Liquidity and Capital Resources

CEL-SCI's lead investigational therapy, MultikineŽ (Leukocyte Interleukin, Injection), is cleared for a Phase III clinical trial in advanced primary head and neck cancer. It has received a go-ahead by the US FDA as well as the Canadian, Polish, Hungarian, Russian, Israeli, Indian and Taiwanese regulators.

Multikine (Leukocyte Interleukin, Injection) is the full name of this investigational therapy, which, for simplicity, is referred to in the remainder of this document as Multikine. Multikine is the trademark that CEL-SCI has registered for this investigational therapy, and this proprietary name is subject to FDA review in connection with our future anticipated regulatory submission for approval. Multikine has not been licensed or approved by the FDA or any other regulatory agency. Neither has its safety or efficacy been established for any use.

CEL-SCI also owns and is developing a pre-clinical technology called LEAPS (Ligand Epitope Antigen Presentation System).

All of CEL-SCI's projects are under development. As a result, CEL-SCI cannot predict when it will be able to generate any revenue from the sale of any of its products.

Since inception, CEL-SCI has financed its operations through the issuance of equity securities, convertible notes, loans and certain research grants. CEL-SCI's expenses will likely exceed its revenues as it continues the development of Multikine and brings other drug candidates into clinical trials. Until such time as CEL-SCI becomes profitable, any or all of these financing vehicles or others may be utilized to assist CEL-SCI's capital requirements.

CEL-SCI has had only limited revenues from operations since its inception in March 1983. CEL-SCI has relied upon capital generated from the public and private offerings of its common stock and convertible notes. In addition, CEL-SCI has utilized short-term loans to meet its capital requirements. Capital raised by CEL-SCI has been expended primarily to acquire an exclusive worldwide license to use, and later purchase, certain patented and unpatented proprietary technology and know-how relating to the human immunological defense system. Capital has also been used for patent applications, debt repayment, research and development, administrative costs, and the construction of CEL-SCI's laboratory facilities. CEL-SCI does not anticipate realizing significant revenues until it enters into licensing arrangements regarding its technology and know-how or until it receives regulatory approval to sell its products (which could take a number of years). As a result CEL-SCI has been dependent upon the proceeds from the sale of its securities to meet all of its liquidity and capital requirements and anticipates having to do so in the future.

CEL-SCI will be required to raise additional capital or find additional long-term financing in order to continue with its research efforts. The ability of CEL-SCI to complete the necessary clinical trials and obtain Food and Drug Administration (FDA) approval for the sale of products to be developed on a commercial basis is uncertain. Ultimately, CEL-SCI must complete the development of its products, obtain the appropriate regulatory approvals and obtain sufficient revenues to support its cost structure. CEL-SCI believes that, counting its cash on hand and access to the capital markets established over the years, it will have enough capital to support its operations for more than the next twelve months. On March 1, 2012, the Company paid the remaining balance due on its convertible note agreement, thereby releasing the Company from all obligations under the Settlement Agreement, as described in the financial statements.

CEL-SCI has two partners who have agreed to participate in and pay for part of the Phase III clinical trial for Multikine. On December 29, 2010, CEL-SCI announced that it had commenced the Phase III clinical trial for Multikine. The Company estimates the future cost of the Phase III trial, with the exception of the parts that will be paid by its licensees, Teva Pharmaceuticals and Orient Europharma, to be approximately $26,000,000.

During the nine month period ended June 30, 2012, the Company's cash increased by $2,961,522. Significant components of this increase include net proceeds from the sale of the Company's stock and the exercise of warrants of $14,289,518 and $2,664,539 respectively. The proceeds were used to pay off the remaining balance (including interest) on the Company's convertible notes of $5,162,106 and to fund the Company's regular operations including its on-going Phase III clinical trial. The Company used $8,920,354 in its operations during the nine months ended June 30, 2012. This compares to $17,724,228 used in operations during the nine months ended June 30, 2011. The decrease in cash used in operations is primarily a result of litigation payments made in 2011, as well as decrease in related legal fees. For the nine months ended June 30, 2012 and 2011, net cash provided by financing activities totaled $12,004,057 (consisting of the proceeds noted above less payments on convertible debt of $4,950,000) and $1,931,582, respectively. Cash used by investing activities was $122,181 and $199,519, for the nine months ended June 30, 2012 and 2011, respectively. The use of cash in investing activities consisted primarily of purchases of equipment and legal costs incurred in patent applications.

In August 2011, the Company paid a deposit of $1,670,917 to the landlord since the Company's cash balances did not meet the minimum amount required by the lease. When the Company meets the minimum cash balance required by the lease, the deposit will be returned to the Company.

Regulatory authorities prefer to see biologics such as Multikine manufactured in the same manufacturing facility for Phase III clinical trials and for the sale of the product since this arrangement helps ensure that the drug lots used to conduct the clinical trials will be consistent with those that may be subsequently sold commercially. Although some biotech companies outsource their manufacturing, this can be risky with biologics because biologics require intense manufacturing and process control. With biologic products a minor change in manufacturing and process control can result in a major change in the biological activity of the final product. Good and consistent manufacturing and process control is critical and is best assured if the product is manufactured and controlled in the manufacturer's own facility by the Company's own specially trained personnel.

In December 2010, the Company entered into a sales agreement with McNicoll Lewis & Vlak LLC relating to the sale of shares of its common stock which have been registered by means of a registration statement the Company filed with the Securities and Exchange Commission in July 2009. In accordance with the terms of the sales agreement, the Company could offer and sell shares of its common stock through McNicoll Lewis & Vlak acting as the Company's agent. The Company could also sell its common stock to McNicoll Lewis & Vlak, as principal for its own account, at a price negotiated at the time of sale. On December 5, 2011 the Company, per the terms of the agreement, exercised its right to terminate the agreement.

In October 2011, the Company sold 13,333,334 shares of its common stock to private investors for $4,000,000, or $0.30 per share. The investors also received 12,000,000 Series F warrants. Each Series F warrant entitles the holder to purchase one share of the Company's common stock at a price of $0.40 per share at any time prior to October 6, 2014. The Company paid the placement agent for this offering a commission consisting of $140,000 in cash and 666,667 Series G warrants. Each Series G warrant entitles the holder to purchase one share of the Company's common stock at a price of $0.40 per share at any time prior to August 12, 2014.

In January 2012, the Company sold 16,000,000 shares of its common stock to one private investor for $5,760,000 or $0.36 per share. The investor also received Series H warrants which entitled the investor to purchase up to 12,000,000 shares of the Company's common stock. The Series H warrants may be exercised at any time after July 31, 2012 and prior to August 1, 2015 at a price of $0.50 per share. The Company paid Chardan Capital Markets, LLC, the placement agent for this offering, a cash commission of $403,200.

In February 2012, the Company received $927,359 from the exercise of Series K warrants to purchase 3,091,195 shares of the Company's common shares. These warrants were issued as part of the August 2006 financing, had an exercise price of $0.30 and expired on February 4, 2012.

In January and February 2012, the Company received $1,625,000 from the exercise of Series O warrants to purchase 6,500,000 shares of the Company's common shares.

In June 2012, the Company sold 16,000,000 shares of its common stock to private investors for $5,600,000 or $0.35 per share. The investor also received Series Q warrants which entitled the investor to purchase up to 12,000,000 shares of the Company's common stock. The Series Q warrants may be exercised at any time after December 22, 2012 and prior to December 22, 2015 at a price of $0.50 per share. The Company paid Chardan Capital Markets, LLC, the placement agent for this offering, a cash commission of $448,000.

Results of Operations and Financial Condition

During the nine months ended June 30, 2012, revenue decreased by $637,469 compared to the nine months ended June 30, 2011. In November 2010, the Company received a $733,437 grant under The Patient Protection and Affordable Care Act of 2011 (PPACA). The grant was related to three of the Company's projects, including the Phase III trial of Multikine. The PPACA provides small and mid-sized biotech, pharmaceutical and medical device companies with up to a 50% tax credit for investments in qualified therapeutic discoveries for tax years 2009 and 2011, or a grant for the same amount tax-free. The tax credit/grant program covers research and development costs from 2009 and 2011 for all qualified "therapeutic discovery projects." The Company recognizes revenue as the expenses are incurred. The Company received the last of the funds under this grant in October for grant money earned before September 30, 2011.

During the nine months and three month ended June 30, 2012, research and development expenses decreased by $1,711,710 and $455,605 compared to the nine months and three month ended June 30, 2011. The Company is continuing the Phase III clinical trial and research and development fluctuates based on the activity level of the clinical trial.

During the nine months and three months ended June 30, 2012, general and administrative expenses decreased by $222,937 and $181,014 compared to the nine and three month periods ended June 30, 2011. This decrease is primarily caused by the legal fees related to litigation that was ongoing during the nine and three months ended June 30, 2011.

During the nine months and three months ended June 30, 2012, other expenses decreased by $12,000,000 and $0, respectively, as a result of the settlement of litigation that occurred during the nine months ended June 30, 2011.

Interest income during the nine months and three months ended June 30, 2012 decreased by $47,609 and $5,751 compared to the nine months and three month ended June 30, 2011. The decrease was due to the decrease in the funds available for investment and lower interest rates.

The gain on derivative instruments of $142,532 and $3,390,389 for the nine months and three months ended June 30, 2012 was the result of the change in fair value of the derivative liabilities during the period. This change was caused by fluctuations in the share price of the Company's common stock.

Interest expense was $220,812 for the nine months ended June 30, 2012 and consisted of interest expense on the loan from the Company's president of $124,206 and interest on the convertible notes of $96,606. Interest expense was $41,402 for the three months ended June 30, 2012 and consisted entirely of interest expense on the loan from the Company's president of $41,402. Interest expense of $149,042 and $66,238 for the nine months and three months ended June 30, 2011 was primarily interest on the loan from the Company's president.

On May 16, 2011, the Company entered into an Exchange Agreement (referred to herein as the "Settlement Agreement") with thirteen hedge funds (the "plaintiffs") to settle all claims arising from a lawsuit initiated by the plaintiffs in October 2009 in the United States District Court for the Southern District of New York (the "Court"). As previously disclosed by the Company in its public filings, in August 2006 the plaintiffs (or their predecessors) purchased from the Company Series K notes convertible into the Company common stock and Series K warrants to purchase the Company common stock under financing agreements which provided the Series K notes and warrants with anti-dilution protection if the Company sold additional shares of common stock, or securities convertible into common stock, at a price below the then applicable conversion price of the notes or the exercise price of the warrants. In their lawsuit, the plaintiffs alleged that a March 2009 drug marketing and distribution agreement in which the Company sold units of common stock and warrants to an unrelated third party triggered these anti-dilution provisions, and that the Company failed to give effect to these provisions. The plaintiffs sought $30 million in actual damages, $90 million in punitive damages, the issuance of additional shares of common stock and warrants, and a reduction in the conversion price of the Series K notes and the exercise price of the Series K warrants. The Company denied the plaintiffs' allegations in the lawsuit and asserted that the 2009 agreement was a strategic transaction which did not trigger the anti-dilution provisions of the 2006 financing agreements.

Although the Company vigorously defended the lawsuit and believed the plaintiffs' claims were without merit, the Company believes that a settlement of this lawsuit was in the best interests of the shareholders. The settlement was entered into to avoid the substantial costs of further litigation and the risk and uncertainty that the litigation entails. By ending this dispute, and ending the significant demands on the time and attention of the Company's management necessary to respond to the litigation, the Company is better able to focus on executing its ongoing Phase III clinical trial with its novel and non-toxic cancer drug Multikine.

Under the terms of the Settlement Agreement and its related agreements, the plaintiffs and the Company terminated the pending litigation and released each other from all claims each may have against the other, with certain customary exceptions. The Company agreed to make a $3 million cash payment and issue $9 million of securities to the plaintiffs. These securities consist of senior secured convertible promissory notes with an aggregate principal amount of $4.95 million and 4,050 shares of redeemable Series A Convertible Preferred Stock with an aggregate stated value of $4.05 million. The $3 million cash payment was made at the closing under the Settlement Agreement. The preferred shares were fully redeemed during the year ended September 30, 2011. All convertible notes had been paid as of March 1, 2012.

Research and Development Expenses

During the nine and three month periods ended June 30, 2012 and 2011, the
Company's research and development efforts involved Multikine and LEAPS. The
table below shows the research and development expenses associated with each
project during nine month periods.

                     Nine months ended June 30,          Three months ended June 30,
                        2012              2011              2012               2011
       MULTIKINE   $    7,212,524      $ 8,846,063     $     2,367,751      $ 2,813,372
       LEAPS              307,062          385,233             101,415          111,399
       TOTAL       $    7,519,586      $ 9,231,296     $     2,469,166      $ 2,924,771

In January 2007, the Company received a "no objection" letter from the FDA indicating that it could proceed with the Phase III protocol with Multikine in head & neck cancer patients. The protocol for the Phase III clinical trial was designed to develop conclusive evidence of the safety and efficacy of Multikine in the treatment of advanced primary squamous cell carcinoma of the oral cavity. The Company had previously received a "no objection" letter from the Canadian Biologics and Genetic Therapies Directorate which enabled the Company to begin its Phase III clinical trial in Canada. The Company's Phase III clinical trial began in December 2010 since the Company had to finish the completion and validation of its Multikine dedicated manufacturing facility.

Clinical and other studies necessary to obtain regulatory approval of a new drug involve significant costs and require several years to complete. The extent of the Company's clinical trials and research programs are primarily based upon the amount of capital available to the Company and the extent to which the Company has received regulatory approvals for clinical trials. The inability of the Company to conduct clinical trials or research, whether due to a lack of capital or regulatory approval, will prevent the Company from completing the studies and research required to obtain regulatory approval for any products which the Company is developing. Without regulatory approval, the Company will be unable to sell any of its products. Since all of the Company's projects are under development, the Company cannot predict when it will be able to generate any revenue from the sale of any of its products.

Critical Accounting Estimates and Policies

Management's discussion and analysis of the Company's financial condition and results of operations is based on its unaudited condensed consolidated financial statements. The preparation of these financial statements is based on the selection of accounting policies and the application of significant accounting estimates, some of which require management to make judgments, estimates and assumptions that affect the amounts reported in the financial statements and notes. The Company believes some of the more critical estimates and policies that affect its financial condition and results of operations are in the areas of operating leases and stock-based compensation. For more information regarding the Company's critical accounting estimates and policies, see Part II, Item 7 of the Company's 2011 10-K report. The application of these critical accounting policies and estimates has been discussed with the Audit Committee of the Company's Board of Directors.