials conducted in the target population. For devices such as our Prolieve system, Phase II studies may serve as the pivotal trials, providing the demonstration of safety and effectiveness required for approval. However, as in the case of the PMA for Prolieve, the FDA has required additional, post-market trials as a condition of approval. In the case of drugs and biological products, Phase II clinical trials generally are conducted in a target patient population to gather evidence about the pharmacokinetics, safety and biological or clinical efficacy of the drug for specific indications, to determine dosage tolerance and optimal dosage and to identify possible adverse effects and safety risks. When a drug or biological compound has shown evidence of efficacy and an acceptable safety profile in Phase II evaluations, Phase III clinical trials are undertaken to serve as the pivotal trials to demonstrate clinical efficacy and safety in an expanded patient population.

There can be no assurance that any of our clinical trials will be completed successfully, within any specified time period or at all. Either the FDA or we may suspend clinical trials at any time, if either the FDA or we conclude that clinical subjects are being exposed to an unacceptable health risk or for other reasons. The FDA inspects and reviews clinical trial sites, informed consent forms, data from the clinical trial sites (including case report forms and record keeping procedures) and the performance of the protocols by clinical trial personnel to determine compliance with Good Clinical Practices. The FDA also examines whether there was bias in the conduct of clinical trials. The conduct of clinical trials is complex and difficult, especially in pivotal Phase II or Phase III trials. There can be no assurance that the design or the performance of the pivotal clinical trial protocols or any of our current or future product candidates will be successful.

The results of pre-clinical studies and clinical trials, if successful, are submitted in an application for FDA approval to market the device, drug or biological product for a specified use. The testing and approval process requires substantial time and effort, and there can be no assurance that any approval will be granted for any product at any time, according to any schedule, or at all. The FDA may refuse to accept or approve an application if it believes that applicable regulatory criteria are not satisfied. The FDA may also require additional testing for safety and efficacy. Moreover, if regulatory approval is granted, the approval will be limited to specific indications. There can be no assurance that any of our current product candidates will receive regulatory approvals for marketing or, if approved, that approval will be for any or all of the indications that we request.

The FDA is authorized to require various user fees including NDA fees (currently up to $896,200) and PMA application fees (currently ranging from $20,275 up to $281,600). The FDA is also authorized to require annual user fees for approved products and for companies with establishments at which finished products are manufactured, which fees may increase from year to year. The FDA may waive or reduce such user fees under special circumstances. We seek waivers or reductions of user fees where possible, but we cannot be assured that we will be eligible for any such waiver or reduction.

6

Table of Contents

Post-Approval Requirements

After receipt of necessary regulatory approvals for initial manufacturing and sale of our product candidates, our manufacturing facilities and products are subject to ongoing review and periodic inspection. Each U.S. device, drug and biologic manufacturing establishment must be registered with the FDA. Manufacturing establishments in the U.S. and abroad are subject to inspections by the FDA and must comply with the FDA’s QSR regulations. Medical devices also must comply with the FDA’s QSR regulations. In order to ensure full technical compliance with such regulations, manufacturers must expend funds, time and effort in the areas of production and quality control. In addition, the FDA may impose post-approval requirements on us, including the requirement that we conduct specified post-marketing studies.

Inspections

We are subject to the periodic inspection of our clinical trials, facilities, procedures and operations and/or the testing of our products by the FDA to determine whether our systems and processes are in compliance with FDA regulations. Following such inspections, the FDA may issue notices on Form 483 and warning letters that could cause us to modify certain activities identified during the inspection. A Form 483 notice is generally issued at the conclusion of an FDA inspection and lists conditions the FDA inspectors believe may violate FDA regulations. FDA guidelines specify that a warning letter only is to be issued for violations of “regulatory significance” for which the failure to adequately and promptly achieve correction may be expected to result in an enforcement action.

Recalls

The FDA has the authority to require the recall of our products in the event of material deficiencies or defects in design or manufacture. A governmentally mandated recall, or a voluntary recall by us, could result from a number of events or factors, including component failures, manufacturing errors, design defects or defects in labeling.

Other FDA Regulations

We are also subject to recordkeeping and reporting regulations, including the FDA’s mandatory Medical Device Reporting, or MDR, regulations. These regulations require, among other things, the reporting to the FDA of adverse events alleged to have been associated with the use of a product or in connection with certain product failures.

Labeling and promotional activities also are regulated by the FDA and, in certain instances, by the Federal Trade Commission (FTC). We must also comply with record keeping requirements as well as requirements to report certain adverse events involving our products. The FDA can impose other post-marketing controls on us as well as our products including, but not limited to, restrictions on sale and use, through the approval process, regulations and otherwise.

OTHER FEDERAL REGULATIONS

The Federal Communications Commission (FCC) regulates the frequencies of microwave and radio-frequency emissions from medical and other types of equipment to prevent interference with commercial and governmental communications networks. The FCC has approved the frequency of 915 MHZ for medical applications, and machines utilizing that frequency do not require shielding to prevent interference with communications. Our products utilize the 915 MHZ frequency.

PRODUCT LIABILITY AND INSURANCE

Our business exposes us to potential product liability risks that are inherent in the testing, manufacturing and marketing of human therapeutic products. We presently have product liability insurance limited to $5,000,000 per incident, and, if we were to be subject to a claim in excess of this coverage or to a claim not covered by our insurance and the claim succeeded, we would be required to pay the claim out of our own limited resources.

7

Table of Contents

EMPLOYEES

As of December 31, 2006, we employed 29 full-time employees and also utilized the services of part-time consultants from time to time. None of our employees are covered by a collective bargaining agreement, and we consider our relations with our employees to be good.

SEASONALITY

Customer purchasing patterns do not show significant predictable seasonal variation.

COMPETITION

Prolieve

BPH has traditionally been treated either surgically using a procedure in which the prostatic urethra and surrounding tissue in the prostate are trimmed with a telescopic knife, thereby reopening the urethral channel for urine flow. Procedures have been developed as alternatives to surgical removal of the obstructing portion of the prostate. The condition can also be treated with one of two classes of drugs,, alpha-blockers are one such class of drug, the most commonly prescribed of which are Hytrin^® and Flowmax^®. These drugs work by relaxing muscles surrounding the urethra, thereby easing urinary flow. The alternate drug type is Proscar^® which is designed to shrink the enlarged gland. However for a number of reasons these treatments may be inadequate due to side effects or lack of effectiveness. This inadequacy has led to the development of transurethral microwave treatments (TUMT) which ablate the tissue surrounding the prostatic urethra removing the blockage. These TUMT systems include devices marketed by Urologix (NASDAQ:ULGX) and American Medical Systems Holdings, Inc. ((NASDAQ:AMMD), or AMS (which acquired TherMatrx in July 2004), as well as Prolieve. Celsion believes, and market experience to date has confirmed, that the Prolieve’s combined attributes of rapid relief, as demonstrated by its low level of post treatment catheterization, low pain and minimal side effects make Prolieve competitive in this market.

ThermoDox

Although there are many drugs and devices marketed and under development for the treatment of cancer, the Company is not aware of any other heat activated drug delivery product either being marketed or under clinical development.

LICENSES, PATENTS AND TRADEMARKS

The Company owns three United States patents pertaining to the treatment of enlarged prostate or prostate cancer. These three patents are all being pursued internationally for patent right protection in a number of territories. Additionally, the Company has filed four other related patent applications in the U.S. and overseas. With regard to Liposome patents licensed from Duke University, the Company has filed two additional patents related to the formulation and use of liposomes. Further, in relation to the patents licensed from Duke, the Company has licensed from Valentis, CA certain global rights covering the use of pegylation for temperature sensitive liposomes

The MMTC and Duke license agreements each contains license fee, royalty and/or research support provisions, testing and regulatory milestones, and other performance requirements that the Company must meet by certain deadlines with respect to the use of the licensed technologies. In conjunction with the patent holders, the Company intends to file international applications for certain of the United States patents.

The Company entered into license agreements with MMTC, a development company, in 1996 and 2002 for exclusive worldwide rights to MMTC’s patents related to its balloon compression technology for the treatment of prostatic disease in humans. The exclusive rights under the MMTC license agreements extend for the life of MMTC’s patents. MMTC currently has patents in the United States and Canada. The terms of these patents expire at various times from April 2008 to November 2014. In addition, MMTC also has patent applications pending in Japan and Europe.

In 1999 the Company entered into a license agreement with Duke University under which the Company received exclusive rights (subject to certain exceptions) to commercialize and use Duke’s thermo-liposome technology. In January 2003, Celsion purchased these rights from Duke in exchange for 253,691 shares of the Company’s Common Stock with a value of $2,175,014, subject to any agreement to pay a royalty based upon future sales.

8

Table of Contents

The Company’s rights under the license agreement with Duke University extend for the longer of 20 years or the end of any term for which any relevant patents are issued by the United States Patent and Trademark Office. Currently, the Company has rights to Duke’s patent for its thermo-liposome technology in the United States, which expires in 2018, and to future patents received by Duke in Canada, Europe, Japan and Australia, where it has patent applications pending. The European application can result in coverage in the United Kingdom, France and Germany. For this technology, the Company’s license rights are worldwide, with various patent rights covering the United States, Canada, the United Kingdom, France, Germany and Japan.

In addition to the rights available to the Company under completed or pending license agreements, the Company relies on its own proprietary know-how and experience in the development and use of heat for medical therapies, which the Company seeks to protect, in part, through proprietary information agreements with employees, consultants and others. The Company cannot offer assurances that these information agreements will not be breached, that the Company will have adequate remedies for any breach or that these agreements, even if fully enforced, will be adequate to prevent third-party use of the Company’s proprietary technology. Similarly, the Company cannot guarantee that technology rights licensed to it by others will not be successfully challenged or circumvented by third parties, or that the rights granted will provide the Company with adequate protection.

The following is a summary of the risk factors that we believe are most relevant to our business. These are factors that, individually or in the aggregate, we think could cause our actual results to differ significantly from anticipated or historical results. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties. We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise. You are advised, however, to consult any further disclosure we make on related subjects in our reports on forms 10-Q and 8-K filed with the SEC.

WE HAVE A HISTORY OF SIGNIFICANT LOSSES AND EXPECT TO CONTINUE SUCH LOSSES FOR THE FORESEEABLE FUTURE.

Since Celsion’s inception in 1982, our expenses have substantially exceeded our revenues, resulting in continuing losses and an accumulated deficit of $90,486,814 at December 31, 2006, including losses of $7,584,230 for the year then ended. Because we presently have only limited revenues from sales of our Prolieve system and related disposables and we are committed to continuing our product research, development and commercialization programs, we will continue to experience significant operating losses unless and until we complete the commercialization of Prolieve, as well as the development of other new products and these products have been clinically tested, approved by the FDA and successfully marketed.

9

Table of Contents

WE DO NOT EXPECT TO GENERATE SIGNIFICANT REVENUE FOR THE FORESEEABLE FUTURE.

Since 1995, we have devoted our resources to developing a new generation of products but have not been able to market these products until we completed clinical testing and obtained all necessary governmental approvals. On February 19, 2004, we received a PMA from the FDA for the first of our new generation of thermotherapy products—our Prolieve Thermodilatation system for the treatment of BPH—and, since that time, our distributor Boston Scientific has begun commercial introduction of the Prolieve system. However, we can give no assurance as to how much revenue will be generated by Prolieve sales. In addition, our other products are still in various stages of development and testing and cannot be marketed until we have completed clinical testing and obtained necessary governmental approval. Accordingly, our revenue sources are, and will remain, extremely limited until our other new products are clinically tested, approved by the FDA and successfully marketed. We cannot guarantee that any or all of our products will be successfully tested, approved by the FDA or marketed, successfully or otherwise, at any time in the foreseeable future or at all.

IF WE ARE NOT ABLE TO OBTAIN NECESSARY FUNDING, WE WILL NOT BE ABLE TO COMPLETE THE DEVELOPMENT, TESTING AND COMMERCIALIZATION OF OUR TREATMENT SYSTEMS.

We will need substantial additional funding in order to complete the development, testing and commercialization of our liver cancer and recurrent chest wall breast cancer treatment systems, as well as other potential new products. We expended approximately $9,345,400 on research and development activities in the 12-month period ended December 31, 2006. As of that date, we had approximately $9,032,700 in cash, cash equivalents and short term investments on hand to fund our operations. We have made a significant commitment to our heat-activated liposome research and development projects and it is our intention at least to maintain, or increase the pace and scope of these activities. The commitment to these new projects could require additional external funding, at least until we are able to generate sufficient cash flow from sale of one or more of our products to support our continued operations. We do not have any committed sources of financing and cannot offer any assurances that additional funding will be available in a timely manner, on acceptable terms or at all.

If adequate funding is not available, we may be required to delay, scale back or eliminate certain aspects of our operations or attempt to obtain funds through unfavorable arrangements with partners or others that may force us to relinquish rights to certain of our technologies, products or potential markets or that could impose onerous financial or other terms. Furthermore, if we cannot fund our ongoing development and other operating requirements, particularly those associated with our obligations to conduct clinical trials under our licensing agreements, we will be in breach of these licensing agreements and could therefore lose our license rights, which could have material adverse effects on our business.

10

Table of Contents

WE HAVE NO INTERNAL SALES OR MARKETING CAPABILITY AND MUST ENTER INTO ALLIANCES WITH OTHERS POSSESSING SUCH CAPABILITIES TO COMMERCIALIZE OUR PRODUCTS SUCCESSFULLY.

Currently our only source of revenues is from the sale of Prolieve control units and disposables to Boston Scientific which, in turn, distributes these products to the market. Consequently, we are dependent upon Boston Scientific for the successful introduction and marketing of our Prolieve system. There can be no assurance that Boston Scientific will establish adequate sales and distribution capabilities or be successful in gaining market acceptance for our Prolieve system. Disruption of our relationship with Boston Scientific, or Boston Scientific’s sales of Prolieve products, would reduce our revenues and, if such reduction were material, it would have a material adverse effect on our business and financial condition.

We intend to market our other products, if and when such products are approved for commercialization by the FDA, either directly or through other strategic alliances and distribution arrangements with third parties. There can be no assurance that we will be able to enter into third-party marketing or distribution arrangements on advantageous terms or at all. To the extent that we do enter into such arrangements, we will be dependent on our marketing and distribution partners. In entering into third-party marketing or distribution arrangements, we expect to incur significant additional expense. There can be no assurance that, to the extent that we sell products directly or we enter into any commercialization arrangements with third parties, such third parties will establish adequate sales and distribution capabilities or be successful in gaining market acceptance for our products and services.

WE DEPEND ON THIRD-PARTY SUPPLIERS TO MANUFACTURE OUR PRODUCTS AND MAY NOT BE ABLE TO OBTAIN THESE PRODUCTS ON FAVORABLE TERMS OR AT ALL.

We currently contract for the manufacture of both our Prolieve control units and disposables from limited source suppliers. The FDA must approve the vendors that supply us with Prolieve control units and disposables, and both our suppliers and the suppliers of our suppliers must comply with FDA regulations including good manufacturing practices. Accordingly, we are dependent upon our contract manufacturers to comply with FDA requirements.

In the event a supplier should lose its regulatory status as an approved source, or otherwise would cease to supply us, we would attempt to locate an alternate source. However, we may not be able to obtain the required products or components in a timely manner, at commercially reasonable prices or at all. To the extent that alternative sources of supply are not available on a timely basis and at reasonable cost, the loss of any of our suppliers could have a material adverse effect on our business. The loss of any of these suppliers would require that we obtain a replacement supplier, which would result in delays and additional expense in being able to meet our supply commitments to Boston Scientific. In addition, our suppliers are in turn largely dependent upon single or limited-source suppliers for critical components of our products. Although we believe that alternative sources of supply ultimately would be available both to us and to our suppliers if the need arose, the need to identify and qualify such alternative suppliers pursuant to FDA requirements would entail significant time and expense.

OUR BUSINESS DEPENDS ON LICENSE AGREEMENTS WITH THIRD PARTIES TO PERMIT US TO USE PATENTED TECHNOLOGIES. THE LOSS OF ANY OF OUR RIGHTS UNDER THESE AGREEMENTS COULD IMPAIR OUR ABILITY TO DEVELOP AND MARKET OUR PRODUCTS.

Our success will depend, in substantial part, on our ability to maintain our rights under license agreements granting us rights to use patented technologies. We have entered into an exclusive license agreement with MMTC, a privately owned developer of medical devices, for microwave balloon catheter technology. We have also entered into license agreements with Duke University, under which we have exclusive rights to commercialize medical treatment products and procedures based on Duke’s thermo-sensitive liposome technology. The MMTC and, Duke University license agreements each contain license fee, royalty and/or research support provisions, testing and regulatory milestones, and other performance requirements that we must meet by certain deadlines. If we were to breach these or other provisions of the license and research agreements, we could lose our ability to use the subject technology, as well as compensation for our efforts in developing or exploiting the technology. Any such loss of rights and access to technology could have a material adverse effect on our business.

11

Table of Contents

Further, we cannot guarantee that any patent or other technology rights licensed to us by others will not be challenged or circumvented successfully by third parties, or that the rights granted will provide adequate protection. We are aware of published patent applications and issued patents belonging to others, and it is not clear whether any of these patents or applications, or other patent applications of which we may not have any knowledge, will require us to alter any of our potential products or processes, pay licensing fees to others or cease certain activities. Litigation, which could result in substantial costs, may also be necessary to enforce any patents issued to or licensed by us or to determine the scope and validity of others’ claimed proprietary rights. We also rely on trade secrets and confidential information that we seek to protect, in part, by confidentiality agreements with our corporate partners, collaborators, employees and consultants. We cannot guarantee that these agreements will not be breached, that, even if not breached, that they are adequate to protect our trade secrets, that we will have adequate remedies for any breach or that our trade secrets will not otherwise become known to, or will not be discovered independently by, competitors.

WE RELY ON THIRD PARTIES TO CONDUCT ALL OF OUR CLINICAL TRIALS. IF THESE THIRD PARTIES DO NOT SUCCESSFULLY CARRY OUT THEIR CONTRACTUAL DUTIES, COMPLY WITH BUDGETS AND OTHER FINANCIAL OBLIGATIONS OR MEET EXPECTED DEADLINES, WE MAY NOT BE ABLE TO OBTAIN REGULATORY APPROVAL FOR OR COMMERCIALIZE OUR PRODUCT CANDIDATES IN A TIMELY OR COST-EFFECTIVE MANNER.

We currently have only 29 full-time employees. We rely, and expect to continue to rely, on third-party CROs to conduct all of our clinical trials. We have contracted with Theradex to conduct our Phase I liver cancer trial and with INC Research, Inc. to conduct our Prolieve post-market study. Because we do not conduct our own clinical trials, we must rely on the efforts of others and cannot always control or predict accurately the timing of such trials, the costs associated with such trials or the procedures that are followed for such trials. We do not anticipate significantly increasing our personnel in the foreseeable future and therefore, expect to continue to rely on third parties to conduct all of our future clinical trials. If these third parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they do not carry out the trials in accordance with budgeted amounts, if the quality or accuracy of the clinical data they obtain is compromised due to their failure to adhere to our clinical protocols or for other reasons, or if they fail to maintain compliance with applicable government regulations and standards, our clinical trials may be extended, delayed or terminated or may become prohibitively expensive, and we may not be able to obtain regulatory approval for or successfully commercialize our product candidates.

OUR BUSINESS IS SUBJECT TO NUMEROUS AND EVOLVING STATE, FEDERAL AND FOREIGN REGULATIONS AND WE MAY NOT BE ABLE TO SECURE THE GOVERNMENT APPROVALS NEEDED TO DEVELOP AND MARKET OUR PRODUCTS.

Our research and development activities, pre-clinical tests and clinical trials, and ultimately the manufacturing, marketing and labeling of our products, all are subject to extensive regulation by the FDA and foreign regulatory agencies. Pre-clinical testing and clinical trial requirements and the regulatory approval process typically take years and require the expenditure of substantial resources. Additional government regulation may be established that could prevent or delay regulatory approval of our product candidates. Delays or rejections in obtaining regulatory approvals would adversely affect our ability to commercialize any product candidates and our ability to generate product revenues or royalties.

The FDA and foreign regulatory agencies require that the safety and efficacy of product candidates be supported through adequate and well-controlled clinical trials. If the results of pivotal clinical trials do not establish the safety and efficacy of our product candidates to the satisfaction of the FDA and other foreign regulatory agencies, we will not receive the approvals necessary to market such product candidates.

Even if regulatory approval of a product candidate is granted, the approval may include significant limitations on the indicated uses for which the product may be marketed. In addition, we are subject to inspections and regulations by the FDA. Medical devices must also continue to comply with the FDA’s Quality System Regulation, or QSR. Compliance with such regulations requires significant expenditures of time and effort to ensure full technical compliance. The FDA stringently applies regulatory standards for manufacturing.

12

Table of Contents

We are subject to the periodic inspection of our clinical trials, facilities, procedures and operations and/or the testing of our products by the FDA to determine whether our systems and processes are in compliance with FDA regulations. Following such inspections, the FDA may issue notices on Form 483 and warning letters that could cause us to modify certain activities identified during the inspection. A Form 483 notice is generally issued at the conclusion of an FDA inspection and lists conditions the FDA inspectors believe may violate FDA regulations. FDA guidelines specify that a warning letter is issued only for violations of “regulatory significance” for which the failure to adequately and promptly achieve correction may be expected to result in an enforcement action.

Failure to comply with FDA and other governmental regulations can result in fines, unanticipated compliance expenditures, recall or seizure of products, total or partial suspension of production and/or distribution, suspension of the FDA’s review of product applications, enforcement actions, injunctions and criminal prosecution. Under certain circumstances, the FDA also has the authority to revoke previously granted product approvals. Although we have internal compliance programs, if these programs do not meet regulatory agency standards or if our compliance is deemed deficient in any significant way, it could have a material adverse effect on the Company.

We are also subject to record keeping and reporting regulations, including FDA’s mandatory Medical Device Reporting, or MDR, regulation. Labeling and promotional activities are regulated by the FDA and, in certain instances, by the Federal Trade Commission.

Many states in which we do or in the future may do business or in which our products may be sold impose licensing, labeling or certification requirements that are in addition to those imposed by the FDA. There can be no assurance that one or more states will not impose regulations or requirements that have a material adverse effect on our ability to sell our products.

In many of the foreign countries in which we may do business or in which our products may be sold, we will be subject to regulation by national governments and supranational agencies as well as by local agencies affecting, among other things, product standards, packaging requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. There can be no assurance that one or more countries or agencies will not impose regulations or requirements that could have a material adverse effect on our ability to sell our products.

LEGISLATIVE AND REGULATORY CHANGES AFFECTING THE HEALTH CARE INDUSTRY COULD ADVERSELY AFFECT OUR BUSINESS.

There have been a number of federal and state proposals during the last few years to subject the pricing of health care goods and services to government control and to make other changes to the United States health care system. It is uncertain which legislative proposals, if any, will be adopted (or when) or what actions federal, state, or private payors for health care treatment and services may take in response to any health care reform proposals or legislation. We cannot predict the effect health care reforms may have on our business and we can offer no assurances that any of these reforms will not have a material adverse effect on our business.

THE SUCCESS OF OUR PRODUCTS MAY BE HARMED IF THE GOVERNMENT, PRIVATE HEALTH INSURERS AND OTHER THIRD-PARTY PAYORS DO NOT PROVIDE SUFFICIENT COVERAGE OR REIMBURSEMENT.

Our ability to commercialize our new cancer treatment systems successfully will depend in part on the extent to which reimbursement for the costs of such products and related treatments will be available from government health administration authorities, private health insurers and other third-party payors. The reimbursement status of newly approved medical products is subject to significant uncertainty. We cannot guarantee that adequate third-party insurance coverage will be available for us to establish and maintain price levels sufficient for us to realize an appropriate return on our investment in developing new therapies. Government, private health insurers and other third-party payors are increasingly attempting to contain health care costs by limiting both coverage and the level of reimbursement for new therapeutic products approved for marketing by the FDA. Accordingly, even if coverage and reimbursement are provided by government, private health insurers and third-party payors for uses of our products, market acceptance of these products would be adversely affected if the reimbursement available proves to be unprofitable for health care providers.

13

Table of Contents

OUR PRODUCTS MAY NOT ACHIEVE SUFFICIENT ACCEPTANCE BY THE MEDICAL COMMUNITY TO SUSTAIN OUR BUSINESS.

Although we have received a PMA from the FDA for our Prolieve system for the treatment of BPH, we can offer no assurance that the Prolieve system will be accepted by the medical community widely or at all. Our cancer treatment development projects using ThermoDox plus RFA or microwave heating, are currently in the early stages of Phase I clinical trials. Any or all of these projects may prove not to be effective in practice. If testing and clinical practice do not confirm the safety and efficacy of our systems or, even if further testing and practice produce positive results but the medical community does not view these new forms of treatment as effective and desirable, our efforts to market our new products may fail, with material adverse consequences to our business.

TECHNOLOGIES FOR THE TREATMENT OF CANCER ARE SUBJECT TO RAPID CHANGE AND THE DEVELOPMENT OF TREATMENT STRATEGIES THAT ARE MORE EFFECTIVE THAN OUR TECHNOLOGIES COULD RENDER OUR TECHNOLOGIES OBSOLETE.

Various methods for treating cancer currently are, and in the future may be expected to be, the subject of extensive research and development. Many possible treatments that are being researched, if successfully developed, may not require, or may supplant, the use of our technologies. The successful development and acceptance of any one or more of these alternative forms of treatment could render our technology obsolete as a cancer treatment method.

WE MAY NOT BE ABLE TO HIRE OR RETAIN KEY OFFICERS OR EMPLOYEES THAT WE NEED TO IMPLEMENT OUR BUSINESS STRATEGY AND DEVELOP OUR PRODUCTS AND BUSINESS.

Our success depends significantly on the continued contributions of our executive officers, scientific and technical personnel and consultants, and on our ability to attract additional personnel as we seek to implement our business strategy and develop our products and businesses. During our operating history, we have assigned many essential responsibilities to a relatively small number of individuals. However, as our business and the demands on our key employees expand, we have been, and will continue to be, required to recruit additional qualified employees. The competition for such qualified personnel is intense, and the loss of services of certain key personnel or our inability to attract additional personnel to fill critical positions could adversely affect our business. Further, we do not carry “key man” insurance on any of our personnel. Therefore, loss of the services of key personnel would not be ameliorated by the receipt of the proceeds from such insurance.

OUR SUCCESS WILL DEPEND IN PART ON OUR ABILITY TO GROW AND DIVERSIFY, WHICH IN TURN WILL REQUIRE THAT WE MANAGE AND CONTROL OUR GROWTH EFFECTIVELY.

Our business strategy contemplates growth and diversification. Our ability to manage growth effectively will require that we continue to expend funds to improve our operational, financial and management controls, reporting systems and procedures. In addition, we must effectively expand, train and manage our employees. We will be unable to manage our businesses effectively if we are unable to alleviate the strain on resources caused by growth in a timely and successful manner. There can be no assurance that we will be able to manage our growth and a failure to do so could have a material adverse effect on our business.

WE FACE INTENSE COMPETITION AND THE FAILURE TO COMPETE EFFECTIVELY COULD ADVERSELY AFFECT OUR ABILITY TO DEVELOP AND MARKET OUR PRODUCTS.

There are many companies and other institutions engaged in research and development of various technologies, both for prostate disease and cancer treatment products that seek treatment outcomes similar to those that we are pursuing. We believe that the level of interest by others in investigating the potential of possible competitive treatments and alternative technologies will continue and may increase. Potential competitors engaged in all areas of prostate and cancer treatment research in the United States and other countries include, among others, major pharmaceutical, specialized technology companies, and universities and other research institutions. Most of our competitors and potential competitors have substantially greater financial, technical, human and other resources, and may also have far greater experience, than do we, both in pre-clinical testing and human clinical trials of new products and in obtaining FDA and other regulatory approvals. One or more of these companies or institutions could succeed in developing products or other technologies that are more effective than the products and technologies that we have been or are developing, or which would render our technology and products obsolete and non-competitive.

14

Table of Contents

Furthermore, if we are permitted to commence commercial sales of any of our products, we will also be competing, with respect to manufacturing efficiency and marketing, with companies having substantially greater resources and experience in these areas.

WE MAY BE SUBJECT TO SIGNIFICANT PRODUCT LIABILITY CLAIMS AND LITIGATION.

Our business exposes us to potential product liability risks inherent in the testing, manufacturing and marketing of human therapeutic products. We presently have product liability insurance limited to $5,000,000 per incident and $5,000,000 annually. If we were to be subject to a claim in excess of this coverage or to a claim not covered by our insurance and the claim succeeded, we would be required to pay the claim with our own limited resources, which could have a material adverse effect on our business. In addition, liability or alleged liability could harm the business by diverting the attention and resources of our management and by damaging our reputation.

THE EXERCISE OF OUR OUTSTANDING OPTIONS AND WARRANTS COULD RESULT IN SIGNIFICANT DILUTION OF OWNERSHIP INTERESTS IN OUR COMMON STOCK OR OTHER CONVERTIBLE SECURITIES.

As of December 31, 2006, we had exercisable warrants and options outstanding enabling the holders thereof to purchase a total of 1,346,089 shares of our Common Stock, including 670,898 shares issueable upon exercise of stock warrants. The exercise prices of these options and warrants range from $2.18 to $75.00 per share, with a weighted average exercise price of $11.96 per share.

We had additional unvested and unexercisable options outstanding to purchase a total of 196,688 shares of our Common Stock at exercise prices ranging from $2.18 to $22.50 per share. Some of the prices are below the current market price of our Common Stock, which has ranged from a low of $1.90 to a high of $2.31 over the 20 trading days ending December 31, 2006 and from a low of $3.58 to a high of $4.75 over the 20 trading days ending March 23, 2007.

If holders of our options and warrants choose to exercise such instruments at prices below the prevailing market price for our Common Stock, the resulting purchase of a substantial number of shares of our Common Stock would have a dilutive effect on our stockholders and could adversely affect the market price of our issued and outstanding Common Stock. In addition, holders of these options and warrants who have the right to require registration of the Common Stock under certain circumstances and who elect to require such registration, or who exercise their options or warrants and then satisfy the one-year holding period and other requirements of Rule 144 of the Securities Act, will be able to sell in the public market shares of Common Stock purchased upon such exercise.

IF THE PRICE OF OUR SHARES REMAINS LOW, WE MAY BE DELISTED BY THE AMERICAN STOCK EXCHANGE AND BECOME SUBJECT TO SPECIAL RULES APPLICABLE TO LOW PRICED STOCKS.

Our Common Stock currently trades on The American Stock Exchange (Amex). The Amex, as a matter of policy, will consider the suspension of trading in, or removal from listing of, any stock when, in the opinion of the Amex, (i) the financial condition and/or operating results of an issuer appear to be unsatisfactory; (ii) it appears that the extent of public distribution or the aggregate market value of the stock has become so reduced as to make further dealings on the Amex inadvisable; (iii) the issuer has sold or otherwise disposed of its principal operating assets; or (iv) the issuer has sustained losses which are so substantial in relation to its overall operations or its existing financial condition has become so impaired that it appears questionable, in the opinion of the Amex, whether the issuer will be able to continue operations and/or meet its obligations as they mature. For example, the Amex will consider suspending dealings in or delisting the stock of an issuer if the issuer has sustained losses from continuing operations and/or net losses in its five most recent fiscal years.

15

Table of Contents

On June 14, 2006 and subsequently and separately on September 6, 2006, Celsion received notice from the Amex that the Amex had determined that the Company was not in compliance with certain conditions of the continued listing standards of Section 1003 of the Amex Company Guide. Specifically, the Amex noted that the Company’s shareholders’ equity continues to be less than $4,000,000 and losses from continuing operations and/or net losses were incurred in three of the last four fiscal years, and that shareholders’ equity was less than $6,000,000 and losses from continuing operations and/or net losses were incurred in each of the last five fiscal years. Additionally, the Company’s shareholders’ equity was less than $2,000,000 and losses from continuing operations and/or net losses were incurred in two of its three most recent fiscal years.

Pursuant to the notice dated June 14, 2006, the Company was afforded the opportunity to submit a plan of compliance to the Amex and on July 14, 2006, it presented its plan to the Amex. On August 31, 2006, the Amex notified the Company that it had accepted the Company’s plan of compliance and granted the Company an extension until December 14, 2007 to regain compliance with the continued listing standards. The Company will be subject to periodic review by the Amex staff during the extension period. Failure to make progress consistent with the plan or to regain compliance with the continued listing standards by the end of the extension period could result in the Company being delisted from the Amex.

If the Company were to be delisted from the Amex, the Common Stock would become subject to the penny stock rules of the SEC, which generally are applicable to equity securities with a price of less than $5.00 per share (other than securities registered on certain national securities exchanges or quoted on the Nasdaq system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the SEC that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with bid and ask quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules require that, prior to a transaction in a penny stock that is not otherwise exempt from such rules; the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements would be likely to have a material adverse effect on stock price and the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules. If our Common Stock were to become subject to the penny stock rules it is likely that the price of the Common Stock would decline and that our stockholders would be likely to find it more difficult to sell their shares.

WE HAVE NOT PAID DIVIDENDS IN THE PAST AND DO NOT INTEND TO DO SO FOR THE FORESEEABLE FUTURE.

We have never paid cash dividends and do not anticipate paying cash dividends in the foreseeable future. Therefore, our stockholders cannot achieve any degree of liquidity with respect to their shares of Common Stock except by selling such shares.

OUR STOCK PRICE HAS BEEN, AND COULD BE, VOLATILE.

Market prices for our Common Stock and the securities of other medical, high technology companies have been volatile. Our Common Stock had a high price of $5.83 and a low price of $1.80 in the 52-week period ending December 31, 2006. Factors such as announcements of technological innovations or new products by us or by our competitors, government regulatory action, litigation, patent or proprietary rights developments and market conditions for medical and high technology stocks in general can have a significant impact on the market for our Common Stock

OUR STOCK HISTORICALLY HAS BEEN THINLY TRADED. THEREFORE, STOCKHOLDERS MAY NOT BE ABLE TO SELL THEIR SHARES FREELY.

While our Common Stock is listed on the Amex, the volume of trading historically has been relatively light. There can be no assurance that our historically light trading volume, or any trading volume whatsoever, will be sustained in the future. Therefore, there can be no assurance that our stockholders will be able to sell their shares of our Common Stock at the time or at the price that they desire, or at all.

16

Table of Contents

ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A CHANGE IN CONTROL.

Our Certificate of Incorporation and Bylaws may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable by authorizing the issuance of “blank check” preferred stock. This preferred stock may be issued by the Board of Directors, on such terms as it determines, without further stockholder approval. Therefore, the Board may issue such preferred stock on terms unfavorable to a potential bidder in the event that is opposes a merger or acquisition. In addition, our classified Board of Directors may discourage such transactions by increasing the amount of time necessary to obtain majority representation on the Board. We also have implemented a stockholder rights plan and distributed rights to our stockholders. When these rights become exercisable, these rights entitle their holders to purchase one share of our Series C Junior Participating Preferred Stock at a price of $66.90 per one ten-thousandth of a share of Series C Preferred Stock. If any person or group acquires more than 15% of our Common Stock, the holders of rights (other than the person or group crossing the 15% threshold) will be able to purchase, in exchange for the $66.90 exercise price, $133.80 of our Common Stock or the stock of any company into which we are merged. Because these rights may substantially dilute stock ownership by a person or group seeking to take us over without the approval of our Board of Directors, our rights plan could make it more difficult for a person or group to take us over (or acquire significant ownership interest in us) without negotiating with our Board regarding such a transaction. Certain other provisions of our Bylaws and of Delaware law may also discourage, delay or prevent a third party from acquiring or merging with us, even if such action were beneficial to some, or even a majority, of our stockholders.

None.

We lease premises consisting of approximately 13,891 square feet of administrative office, laboratory and workshop space at 10220-L Old Columbia Road, Columbia, Maryland 21046-2364 from an unaffiliated party under a seven-year lease that expires on October 31, 2010. Rent expense for the year ended December 31, 2006 was $283,870. Future minimum lease obligations are as follows:

Celsion has adequate office and laboratory space for the foreseeable future.

17

Table of Contents

On April 27, 2006 American Medical Systems, Inc. and AMS Research Corporation (together referred to as “AMS”) filed suit in the U.S. District Court for the District of Minnesota alleging infringement of two patents of AMS resulting from our manufacture, use and sale of the Prolieve Thermodilatation system. The suit is captioned American Medical Systems, Inc. and AMS Research Corporation vs. Celsion Corporation, Case no. 0:06-cv-01606-JMR-FLN. The complaint sought injunctive relief against the alleged infringement, unspecified trebled damages, plaintiff costs, expenses and attorney fees.

On September 1, 2006 AMS amended the compliant alleging that Prolieve infringes two additional AMS patents. On September 27, 2006, the U.S. District Court for the District of Minnesota dismissed the patent infringement lawsuit filed by American Medical Systems, Inc. (AMS) against us for lack of personal jurisdiction. On September 28, 2006, AMS filed a new suit against us in the U.S. District Court for the District of Delaware, where both companies are incorporated (case no. CA-06-606 (SLR)), alleging that our Prolieve Thermodilatation System infringes the patents previously asserted in the Minnesota suit. The complaint sought injunctive relief against alleged infringement, unspecified trebled damages, plaintiff costs, expenses and attorney fees.

As disclosed on our Current Report on Form 8-K filed February 9, 2007, Celsion entered into an agreement with AMS on February 7, 2007 that settled the patent dispute. Under the settlement terms Celsion paid a licensing fee and will pay a royalty based on sales of its Prolieve product to acquire a product license to AMS’ patents for the use of microwave energy to treat BPH and prostatitis. The agreement ended litigation between the two parties. The terms of the license agreement will not have a material impact on Celsion’s sales or gross margin. The agreement was also reached with the concurrence of BSC in accordance with the Transaction Agreement between BSC and Celsion dated January 21, 2003 which granted BSC an option to purchase the Prolieve Assets and which required that Celsion obtain BSC’s approval prior to entering into agreements related to the Prolieve business.

None.

18

Table of Contents

PART II

MARKET PRICE FOR OUR COMMON STOCK

Our Common Stock trades on The American Stock Exchange. The following table sets forth the high and low sales prices for our Common Stock reported by The American Stock Exchange. The quotations set forth below do not include retail markups, markdowns or commissions.

(Reflects 15:1 reverse stock split effective February 27, 2006).

On March 23, 2007, the last reported sale price for our Common Stock on The American Stock Exchange was $4.14 As of March 23, 2007, there were approximately 394 holders of record of our Common Stock.

19

Table of Contents

PERFORMANCE GRAPH

Under the rules and regulations of the SEC, we are required to include in this Annual Report on Form 10-K a line graph comparing the cumulative total stockholder return on our Common Stock with the cumulative total return of (1) a broad equity market index that includes companies whose equity securities are traded on the same stock exchange as our stock (American Stock Exchange) and (2) a published industry or line-of-business index.

The Board of Directors recognizes that the market price of shares is influenced by many factors, only one of which is Company performance. The stock performance shown on the graph is not necessarily indicative of future price performance.

TOTAL RETURN TO STOCKHOLDERS

(Assumes $100 investment on 12/31/01)

Total Return Analysis

Source: CTA Integrated Communications www.ctaintegrated.com (303) 665-4200. Data from ReutersBRIDGE Data Networks

DIVIDEND POLICY

We have never declared or paid any cash dividends on our Common Stock or other securities and do not currently anticipate paying cash dividends in the foreseeable future.

20

Table of Contents

ISSUANCE OF SHARES WITHOUT REGISTRATION

On March 16, 2006, we issued 6,127 shares of Common Stock, valued at $25,000, to Dr. Max Link as a retainer for his services as Chairman of the Board of Directors. These shares are restricted stock, and the certificates representing such shares are endorsed with the Celsion’s standard restricted stock legend, with a stop transfer instruction recorded by the transfer agent. Accordingly, Celsion views the shares issued as exempt from registration under Sections 4(2) and/or 4(6) of the Securities Act of 1933, as amended.

See also “Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters—Equity Compensation Plan Information.”

The Company has never entered into a stock repurchase program.

21

Table of Contents

The following table contains certain financial data for Celsion for the five fiscal years ended December 31, 2006, and is qualified in its entirety by, and should be read in conjunction with, Item 8. “Financial Statements and Supplementary Data and Financial Disclosure” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” In December 2003, the Board of Directors acted to change Celsion’s fiscal year end from September 30 to December 31, effective with the year ended December 31, 2003. Therefore, the information for prior periods had been restated consistent with a December 31 year end.

22

Table of Contents

Overview

Celsion is a biotechnology company dedicated to furthering the development and commercialization of oncology drugs including tumor-targeting treatments using focused heat energy in combination with heat activated drug delivery. In 1989, we obtained premarketing approval (PMA) from the FDA to use our microwave-based Microfocus 1000 heat therapy system on surface and subsurface tumors in conjunction with radiation therapy. We marketed this system until 1995. From 1995 until early in 2004 we engaged in research and development of new treatment systems. On February 19, 2004, we obtained a PMA for our Prolieve Thermodilatation system for the treatment of Benign Prostatic Hyperplasia (BPH) and thereafter our marketing partner, Boston Scientific, commenced commercial sales of the Prolieve system. In addition, we are engaged in the development of treatment systems using a combination of heat and ThermoDox ^TM , our proprietary heat activated liposomal encapsulation of doxorubicin, for the treatment of liver cancer and breast cancer.

Development pipeline

Our pipeline presently consists of the following products, in the indicated stages of development:

From 1995 to 2004, we generated minimal revenues and funded our operations primarily through private placements of our equity securities. During 2004, following FDA premarketing approval of our Prolieve Thermodilatation system, we received a one-time licensing fee of $4 million under our agreement with Boston Scientific, the distributor of our Prolieve system. Since receipt of the PMA in February 2004, sales of Prolieve products generated revenues to us of $26.1 million. Until such time as we are able to complete development and testing of, and gain necessary regulatory approvals for, one or more of our other products, sales of Prolieve products may represent our only source of revenue. We presently do not have any committed sources of financing.

23

Table of Contents

We anticipate that our revenues in the next 12 months will be generated from the sale of our Prolieve system and related disposables. The Prolieve system consists of a microwave generator and conductors, along with a computer and computer software programs that control the focusing and application of heat (control units), plus a specially designed, single-use catheter kit. Under our agreement with Boston Scientific, we are entitled to receive our costs plus 50% of the “profit” for each control unit—measured as the difference between our costs and Boston Scientific’s selling price (determined in accordance with the agreement) for each control unit—and 50% of the revenue generated by Boston Scientific from the sale of catheter kits, for which Celsion bears the cost of goods sold. While we anticipate strong initial sales growth for Prolieve over time as the product becomes established in the market sales growth will level off.

Should Boston Scientific exercise its option to acquire our Prolieve assets and related technology for $60 million as described further in Note 7 to our financial statements, we would not expect to generate any revenues for at least the next 12 months. However, the Company would expect to generate investment income on the aggregate proceeds received from such sale.

In the longer term, we will attempt to develop new revenue streams from our current work with Duke University in targeted drug delivery systems. We anticipate that revenues will come from the licensing of these technologies to pharmaceutical manufacturers and from eventual sales to major institutional health care providers who would employ these technologies to deliver drug regimens throughout the body or from the sale of one or more of these technologies.

Costs

Our principal costs consist of:

Our research and development activities, pre-clinical tests and clinical trials, and the manufacturing, marketing and labeling of each of our products are subject to extensive regulation by the FDA. We may not bring to market any product in the U.S. without FDA final or FDA premarketing approval. We received such premarketing approval for our Prolieve system on February 19, 2004. We are currently conducting basic research and development activities and pursuing prototype products through clinical testing and regulatory approval. Our ultimate objective is to commercialize those products to generate a return on investment for our stockholders through one of several means including:

24

Table of Contents

Significant events during 2006

Under the Stock Purchase Agreement, all of the capital stock of Canada was transferred to Dr. Cheung in exchange for a promissory note made by Dr. Cheung in favor of the Company in the principal amount of $1,500,000 to be paid over a period of up to 78 months. The promissory note is secured by a pledge of 100,856 shares of Celsion common stock owned by Dr. Cheung and his wife, and the commitment of Canada to pay up to $18,500,000 in royalties based on a 5% royalty on net sales of certain products sold by, and patent royalties received by, Canada.

25

Table of Contents

ACCOUNTING POLICIES AND ESTIMATES

Our financial statements, which appear at Item 8 to this Annual Report on Form 10-K, have been prepared in accordance with accounting principles generally accepted in the United States, which require that the Company make certain assumptions and estimates and, in connection therewith, adopt certain accounting policies. Our significant accounting policies are set forth in Note 2 to our financial statements. Of those policies, we believe that the following may involve a higher degree of judgment and may be more critical to an accurate reflection of our financial condition and results of operations:

26

Table of Contents

We use the Black-Scholes model for determining the fair value of our options granted. The Black-Scholes model was originally developed for use in estimating the fair value of traded options, which have different characteristics from Celsion’s incentive and non-qualified stock options. The model is also sensitive to changes in assumptions, which can materially affect the fair value estimate.

As a result of adopting Statement 123(R) on January 1, 2006, the Company’s loss before income taxes and net loss for the year ended December 31, 2006 are $838,602 higher than if the Company had continued to account for share-based compensation under Opinion 25. As a result of adopting Statement 123(R) on January 1, 2006, the Company’s reported basic loss per share and diluted loss per share for the year ended December 31, 2006 are $0.08 higher than if it had continued to account for share-based compensation under Opinion 25.

We review our financial reporting and disclosure practices and accounting policies on an ongoing basis to ensure that our financial reporting and disclosure system provides accurate and transparent information relative to the current economic and business environment. As part of the process, the Company reviews the selection, application and communication of critical accounting policies and financial disclosures. The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires that our management 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 period. We review our estimates and the methods by which they are determined on an ongoing basis. However, actual results could differ from our estimates.

Results of Operations

Comparison of year ended December 31, 2006 and year ended December 31, 2005

Our net loss decreased to $7,584,230 for the year ended December 31, 2006 from $8,685,319 for the year ended December 31, 2005. The decrease in net loss was primarily the result of the non-recurring gain recorded related to the sale of Celsion Canada (equal to $1,011,923 or $0.09 per common share) and a reduction of research and development expenses, offset partially by the recognition of stock-based compensation expense of $838,602 (or $0.08 per common share) recognized during 2006 related to the adoption of SFAS 123(R) effective January 1, 2006 and increased interest expense, net of interest income. There was no stock-based compensation expense related to employee stock options included in net loss for the year ended December 31, 2005 because the Company did not adopt the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation (SFAS 123”), but rather used the alternative intrinsic value method.

27

Table of Contents

Net sales for the year ended December 31, 2006 were $11,250,817, a decrease of $1,069,324 or 9% as compared to net sales of $12,320,141 for the prior year. Product sales consist of sales of our Prolieve products and are comprised of two elements – sales of control units and sales of disposable catheter kits, all to our exclusive distributor, Boston Scientific Corporation. The decrease in sales during 2006 was due to an interruption in the supply of product during the second and third quarters of 2006, caused by a product recall of our disposable Prolieve catheter kits. The product recall was the result of issues in the manufacturing process following the transition to a new supplier. All of the costs related to this product recall were accrued in 2006.

Gross profit for 2006 amounted to $4,581,742 as compared to $4,207,381, an increase of $374,461 or 9% for the year. As a percentage of sales, gross margin increased to 40.7% of net sales during the year ended December 31, 2006 as compared to 34.1% of net sales for the year ended December 31, 2005. The increase of gross margin as a percentage of net sales was the result of purchasing lower cost catheter kits from a new supplier.

Research and development expenses amounted $9,345,381 for the year ended December 31, 2006 as compared to $10,081,483 for the year ended December 31, 2005, a decrease of $736,102 or 9% over the prior year. The decrease in research and development expenses for the year was due primarily to:

The reduction in research and development expenses was partially offset by $432,402 of stock-based compensation expense recognized for the year ended December 31, 2006 related to the adoption of SFAS 123(R) effective January 1, 2006, and increased regulatory and quality assurance expenses amounting to $448,000.

General and administrative expense amounted $3,722,991 for the year ended December 31, 2006 as compared to $3,405,409 for the year ended December 31, 2005, an increase of $317,582 or 9% over the prior year. The increase in general and administrative expenses for the year was due primarily to the recognition of stock-based compensation expense of $406,200 recorded during 2006 related to the adoption of SFAS 123(R) effective January 1, 2006 and higher accounting, audit, Sarbanes-Oxley compliance and director fees, partially offset by reduced compensation costs for corporate personnel.

The Company recorded a net gain on sale of Celsion Canada of $1,011,923 during the year ended December 31, 2006. As described further in Note 4 to the Celsion financial statements, the Company sold 100% of the outstanding shares of Celsion Canada to Dr. Augustine Y. Cheung, Celsion’s founder and director, in exchange for a non-interest bearing promissory note of $1,500,000 to be paid over 78 months. The Stock Purchase Agreement also provides for Celsion Canada to pay up to $18,500,000 in royalties based on a 5% royalty on net sales of certain products sold by, and patent royalties received by, Celsion Canada and its successors and assigns.

Other expense, net for the year ended December 31, 2006, was $213,869 as compared to $96,891 for the year ended December 31, 2005. Other expense, net for 2006, consisted primarily of the $207,687 loss associated with the termination of our interest in Celsion China, Ltd.

Interest income for the year ended December 31, 2006 amounted to $636,561 as compared to $299,245 for the year ended December 31, 2005, an increase of $337,316 or 113%. The increase was the result of higher average principal balances (in part due to the drawdown of loans from Boston Scientific on February 22, 2006 and July 28, 2006) and higher yields earned on our investments.

28

Table of Contents

Interest expense for the year ended December 31, 2006 amounted to $1,103,644 as compared to $179,591 for the year ended December 31, 2005, an increase of $924,053 or 515%. This increase was due to the drawdown of the second installment of the BSC loan on February 2, 2006 (in the amount of $4,500,000) and the third installment on July 28, 2006 ($4,500,000) as well as a full year of interest expense on the first loan installment of $6,000,000 received from Boston Scientific on August 17, 2005.

Comparison of year ended December 31, 2005 and year ended December 31, 2004

Net sales for 2005 were $12,320,141, an increase of $9,813,913 or 392%, compared to $2,506,228 in 2004. Product sales consist of sales of our Prolieve products and are comprised of two elements – sales of control units and sales of disposable catheter kits, all to our exclusive distributor, Boston Scientific Corporation. The increase in revenues during the year ended December 31, 2005 compared to the year ended December 31, 2004 reflects a partial period (commencing with grant of the PMA on February 19, 2004) in 2004, as well as the progress of commercialization and marketing efforts.

Research and development expenses for the year ended December 31, 2005 of $10,081,000 were $1,452,000 or 13% lower than expenses incurred in the year ended December 31, 2004 of $11,533,000. The decrease in expenses was due to the non-recurrence of expenses associated with receipt of the PMA for the Prolieve system, cash bonuses paid to employees in connection with receipt of the PMA offset by 2004 performance bonus payments ($375,000) and a reduction in consulting support related to development and approval of the Prolieve system ($851,000). The reduction is also attributable to non-recurrence of costs related to personnel matters ($1,102,000); a reduction in clinical costs due to the closure of our heat-alone breast cancer clinical study and suspension of our prostate cancer clinical study ($400,000); write-off of product development costs ($379,000) and costs related to consultants hired to aid in clinical compliance ($217,000), offset by adjustments in stock related compensation expense in 2004 due to decreases in the market price of our Common Stock ($622,000); patent expenses ($236,000); preclinical and clinical costs associated with our liver cancer clinical studies ($574,000); and the first installment of the grant to Duke University related to the recurrent chest wall breast cancer study ($275,000).

General and administrative expenses in the year ended December 31, 2005 were $3,405,000 a reduction of $65,000, or 2%, compared to $3,471,000 for the year ended December 31, 2004. There were, however, a number of changes in the expenses making up total general and administrative costs. Compensation costs increased as a result of adjustments in stock related compensation expense in 2004 due to decreases in the market price of our Common Stock ($464,000) and provision for costs related to personnel matters ($308,000) offset by non-recurrence of expenses arising due to the approval of the Prolieve system in February 2004, principally consisting of a payment to Legg Mason for investment banking services rendered in connection with negotiation of our strategic relationship with Boston Scientific in 2003 which became due upon receipt of the PMA ($410,000); cash bonuses paid to employees in connection with receipt of the PMA offset by 2004 performance bonus payments ($85,000); and changes in investor relations programs and consultants ($188,000).

The net decrease of $1,517,000 in operating expenditures during the year ended December 31, 2005 compared to the comparable period during 2004, combined with income generated (gross margin) from the sale of Prolieve products during the year ended December 31, 2005, resulted in a decrease in the loss from operations for the year ended December 31, 2005 of $5,319,000 or 36%, to $9,280,000 from $14,599,000 in the year ended December 31, 2004.

29

Table of Contents

Interest income, which is reflected net of any interest expense, decreased by 48%, or $110,000 for the year ended December 31, 2005 compared to the year ended December 31, 2004. The decrease was due to interest accrued on a loan from Boston Scientific which closed on August 8, 2005, and whose principal balance increased during 2006.

Financial Condition, Liquidity and Capital Resources

Our core business activity is to develop products to treat cancer and other diseases, and to commercialize those products to generate a return on investment for stockholders through one of several means including:

Our business model will generate uneven cash flows, as continuing research and development expenditures will not necessarily be matched by revenues from one of the above sources. In the event that our annual research and development expenditures are not covered by current revenues, funding will be provided from other sources including any cash on hand, revenues provided as above, income generated from licensing agreements and debt or equity funding raised in the capital markets.

Since inception, our expenses have significantly and regularly exceeded our revenues, and we have an accumulated deficit of $90,486,814 and stockholders’ deficit of $3,200,824 at December 31, 2006. We have incurred negative cash flows from operations since our inception and have funded our operations primarily through the sale of equity securities, loans from Boston Scientific and profit generated from the sale of our Prolieve units. At December 31, 2006, we had total current assets of $16,022,505 (including cash and short term investments of $9,032,674) and current liabilities of $4,008,002, resulting in a working capital surplus of $12,014,503. At December 31, 2005, we had total current assets of $12,841,104 (including $8,313,430 in cash and short term investments) and current liabilities of $3,895,594, which resulted in working capital of $8,945,510 at such date. The decrease in working capital is primarily the result of funds used in our research and other operating activities, as well as fixed asset purchases.

Our short term investments consist of Auction Rate Certificates and Auction Preferred Securities. Auction Rate Certificates are municipal bonds which pay interest at a floating rate set periodically, usually 7, 28 or 35 days. Auction Preferred Securities are issued by closed end bond funds and pay dividends every 7, 28 or 35 days. Increases or withdrawals from investments can take place every 7, 28 or 35 days. Both investment vehicles are rated A1P1 commercial paper equivalents, trade at par and do not have significant market fluctuations.

Net cash used in operating activities for the year ended December 31, 2006 was $7,232,790. This net cash requirement was funded from cash on hand at the beginning of the year, together with the second and third installments of a loan from Boston Scientific totaling $9,000,000. Under the loan agreement, which was effective on August 8, 2005, Boston Scientific agreed to lend the Company up to $15,000,000, disbursed in three installments. The first installment, in the amount of $6,000,000, was disbursed on August 17, 2005. The second installment of $4,500,000 was disbursed on February 2, 2006 and the third installment of $4,500,000 was disbursed on July 28, 2006.

Loans from Boston Scientific are repayable on February 28, 2009 and accrue interest at a rate of prime plus 1%. The maturity date of the loan is accelerated in the event Boston Scientific exercises its option to purchase certain assets and technology of the Company under the Transaction Agreement. Loans outstanding are secured by a continuing security interest in the Company’s right, title and interest in the BPH Business and the BPH Assets (as those terms are defined in the Transaction Agreement).

30

Table of Contents

Boston Scientific may, at any time, convert in whole or in part the outstanding loan balance plus accrued interest into shares of the Company’s common stock at a minimum conversion price of $9.15 per share (as adjusted for the 2006 15:1 reverse stock split). Additionally, Boston Scientific may apply the outstanding principal plus accrued interest on the Note toward the Option Exercise Price (as defined in the Transaction Agreement) if Boston Scientific decides to exercise the option granted to BSC under the Transaction Agreement relating to the assets and technology with respect to the Company’s Prolieve product. Such option gives Boston Scientific the right to purchase for $60 million the assets and technology relating to the manufacture, marketing, sale, distribution and/or research and development of products using the Company’s thermal therapy for the treatment of BPH (the “Prolieve Assets”). There can be no assurance when, if ever, Boston Scientific will exercise its right to purchase. In the event that Boston Scientific does exercise its option, the Company will receive an immediate infusion of cash but will cease to receive revenues from the sale of Prolieve systems and related disposables. The Company has the right to prepay the loan at any time without penalty.

The Company has a balance of $1,824,740 at December 31, 2006 in a restricted escrow account related to the license fee and distribution agreement with BSC. This balance was released from escrow on February 20, 2007 and used to purchase a license from AMS and pay final legal costs. Costs of $318,199 were disbursed from the escrow account during the year ended December 31, 2006.

As of December 31, 2006, we had net operating loss carry forwards for federal income tax purposes of approximately $77,900,000, which expire, if unused, by the year 2027. These NOL’s may be determined to be restricted in their future use due to various IRS utilization rules.

For the year ending December 31, 2007, we expect to expend approximately $18,000,000 to commercialize our Prolieve system and for clinical testing of liver cancer and breast cancer treatment systems, as well as for corporate overhead, all of which we expect to fund from funds on hand and revenues anticipated from the sale of our Prolieve system and related disposables. The foregoing is an estimate, based upon assumptions as to the scheduling of institutional clinical research and testing personnel, the timing of clinical trials and other factors, not all of which are fully predictable.

31

Table of Contents

The Company does not believe that inflation had a material affect on its reported sales or net loss for the years reported.

Our contractual obligations as of December 31, 2006 are summarized as follows:

We do not currently hold any derivative instruments and do not engage in hedging activities and currently do not enter into any transactions denominated in a foreign currency. Thus, our exposure to interest rate and foreign exchange fluctuations is minimal.

The financial statements, supplementary data and report of independent public accountants are filed as part of this report on pages F-2 through F-25.

None.

We have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) under the supervision, and with the participation, of our management, including our principal executive officer and principal financial officer. Based on that evaluation, our principal executive officer and principal financial officer concluded that as of December 31, 2006, which is the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures are effective.

There have been no changes in our internal controls over financial reporting in the fiscal quarter ended December 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management has issued its Report on Internal Control over Financial Reporting as of December 31, 2006, which appears in Item 15 of this Report. The report of the Independent Registered Public Accounting Firm on Management’s Report on Internal Control over Financial Reporting also appears in Item 15.

None.

32

Table of Contents

PART III

The information required by this Item 10 is incorporated herein by reference to the definitive Proxy Statement to be, filed with the SEC pursuant to Regulation 14A within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.

The information required by this item is incorporated by reference to the information set forth under the caption “Executive Compensation” in Celsion’s Definitive Proxy Statement in connection with the Annual Meeting of Stockholders which is expected to be held on June 13, 2007, which has been, or will be, filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2006.

Certain information required by this item is incorporated by reference to the information set forth under the caption “Security Ownership of Certain Beneficial Owners and Management” in Celsion’s Definitive Proxy Statement in connection with the Annual Meeting of Stockholders which is expected to be held on June 13, 2007, which has been, or will be, filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2006.

Equity Compensation Plan Information as of December 31, 2006

The information required by this item is incorporated by reference to the information set forth under the captions “Certain Transactions” in Celsion’s Definitive Proxy Statement in connection with the Annual Meeting of Stockholders which is expected to be held on June 13, 2007, which has been, or will be, filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2006.

33

Table of Contents

The information required by this item is incorporated by reference to the information set forth under the captions “Proposal No. 3: Ratification of Independent Public Accountants—Fees,” “—Services by Employees of Stegman & Company” and “—Audit Committee Policy on Approval of Audit and Non-Audit Services” in Celsion’s Definitive Proxy Statement in connection with the Annual Meeting of Stockholders which is expected to be held on June 13, 2007, which has been, or will be, filed with the Securities and Exchange Commission within 120 days after the end of our fiscal year ended December 31, 2006.

1. FINANCIAL STATEMENTS

The following is a list of the financial statements of Celsion Corporation filed with this Annual Report on Form 10-K, together with the reports of our independent registered public accountants and Management’s Report on Internal Control over Financial Reporting.

2. FINANCIAL STATEMENT SCHEDULES

No schedules are provided because of the absence of conditions under which they are required.

34

Table of Contents

3. EXHIBITS

The following documents are included as exhibits to this report:

35

Table of Contents

36

Table of Contents

37

Table of Contents

38

Table of Contents

SIGNATURES

Pursuant to the requirement of Section 13 or 159(d) of the Securities Exchange Act of 1934, the Registrant has duly caused its annual report on Form 10-K to be signed on its behalf by the undersigned thereunto duly authorized.

Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

39

Table of Contents

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Celsion Corporation is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (GAAP). The Company’s internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions of the Company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria set forth in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based on management’s assessment and those criteria, management has concluded that, as of December 31, 2006, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

The Company’s independent registered public accountants, Stegman & Company, have issued an attestation report on management s assessment of the Company’s internal control over financial reporting. The report of Stegman & Company appears on the following page.

F - 1

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Celsion Corporation

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Celsion Corporation (the Company) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A Company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006 is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by COSO. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets as of December 31, 2006 and 2005 and the related statements of operations, changes in stockholders’ (deficit)/equity , and cash flows for each of the three years in the period ended December 31, 2006, and our report dated March 2, 2007, expressed an unqualified opinion on those financial statements.

F - 2

Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Celsion Corporation

Columbia, Maryland

We have audited the accompanying balance sheets of Celsion Corporation (the Company) as of December 31, 2006 and 2005, and the related statements of operations, changes in stockholders’ (deficit)/equity, and cash flows for each of the three years in the period ended December 31, 2006. 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Celsion Corporation as of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 2, 2007 expressed an unqualified opinion on management’s assessment of internal control over financial reporting and an unqualified opinion on the effectiveness of internal control over financial reporting.

F - 3

Table of Contents

CELSION CORPORATION

BALANCE SHEETS

DECEMBER 31, 2006 AND 2005

F - 4

Table of Contents

CELSION CORPORATION

BALANCE SHEETS

DECEMBER 31, 2006 AND 2005

(continued)