UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549








FORM
10-Q







ý
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934









For the
quarterly period ended October 31, 2009







o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
      the transition period from _______________ to
    _______________




Commission
file number: 0-17085




PEREGRINE
PHARMACEUTICALS, INC.


(Exact
name of Registrant as specified in its charter)




Delaware
              
              95-3698422(State
      or other jurisdiction of incorporation or organization)
              
              (I.R.S.
      Employer Identification No.)14282
      Franklin Avenue, Tustin, California
              
              92780-7017(Address
      of principal executive offices)
              
              (Zip
      Code)


(714)
508-6000


(Registrant's
telephone number, including area code)





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.


Yesý    Noo


Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


Yes o   No  o


Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one)





Large
      Accelerated Filer  o
              Accelerated
      Filer   ýNon-
      Accelerated Filer   o
              Smaller
      reporting company   o(Do
      not check if a smaller reporting company)





Indicate
by checkmark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).


YesoNoý





As of
December 1, 2009, there were 49,150,826 shares of common stock, $0.001 par
value, outstanding.





PEREGRINE
PHARMACEUTICALS, INC.


FORM
10-Q FOR THE QUARTER ENDED OCTOBER 31, 2009


INDEX







PART
      I - FINANCIAL INFORMATION
            
            Page
      No.Item
      1.
            Consolidated
      Financial Statements (unaudited):Condensed
      Consolidated Balance Sheets
            
            1Condensed
      Consolidated Statements of Operations
            
            3Condensed
      Consolidated Statements of Cash Flows
            
            4Notes
      to Condensed Consolidated Financial Statements
            
            5Item
      2.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            
            18Company
      Overview
            
            18Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            
            29Item
      4.
            Controls
      and Procedures
            
            29PART
      II - OTHER INFORMATIONItem
      1.
            Legal
      Proceedings
            
            30Item
      1A.
            Risk
      Factors
            
            30Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            
            45Item
      3.
            Defaults
      upon Senior Securities
            
            45Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            
            46Item
      5.
            Other
      Information
            
            46Item
      6.
            Exhibits
            
            47SIGNATURES
            
            48







The terms “we,” “us,” “our,” “the
Company,” and “Peregrine,” as used in this Report
on Form 10-Q refers to Peregrine Pharmaceuticals, Inc. and its wholly owned
subsidiary, Avid Bioservices, Inc.







NOTE
REGARDING REVERSE STOCK SPLIT




On
October 16, 2009, we filed a Certificate of Amendment to our Certificate of
Incorporation with the Secretary of State of Delaware to effect a reverse split
of our common stock at a ratio of one-for-five.  The reverse stock
split was effective at the close of business on October 16, 2009.  All
fractional shares created by the reverse stock split were rounded up to the
nearest whole share.  All historical share and per share amounts have
been adjusted to reflect the reverse stock split, however, we have not adjusted
the prior year balance sheet.




i


PART I - FINANCIAL
INFORMATION





Item
1.                Financial
Statements





PEREGRINE
PHARMACEUTICALS, INC.
 CONDENSED
CONSOLIDATED BALANCE SHEETS





OCTOBER
      31,
              2009
            
            
            APRIL
      30,
              2009UnauditedASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
            
            $
            13,599,000
            
            
            $
            10,018,000Trade
      and other receivables, net
            
            
            2,487,000
            
            
            
            1,770,000Government
      contract receivables
            
            
            1,595,000
            
            
            
            1,944,000Inventories,
      net
            
            
            5,850,000
            
            
            
            4,707,000Debt
      issuance costs, current portion
            
            
            175,000
            
            
            
            229,000Prepaid
      expenses and other current assets
            
            
            1,049,000
            
            
            
            1,466,000Total current
    assets
            
            
            24,755,000
            
            
            
            20,134,000PROPERTY:Leasehold
      improvements
            
            
            675,000
            
            
            
            675,000Laboratory
      equipment
            
            
            4,100,000
            
            
            
            4,180,000Furniture,
      fixtures and office equipment
            
            
            901,000
            
            
            
            902,0005,676,000
            
            
            
            5,757,000Less
      accumulated depreciation and amortization
            
            
            (4,245,000
            )
            
            
            (4,076,000
            )Property, net
            
            
            1,431,000
            
            
            
            1,681,000OTHER
      ASSETS:Debt
      issuance costs, less current portion
            
            
            68,000
            
            
            
            142,000Other
      assets
            
            
            1,275,000
            
            
            
            1,170,000Total other
assets
            
            
            1,343,000
            
            
            
            1,312,000TOTAL
      ASSETS
            
            $
            27,529,000
            
            
            $
            23,127,000








1


PEREGRINE
PHARMACEUTICALS, INC.
 CONDENSED
CONSOLIDATED BALANCE SHEETS (continued)





OCTOBER
      31,
              2009
            
            
            APRIL
      30,
              2009UnauditedLIABILITIES
      AND STOCKHOLDERS' EQUITYCURRENT
      LIABILITIES:Accounts
      payable
            
            $
            3,659,000
            
            
            $
            3,518,000Accrued
      clinical trial site fees
            
            
            416,000
            
            
            
            955,000Accrued
      legal and accounting fees
            
            
            284,000
            
            
            
            667,000Accrued
      royalties and license fees
            
            
            145,000
            
            
            
            182,000Accrued
      payroll and related costs
            
            
            1,363,000
            
            
            
            1,580,000Notes
      payable, current portion and net of discount
            
            
            1,846,000
            
            
            
            1,465,000Deferred
      revenue
            
            
            4,260,000
            
            
            
            3,776,000Deferred
      government contract revenue
            
            
            3,989,000
            
            
            
            3,871,000Customer
      deposits
            
            
            790,000
            
            
            
            2,287,000Other
      current liabilities
            
            
            550,000
            
            
            
            563,000Total current
      liabilities
            
            
            17,302,000
            
            
            
            18,864,000Notes
      payable, less current portion and net of discount
            
            
            2,157,000
            
            
            
            3,208,000Other
      long-term liabilities
            
            
            152,000
            
            
            
            154,000Commitments
      and contingenciesSTOCKHOLDERS'
      EQUITY:Preferred
      stock-$0.001 par value; authorized 5,000,000 shares; non-voting;none
      issued
            
            
            -
            
            
            
            -Common
      stock-$0.001 par value; authorized 325,000,000 shares; outstanding –
      48,869,563 and 45,537,711, respectively
            
            
            48,000
            
            
            
            227,000Additional
      paid-in capital
            
            
            260,445,000
            
            
            
            248,034,000Accumulated
      deficit
            
            
            (252,575,000
            )
            
            
            (247,360,000
            )Total stockholders'
      equity
            
            
            7,918,000
            
            
            
            901,000TOTAL
      LIABILITIES AND STOCKHOLDERS' EQUITY
            
            $
            27,529,000
            
            
            $
            23,127,000








See
accompanying notes to unaudited condensed consolidated financial
statements


2


PEREGRINE
PHARMACEUTICALS, INC.
 CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS





Three
      Months Ended
              October
      31,
            
            
            Six
      Months Ended
              October
      31,2009
            
            
            2008
            
            
            2009
            
            
            2008Unaudited
            
            
            Unaudited
            
            
            Unaudited
            
            
            UnauditedREVENUES:Contract
      manufacturing revenue
            
            $
            5,308,000
            
            
            $
            983,000
            
            
            $
            7,378,000
            
            
            $
            2,176,000Government
      contract revenue
            
            
            1,510,000
            
            
            
            958,000
            
            
            
            6,181,000
            
            
            
            1,282,000License
      revenue
            
            
            78,000
            
            
            
            -
            
            
            
            87,000
            
            
            
            -Total
      revenues
            
            
            6,896,000
            
            
            
            1,941,000
            
            
            
            13,646,000
            
            
            
            3,458,000COSTS
      AND EXPENSES:Cost
      of contract manufacturing
            
            
            3,540,000
            
            
            
            663,000
            
            
            
            4,613,000
            
            
            
            1,566,000Research
      and development
            
            
            4,132,000
            
            
            
            4,301,000
            
            
            
            10,206,000
            
            
            
            8,369,000Selling,
      general and administrative
            
            
            1,761,000
            
            
            
            1,527,000
            
            
            
            3,554,000
            
            
            
            3,233,000Total
      costs and expenses
            
            
            9,433,000
            
            
            
            6,491,000
            
            
            
            18,373,000
            
            
            
            13,168,000LOSS
      FROM OPERATIONS
            
            
            (2,537,000
            )
            
            
            (4,550,000
            )
            
            
            (4,727,000
            )
            
            
            (9,710,000
            )OTHER
      INCOME (EXPENSE):Interest
      and other income
            
            
            34,000
            
            
            
            53,000
            
            
            
            74,000
            
            
            
            128,000Interest
      and other expense
            
            
            (284,000
            )
            
            
            -
            
            
            
            (562,000
            )
            
            
            (1,000
            )NET
      LOSS
            
            $
            (2,787,000
            )
            
            $
            (4,497,000
            )
            
            $
            (5,215,000
            )
            
            $
            (9,583,000
            )WEIGHTED
      AVERAGECOMMON
      SHARES OUTSTANDING:Basic
      and Diluted
            
            
            48,147,702
            
            
            
            45,242,124
            
            
            
            47,478,247
            
            
            
            45,242,124BASIC
      AND DILUTED LOSS  PER COMMON SHARE
            
            $
            (0.06
            )
            
            $
            (0.10
            )
            
            $
            (0.11
            )
            
            $
            (0.21
            )








See
accompanying notes to unaudited condensed consolidated financial
statements


3


PEREGRINE
PHARMACEUTICALS, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


Six
      Months Ended
                October
      31,2009
              
              
              2008Unaudited
              
              
              UnauditedCASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
              
              $
              (5,215,000
              )
              
              $
              (9,583,000
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
              
              
              228,000
              
              
              
              260,000Share-based
      compensation
              
              
              320,000
              
              
              
              493,000Amortization
      of discount on notes payable and debt issuance costs
              
              
              241,000
              
              
              
              -Loss
      on disposal of property
              
              
              51,000
              
              
              
              -Changes
      in operating assets and liabilities:Trade
      and other receivables, net
              
              
              (717,000
              )
              
              
              (1,142,000
              )Government
      contract receivables
              
              
              349,000
              
              
              
              (837,000
              )Inventories,
      net
              
              
              (1,143,000
              )
              
              
              (3,800,000
              )Prepaid
      expenses and other current assets
              
              
              417,000
              
              
              
              66,000Accounts
      payable
              
              
              141,000
              
              
              
              1,359,000Accrued
      clinical trial site fees
              
              
              (539,000
              )
              
              
              313,000Accrued
      payroll and related costs
              
              
              (217,000
              )
              
              
              (302,000
              )Deferred
      revenue
              
              
              484,000
              
              
              
              4,276,000Deferred
      government contract revenue
              
              
              118,000
              
              
              
              1,701,000Customer
      deposits
              
              
              (1,497,000
              )
              
              
              737,000Other
      accrued expenses and current liabilities
              
              
              (423,000
              )
              
              
              (293,000
              )Net cash used in operating
      activities
              
              
              (7,402,000
              )
              
              
              (6,752,000
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Property
      acquisitions
              
              
              (29,000
              )
              
              
              (112,000
              )Increase
      in other assets
              
              
              (105,000
              )
              
              
              (45,000
              )Net cash used in investing
      activities
              
              
              (134,000
              )
              
              
              (157,000
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from issuance of common stock, net of issuance costs
      of  $469,000
              
              
              11,912,000
              
              
              
              -Principal
      payments on notes payable
              
              
              (783,000
              )
              
              
              -Principal
      payments on capital leases
              
              
              (12,000
              )
              
              
              (11,000
              )Net
      cash provided by (used in) financing activities
              
              
              11,117,000
              
              
              
              (11,000
              )NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
              
              
              3,581,000
              
              
              
              (6,920,000
              )CASH AND CASH EQUIVALENTS,beginning of period
              
              
              10,018,000
              
              
              
              15,130,000CASH AND CASH
      EQUIVALENTS, end of period
              
              $
              13,599,000
              
              
              $
              8,210,000








See
accompanying notes to unaudited condensed consolidated financial
statements


4


PEREGRINE
PHARMACEUTICALS, INC.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2009





1.
              ORGANIZATION
      AND BUSINESS





Peregrine
Pharmaceuticals, Inc. (“Peregrine” or “Company”) is a biopharmaceutical company
developing monoclonal antibodies for the treatment of cancer and serious virus
infections.  The Company is pursuing three separate clinical programs
in cancer and Hepatitis C Virus (“HCV”) infection with its lead product
candidates bavituximab and Cotara®.  Peregrine also has in-house
manufacturing capabilities through its wholly owned subsidiary Avid Bioservices,
Inc. (“Avid”), which provides process development and bio-manufacturing services
for both Peregrine and outside customers on a fee-for-service
basis.





2.
              BASIS
      OF PRESENTATION





The
accompanying interim unaudited condensed consolidated financial statements have
been prepared in accordance with United States generally accepted accounting
principles (“U.S. GAAP”) and with the rules and regulations of the U.S.
Securities and Exchange Commission (“SEC”) related to a quarterly report on Form
10-Q.  Accordingly, they do not include all of the information and
disclosures required by U.S. GAAP for a complete set of financial
statements.  These interim unaudited condensed consolidated financial
statements and notes thereto should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K for the year ended April 30, 2009.  The
unaudited financial information for the interim periods presented herein
reflects all adjustments which, in the opinion of management, are necessary for
a fair presentation of the financial condition and results of operations for the
periods presented, with such adjustments consisting only of normal recurring
adjustments.  Results of operations for interim periods covered by
this quarterly report on Form 10-Q may not necessarily be indicative of results
of operations for the full fiscal year.





The interim
unaudited condensed consolidated financial statements include the accounts
of Peregrine Pharmaceuticals, Inc. and its wholly owned subsidiary, Avid
Bioservices, Inc.  All intercompany accounts and transactions have
been eliminated in the interim unaudited condensed consolidated financial
statements.





The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts,
as well as disclosures of commitments and contingencies in the financial
statements and accompanying notes.  Actual results could differ from
those estimates.





Subsequent
Events





In
connection with the preparation of the interim unaudited condensed consolidated
financial statements, we have evaluated subsequent events through December 10,
2009, the filing date of this Form 10-Q.





Reverse
Stock Split





On
October 16, 2009, we filed a Certificate of Amendment to ourCertificate of Incorporationwith the Secretary
of State of Delaware to effect a reverse split of our common
stock at a ratio of one-for-five. The reverse stock split was effective at
the close of business on October 16, 2009.
All fractional shares created by the
reverse stock split were rounded up to the nearest
whole share. All historical
share and per share amounts have been adjusted to reflect the reverse stock
split, however, we have not adjusted the prior year balance sheet.





Going Concern





Our interimunauditedcondensed consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of
business.  The financial statements do not include any adjustments
relating to the recoverability of the recorded assets or the classification of
liabilities that may be necessary should it be determined that we are unable to
continue as a going concern.At October 31, 2009, we had
$13,599,000 in cash and cash equivalents.  We have expended
substantial funds on the research, development and clinical trials of our
product candidates, and funding the operations of Avid.  As a result,
we have historically experienced negative cash flows from operations since our
inception and we expect the negative cash flows from operations to continue for
the foreseeable future.  Our net losses incurred during the past three
fiscal years ended April 30, 2009, 2008 and 2007 amounted to $16,524,000,
$23,176,000, and $20,796,000, respectively.  Unless and until we are
able to generate sufficient revenues from Avid’s contract manufacturing services
and/or from the sale and/or licensing of our products under development, we
expect such losses to continue for the foreseeable future.


5
 
 PEREGRINE
PHARMACEUTICALS, INC.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2009 (continued)





Therefore,
our ability to continue our clinical trials and development efforts is highly
dependent on the amount of cash and cash equivalents on hand combined with our
ability to raise additional capital to support our future
operations.





We will
need to raise additional capital through one or more methods, including but not
limited to, issuing additional equity or debt, in order to support the costs of
our research and development programs.





With
respect to financing our operations through the issuance of equity, on July 14,
2009, we filed a shelf registration statement on Form S-3, File number
333-160572 (“July 2009 Shelf”), under which we may issue, from time to time, in
one or more offerings, shares of our common stock for gross proceeds of up to
$50,000,000.  As of October 31, 2009, gross proceeds of up to
$44,597,000 remained available under the July 2009 Shelf.





In
addition, on July 14, 2009, we entered into an At Market Issuance Sales
Agreement (“July 2009 AMI Agreement”) with Wm Smith & Co., pursuant to which
we may sell shares of our common stock through Wm Smith & Co., as agent, in
registered transactions from the above shelf registration statement on Form S-3,
File Number 333-160572, for aggregate gross proceeds of up to
$25,000,000.  Shares of common stock sold under this arrangement are
to be sold at market prices.  We are obligated to pay Wm Smith &
Co. a commission equal to 3% of the first $15,000,000 in gross proceeds from the
sale of shares of our common stock and 2% of the next $10,000,000 in gross
proceeds from the sale of shares of common stock.  As of October 31,
2009, we had sold 1,429,582 shares of common stock at market prices under the
July 2009 AMI Agreement in exchange for net proceeds of $5,240,000.





In
addition to the above, we may also raise additional capital through additional
equity offerings, licensing our products in development, or increasing revenue
from our wholly owned subsidiary, Avid.  While we will continue to
explore these potential opportunities, there can be no assurances that we will
be successful in raising sufficient capital on terms acceptable to us, or at
all, or that sufficient additional revenues will be generated from Avid or under
potential licensing or partnering agreements to complete the research,
development, and clinical testing of our product candidates.  Based on
our current projections, which include projected revenues under signed contracts
with existing customers of Avid, combined with the projected revenues from our
government contract and licensing agreements, we believe we have sufficient cash
on hand combined with amounts expected to be received from Avid customers and
from our government contract and licensing agreements to meet our obligations as
they become due through at least fiscal year 2010 based on current
assumptions.  There are a number of uncertainties associated with our
financial projections, including but not limited to, termination of third party
or government contracts, technical challenges, or possible reductions in funding
under our government contract, which could reduce or delay our future projected
cash-inflows.  In addition, under our Loan Agreement (see Note 7), in
the event our government contract with the Transformational Medical Technologies
Initiative is terminated or canceled for any reason, including reasons
pertaining to budget cuts by the government or reduction in government funding
for the program, we would be required to set aside cash and cash equivalents in
an amount equal to 80% of the outstanding loan balance in a restricted
collateral account non-accessable by us.  In the event our projected
cash-inflows are reduced or delayed or if we default on a loan covenant that
limits our access to our available cash on hand, we might not have sufficient
capital to operate our business through fiscal year 2010 unless we raise
additional capital.  The uncertainties surrounding our future cash
inflows have raised substantial doubt regarding our ability to continue as a
going concern.





6


PEREGRINE
PHARMACEUTICALS, INC.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2009 (continued)





3.
              SUMMARY
      OF SIGNIFICANT ACCOUNTING
POLICIES





Revenue
Recognition





We
currently derive revenue from the following three sources:  (i)
contract manufacturing services provided by Avid, (ii) licensing revenues
related to agreements associated with Peregrine’s technologies under
development, and (iii) government contract revenues for services provided under
a government contract awarded to Peregrine through the Transformational Medical
Technologies Initiative (“TMTI”) of the U.S. Department of Defense’s Defense
Threat Reduction Agency (“DTRA”).





We recognize revenue in accordance with the
authoritative guidance for revenue recognition.  We recognize
revenue whenall of the following criteria are
met: (i) persuasive evidence of an arrangement exists, (ii) delivery (or
passage of title) has occurred or services have been rendered, (iii) the
seller's price to the buyer is fixed or determinable, and (iv) collectibility is
reasonably assured.





We also
comply with the authoritative guidance for
revenue recognition regarding arrangements with multiple
deliverables.  We recognize revenue for delivered elements only when
the delivered element has stand-alone value and we have objective and reliable
evidence of fair value for each undelivered element.  If the fair
value of any undelivered element included in a multiple element arrangement
cannot be objectively determined, the arrangement would then be accounted for as
a single unit of accounting, and revenue is recognized over the estimated period
of when the performance obligation(s) are performed.





In
addition, we also follow the authoritativeguidance when reporting revenue as gross when we act as a principal
versus reporting revenue as net when we act as an agent.  For
transactions in which we act as a principal, have discretion to choose
suppliers, bear credit risk and performs a substantive part of the services,
revenue is recorded at the gross amount billed to a customer and costs
associated with these reimbursements are reflected as a component of cost of
sales for contract manufacturing services and research and development expense
for services provided under our contract with the TMTI.





Contract Manufacturing
Revenue – Revenue associated with contract manufacturing services
provided by Avid are recognized once the service has been rendered and/or upon
shipment (or passage of title) of the product to the customer.  On
occasion, we recognize revenue on a “bill-and-hold” basis in accordance with the
authoritative guidance.  Under
“bill-and-hold” arrangements, revenue is recognized once the product is complete
and ready for shipment, title and risk of loss has passed to the customer,
management receives a written request from the customer for “bill-and-hold”
treatment, the product is segregated from other inventory, and no further
performance obligations exist.





Any
amounts received prior to satisfying our revenue recognition criteria are
recorded as deferred revenue in the accompanying interim unaudited condensed
consolidated financial statements.  We also record a provision for
estimated contract losses, if any, in the period in which they are
determined.





License Revenue – Revenue
associated with licensing agreements primarily consist of non-refundable upfront
license fees, non-refundable annual license fees and milestone
payments.





7


PEREGRINE
PHARMACEUTICALS, INC.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2009 (continued)


Non-refundable
upfront license fees received under license agreements, whereby continued
performance or future obligations are considered inconsequential to the relevant
license technology, are recognized as revenue upon delivery of the
technology.  If a license agreement has multiple element arrangements,
we analyze and determine whether the deliverables, which often include
performance obligations, can be separated or whether they must be accounted for
as a single unit of accounting in accordance with the authoritative
guidance.  Under multiple element arrangements, we recognize upfront
license payments as revenue upon delivery of the license only if the license has
stand-alone value and the fair value of the undelivered performance obligations
can be determined.  If the fair value of the undelivered performance
obligations can be determined, such obligations would then be accounted for
separately as performed.  If the license is considered to either not
have stand-alone value or have stand-alone value but the fair value of any of
the undelivered performance obligations cannot be determined, the arrangement
would then be accounted for as a single unit of accounting and the license
payments and payments for performance obligations are recognized as revenue over
the estimated period of when the performance obligations are
performed.  If we determine that an arrangement should be accounted
for as a single unit of accounting, we must determine the period over which the
performance obligations will be performed and revenue will be
recognized.  Revenue recognized under licensing agreements is limited
to the lesser of the cumulative amount of payments received or the cumulative
amount of revenue earned, as determined using the straight-line method, as of
the period ending date.  Amounts received prior to satisfying the
above revenue recognition criteria are recorded as deferred revenue in the
accompanying interim unaudited condensed consolidated financial
statements.


Non-refundable
annual license fees are recognized as revenue on the anniversary date of the
agreement in accordance with the authoritative
guidance for revenue recognition.





Milestone
payments are recognized as revenue upon the achievement of the specified
milestone, provided that (i) the milestone event is substantive in nature and
the achievement of the milestone is not reasonably assured at the inception of
the agreement, (ii) the fees are non-refundable, and (3) there is no continuing
performance obligations associated with the milestone payment.  Any
milestone payments received prior to satisfying these revenue recognition
criteria are recorded as deferred revenue in the accompanying interim
unaudited condensed consolidated financial statements.





Government
Contract Revenue–On June 30,
2008, we were awarded a five-year contract potentially worth up to $44.4 million
to test and develop bavituximab and an equivalent fully human antibody as
potential broad-spectrum treatments for viral hemorrhagic fever
infections.  The initial contract was awarded through the
Transformational Medical Technologies Initiative (“TMTI”) of the U.S. Department
of Defense's Defense Threat Reduction Agency (“DTRA”).  This federal
contract is expected to provide us with up to $22.3 million in funding over
a 24-month base period, with $19.4 million having been appropriated as of
October 31, 2009.  The remainder of the $22.3 million in funding is
expected to be appropriated over the remainder of the two-year base period
ending June 29, 2010.  Subject to the progress of the program and
budgetary considerations in future years, the contract can be extended beyond
the base period to cover up to $44.4 million in funding over the five-year
contract period through three one-year option terms.





Our
contract with the TMTI is a “cost-plus-fixed-fee” contract whereby we recognize
government contract revenue in accordance with the revenue recognition criteria
noted above and in accordance with the authoritative guidance specific to federal government
contracts.  Reimbursable costs under the contract primarily
include direct labor, subcontract costs, materials, equipment, travel, indirect
costs, and a fixed fee for our efforts.  Revenue under this
“cost-plus-fixed-fee” contract is generally recognized as we perform the
underlying research and development activities.  However, progress
billings and/or payments associated with services that are billed and/or
received in a manner that is not consistent with the timing of when services are
performed are classified as deferred government contract revenue in the
accompanying interim unaudited condensed consolidated financial statements and
are recognized as revenue upon satisfying our revenue recognition
criteria.


8


PEREGRINE
PHARMACEUTICALS, INC.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2009 (continued)





Fair Value
Measurements





We
determine fair value measurements in accordance with the authoritative guidance
for fair value measurements and disclosures for all assets and liabilities
within the scope of this guidance.  This guidance clarifies the
definition of fair value for financial reporting, establishes a framework for
measuring fair value and requires additional disclosures about the use of fair
value measurements. The guidance also clarifies its application in a market that
is not active and provides an example to illustrate key considerations in
determining the fair value of a financial asset when the market for that
financial asset is not active. The guidance prioritizes the inputs used in
measuring fair value into the following hierarchy:





●
              Level
      1 –
              Quoted
      prices in active markets for identical assets or
    liabilities.●
              Level
      2 –
              Observable
      inputs other than quoted prices included in Level 1, such as assets or
      liabilities whose value are based on quoted market prices in markets where
      trading occurs infrequently or whose values are based on quoted prices of
      instruments with similar attributes in active markets.●
              Level
      3 –
              Unobservable
      inputs that are supported by little or no market activity and significant
      to the overall fair value
measurement.
 
 As of
October 31, 2009, we do not have any Level 2 or Level 3 financial assets or
liabilities and our cash and cash equivalents are carried at fair value based on
quoted market prices for identical securities (Level 1
input).





Share-Based
Compensation





We
account for stock options granted under our equity compensation plans in
accordance with the authoritative guidance for share-based
compensation.  The authoritative guidance requires the recognition of
compensation expense, using a fair value based method, for costs related to all
share-based payments including grants of employee stock options.  In
addition, it requires companies to estimate the fair value of share-based
payment awards on the date of grant using an option-pricing
model.  The value of the portion of the award that is ultimately
expected to vest is recognized as expense on a straight-line basis over the
requisite service periods (typically 2 to 4 years).





The fair
value of each option grant is estimated using the Black-Scholes option valuation
model.  The use of a valuation model requires us to make certain
estimates and assumptions with respect to selected model inputs including
estimated stock price volatility, risk-free interest rate, expected dividends
and projected employee stock option exercise behaviors.  In addition,
the authoritative guidance requires forfeitures to be estimated at the time of
grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates.





Total share-based compensation expense related to
employee stock option grants for the three and six-month periods ended October
31, 2009 and 2008 are included in the accompanyinginterim unauditedcondensed consolidated statements of operations as
follows:





Three
      Months Ended
              October
      31,
            
            
            Six
      Months Ended
              October
      31,2009
            
            
            2008
            
            
            2009
            
            
            2008Research
      and development
            
            $
            102,000
            
            
            $
            123,000
            
            
            $
            180,000
            
            
            $
            264,000Selling,
      general and administrative
            
            
            55,000
            
            
            
            98,000
            
            
            
            132,000
            
            
            
            223,000Total
            
            $
            157,000
            
            
            $
            221,000
            
            
            $
            312,000
            
            
            $
            487,000




As of
October 31, 2009, the total estimated unrecognized compensation cost related to
non-vested stock options was $838,000.  This cost is expected to be
recognized over a weighted average vesting period of 2.30 years based on current
assumptions.


9


PEREGRINE
PHARMACEUTICALS, INC.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2009 (continued)


Periodically,
we grant stock options to non-employee consultants.  The fair value of
options granted to non-employees are measured utilizing the Black-Scholes option
valuation model and are amortized over the estimated period of service or
related vesting period in accordance with the authoritative
guidance.  Share-based compensation expense recorded during the three
and six months ended October 31, 2009 associated with non-employees amounted to
$1­­­­­­­­­­­­,000 and $8,000,
respectively.  Share-based compensation expense recorded during the
three and six months ended October 31, 2008 associated with non-employees
amounted to $1­­­­­­­­­­­­,000
and $6,000, respectively.





Comprehensive
Loss





Comprehensive
loss is equal to net loss for all periods presented.





Basic
and Dilutive Net Loss Per Common Share





Basic net
loss per common share is computed by dividing our net loss by the weighted
average number of common shares outstanding during the period excluding the
dilutive effects of options and warrants in accordance with the authoritative
guidance.  Diluted net loss per common share is computed by dividing
the net loss by the sum of the weighted average number of common shares
outstanding during the period plus the potential dilutive effects of options and
warrants outstanding during the period calculated in accordance with the
treasury stock method, but are excluded if their effect is
anti-dilutive.  Because the impact of options and warrants are
anti-dilutive during periods of net loss, there was no difference between basic
and diluted loss per share amounts for the three and six months ended October
31, 2009 and 2008.





The
calculation of weighted average diluted shares outstanding excludes the dilutive
effect of options and warrants to purchase up to 630,594and 637,082shares of common stock for the three
and six months ended October 31, 2009, respectively, and 228 and 18,676 shares of common stock for the
three and six months ended October 31, 2008, respectively, since the impact of such options and warrants are anti-dilutive
during periods of net loss.





The
calculation of weighted average diluted shares outstanding also excludes
weighted average outstanding options and warrants to purchase up to 1,744,905
and 1,740,799 shares of common stock for the three and six months ended October
31, 2009, respectively, and 2,846,353 and 2,651,304 shares of common stock for
the three and six months ended October 31, 2008, respectively, as the exercise
prices of those options were greater than the average market price of our common
stock during the respective periods, resulting in an anti-dilutive
effect.





4.
            ACCOUNTING
      PRONOUNCEMENTS





Recently
Adopted Accounting Standards




In June 2009, the Financial Accounting Standards
Board (“FASB”) approvedThe FASB Accounting Standards Codification(the “Codification”) as the single source of authoritative U.S. GAAP for all
non-governmental entities, with the exception of the SEC and its
staff.  The Codification, which launched on July 1, 2009, changes
the referencing and organization of accounting guidance and became effective for
interim and annual periods ending after September 15, 2009.  The
Codification is now the single official source of authoritative U.S. GAAP (other
than guidance issued by the SEC), superseding existing FASB, American Institute
of Certified Public Accountants, Emerging Issues Task Force (“EITF”), and
related literature.  Only one level of authoritative U.S. GAAP now
exists.  All other literature is considered
non-authoritative.  The Codification does not change U.S.
GAAP.  We adopted the Codification effective August 1, 2009. The
adoption of the Codification did not have a material impact on ourinterim unauditedcondensed consolidated
financial statements.







10


PEREGRINE
PHARMACEUTICALS, INC.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2009 (continued)




Effective May 1, 2009, we adopted authoritative
guidance for subsequent events which establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.  The
guidance sets forth the circumstances under which an entity should recognize
events or transactions occurring after the balance sheet date in its financial
statements.  The guidance also requires the disclosure of the date
through which an entity has evaluated subsequent events and whether that date
represents the date the financial statements were issued or were available to be
issued.  The adoption of this new guidance did not have a material
impact on ourinterim unauditedcondensed
consolidated financial statements.
 
 Effective May 1, 2009, we adopted authoritative
guidance on accounting for collaborative arrangements, which focuses on how the
parties to a collaborative agreement should account for costs incurred and
revenue generated on sales to third parties, how sharing payments pursuant to a
collaboration agreement should be presented in the statement of operations and
certain related disclosure questions.  The adoption of the new
guidance on accounting for collaborative arrangements did not have a material
impact on ourinterim unauditedcondensed
consolidated financial statements.





Effective May 1, 2009, we adopted authoritative
guidance on determining whether an instrument (or an embedded feature) is
indexed to an entity’s own stock.  The guidance provides that an
entity should use a two-step approach to evaluate whether an equity-linked
financial instrument (or embedded feature) is indexed to its own stock,
including evaluating the instrument’s contingent exercise and settlement
provisions.  It also clarifies the impact of foreign currency
denominated strike prices and market-based employee stock option valuation
instruments on the evaluation.  The adoption of this new guidance did
not have a material impact on ourinterim unauditedcondensed consolidated financial
statements.





Effective May 1, 2009, we adopted authoritative
guidancewhich requires publicly traded companies to include in their
interim financial reports certain disclosures about the carrying value and fair
value of financial instruments previously required only in annual financial
statements and to disclose changes in significant assumptions used to calculate
the fair value of financial instruments.  The adoption of this new guidance did not have a
material impact on ourinterim unauditedcondensed consolidated statements.





New Accounting Standards Not Yet
Adopted





In October 2009, the FASB issued an accounting standards
update that requires an entity to allocate arrangement consideration at the
inception of an arrangement to all of its deliverables based on their relative
selling prices, eliminates the use of the residual method of allocation, and
requires the relative-selling-price method in all circumstances in which an
entity recognizes revenue of an arrangement with multiple
deliverables.  This guidance will be effective for revenue
arrangements entered into or materially modified in fiscal years beginning on or
after June 15, 2010, with earlier application permitted. We have not yet
evaluated the potential impact of adopting this guidance on ourinterim
unauditedcondensed consolidated financial
statements.





5.
            ACCOUNTS
      RECEIVABLE





Accounts receivable is recorded at the invoiced amount
net of an allowance for doubtful accounts, if necessary.  Trade and
other receivables primarily include amounts billed for contract manufacturing
services provided by Avid (“trade” receivables).  Government contract
receivables include amounts billed under our contract with the Transformational
Medical Technologies Initiative (“TMTI”) of the U.S. Department of Defense’s
Defense Threat Reduction Agency (“DTRA”) that was signed on June 30,
2008.  In addition, amounts unbilled under our contract with TMTI atOctober 31, 2009 were $187,000, of which
amount, included $168,000 in prepaid expenses and other current assets and
included $19,000 in other assets in the accompanyinginterim
unauditedcondensed consolidated financial
statements.




11




We continually monitor our allowance for doubtful
accounts for all receivables.  A considerable amount of judgment is
required in assessing the ultimate realization of these receivables and we
estimate an allowance for doubtful accounts based on these factors at that point
in time.  With respect to our trade and other receivables, we
determined a $20,000 allowance for doubtful accounts was necessary based on our
analysis as ofOctober 31,
2009.  With respect to our government contract receivables, we
determined no allowance for doubtful accounts was necessary based on our
analysis as of October 31, 2009.





6.
            INVENTORIES





Inventories
are stated at the lower of cost or market and primarily include raw materials,
direct labor and overhead costs associated with our wholly owned subsidiary,
Avid.





Inventories consist of the following atOctober
31, 2009 and April 30, 2009:





October
      31,
              2009
            
            
            April
      30,
              2009Raw
      materials
            
            $
            1,355,000
            
            
            $
            1,654,000Work-in-process
            
            
            4,495,000
            
            
            
            3,053,000Total
      inventories, net
            
            $
            5,850,000
            
            
            $
            4,707,000




7.
              NOTE
      PAYABLE
 
 On
December 9, 2008, we entered into a loan and security agreement whereby we
borrowed $5,000,000 (“Loan Agreement”) from MidCap Financial LLC and BlueCrest
Capital Finance, L.P.
 
 Under the
Loan Agreement, the outstanding principal balance each month will bear interest
at the then current thirty (30) day LIBOR rate (set at a floor of 3%) plus 9%
(12% at October 31, 2009).  The Loan Agreement allowed for
interest-only payments during the initial six (6) months through July 2009
followed by thirty (30) equal monthly principal payments plus
interest.  The Loan Agreement, which is secured by generally all
assets of the Company, contains customary covenants that, among other things,
generally restricts our ability to incur additional indebtedness.  In
addition, the Loan Agreement contains a covenant, whereby if our contract with
the TMTI (Note 3) is terminated while the loan is outstanding, we would be
required to set aside cash and cash equivalents in an amount equal to at least
80% of the outstanding loan balance in a secured account over which we will not
be permitted to make withdrawals or otherwise exercise
control.  Moreover, the Loan Agreement includes a Material Adverse
Change clause whereby if there is a material impairment in the priority of
lenders' lien in the collateral or in the value of such collateral, or if we
encounter a material adverse change in our business, operations, or condition
(financial or otherwise), or a material impairment of the prospect of repayment
of any portion of the loan, then an event of default can be invoked by the
lender.


12


PEREGRINE
PHARMACEUTICALS, INC.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2009 (continued)




The terms
of the Loan Agreement also include a provision for warrant coverage equal to 10%
of the amount borrowed divided by the warrant exercise price.  The
warrant exercise price was calculated based on the average closing price of our
common stock for the 20-day period prior to the date of the Loan
Agreement.  The warrants are exercisable immediately and have a
five-year term.  In connection with the advance of $5,000,000, we
issued warrants to purchase an aggregate of 338,410 shares of our common stock
at an exercise price of $1.48 per share.  The fair value of the
warrants was $414,000, and this amount was credited to additional paid-in
capital and reduced the carrying value of the debt, reflected as a debt discount
in the accompanying interim unaudited condensed consolidated financial
statements.  The debt discount is being amortized as a non-cash
interest expense over the term of the outstanding loan using the effective
interest method.  The fair value of the warrants was determined using
the Black-Scholes model with the following assumptions:  estimated
volatility of 70.72%; risk free interest rate of 2.00%; an expected life of five
years; and no dividend yield.





In
connection with the Loan Agreement, we also incurred $469,000 in financing fees
and legal costs related to closing the Loan Agreement.  These fees and
costs are classified as debt issuance costs, and the short-term and long-term
portions of these costs are included in current assets and other long-term
assets, respectively, in the accompanying interim unaudited condensed
consolidated balance sheets and are being amortized as a non-cash interest
expense over the term of the outstanding loan using the effective interest
method.  Included in debt issuance costs is a final payment fee of
$150,000, which is due and payable on the maturity date of the outstanding loan
balance, and is equal to 3% of the total amount funded under the Loan
Agreement.  The final payment fee payable of $150,000 is classified as
other long-term liabilities in the accompanying interim unaudited condensed
consolidated balance sheets.





As of
October 31, 2009, we will make the following principal payments in the years
ending April 30:





2010
            
            $
            884,0002011
            
            
            2,000,0002012
            
            
            1,333,000Total
            
            $
            4,217,000





8.
            STOCKHOLDERS’
      EQUITY





On
March 26, 2009, we entered into an At Market Issuance Sales Agreement
(“March 2009 AMI Agreement”) with Wm Smith & Co., pursuant to which we sold
shares of our common stock through Wm Smith & Co., as agent, in registered
transactions from our shelf registration statement on Form S-3, File Number
333-139975 (“January 2007 Shelf”), for aggregate gross proceeds of
$7,500,000.  Shares of common stock sold under this arrangement were
sold at market prices.  During the quarter ended July 31, 2009, we had
sold 1,855,172 shares of common stock under the March 2009 AMI Agreement for
aggregate net proceeds of $6,587,000 after deducting commissions of 3% paid to
Wm Smith & Co and other issuance costs.  As of July 31, 2009, we
had raised the aggregate gross proceeds of $7,500,000 permitted under the March
2009 AMI Agreement.  In addition, as of July 31, 2009, we had raised
the aggregate gross proceeds permitted under the January 2007
Shelf.





On July
14, 2009, we filed a shelf registration statement on Form S-3, File number
333-160572 (“July 2009 Shelf”), under which we may issue, from time to time, in
one or more offerings, shares of our common stock for gross proceeds of up to
$50,000,000.   As of October 31, 2009, gross proceeds of up to
$44,597,000 remained available under the July 2009 Shelf.


13


PEREGRINE
PHARMACEUTICALS, INC.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2009 (continued)




In
addition, on July 14, 2009, we entered into a separate At Market Issuance Sales
Agreement (“July 2009 AMI Agreement”) with Wm Smith & Co., pursuant to which
we may sell shares of our common stock through Wm Smith & Co., as agent, in
registered transactions from our July 2009 Shelf, for aggregate gross proceeds
of up to $25,000,000.  Shares of common stock sold under this
arrangement are to be sold at market prices.  We are obligated to pay
Wm Smith & Co. a commission equal to 3% of the first $15,000,000 in gross
proceeds from the sale of shares of our common stock and 2% of the next
$10,000,000 in gross proceeds from the sale of shares of common
stock.  As of October 31, 2009, we had sold 1,429,582 shares of common
stock at market prices under the July 2009 AMI Agreement for aggregate net
proceeds of $5,240,000 after deducting commissions of 3% paid to Wm Smith &
Co and other issuance costs.





As of
October 31, 2009, we have reserved 6,274,693 additional shares of our common
stock which may be issued under our stock option plans and outstanding warrant
agreements, excluding shares of common stock that could potentially be issued
under the July 2009 Shelf, as further described in the following
table:





Number
      of Shares ReservedStock
      options issued and outstanding
            
            
            2,708,108Stock
      options available for future grant
            
            
            3,228,175Warrants
      issued and outstanding
            
            
            338,410Total
      shares of common stock reserved for issuance
            
            
            6,274,693





9.
            STOCK
      OPTIONS AND WARRANTS





In
connection with the one-for-five reverse stock split we implemented at the close
of business on October 16, 2009, the number of outstanding equity awards was
proportionately adjusted to reflect the reverse stock split.  As a
result, the number of outstanding equity awards was determined by dividing the
number of outstanding equity awards by five.  The per share exercise
price of stock options and warrants was determined by multiplying the exercise
price by five.





During
the six months ended October 31, 2009, holders of our outstanding options
exercised rights to purchase 46,085 shares of common stock at a weighted average
exercise price of $1.86 per share, respectively, for net proceeds of
approximately $85,000.  Options to purchase 2,708,108 shares of our
common stock were outstanding as of October 31, 2009.





As of
October 31, 2009, we had warrants outstanding to purchase up to 338,410 shares
of our common stock at an exercise price of $1.48 per share with an expiration
date of December 19, 2013.  These warrants were issued during fiscal
year 2009 in connection with the loan and security agreement we entered into on
December 9, 2008, as further discussed in Note 7.  There were no
warrants granted or exercised during the six months ended October 31,
2009.





10.
            SEGMENT
      REPORTING





Our
business is organized into two reportable operating
segments.  Peregrine is engaged in the research and development of
monoclonal antibody-based therapies for the treatment of cancer and serious
viral infections.  Avid is engaged in providing contract manufacturing
services for Peregrine and outside customers on a fee-for-service
basis.   14


PEREGRINE
PHARMACEUTICALS, INC.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2009 (continued)




The
accounting policies of the operating segments are the same as those described in
Note 3.  We primarily evaluate the performance of our contract
manufacturing services segment based on gross profit or
loss.  However, our products in the research and development segment
are not evaluated based on gross profit or loss, but rather based on scientific
progress of the technologies.  As such, gross profit is only provided
for our contract manufacturing services segment in the below
table.  All revenues shown below are derived from transactions with
external customers.









Three
      Months Ended October 31,2009
            
            
            2008Contract
      manufacturing services revenue
            
            $
            5,308,000
            
            
            $
            983,000Cost
      of contract manufacturing services
            
            
            3,540,000
            
            
            
            663,000Gross
      profit
            
            
            1,768,000
            
            
            
            320,000Revenues
      from products in research and development
            
            
            1,588,000
            
            
            
            958,000Research
      and development expense
            
            
            (4,132,000
            )
            
            
            (4,301,000
            )Selling,
      general and administrative expense
            
            
            (1,761,000
            )
            
            
            (1,527,000
            )Other
      income (expense), net
            
            
            (250,000
            )
            
            
            53,000Net
      loss
            
            $
            (2,787,000
            )
            
            $
            (4,497,000
            )





Revenues
generated from our contract manufacturing services segment were from the
following customers:





Three
      Months Ended October 31,2009
            
            
            2008United
      States (one customer)
            
            
            23%
            
            
            
            
            95%Canada
      (one customer)
            
            
            50%
            
            
            
            
            0%Germany
      (one customer)
            
            
            20%
            
            
            
            
            5%Other
      customers
            
            
            7%
            
            
            
            
            0%Total
            
            
            100%
            
            
            
            
            100%





Segment
information for the six-month periods is summarized as follows:





Six
      Months Ended October 31,2009
            
            
            2008Contract
      manufacturing services revenue
            
            $
            7,378,000
            
            
            $
            2,176,000Cost
      of contract manufacturing services
            
            
            4,613,000
            
            
            
            1,566,000Gross
      profit
            
            
            2,765,000
            
            
            
            610,000Revenues
      from products in research and development
            
            
            6,268,000
            
            
            
            1,282,000Research
      and development expense
            
            
            (10,206,000
            )
            
            
            (8,369,000
            )Selling,
      general and administrative expense
            
            
            (3,554,000
            )
            
            
            (3,233,000
            )Other
      income (expense), net
            
            
            (488,000
            )
            
            
            127,000Net
      loss
            
            $
            (5,215,000
            )
            
            $
            (9,583,000
            )


15


PEREGRINE
PHARMACEUTICALS, INC.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2009 (continued)





Revenues
generated from our contract manufacturing services segment were from the
following customers:





Six
      Months Ended October 31,2009
            
            
            2008United
      States (one customer)
            
            
            26%
            
            
            
            
            89%Canada
      (one customer)
            
            
            50%
            
            
            
            
            0%Germany
      (one customer)
            
            
            17%
            
            
            
            
            6%Other
      customers
            
            
            7%
            
            
            
            
            5%Total
            
            
            100%
            
            
            
            
            100%





Revenues
generated from our products in our research and development segment during the
three and six months ended October 31, 2009 and 2008 were primarily from
revenues earned under the government contract with the TMTI (Note
3).  The remainder of revenue generated from our products in our
research and development segment during the three and six months ended October
31, 2009 was from revenue earned under licensing agreements (Note
11).





Our
long-lived assets consist of leasehold improvements, laboratory equipment, and
furniture, fixtures and computer equipment and are net of accumulated
depreciation.  Long-lived assets by segment consist of the
following:





October
      31,
              2009
            
            
            April
      30,
              2009Long-lived
      Assets, net:Contract
      manufacturing services
            
            $
            1,307,000
            
            
            $
            1,531,000Products
      in research and development
            
            
            124,000
            
            
            
            150,000Total
      long-lived assets, net
            
            $
            1,431,000
            
            
            $
            1,681,000





11.
            LICENSING
      AGREEMENTS





During
July 2009, we sub-licensed certain rights and agreed to assign certain other
rights under our anti-VEGF (Vascular Endothelial Growth Factor) antibody program
to an unrelated entity.  In consideration for the rights granted under
our anti-VEGF antibody program, we will receive a non-refundable up-front
license fee of $250,000, of which $100,000 is due immediately and $150,000 is
due within six months of the date of the agreements.  In addition, we
expect to receive an additional $1,000,000 upon delivery of a pre-clinical
development package as defined in the agreements.  We could also
receive up to $16,500,000 in future milestone payments based on the achievement
of all clinical and regulatory milestones for initial product approval plus a
royalty on net sales, as defined in the agreements.  Under the license
agreements, we also granted the unrelated entity a research license in the
ocular field with an option to grant sub-licenses in the ocular
field.  If the unrelated entity exercises this option to grant
sub-licenses in the ocular field, we would receive pre-defined up-front fees,
milestone payments, and a royalty on net sales.  We have determined
that, pursuant to the authoritative guidance for revenue recognition, the
license and the undelivered services (pre-clinical development package and the
option to the ocular field) are not separable and, accordingly, the license and
services are being treated as a single unit of accounting.  Under the
agreements, we determined our obligations under the agreements would be up to a
four year period and therefore, we are recognizing the non-refundable up-front
payments of $250,000 and the additional $1,000,000 associated with other
deliverables, as defined in the agreements, on a straight-line basis over a four
year period.  However, we will continue to reassess the length of our
obligation period, and accordingly, our estimated obligation period may change
based on future events.  Revenue recognized under these agreements is
included in license revenue in the accompanying interim unaudited condensed
consolidated financial statements.  Amounts received prior to
satisfying our revenue recognition criteria are recorded as deferred revenue in
the accompanying interim unaudited condensed consolidated financial
statements.





16


PEREGRINE
PHARMACEUTICALS, INC.
 
 NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2009 (continued)





12.
            COMMITMENTS
      AND CONTINGENCIES





From time
to time, we are involved in legal disputes arising in the normal course of our
business. We are not presently subject to any material litigation or other
dispute nor, to management’s knowledge, is any litigation or other proceeding
threatened against us that collectively is expected to have a material adverse
effect on our consolidated cash flows, financial condition or results of
operations.





13.
            SUBSEQUENT
      EVENTS





On
December 22, 1999, the Company’s Board of Directors granted stock options to
certain employees, consultants, and a current member of the Board of Directors
(“Option Holders”), which are set to expire on December 22, 2009, unless
exercised prior to such date.  On December 9, 2009, the Company’s
Board of Directors deemed it to be in the best interest of the Company to enter
into Option Exercise Forbearance Agreements (the “Agreement”) with the
Option Holders.  Pursuant to the terms of the Agreement, each Option
Holder will receive the same amount in net proceeds as if he or she had
exercised his or her stock options in the open market based on the market price
paid per share equal to the volume weighted average price of the Company’s
common stock sold under its At-the-Market Issuance agreement with Wm Smith &
Co during the period from August 1, 2009 to December 4, 2009 in exchange for
allowing the options to expire unexercised.  Pursuant to the
Agreement, the Company has accrued $382,000 in December
2009.
 
 On
December 9, 2009, the Company’s Board of Directors also authorized a one-time
bonus to seven members of the Company’s management in recognition of their
contributions toward successfully completing discussions for the Company’s
bavituximab clinical program with the Food and Drug Administration in November
2009.  This one-time bonus totals $353,000 in aggregate, of which
$49,000 is payable prior to December 31, 2009 and $304,000 is being deferred
until the earlier of such time as the Board of Directors, in its sole
discretion, shall determine or the termination of an individual’s
employment.


17


ITEM
      2.
            MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS




This Quarterly Report on Form 10-Q
contains “forward-looking statements” within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which represent our projections, estimates,
expectations or beliefs concerning among other things, financial items that
relate to management’s future plans or objectives or to our future economic and
financial performance.  In some cases, you can identify these
statements by terminology such as “may”, “should”, “plans”, “believe”, “will”,
“anticipate”, “estimate”, “expect” “project”, or “intend”, including their
opposites or similar phrases or expressions.  You should be aware that
these statements are projections or estimates as to future events and are
subject to a number of factors that may tend to influence the accuracy of the
statements.  These forward-looking statements should not be regarded
as a representation by the Company or any other person that the events or plans
of the Company will be achieved.  You should not unduly rely on these
forward-looking statements, which speak only as of the date of this Quarterly
Report.  We undertake no obligation to publicly revise any
forward-looking statement to reflect circumstances or events after the date of
this Quarterly Report or to reflect the occurrence of unanticipated events. You
should, however, review the factors and risks we describe in the reports we file
from time to time with the Securities and Exchange Commission (“SEC”) after the
date of this Quarterly Report. Actual results may differ materially from any
forward looking statement.





Company
Overview





We are a clinical stage
biopharmaceutical company that manufactures and develops monoclonal antibodies
for the treatment of cancer and serious viral infections.  We are
advancing three separate clinical programs with our first-in-class compounds
bavituximab and Cotara®.





The below table is a summary of our
clinical trials and the current status of each clinical trial.





Product
              
              Indication
              
              Trial
      Design
              
              Trial
      StatusBavituximab
              
              Solid
      tumor cancers
              
              Phase
      I monotherapy repeat dose safety study designed to treat up to 28
      patients.
              
              June
      2009 – Completion of patient enrollment was announced.Bavituximab
      plus docetaxel
              
              Advanced
      breast cancer
              
              Phase
      II study designed to treat up to 15 patients initially.  Study
      was expanded to treat up to a total of 46 patients based on early
      promising results observed in the initial 15 patients.
              
              May
      2009 – Completion of patient enrollment was announced.
                
                October
      2009 – We announced that 28 of 46 (61%) of all patients enrolled in the
      trial achieved an objective tumor response according to RECIST criteria
      after up to six treatment cycles.
                
                Patient
      treatment and follow-up are continuing and secondary clinical trial
      endpoints are being monitored.Bavituximab
      plus carboplatin and paclitaxel
              
              Advanced
      breast cancer
              
              Phase
      II study designed to treat up to 15 patients initially.  Study
      was expanded to treat up to a total of 46 patients based on early
      promising results observed in the initial 15 patients.
              
              September
      2009 – Completion of patient enrollment was announced.
                
                Patient
      treatment and follow-up are continuing and clinical trial endpoints are
      being monitored.
   18
  Product
              
              Indication
              
              Trial
      Design
              
              Trial
      StatusBavituximab
      plus carboplatin and paclitaxel
              
              Non-small
      cell lung cancer (NSCLC)
              
              Phase
      II study designed to treat up to 21 patients initially. Study was expanded
      to treat up to a total of 49 patients based on early promising results
      observed in the initial 21 patients.
              
              October
      2009 – Completion of patient enrollment was announced in the total 49
      patients.
                October 2009–We announced that median progression-free-survival was 6.5 months
      in the initial 15 patient cohort.
                
                Patient
      treatment and follow-up are continuing and secondary clinical trial
      endpoints are being monitored.Cotara
              
              Glioblastoma
      multiforme (GBM)
              
              Dosimetry
      and dose confirmation study designed to treat up to 12 patients with
      recurrent GBM.
              
              December
      2009 - Completion of patient enrollment was announced.
                Patient
      treatment and follow-up are continuing.  Dosimetry data
      objectives have all been met and final data from this trial is expected in
      calendar year 2010.Cotara
              
              Glioblastoma
      multiforme (GBM)
              
              Phase
      II safety and efficacy study to treat up to 40 patients at first
      relapse.
              
              This
      study is actively enrolling patients and enrollment is over halfway
      completed.Bavituximab
              
              Chronic
      hepatitis C virus (“HCV”) infection co-infected with HIV
              
              Phase
      Ib repeat dose safety study designed to treat up to 24
      patients.
              
              This
      study is actively enrolling
patients.




In addition to our clinical programs,
we are also working on a major government contract.  On June 30, 2008,
we were awarded a five-year contract potentially worth up to $44.4 million to
test and develop bavituximab and an equivalent fully human antibody as potential
broad-spectrum treatments for viral hemorrhagic fever infections.  The
contract was awarded through the Transformational Medical Technologies
Initiative (“TMTI”) of the U.S. Department of Defense's Defense Threat Reduction
Agency (“DTRA”).  As of October 31, 2009, we have recognized
$11,194,000 in government contract revenue under the contract, of which, we
recognized $5,013,000 during fiscal year 2009 and $6,181,000 during the six
months ended October 31, 2009.  This federal contract is expected to
provide us with up to $22.3 million in funding over an initial 24-month
base period, with $19.4 million having been appropriated as of October 31,
2009.  The remainder of the $22.3 million in funding is expected to be
appropriated over the remainder of the two-year base period ending June 29,
2010.  Subject to the progress of the program and budgetary
considerations in future years, the contract can be extended beyond the base
period to cover up to $44.4 million in funding over the five-year contract
period through three one-year option terms.





In addition to our advancing our
clinical pipeline and pre-clinical research under our government contract, we
also operate a wholly owned cGMP (current Good Manufacturing Practices) contract
manufacturing subsidiary, Avid Bioservices, Inc. (“Avid”).  Avid
provides contract manufacturing services for biotechnology and biopharmaceutical
companies on a fee-for-service basis, from pre-clinical drug supplies up through
commercial-scale drug manufacturing.  In addition to these activities,
Avid provides critical services in support of Peregrine’s product pipeline
including manufacture and scale-up of pre-clinical and clinical drug
supplies.




Going
Concern





Our interim unaudited condensed
consolidated financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business.  The financial statements do not
include any adjustments relating to the recoverability of the recorded assets or
the classification of liabilities that may be necessary should it be determined
that we are unable to continue as a going concern.




19




At October 31, 2009, we had $13,599,000
in cash and cash equivalents.  We have expended substantial funds on
the research, development and clinical trials of our product candidates, and
funding the operations of Avid.  As a result, we have historically
experienced negative cash flows from operations since our inception and we
expect the negative cash flows from operations to continue for the foreseeable
future.  Our net losses incurred during the past three fiscal years
ended April 30, 2009, 2008 and 2007 amounted to $16,524,000, $23,176,000, and
$20,796,000, respectively.  Unless and until we are able to generate
sufficient revenues from Avid’s contract manufacturing services and/or from the
sale and/or licensing of our products under development, we expect such losses
to continue for the foreseeable future.





Therefore, our ability to continue our
clinical trials and development efforts is highly dependent on the amount of
cash and cash equivalents on hand combined with our ability to raise additional
capital to support our future operations.





We will need to raise additional
capital through one or more methods, including but not limited to, issuing
additional equity or debt, in order to support the costs of our research and
development programs.





With respect to financing our
operations through the issuance of equity, on July 14, 2009, we filed a shelf
registration statement on Form S-3, File number 333-160572 (“July 2009 Shelf”),
under which we may issue, from time to time, in one or more offerings, shares of
our common stock for gross proceeds of up to $50,000,000.  As of
October 31, 2009, gross proceeds of $44,597,000 remained available under the
July 2009 Shelf.





In addition, on July 14, 2009, we
entered into an At Market Issuance Sales Agreement (“July 2009 AMI Agreement”)
with Wm Smith & Co., pursuant to which we may sell shares of our common
stock through Wm Smith & Co., as agent, in registered transactions from the
above shelf registration statement on Form S-3, File Number 333-160572, for
aggregate gross proceeds of up to $25,000,000.  Shares of common stock
sold under this arrangement are to be sold at market prices.  We are
obligated to pay Wm Smith & Co. a commission equal to 3% of the first
$15,000,000 in gross proceeds from the sale of shares of our common stock and 2%
of the next $10,000,000 in gross proceeds from the sale of shares of common
stock.As of October 31, 2009, we had
sold 1,429,582 shares of common stock at market prices under the July 2009 AMI
Agreement in exchange for net proceeds of $5,240,000.





In addition to the above, we may also
raise additional capital through additional equity offerings, licensing our
products in development, or increasing revenue from our wholly owned subsidiary,
Avid.  While we will continue to explore these potential
opportunities, there can be no assurances that we will be successful in raising
sufficient capital on terms acceptable to us, or at all, or that sufficient
additional revenues will be generated from Avid or under potential licensing or
partnering agreements to complete the research, development, and clinical
testing of our product candidates.  Based on our current projections,
which include projected revenues under signed contracts with existing customers
of Avid, combined with the projected revenues from our government contract and
licensing agreements, we believe we have sufficient cash on hand combined with
amounts expected to be received from Avid customers and from our government
contract and licensing agreements to meet our obligations as they become due
through at least fiscal year 2010 based on current assumptions.  There
are a number of uncertainties associated with our financial projections,
including but not limited to, termination of third party or government
contracts, technical challenges, or possible reductions in funding under our
government contract, which could reduce or delay our future projected
cash-inflows.  In addition, under our Loan Agreement (see Note 7 to
the accompanying interim unaudited condensed consolidated financial statements),
in the event our government contract with the Transformational Medical
Technologies Initiative is terminated or canceled for any reason, including
reasons pertaining to budget cuts by the government or reduction in government
funding for the program, we would be required to set aside cash and cash
equivalents in an amount equal to 80% of the outstanding loan balance in a
restricted collateral account non-accessable by us.  In the event our
projected cash-inflows are reduced or delayed or if we default on a loan
covenant that limits our access to our available cash on hand, we might not have
sufficient capital to operate our business through fiscal year 2010 unless we
raise additional capital.  The uncertainties surrounding our future
cash inflows have raised substantial doubt regarding our ability to continue as
a going concern.




20




Results
of Operations





The following table compares the
interim unaudited condensed consolidated statements of operations for the three
and six-month periods ended October 31, 2009 and 2008.  This table
provides you with an overview of the changes in the interim unaudited condensed
consolidated statements of operations for the comparative periods, which are
further discussed below.





Three
      Months Ended
              October
      31,
            
            
            Six
      Months Ended
              October
      31,2009
            
            
            2008
            
            
            $
      Change
            
            
            2009
            
            
            2008
            
            
            $
      ChangeREVENUES:Contract
      manufacturing revenue
            
            $
            5,308,000
            
            
            $
            983,000
            
            
            $
            4,325,000
            
            
            $
            7,378,000
            
            
            $
            2,176,000
            
            
            $
            5,202,000Government
      contract revenue
            
            
            1,510,000
            
            
            
            958,000
            
            
            
            552,000
            
            
            
            6,181,000
            
            
            
            1,282,000
            
            
            
            4,899,000License
      revenue
            
            
            78,000
            
            
            
            -
            
            
            
            78,000
            
            
            
            87,000
            
            
            
            -
            
            
            
            87,000Total
      revenues
            
            
            6,896,000
            
            
            
            1,941,000
            
            
            
            4,955,000
            
            
            
            13,646,000
            
            
            
            3,458,000
            
            
            
            10,188,000COST
      AND EXPENSES:Cost
      of contract manufacturing
            
            
            3,540,000
            
            
            
            663,000
            
            
            
            2,877,000
            
            
            
            4,613,000
            
            
            
            1,566,000
            
            
            
            3,047,000Research
      and development
            
            
            4,132,000
            
            
            
            4,301,000
            
            
            
            (169,000
            )
            
            
            10,206,000
            
            
            
            8,369,000
            
            
            
            1,837,000Selling,
      general and administrative
            
            
            1,761,000
            
            
            
            1,527,000
            
            
            
            234,000
            
            
            
            3,554,000
            
            
            
            3,233,000
            
            
            
            321,000Total
      cost and expenses
            
            
            9,433,000
            
            
            
            6,491,0000
            
            
            
            2,942,000
            
            
            
            18,373,000
            
            
            
            13,168,000
            
            
            
            5,205,000LOSS
      FROM OPERATIONS
            
            
            (2,537,000
            )
            
            
            (4,550,000
            )
            
            
            2,013,000
            
            
            
            (4,727,000
            )
            
            
            (9,710,000
            )
            
            
            4,983,000OTHER
      INCOME (EXPENSE):Interest
      and other income
            
            
            34,000
            
            
            
            53,000
            
            
            
            (19,000
            )
            
            
            74,000
            
            
            
            128,000
            
            
            
            (54,000
            )Interest
      and other expense
            
            
            (284,000
            )
            
            
            -
            
            
            
            (284,000
            )
            
            
            (562,000
            )
            
            
            (1,000
            )
            
            
            (561,000
            )NET
      LOSS
            
            $
            (2,787,000
            )
            
            $
            (4,497,000
            )
            
            $
            1,710,000
            
            
            $
            (5,215,000
            )
            
            $
            (9,583,000
            )
            
            $
            4,368,000





Results
of operations for interim periods covered by this quarterly report on Form 10-Q
may not necessarily be indicative of results of operations for the full fiscal
year.





Contract Manufacturing
Revenue.





Three and
six months:  The increases in contract manufacturing revenue of
$4,325,000 (or 440%) and $5,202,000 (or 239%) during the three and six months
ended October 31, 2009, respectively, compared to the same periods in the prior
year is primarily due to an increase in manufacturing services provided by Avid
to unrelated entities on a fee-for-service basis including an increase in the
number of completed manufacturing runs compared to the same periods in the prior
year.





We expect
to continue to generate contract manufacturing revenue during the remainder of
the current fiscal year based on the anticipated completion of in-process
customer related projects and the anticipated demand for Avid’s services under
signed and outstanding proposals.


21


Government
Contract Revenue.





Three and
six months:  The increases in government contract manufacturing
revenue of $552,000 (or 58%) and $4,899,000 (or 382%) during the three and six
months ended October 31, 2009, respectively, compared to the same periods in the
prior year is due to an increase in research and development services performed
under our government contract with the Transformational Medical Technologies
Initiative (“TMTI”) of the U.S. Department of Defense's Defense Threat Reduction
Agency (“DTRA”) as pre-clinical and manufacturing activities have increased
compared to the prior year periods.  In addition, since the contract
was signed on June 30, 2008, there was no corresponding revenue generated during
the initial two months of the prior year six-month period ended October 31,
2008.





The
contract was awarded through the TMTI of the U.S. Department of Defense's
DTRA.  The purpose of the contract is to test and develop bavituximab
and an equivalent fully human antibody as potential broad-spectrum treatments
for viral hemorrhagic fever infections.  As of October 31, 2009, we
have recognized $11,194,000 in total government contract revenue under the
contract, of which, we recognized $5,013,000 during fiscal year 2009 and
$6,181,000 during the six months ended October 31, 2009.  The contract
has an initial 24-month base period with up to $22.3 million in funding
with $19.4 million having been appropriated as of October 31,
2009.  We expect to continue to generate government contract revenue
associated with our contract with the TMTI.





The
contract also includes up to three one-year option periods and aggregate funding
under the contract is potentially worth up to $44.4 million over the entire five
year period.  Subject to the progress of the program and budgetary
considerations, the contact can be canceled by the TMTI at any
time.





License
Revenue.





Three and
Six Months:  The increases in license revenue of $78,000 and $87,000
during the three and six months ended October 31, 2009, respectively, compared
to the same periods in the prior year is due to revenue recognized for the same
amounts under a licensing agreement we entered into during July 2009 associated
with our anti-VEGF (Vascular Endothelial Growth Factor) antibody
program.  We expect to continue to recognize license revenue during
the remainder of the current fiscal year in accordance with the terms of the
licensing agreement as further discussed in Note 11, “Licensing Agreements” to
the accompanying interim unaudited condensed consolidated financial
statements.





Cost of Contract
Manufacturing.





Three and
Six Months:  The increases in cost of contract manufacturing of
$2,877,000 and $3,047,000 during the three and six months ended October 31,
2009, respectively, compared to the same periods in the prior year is primarily
related to the current year three and six-month increases in contract
manufacturing revenue.  We expect to continue to incur contract
manufacturing costs during the remainder of the current fiscal year based on the
anticipated completion of customer projects under our current contract
manufacturing agreements.





Research and
Development Expenses.





Three and
Six Months:  The decrease in research and development (“R&D”)
expenses of $169,000 for the three-month period ended October 31, 2009 and the
increase in R&D expenses of $1,837,000 for the six-month period ended
October 31, 2009 compared to the same periods in the prior year is due to the
following changes associated with each of our following platform technologies
under development:


22





Technology
      Platform
            
            R&D
      Expenses –
              Three
      MonthsEnded
      October 31,
            
            
            R&D
      Expenses –
              Six
      MonthsEnded
      October 31,2009
            
            
            2008
            
            
            $
      Change
            
            
            2009
            
            
            2008
            
            
            $
      ChangePhosphatidylserine
      (“PS”)-Targeting (bavituximab)
            
            $
            3,684,000
            
            
            $
            3,292,000
            
            
            $
            392,000
            
            
            $
            8,857,000
            
            
            $
            6,101,000
            
            
            $
            2,756,000TNT
      (Cotara®)
            
            
            330,000
            
            
            
            959,000
            
            
            
            (629,000
            )
            
            
            1,026,000
            
            
            
            2,114,000
            
            
            
            (1,088,000
            )Other
            
            
            118,000
            
            
            
            50,000
            
            
            
            68,000
            
            
            
            323,000
            
            
            
            154,000
            
            
            
            169,000Total
      R&D Expenses
            
            $
            4,132,000
            
            
            $
            4,301,000
            
            
            $
            (169,000
            )
            
            $
            10,206,000
            
            
            $
            8,369,000
            
            
            $
            1,837,000





o
            Phosphatidylserine
      (“PS”)-Targeting Technology Platform (bavituximab)– The increase
      in PS-Targeting program expenses of $392,000 and $2,756,000 during the
      three and six months ended October 31, 2009, respectively, compared to the
      same periods in the prior year is primarily due to an increase in R&D
      expenses directly associated with our efforts to advance the development
      of bavituximab and a fully human antibody as potential broad-spectrum
      treatments for viral hemorrhagic fever infections under our federal
      contract with the TMTI.  The increase in PS-Targeting program
      expenses was further supplemented with an increase in clinical trial and
      related expenses to support the advancement of four clinical trials using
      bavituximab for the treatment of solid tumors and one clinical trial for
      the treatment of HCV patients co-infected with
  HIV.





o
            Tumor Necrosis Therapy (“TNT”)
      Technology Platform (Cotara®) –The decrease in TNT program
      expenses of $629,000 and $1,088,000 during the three and six months ended
      October 31, 2009, respectively, compared to the same periods in the prior
      year is primarily due to a decrease in payroll and related expenses and
      manufacturing expenses associated with a decrease in our in-house TNT
      research and development efforts as our in-house research efforts were
      focused primarily on the development of our PS-Targeting
      program.  The decrease in TNT program expenses was further
      supplemented with a decrease in clinical trial expenses primarily
      associated with the timing of patient enrollment of our two ongoing
      Cotara® clinical trials for the treatment of brain
  cancer.





o
            Other R&D programs
      – The increase in our other R&D program expenses of $68,000 and
      $169,000 during the three and six months ended October 31, 2009 compared
      to the same periods in the prior year is primarily due to an increase in
      R&D expenses associated with increased development efforts associated
      with the advancement of our R84 antibody that was subsequently licensed to
      a unaffiliated entity in July 2009.




Looking
beyond the current fiscal year, it is extremely difficult for us to reasonably
estimate all future research and development costs associated with each of our
technologies due to the number of unknowns and uncertainties associated with
pre-clinical and clinical trial development.  These unknown variables
and uncertainties include, but are not limited to:





●
            the
      uncertainty of future clinical trial
results;


●
            the
      uncertainty of the ultimate number of patients to be treated in any
      current or future clinical trial;


●
            the
      uncertainty of the U.S. Food and Drug Administration allowing our studies
      to move forward from Phase I clinical studies to Phase II and Phase III
      clinical studies;


●
            the
      uncertainty of the rate at which patients are enrolled into any current or
      future study.  Any delays in clinical trials could significantly
      increase the cost of the study and would extend the estimated completion
      dates;


●
            the
      uncertainty of terms related to potential future partnering or licensing
      arrangements;


●
            the
      uncertainty of protocol changes and modifications in the design of our
      clinical trial studies, which may increase or decrease our future costs;
      and


●
            The
      uncertainty of our ability to raise additional capital to support our
      future research and development efforts beyond our fiscal year
      2010.




23




We or our
potential partners will need to do additional development and clinical testing
prior to seeking any regulatory approval for commercialization of our product
candidates as all of our products are in discovery, pre-clinical or clinical
development.  Testing, manufacturing, commercialization, advertising,
promotion, exporting, and marketing, among other things, of our proposed
products are subject to extensive regulation by governmental authorities in the
United States and other countries.  The testing and approval process
requires substantial time, effort, and financial resources, and we cannot
guarantee that any approval will be granted on a timely basis, if at
all.  Companies in the pharmaceutical and biotechnology industries
have suffered significant setbacks in conducting advanced human clinical trials,
even after obtaining promising results in earlier
trials.  Furthermore, the United States Food and Drug Administration
may suspend clinical trials at any time on various grounds, including a finding
that the subjects or patients are being exposed to an unacceptable health
risk.  Even if regulatory approval of a product is granted, such
approval may entail limitations on the indicated uses for which it may be
marketed.  Accordingly, we or our potential partners may experience
difficulties and delays in obtaining necessary governmental clearances and
approvals to market our products.





Selling, General and Administrative
Expenses.





Selling, general and administrative
expenses consist primarily of payroll and related expenses, director fees, legal
and accounting fees, share-based compensation expense, investor and public
relation fees, insurance, and other expenses relating to the general management,
administration, and business development activities of the Company.





Three and Six Months:  The
increases in selling, general and administrative expenses of $234,000 and
$321,000 during the three and six months ended October 31, 2009, respectively,
compared to the same periods in the prior year is primarily due to an increase
in payroll and related expenses associated with an increase in general and
administrative employee headcount to support our government contract and Avid’s
expanding operations combined with an increase in consulting fees associated
with business development activities.  These increases in selling,
general and administrative expenses were offset by current year period decreases
in non-cash share-based compensation expense.





Interest and
Other Income.





Three and Six Months:  The
decreases in interest and other income of $19,000 and $54,000 during the three
and six months ended October 31, 2009, respectively, compared to the same
periods in the prior year is primarily due to decreases in interest income as a
result of lower prevailing interest rates during the current year compared to
the prior year.





Interest and
Other Expense.





Three and Six Months:  The
increases in interest and other expense of $284,000 and $561,000 during the
three and six months ended October 31, 2009, respectively, compared to the same
periods in the prior year is primarily due to increases in interest expense and
non-cash interest expense.  During the current year three and
six-month periods, interest expense increased $138,000 and $289,000,
respectively, primarily associated with the $5,000,000 term loan we entered into
in December 2008.  In addition, we saw current year three and
six-month period increases in non-cash interest expense of $115,000 and
$241,000, respectively, associated with the amortization of the fair value of
detachable warrants and related debt issuance costs.  Since the term
loan was entered into during December 2008, there were no corresponding amounts
during the same periods in the prior year.




24




Critical
Accounting Policies





The preparation and presentation of financial statements
in conformity with accounting principles generally accepted in the United
States, or GAAP, requires us to establish policies and to make estimates and
assumptions that affect the amounts reported in ourinterim
unauditedcondensed consolidated financial
statements.In our judgment, our critical accounting policies,
estimates and assumptions have the greatest potential impact on our consolidated
financial statements. We evaluate our estimates and judgments on an
ongoing basis.  We base our estimates on historical experience and on
assumptions that we believe to be reasonable under the
circumstances.  Our experience and assumptions form the basis for our
judgments about the carrying value of assets and liabilities that are not
readily apparent from other sources.  Actual results may vary from
what we anticipate and different assumptions or estimates about the future could
change our reported results.  We believe the following critical
accounting policy below updates, and should be considered in addition to, the
critical accounting policies previously disclosed by us in Part II, Item 7 of
our Annual Report for the fiscal year ended April 30, 2009.





Revenue
Recognition





We
currently derive revenue from the following three sources:  (i)
contract manufacturing services provided by Avid, (ii) licensing revenues
related to agreements associated with Peregrine’s technologies under
development, and (iii) government contract revenues for services provided under
a government contract awarded to Peregrine through the Transformational Medical
Technologies Initiative (“TMTI”) of the U.S. Department of Defense’s Defense
Threat Reduction Agency (“DTRA”).





We
recognize revenue in accordance with the authoritative guidance for revenue
recognition.  We recognize revenue when all of the following criteria
are met: (i) persuasive evidence of an arrangement exists, (ii) delivery (or
passage of title) has occurred or services have been rendered, (iii) the
seller's price to the buyer is fixed or determinable, and (iv) collectibility is
reasonably assured.





We also
comply with the authoritative guidance for revenue recognition regarding
arrangements with multiple deliverables.  We recognize revenue for
delivered elements only when the delivered element has stand-alone value and we
have objective and reliable evidence of fair value for each undelivered
element.  If the fair value of any undelivered element included in a
multiple element arrangement cannot be objectively determined, the arrangement
would then be accounted for as a single unit of accounting, and revenue is
recognized over the estimated period of when the performance obligation(s) are
performed.





In
addition, we also follow the authoritative guidance when reporting revenue as
gross when we act as a principal versus reporting revenue as net when we act as
an agent.  For transactions in which we act as a principal, have
discretion to choose suppliers, bear credit risk and performs a substantive part
of the services, revenue is recorded at the gross amount billed to a customer
and costs associated with these reimbursements are reflected as a component of
cost of sales for contract manufacturing services and research and development
expense for services provided under our contract with the TMTI.





Contract Manufacturing
Revenue – Revenue associated with contract manufacturing services
provided by Avid are recognized once the service has been rendered and/or upon
shipment (or passage of title) of the product to the customer.  On
occasion, we recognize revenue on a “bill-and-hold” basis in accordance with the
authoritative guidance.  Under “bill-and-hold” arrangements, revenue
is recognized once the product is complete and ready for shipment, title and
risk of loss has passed to the customer, management receives a written request
from the customer for “bill-and-hold” treatment, the product is segregated from
other inventory, and no further performance obligations exist.





Any
amounts received prior to satisfying our revenue recognition criteria are
recorded as deferred revenue in the accompanying interim
unaudited condensed consolidated financial statements.  We also
record a provision for estimated contract losses, if any, in the period in which
they are determined.




25




License Revenue – Revenue
associated with licensing agreements primarily consist of non-refundable upfront
license fees, non-refundable annual license fees and milestone
payments.





Non-refundable
upfront license fees received under license agreements, whereby continued
performance or future obligations are considered inconsequential to the relevant
license technology, are recognized as revenue upon delivery of the
technology.  If a license agreement has multiple element arrangements,
we analyze and determine whether the deliverables, which often include
performance obligations, can be separated or whether they must be accounted for
as a single unit of accounting in accordance with the authoritative
guidance.  Under multiple element arrangements, we recognize upfront
license payments as revenue upon delivery of the license only if the license has
stand-alone value and the fair value of the undelivered performance obligations
can be determined.  If the fair value of the undelivered performance
obligations can be determined, such obligations would then be accounted for
separately as performed.  If the license is considered to either not
have stand-alone value or have stand-alone value but the fair value of any of
the undelivered performance obligations cannot be determined, the arrangement
would then be accounted for as a single unit of accounting and the license
payments and payments for performance obligations are recognized as revenue over
the estimated period of when the performance obligations are
performed.  If we determine that an arrangement should be accounted
for as a single unit of accounting, we must determine the period over which the
performance obligations will be performed and revenue will be
recognized.  Revenue recognized under licensing agreements is limited
to the lesser of the cumulative amount of payments received or the cumulative
amount of revenue earned, as determined using the straight-line method, as of
the period ending date.  Amounts received prior to satisfying the
above revenue recognition criteria are recorded as deferred revenue in the
accompanying interim unaudited condensed consolidated financial
statements.





Non-refundable
annual license fees are recognized as revenue on the anniversary date of the
agreement in accordance with the authoritative guidance for revenue
recognition.





Milestone
payments are recognized as revenue upon the achievement of the specified
milestone, provided that (i) the milestone event is substantive in nature and
the achievement of the milestone is not reasonably assured at the inception of
the agreement, (ii) the fees are non-refundable, and (3) there is no continuing
performance obligations associated with the milestone payment.  Any
milestone payments received prior to satisfying these revenue recognition
criteria are recorded as deferred revenue in the accompanying interim unaudited
condensed consolidated financial statements.





Government Contract Revenue –
On June 30, 2008, we were awarded a five-year contract potentially worth up to
$44.4 million to test and develop bavituximab and an equivalent fully human
antibody as potential broad-spectrum treatments for viral hemorrhagic fever
infections.  The initial contract was awarded through the
Transformational Medical Technologies Initiative (“TMTI”) of the U.S. Department
of Defense's Defense Threat Reduction Agency (“DTRA”).  This federal
contract is expected to provide us with up to $22.3 million in funding over
a 24-month base period, with $19.4 million having been appropriated as of
October 31, 2009.  The remainder of the $22.3 million in funding is
expected to be appropriated over the remainder of the two-year base period
ending June 29, 2010.  Subject to the progress of the program and
budgetary considerations in future years, the contract can be extended beyond
the base period to cover up to $44.4 million in funding over the five-year
contract period through three one-year option terms.





Our
contract with the TMTI is a “cost-plus-fixed-fee” contract whereby we recognize
government contract revenue in accordance with the revenue recognition criteria
noted above and in accordance with the authoritative guidance specific to
federal government contracts.  Reimbursable costs under the contract
primarily include direct labor, subcontract costs, materials, equipment, travel,
indirect costs, and a fixed fee for our efforts.  Revenue under this
“cost-plus-fixed-fee” contract is generally recognized as we perform the
underlying research and development activities.  However, progress
billings and/or payments associated with services that are billed and/or
received in a manner that is not consistent with the timing of when services are
performed are classified as deferred government contract revenue in the
accompanying interim unaudited condensed consolidated financial statements
and are recognized as revenue upon satisfying our revenue recognition
criteria.





26





Liquidity
and Capital Resources





At October 31, 2009, we had $13,599,000
in cash and cash equivalents.  We have expended substantial funds on
the research, development and clinical trials of our product candidates, and
funding the operations of Avid.  As a result, we have historically
experienced negative cash flows from operations since our inception and we
expect to continue to experience negative cash flows from operations for the
foreseeable future.  Our net losses incurred during the past three
fiscal years ended April 30, 2009, 2008 and 2007 amounted to $16,524,000,
$23,176,000, and $20,796,000, respectively.  Unless and until we are
able to generate sufficient revenues from Avid’s contract manufacturing services
and/or from the sale and/or licensing of our products under development, we
expect such losses to continue for the foreseeable future.





Therefore, our ability to continue our
clinical trials and development efforts is highly dependent on the amount of
cash and cash equivalents on hand combined with our ability to raise additional
capital to support our future operations.  As discussed in Note 2 to
the accompanying interim unaudited condensed consolidated financial
statements, there exists substantial doubt regarding our ability to continue as
a going concern.





We will need to raise additional
capital through one or more methods, including but not limited to, issuing
additional equity or debt, in order to support the costs of our research and
development programs.





With respect to financing our
operations through the issuance of equity, on July 14, 2009, we filed a shelf
registration statement on Form S-3, File number 333-160572 (“July 2009 Shelf”),
under which we may issue, from time to time, in one or more offerings, shares of
our common stock for gross proceeds of up to $50,000,000.  As of
October 31, 2009, gross proceeds of $44,597,000 remained available under the
July 2009 Shelf.





In addition, on July 14, 2009, we
entered into an At Market Issuance Sales Agreement (“July 2009 AMI Agreement”)
with Wm Smith & Co., pursuant to which we may sell shares of our common
stock through Wm Smith & Co., as agent, in registered transactions from the
above shelf registration statement on Form S-3, File Number 333-160572, for
aggregate gross proceeds of up to $25,000,000.  Shares of common stock
sold under this arrangement are to be sold at market prices.  We are
obligated to pay Wm Smith & Co. a commission equal to 3% of the first
$15,000,000 in gross proceeds from the sale of shares of our common stock and 2%
of the next $10,000,000 in gross proceeds from the sale of shares of common
stock.  As of October 31, 2009, we had sold 1,429,582 shares of common
stock at market prices under the July 2009 AMI Agreement in exchange for net
proceeds of $5,240,000.





In addition to the above, we may also
raise additional capital through additional equity offerings, licensing our
products in development, or increasing revenue from our wholly owned subsidiary,
Avid.  While we will continue to explore these potential
opportunities, there can be no assurances that we will be successful in raising
sufficient capital on terms acceptable to us, or at all, or that sufficient
additional revenues will be generated from Avid or under potential licensing or
partnering agreements to complete the research, development, and clinical
testing of our product candidates.  Based on our current projections,
which include projected revenues under signed contracts with existing customers
of Avid, combined with the projected revenues from our government contract and
licensing agreements, we believe we have sufficient cash on hand combined with
amounts expected to be received from Avid customers and from our government
contract and licensing agreements to meet our obligations as they become due
through at least fiscal year 2010 based on current assumptions.  There
are a number of uncertainties associated with our financial projections,
including but not limited to, termination of third party or government
contracts, technical challenges, or possible reductions in funding under our
government contract, which could reduce or delay our future projected
cash-inflows.  In addition, under our Loan Agreement (see Note 7 to
the accompanying interim unaudited condensed consolidated financial statements),
in the event our government contract with the Transformational Medical
Technologies Initiative is terminated or canceled for any reason, including
reasons pertaining to budget cuts by the government or reduction in government
funding for the program, we would be required to set aside cash and cash
equivalents in an amount equal to 80% of the outstanding loan balance in a
restricted collateral account non-accessable by us.  In the event our
projected cash-inflows are reduced or delayed or if we default on a loan
covenant that limits our access to our available cash on hand, we might not have
sufficient capital to operate our business through fiscal year 2010 unless we
raise additional capital.  The uncertainties surrounding our future
cash inflows have raised substantial doubt regarding our ability to continue as
a going concern.




27





Significant
components of the changes in cash flows from operating, investing, and financing
activities for the six months ended October 31, 2009 compared to the same prior
year period are as follows:





Cash Used In Operating
Activities.  Cash used in operating activities is primarily
driven by changes in our net loss.  However, cash used in operating
activities generally differs from our reported net loss as a result of non-cash
operating expenses or differences in the timing of cash flows as reflected in
the changes in operating assets and liabilities.  During the six
months ended October 31, 2009, cash used in operating activities increased
$650,000 to $7,402,000 compared to $6,752,000 for the six months ended October
31, 2008.  This increase in net cash used in operating activities was
due to a net change in operating assets and payment or reduction of liabilities
in the aggregate amount of $5,105,000 offset by a decrease of $4,455,000 in our
net loss reported in the current six-month period after taking into
consideration non-cash operating expenses.  The increase in the net
change in operating assets and payment or reduction of liabilities was primarily
due to net changes associated with receivables, inventories, accounts payable,
deferred revenue and customer deposits.  The decrease in our current
six-month period net loss was primarily due to current period increases in
contract manufacturing revenue and government contract revenue offset by
increases in cost of contract manufacturing, research and development expenses
and selling, general and administrative expenses.





The
changes in operating activities as a result of non-cash operating expenses or
differences in the timing of cash flows as reflected by the changes in operating
assets and liabilities are as follows:




SIX
      MONTHS ENDEDOctober
      31,
                2009
              
              
              October
      31,
                2008Net
      loss, as reported
              
              $
              (5,215,000
              )
              
              $
              (9,583,000
              )Less
      non-cash expenses and adjustments to net loss:Depreciation
      and amortization
              
              
              228,000
              
              
              
              260,000Share-based
      compensation
              
              
              320,000
              
              
              
              493,000Amortization
      of discount on notes payable and debt issuance costs
              
              
              241,000
              
              
              
              -Loss
      on disposal of property
              
              
              51,000
              
              
              
              -Net
      cash used in operating activities before changes in operating assets and
      liabilities
              
              $
              (4,375,000
              )
              
              $
              (8,830,000
              )Net
      change in operating assets and liabilities
              
              $
              (3,027,000
              )
              
              $
              2,078,000Net
      cash used in operating activities
              
              $
              (7,402,000
              )
              
              $
              (6,752,000
              )





Cash Used In Investing
Activities.  Net cash used in investing activities decreased
$23,000 to $134,000 for the six months ended October 31, 2009 compared to net
cash used of $157,000 for the six months ended October 31, 2008.  This
decrease was due to a decrease in property acquisitions of $83,000 offset with a
$60,000 increase in other assets primarily associated with deposits and/or
progress payments for certain laboratory and computer equipment.





28





Cash Provided By (Used In) Financing
Activities.  Net cash provided by financing activities
increased $11,128,000 to $11,117,000 for the six months ended October 31, 2009
compared to net cash used of $11,000 for the six months ended October 31,
2008.  During the six months ended October 31, 2009, we received net
proceeds under two separate At Market Issuance Sales Agreements, whereby we sold
3,284,754 shares of our common stock for net proceeds of $11,827,000, net of
commissions and issuance costs of $469,000.  This amount was
supplemented with net proceeds of $85,000 from the exercise of stock
options.  In addition, principal payments on notes payable and capital
leases were $795,000 for the six months ended October 31, 2009 compared to
capital lease principal payments of $11,000 paid in the same prior year period,
or an increase of $784,000.  The increase pertains to principal
payments made on our $5 million term loan we secured in December
2008.





Commitments





At October 31, 2009, we had no material
capital commitments.





ITEM
      3.
            QUANTITATIVE AND
      QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Changes in United States interest rates
would affect the interest earned on our cash and cash equivalents and interest
expense on our outstanding notes payable, however, they would not have an affect
on our capital leases, which have fixed interest rates and terms.





Based on our overall cash and cash
equivalents interest rate exposure at October 31, 2009, a near-term change in
interest rates, based on historical movements, would not have a material adverse
effect on our financial position or results of operations.





At October 31, 2009, we had an
outstanding notes payable balance of $4,217,000 under a loan and security
agreement, which bear interest at a monthly variable rate equal to the then
current thirty (30) day LIBOR rate (set at a floor of 3%) plus 9%, which may
expose us to market risk due to changes in interest rates.  However,
based on current LIBOR interest rates, which are currently under the minimum
floor set at 3% under our loan and security agreement and based on historical
movements in LIBOR rates, we believe a near-term change in interest rates would
not have a material adverse effect on our financial position or results of
operations.


ITEM
      4.
              CONTROLS AND
      PROCEDURES





The Company maintains disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are
designed to ensure that information required to be disclosed in its reports
filed under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to our management, including its
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.  In designing and
evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.




29




The Company carried out an evaluation,
under the supervision and with the participation of management, including its
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of its disclosure controls and procedures as of October 31,
2009, the end of the period covered by this Quarterly Report.  Based
on that evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer concluded that its disclosure controls and procedures were effective at
the reasonable assurance level as of October 31, 2009.





There were no significant changes in
the Company’s internal controls over financial reporting, during the quarter
ended October 31, 2009, that have materially affected, or are reasonably likely
to materially affect, the Company’s internal controls over financial
reporting.





PART II OTHER
INFORMATION




ITEM
      1.
            LEGAL
      PROCEEDINGS.





In the
ordinary course of business, we are at times subject to various legal
proceedings and disputes.  We currently are not aware of any such
legal proceedings or claim that we believe will have, individually or in the
aggregate, a material adverse effect on our business, operating results or cash
flows.








ITEM
      1A.
            RISK
      FACTORS





The following risk factors update, and
should be considered in addition to, the risk factors previously disclosed by us
in Part 1, Item 1A of our Annual Report for the fiscal year ended April 30,
2009.





If
We Cannot Obtain Additional Funding, Our Product Development And
Commercialization Efforts May Be Reduced Or Discontinued And We May Not Be Able
To Continue Operations.





At
October 31, 2009, we had $13,599,000 in cash and cash equivalents.  We
have expended substantial funds on the research, development and clinical trials
of our product candidates, and funding the operations of Avid.  As a
result, we have historically experienced negative cash flows from operations
since our inception and we expect to continue to experience negative cash flows
from operations for the foreseeable future.  Our net losses incurred
during the past three fiscal years ended April 30, 2009, 2008 and 2007 amounted
to $16,524,000, $23,176,000, and $20,796,000, respectively.  Unless
and until we are able to generate sufficient revenues from Avid’s contract
manufacturing services and/or from the sale and/or licensing of our products
under development, we expect such losses to continue for the foreseeable
future.





Therefore, our ability to continue our
clinical trials and development efforts is highly dependent on the amount of
cash and cash equivalents on hand combined with our ability to raise additional
capital to support our future operations.  As discussed in Note 2 to
the accompanying interim unaudited condensed consolidated financial statements,
there exists substantial doubt regarding our ability to continue as a going
concern.





We will
need to raise additional capital through one or more methods, including but not
limited to, issuing additional equity or debt, in order to support the costs of
our research and development programs.





With
respect to financing our operations through the issuance of equity, on July 14,
2009, we filed a shelf registration statement on Form S-3, File number
333-160572 (“July 2009 Shelf”), under which we may issue, from time to time, in
one or more offerings, shares of our common stock for gross proceeds of up to
$50,000,000.  As of October 31, 2009, gross proceeds of up to
$44,597,000 remained available under the July 2009 Shelf.




30




In addition, on July 14, 2009, we
entered into an At Market Issuance Sales Agreement (“July 2009 AMI Agreement”)
with Wm Smith & Co., pursuant to which we may sell shares of our common
stock through Wm Smith & Co., as agent, in registered transactions from the
above shelf registration statement on Form S-3, File Number 333-160572, for
aggregate gross proceeds of up to $25,000,000.  Shares of common stock
sold under this arrangement are to be sold at market prices.  We are
obligated to pay Wm Smith & Co. a commission equal to 3% of the first
$15,000,000 in gross proceeds from the sale of shares of our common stock and 2%
of the next $10,000,000 in gross proceeds from the sale of shares of common
stock.  As of October 31, 2009, we had sold 1,429,582 shares of common
stock at market prices under the July 2009 AMI Agreement in exchange for net
proceeds of $5,240,000.





In addition to the above, we may also
raise additional capital through additional equity offerings, licensing our
products in development, or increasing revenue from our wholly owned subsidiary,
Avid. While we will continue to explore these potential opportunities, there can
be no assurances that we will be successful in raising sufficient capital on
terms acceptable to us, or at all, or that sufficient additional revenues will
be generated from Avid or under potential licensing or partnering agreements to
complete the research, development, and clinical testing of our product
candidates.  Based on our current projections, which include projected
revenues under signed contracts with existing customers of Avid, combined with
the projected revenues from our government contract and licensing agreements, we
believe we have sufficient cash on hand combined with amounts expected to be
received from Avid customers and from our government contract and licensing
agreements to meet our obligations as they become due through at least fiscal
year 2010 based on current assumptions.  There are a number of
uncertainties associated with our financial projections, including but not
limited to, termination of third party or government contracts, technical
challenges, or possible reductions in funding under our government contract,
which could reduce or delay our future projected cash-inflows.  In
addition, under our Loan Agreement (see Note 7 to the accompanying interim
unaudited condensed consolidated financial statements), in the event our
government contract with the Transformational Medical Technologies Initiative is
terminated or canceled for any reason, including reasons pertaining to budget
cuts by the government or reduction in government funding for the program, we
would be required to set aside cash and cash equivalents in an amount equal to
80% of the outstanding loan balance in a restricted collateral account
non-accessable by us.  In the event our projected cash-inflows are
reduced or delayed or if we default on a loan covenant that limits our access to
our available cash on hand, we might not have sufficient capital to operate our
business through fiscal year 2010 unless we raise additional
capital.  The uncertainties surrounding our future cash inflows have
raised substantial doubt regarding our ability to continue as a going
concern.





Our Outstanding
Indebtedness To MidCap Financial LLC and BlueCrest Capital Finance, L.P. Imposes
Certain Restrictions On How We Conduct Our Business.  In Addition, All
Of Our Assets, Including Our Intellectual Property, Are Pledged To Secure This
Indebtedness.  If We Fail To Meet Our Obligations To The Lenders, Our
Payment Obligations May Be Accelerated And The Collateral Securing The Debt May
Be Sold To Satisfy These Obligations.





Pursuant
to a Loan and Security Agreement dated December 9, 2008 (the “Loan
Agreement”), MidCap Financial LLC and BlueCrest Capital Finance, L.P. (the
“Lenders”) have provided us a three-year, $5,000,000 working capital loan, which
funded on December 19, 2008, of which, the principal amount of $4,217,000 is
owed to the Lenders as of October 31, 2009.  As collateral to secure
our repayment obligations to the Lenders, we and our wholly-owned subsidiary,
Avid Bioservices, Inc., have granted the Lenders a first priority security
interest in generally all of our respective assets, including our intellectual
property.





The
Loan Agreement also contains various covenants that restrict our operating
flexibility.  Pursuant to the Loan Agreement, we may not, among other
things:





●
            incur additional indebtedness, except for certain
      permitted indebtedness. Permitted indebtedness is defined to include
      accounts payable incurred in the ordinary course of business, leases of
      equipment or property incurred in the ordinary course of business not to
      exceed in the aggregate $100,000 outstanding at any one
      time;




31




●
            incur additional liens on any of our assets except
      for certain permitted liens including but not limited to non-exclusive
      licenses of our intellectual property in the ordinary course of business
      and exclusive licenses of intellectual property provided they are approved
      by our board of directors and do not involve bavituximab or
      Cotara;


●
            make any payment of subordinated debt, except as
      permitted under the applicable subordination or intercreditor
      agreement;


●
            merge with or acquire any other entity, or sell
      all or substantially all of our assets, except as permitted under the Loan
      Agreement;


●
            pay dividends (other than stock dividends) to our
      shareholders;


●
            redeem any outstanding shares of our common stock
      or any outstanding options or warrants to purchase shares of our common
      stock except in connection with the repurchase of stock from former
      employees and consultants pursuant to share repurchase agreements provided
      such repurchases do not exceed $50,000 in the aggregate during any
      twelve-month period;


●
            enter into transactions with affiliates other than
      on arms-length terms; and


●
            make any change in any of our business objectives,
      purposes and operations which has or could be reasonably expected to have
      a material adverse effect on our
  business.





These
provisions could have important consequences for us, including (i) making
it more difficult for us to obtain additional debt financing from another
lender, or obtain new debt financing on terms favorable to us, because a new
lender will have to be willing to be subordinate to the lenders,
(ii) causing us to use a portion of our available cash for debt repayment
and service rather than other perceived needs and/or (iii) impacting our
ability to take advantage of significant, perceived business
opportunities.  Our failure to timely repay our obligations under the
Loan Agreement or meet the covenants set forth in the Loan Agreement could give
rise to a default under the agreement.  In the event of an uncured
default, the Loan Agreement provides that all amounts owed to the Lender may be
declared immediately due and payable and the Lenders have the right to enforce
their security interest in the assets securing the Loan Agreement.  In
such event, the Lenders could take possession of any or all of our assets in
which they hold a security interest, and dispose of those assets to the extent
necessary to pay off our debts, which would materially harm our
business.





In
The Event Our Contract With The TMTI Is Terminated, Our Loan Requires Us To
Place A Significant Amount Of Our Cash In A Restricted Bank
Account.





Under the
terms of the Loan Agreement, if our contract with the Transformational Medical
Technologies Initiative (“TMTI”) of the U.S. Department of Defense's Defense
Threat Reduction Agency (“DTRA”) is terminated while any principal balance of
the loan is outstanding, we will be required to at all times thereafter maintain
cash and cash equivalents in an amount of at least eighty percent (80%) of the
then outstanding principal balance of the loan in a restricted account over
which we will not be permitted to make withdrawals or otherwise exercise
control.





We
Have Had Significant Losses And We Anticipate Future Losses.





We have
incurred net losses in most fiscal years since we began operations in
1981.  The following table represents net losses incurred for the six
months ended October 31, 2009 and for each of the past three fiscal
years:




Net
      LossSix
      months ended October 31, 2009 (unaudited)
              
              $
              5,215,000Fiscal
      Year 2009
              
              $
              16,524,000Fiscal
      Year 2008
              
              $
              23,176,000Fiscal
      Year 2007
              
              $
              20,796,000
  32


As of
October 31, 2009, we had an accumulated deficit of
$252,575,000.  While we expect to continue to generate revenues from
Avid’s contract manufacturing services, in order to achieve and sustain
profitable operations, we must successfully develop and obtain regulatory
approval for our products, either alone or with others, and must also
manufacture, introduce, market and sell our products.  The costs
associated with clinical trials and product manufacturing is very expensive and
the time frame necessary to achieve market success for our products is long and
uncertain.  We do not expect to generate product or royalty revenues for at least the next two years, and we may
never generate product and/or royalty revenues sufficient to become profitable
or to sustain profitability.





The Sale Of
Substantial Shares Of Our Common Stock May Depress Our Stock Price.





As of
October 31, 2009, there were 48,869,563 shares of our common stock
outstanding.  Substantially all of these
shares are eligible for trading in the public market, subject in some cases to
volume and other limitations.  The market price of our common stock
may decline if our common stockholders sell a large number of shares of our
common stock in the public market, or the market perceives that such sales may
occur.





We could also issue up to 6,274,693
additional shares of our common stock that are reserved for future issuance
under our stock option plans and for outstanding warrants, as further described
in the following table:





Number
      of Shares
              of
      Common Stock Reserved For IssuanceCommon
      shares reserved for issuance upon exercise of outstanding options or
      reserved for future option grants
              under our stock incentive plans
            
            
            5,936,283Common
      shares issuable upon exercise of outstanding warrants
            
            
            338,410Total
            
            
            6,274,693





In addition, the above table does not
include shares of common stock that we have available to issue from the
registration statement we filed during July 2009 on Form S-3, File number
333-160572 (“July 2009 Shelf”), under which we may issue, from time to time, in
one or more offerings, shares of our common stock for gross proceeds of up to
$50,000,000.   As of October 31, 2009, gross proceeds of up to
$44,597,000 remained available under the July 2009 Shelf.





Of the
total options and warrants outstanding as of October 31, 2009, 1,216,002 would
be considered dilutive to stockholders because we would receive an amount per
share which is less than the market price of our common stock at October 31,
2009.





In addition, we will need to raise
substantial additional capital in the future to fund our
operations.  If we raise additional funds by issuing equity
securities, the market price of our securities may decline and our existing
stockholders may experience significant dilution.





Current
Economic Conditions And Capital Markets Are In A Period Of Disruption And
Instability Which Could Adversely Affect Our Ability To Access The Capital
Markets, And Thus Adversely Affect Our Business And Liquidity.





The
current economic conditions and financial crisis have had, and will continue to
have, a negative impact on our ability to access the capital markets, and thus
have a negative impact on our business and liquidity.  The shortage of
liquidity and credit combined with the substantial losses in worldwide equity
markets could lead to an extended worldwide recession.  We may face
significant challenges if conditions in the capital markets do not
improve.  Our ability to access the capital markets has been and
continues to be severely restricted at a time when we need to access such
markets, which could have a negative impact on our business plans, including our
clinical trial programs and other research and development
activities.  Even if we are able to raise capital, it may not be at a
price or on terms that are favorable to us.  We cannot predict the
occurrence of future disruptions or how long the current conditions may
continue.





33





Our
Highly Volatile Stock Price And Trading Volume May Adversely Affect The
Liquidity Of Our Common Stock.





The
market price of our common stock and the market prices of securities of
companies in the biotechnology sector have generally been highly volatile and
are likely to continue to be highly volatile.





The
following table shows the high and low sales price and trading volume of our
common stock for each quarter in the three fiscal years ended April 30, 2009,
and our two fiscal quarters ended October 31, 2009:





Common
      Stock
              Sales
      Price
            
            Common
      Stock Daily Trading Volume
              (000’s
      omitted)High
            
            Low
            
            High
            
            LowFiscal
      Year 2010Quarter
      Ended October 31, 2009
            
            $4.74
            
            $2.74
            
            2,243
            
            
            64Quarter
      Ended July 31, 2009
            
            $5.65
            
            $1.85
            
            7,345
            
            
            39Fiscal
      Year 2009Quarter
      Ended April 30, 2009
            
            $2.60
            
            $1.52
            
            702
            
            
            14Quarter
      Ended January 31, 2009
            
            $2.35
            
            $1.10
            
            260
            
            
            19Quarter
      Ended October 31, 2008
            
            $2.00
            
            $1.15
            
            263
            
            
            15Quarter
      Ended July 31, 2008
            
            $2.65
            
            $1.54
            
            599
            
            
            21Fiscal
      Year 2008Quarter
      Ended April 30, 2008
            
            $3.63
            
            $1.75
            
            769
            
            
            26Quarter
      Ended January 31, 2008
            
            $3.25
            
            $1.75
            
            622
            
            
            28Quarter
      Ended October 31, 2007
            
            $3.95
            
            $2.70
            
            526
            
            
            34Quarter
      Ended July 31, 2007
            
            $7.00
            
            $3.60
            
            4,331
            
            
            47Fiscal
      Year 2007Quarter
      Ended April 30, 2007
            
            $6.30
            
            $4.30
            
            1,243
            
            
            82Quarter
      Ended January 31, 2007
            
            $6.95
            
            $5.45
            
            860
            
            
            41Quarter
      Ended October 31, 2006
            
            $7.42
            
            $5.60
            
            752
            
            
            55Quarter
      Ended July 31, 2006
            
            $9.95
            
            $6.50
            
            4,758
            
            
            86





The market price of our common stock
may be significantly impacted by many factors, including, but not limited
to:





·
            announcements
      of technological innovations or new commercial products by us or our
      competitors;


·
            publicity
      regarding actual or potential clinical trial results relating to products
      under development by us or our
competitors;


·
            our
      financial results or that of our competitors, including our abilities to
      continue as a going concern;


·
            the offering and sale of shares of our common
      stock at a discount under an equity
  transaction;


·
            changes
      in our capital structure;


·
            published
      reports by securities analysts;


·
            announcements
      of licensing agreements, joint ventures, strategic alliances, and any
      other transaction that involves the sale or use of our technologies or
      competitive technologies;


·
            developments
      and/or disputes concerning our patent or proprietary
    rights;


·
            regulatory
      developments and product safety
concerns;


·
            general
      stock trends in the biotechnology and pharmaceutical industry
      sectors;


·
            public
      concerns as to the safety and effectiveness of our
    products;


·
            economic
      trends and other external factors, including but not limited to, interest
      rate fluctuations, economic recession, inflation, foreign market trends,
      national crisis, and disasters; and


·
            healthcare
      reimbursement reform and cost-containment measures implemented by
      government agencies.






34





These and
other external factors have caused and may continue to cause the market price
and demand for our common stock to fluctuate substantially, which may limit or
prevent investors from readily selling their shares of common stock, and may
otherwise negatively affect the liquidity of our common stock.





The
Liquidity Of Our Common Stock Will Be Adversely Affected If Our Common Stock Is
Delisted From The NASDAQ Capital Market.





Our
common stock is presently traded on The NASDAQ Capital Market.  To
maintain inclusion on The NASDAQ Capital Market, we must continue to meet the
following six listing requirements:





1.
            Net
      tangible assets of at least $2,500,000 or market capitalization of at
      least $35,000,000 or net income of at least $500,000 in either our latest
      fiscal year or in two of our last three fiscal
  years;


2.
            Public
      float of at least 500,000 shares;


3.
            Market
      value of our public float of at least
  $1,000,000;


4.
            A
      minimum closing bid price of $1.00 per share of common stock, without
      falling below this minimum bid price for a period of thirty consecutive
      trading days;


5.
            At
      least two market makers; and


6.
            At
      least 300 stockholders, each holding at least 100 shares of common
      stock.





On July
25, 2007, we received a deficiency notice from The NASDAQ Stock Market notifying
us that we had not met the $1.00 minimum closing bid price requirement for
thirty consecutive trading days as required under NASDAQ listing rules and
several extensions of time not to exceed November 11, 2009 to meet the $1.00
minimum closing bid price requirement.  In order to regain compliance,
at the close of business on October 16, 2009, we implemented a 1-for-5 reverse
stock split of our outstanding common stock previously approved by our
stockholders.  On November 3, 2009, the Company received a letter from
the NASDAQ Market Listing Qualifications Department stating that the Company had
regained compliance with the minimum bid price rule for the continued listing of
its common stock on the NASDAQ Capital Market.




Although we currently meet all NASDAQ
listing requirements, the market price of our common stock has generally been
highly volatile and we cannot guarantee that we will continue to maintain
compliance with The NASDAQ Capital Market listing requirements.





If our
common stock is ever delisted, we would apply to have our common stock quoted on
the over-the-counter electronic bulletin board.  Upon any such
delisting, our common stock would become subject to the regulations of the
Securities and Exchange Commission relating to the market for penny
stocks.  A penny stock, as defined by the Penny Stock Reform Act, is
any equity security not traded on a national securities exchange that has a
market price of less than $5.00 per share.  The penny stock
regulations generally require that a disclosure schedule explaining the penny
stock market and the risks associated therewith be delivered to purchasers of
penny stocks and impose various sales practice requirements on broker-dealers
who sell penny stocks to persons other than established customers and accredited
investors.  The broker-dealer must make a suitability determination
for each purchaser and receive the purchaser’s written agreement prior to the
sale.  In addition, the broker-dealer must make certain mandated
disclosures, including the actual sale or purchase price and actual bid offer
quotations, as well as the compensation to be received by the broker-dealer and
certain associated persons.  The regulations applicable to penny
stocks may severely affect the market liquidity for our common stock and could
limit your ability to sell your securities in the secondary market.




35





Successful
Development Of Our Products Is Uncertain.  To Date, No Revenues Have
Been Generated From The Commercial Sale Of Our Products And Our Products May Not
Generate Revenues In The Future.





Our
development of current and future product candidates is subject to the risks of
failure inherent in the development of new pharmaceutical products and products
based on new technologies.  These risks include:





·
            delays
      in product development, clinical testing or
  manufacturing;


·
            unplanned
      expenditures in product development, clinical testing or
      manufacturing;


·
            failure
      in clinical trials or failure to receive regulatory
    approvals;


·
            emergence
      of superior or equivalent products;


·
            inability
      to manufacture on our own, or through others, product candidates on a
      commercial scale;


·
            inability
      to market products due to third party proprietary rights;
    and


·
            failure
      to achieve market acceptance.





Because
of these risks, our research and development efforts or those of our partners
may not result in any commercially viable products.  If significant
portions of these development efforts are not successfully completed, required
regulatory approvals are not obtained, or any approved products are not
commercially successful, our business, financial condition and results of
operations may be materially harmed.





Because
we have not begun the commercial sale of any of our products, our revenue and
profit potential is unproven and our limited operating history makes it
difficult for an investor to evaluate our business and prospects.  Our
technology may not result in any meaningful benefits to our current or potential
partners.  No revenues have been generated from the commercial sale of
our products, and our products may not generate revenues in the
future.  Our business and prospects should be considered in light of
the heightened risks and unexpected expenses and problems we may face as a
company in an early stage of development in a new and rapidly evolving
industry.





We
Are Primarily Focusing Our Activities And Resources On The Development Of
Bavituximab And Depend On Its Success.





We are focusing most of our near-term
research and development activities and resources on bavituximab, and we believe
a significant portion of the value of our Company relates to our ability to
develop this drug candidate.  The development of bavituximab is
subject to many risks, including the risks discussed in other risk
factors.  If the results of clinical trials of bavituximab, the
regulatory decisions affecting bavituximab, the anticipated or actual timing and
plan for commercializing bavituximab, or, ultimately, the market acceptance of
bavituximab do not meet our, your, analysts’ or others’ expectations, the market
price of our common stock could be adversely affected.





Our
Product Development Efforts May Not Be Successful.





Our product candidates have not
received regulatory approval and are generally in research, pre-clinical and
various clinical stages of development.  If the results from any of
the clinical trials are poor, those results may adversely affect our ability to
raise additional capital or obtain regulatory approval to conduct additional
clinical trials, which will affect our ability to continue full-scale research
and development for our antibody technologies.  In addition, our
product candidates may take longer than anticipated to progress through clinical
trials, or patient enrollment in the clinical trials may be delayed or prolonged
significantly, thus delaying the clinical trials.  Patient enrollment
is a function of many factors, including the size of the patient population, the
nature of the protocol, the proximity of patients to the clinical sites, and the
eligibility criteria for the study.  In addition, because our Cotara®
product currently in clinical trials represents a departure from more commonly
used methods for cancer treatment, potential patients and their doctors may be
inclined to use conventional therapies, such as chemotherapy, rather than enroll
patients in our clinical study.




36




Clinical
Trials Required For Our Product Candidates Are Expensive And Time Consuming, And
Their Outcome Is Uncertain.





In order
to obtain FDA approval to market a new drug product, we or our potential
partners must demonstrate proof of safety and efficacy in humans.  To
meet these requirements, we or our potential partners will have to conduct
extensive pre-clinical testing and “adequate and well-controlled” clinical
trials.  Conducting clinical trials is a lengthy, time-consuming and
expensive process.  The length of time may vary substantially
according to the type, complexity, novelty and intended use of the product
candidate, and often can be several years or more per trial.  Delays
associated with products for which we are directly conducting pre-clinical or
clinical trials may cause us to incur additional operating
expenses.  Moreover, we may continue to be affected by delays
associated with the pre-clinical testing and clinical trials of certain product
candidates conducted by our partners over which we have no
control.  The commencement and rate of completion of clinical trials
may be delayed by many factors, including, for example:




·
              obtaining
      regulatory approval to commence a clinical
  trial;
 ·
              reaching
      agreement on acceptable terms with prospective contract research
      organizations, or CROs, and trial sites, the terms of which can be subject
      to extensive negotiation and may vary significantly among different CROs
      and trial sites;
 ·
              slower
      than expected rates of patient recruitment due to narrow screening
      requirements;
 ·
              the
      inability of patients to meet FDA or other regulatory authorities imposed
      protocol requirements;
 ·
              the
      inability to retain patients who have initiated a clinical trial but may
      be prone to withdraw due to various clinical or personal reasons, or who
      are lost to further follow-up;
 ·
              the
      inability to manufacture sufficient quantities of qualified materials
      under current good manufacturing practices, or cGMPs, for use in clinical
      trials;
 ·
              the
      need or desire to modify our manufacturing
  processes;
 ·
              the
      inability to adequately observe patients after
  treatment;
 ·
              changes
      in regulatory requirements for clinical
trials;
 ·
              the
      lack of effectiveness during the clinical
  trials;
 ·
              unforeseen
      safety issues;
 ·
              delays,
      suspension, or termination of the clinical trials due to the institutional
      review board responsible for overseeing the study at a particular study
      site; and
 ·
              government
      or regulatory delays or “clinical holds” requiring suspension or
      termination of the trials.


Even if
we obtain positive results from pre-clinical or initial clinical trials, we may
not achieve the same success in future trials.  Clinical trials may
not demonstrate statistically sufficient safety and effectiveness to obtain the
requisite regulatory approvals for product candidates employing our
technology.





Clinical
trials that we conduct or that third-parties conduct on our behalf may not
demonstrate sufficient safety and efficacy to obtain the requisite regulatory
approvals for any of our product candidates.  We expect to commence
new clinical trials from time to time in the course of our business as our
product development work continues.  The failure of clinical trials to
demonstrate safety and effectiveness for our desired indications could harm the
development of that product candidate as well as other product
candidates.  Any change in, or termination of, our clinical trials
could materially harm our business, financial condition and results of
operations.










37




We Rely On Third Parties To Conduct
Our Clinical Trials And Many Of Our Preclinical Studies.  If Those
Parties Do Not Successfully Carry Out Their Contractual Duties Or Meet Expected
Deadlines, Our Drug Candidates May Not Advance In A Timely Manner Or At
All.




In the
course of our discovery, preclinical testing and clinical trials, we rely on
third parties, including universities, investigators and clinical research
organizations, to perform critical services for us. For example, we rely on
third parties to conduct our clinical trials and many of our preclinical
studies. Clinical research organizations and investigators are responsible for
many aspects of the trials, including finding and enrolling patients for testing
and administering the trials.  Although we rely on these third parties
to conduct our clinical trials, we are responsible for ensuring that each of our
clinical trials is conducted in accordance with its investigational plan and
protocol.  Moreover, the FDA and foreign regulatory authorities
require us to comply with regulations and standards, commonly referred to as
good clinical practices, or GCPs, for conducting, monitoring, recording and
reporting the results of clinical trials to ensure that the data and results are
scientifically credible and accurate and that the trial subjects are adequately
informed of the potential risks of participating in clinical
trials.  Our reliance on third parties does not relieve us of these
responsibilities and requirements.  These third parties may not be
available when we need them or, if they are available, may not comply with all
regulatory and contractual requirements or may not otherwise perform their
services in a timely or acceptable manner, and we may need to enter into new
arrangements with alternative third parties and our clinical trials may be
extended, delayed or terminated.  These independent third parties may
also have relationships with other commercial entities, some of which may
compete with us.  In addition, if such third parties fail to perform
their obligations in compliance with our clinical trial protocols, our clinical
trials may not meet regulatory requirements or may need to be
repeated.  As a result of our dependence on third parties, we may face
delays or failures outside of our direct control.  These risks also
apply to the development activities of our collaborators, and we do not control
our collaborators’ research and development, clinical trials or regulatory
activities.  We do not expect any drugs resulting from our
collaborators’ research and development efforts to be commercially available for
many years, if ever.





We
Do Not Have Experience As a Company Conducting Large-Scale Clinical Trials, Or
In Other Areas Required For The Successful Commercialization And Marketing Of
Our Product Candidates.




Preliminary results from clinical
trials of bavituximab may not be indicative of successful outcomes in later
stage trials.  Negative or limited results from any current or future
clinical trial could delay or prevent further development of our product
candidates which would adversely affect our business.




We have no experience as a Company in
conducting large-scale, late stage clinical trials, and our experience with
early-stage clinical trials with small numbers of patients is
limited.  In part because of this limited experience, we cannot be
certain that planned clinical trials will begin or be completed on time, if at
all.  Large-scale trials would require either additional financial and
management resources, or reliance on third-party clinical investigators,
clinical research organizations (“CROs”) or consultants. Relying on third-party
clinical investigators or CROs may force us to encounter delays that are outside
of our control.  Any such delays could have a material adverse effect
on our business.




We
also do not currently have marketing and distribution capabilities for our
product candidates. Developing an internal sales and distribution capability
would be an expensive and time-consuming process.  We may enter into
agreements with third parties that would be responsible for marketing and
distribution.  However, these third parties may not be capable of
successfully selling any of our product candidates.  The inability to
commercialize and market our product candidates could materially affect our
business.




Our
International Clinical Trials May Be Delayed Or Otherwise Adversely Impacted By
Social, Political And Economic Factors Affecting The Particular Foreign
Country.





We are
presently conducting clinical trials in India and the Republic of
Georgia.  Our ability to successfully initiate, enroll and complete a
clinical trial in either country, or in any future foreign country in which we
may initiate a clinical trial, are subject to numerous risks unique to
conducting business in foreign countries, including:





·
              difficulty
      in establishing or managing relationships with clinical research
      organizations and physicians;
 ·
              different
      standards for the conduct of clinical trials and/or health care
      reimbursement;
 ·
              our
      inability to locate qualified local consultants, physicians, and
      partners;
 ·
              the
      potential burden of complying with a variety of foreign laws, medical
      standards and regulatory requirements, including the regulation of
      pharmaceutical products and treatment;
and
 ·
              general
      geopolitical risks, such as political and economic instability, and
      changes in diplomatic and trade
relations.
   38


Because
we will be conducting a number of our Phase II clinical trials in India and the
Republic of Georgia and potentially other foreign countries, any disruption to
our international clinical trial program could significantly delay our product
development efforts.  In addition, doing business in the Republic of
Georgia, which is in Eastern Europe, involves other significant risks which
could materially and adversely affect our business as there remains a high
degree of political instability in many parts of Eastern Europe.





Success
In Early Clinical Trials May Not Be Indicative Of Results Obtained In Later
Trials.





A number
of new drugs and biologics have shown promising results in initial clinical
trials, but subsequently failed to establish sufficient safety and effectiveness
data to obtain necessary regulatory approvals.  Data obtained from
pre-clinical and clinical activities are subject to varying interpretations,
which may delay, limit or prevent regulatory approval.





Data from
our pre-clinical studies, Phase I and initial Phase II clinical trials should
not be relied upon as evidence that later or larger-scale clinical trials will
succeed.  The Phase I studies we have completed to date have been
designed to primarily assess safety in a small number of patients.  In
addition, the limited results we have obtained, and will obtain in the Phase II
trials, may not predict results for any future studies and also may not predict
future therapeutic benefit of our drug candidates.  We will be
required to demonstrate through larger-scale clinical trials that bavituximab
and Cotara® are safe and effective for use in a diverse population before we can
seek regulatory approval for their commercial sale.  There is
typically an extremely high rate of attrition from the failure of drug
candidates proceeding through clinical trials.





In
addition, regulatory delays or rejections may be encountered as a result of many
factors, including changes in regulatory policy during the period of product
development.





If
We Successfully Develop Products But Those Products Do Not Achieve And Maintain
Market Acceptance, Our Business Will Not Be Profitable.





Even if bavituximab, Cotara®, or any
future product candidate is approved for commercial sale by the FDA or other
regulatory authorities, the degree of market acceptance of any approved product
candidate by physicians, healthcare professionals and third-party payors and our
profitability and growth will depend on a number of factors,
including:





·
            our
      ability to provide acceptable evidence of safety and
    efficacy;


·
            relative
      convenience and ease of
administration;


·
            the
      prevalence and severity of any adverse side
  effects;


·
            availability
      of alternative treatments;


·
            pricing
      and cost effectiveness;


·
            effectiveness
      of our or our collaborators’ sales and marketing strategy;
    and


·
            our
      ability to obtain sufficient third-party insurance coverage or
      reimbursement.





In
addition, if bavituximab, Cotara®, or any future product candidate that we
discover and develop does not provide a treatment regimen that is more
beneficial than the current standard of care or otherwise provide patient
benefit, that product likely will not be accepted favorably by the
market.  If any products we may develop do not achieve market
acceptance, then we may not generate sufficient revenue to achieve or maintain
profitability.




39




In addition, even if our products
achieve market acceptance, we may not be able to maintain that market acceptance
over time if new products or technologies are introduced that are more favorably
received than our products, are more cost effective or render our products
obsolete.





If
We Cannot License Or Sell Cotara®, It May Be Delayed Or Never Be Further
Developed.





We have completed initial Phase I and
Phase I/II studies with Cotara® for the treatment of brain cancer.  In
addition, we recently announced the completion of patient enrollment in a dose
confirmation and dosimetry clinical trial in patients with recurrent
glioblastoma multiforme (“GBM”) We are also currently conducting a Phase II
safety and efficacy study using a single administration of the drug through an
optimized delivery method. Taken together, the dose
confirmation and dosimetry clinical trial along with data collected from the
Phase II safety and efficacy study may provide the safety, dosimetry and
efficacy data that will support the final design of the larger Phase III
study.  Once we complete enrollment and collect data from the two
Cotara® studies for the treatment of GBM, substantial financial resources will
be needed to complete the final part of the trial and any additional supportive
clinical studies necessary for potential product approval.  We do not
presently have the financial resources internally to complete the larger Phase
III study.  We therefore intend to continue to seek a licensing or
funding partner for Cotara®, and hope that the data from our clinical studies
will enhance our opportunities of finding such partner.  If a partner
is not found for this technology, we may not be able to advance the project past
its current state of development.  Because there are a limited number
of companies which have the financial resources, the internal infrastructure,
the technical capability and the marketing infrastructure to develop and market
a radiopharmaceutical based oncology drug, we may not find a suitable partnering
candidate for Cotara®.  We also cannot ensure that we will be able to
find a suitable licensing partner for this technology.  Furthermore,
we cannot ensure that if we do find a suitable licensing partner, the financial
terms that they propose will be acceptable to the Company.





Our
Dependency On Our Radiolabeling Suppliers May Negatively Impact Our Ability To
Complete Clinical Trials And Market Our Products.





We have
procured our antibody radioactive isotope combination services (“radiolabeling”)
for Cotara® with Iso-tex Diagnostics, Inc. for all U.S. clinical trials and with
the Board of Radiation & Isotope Technology (“BRIT”) for our Phase II study
in India.  If either of these suppliers is unable to continue to
qualify its respective facility or radiolabel and supply our antibody in a
timely manner, our current clinical trials using radiolabeling technology could
be adversely affected and significantly delayed.  While there are
other suppliers for radioactive isotope combination services in the U.S., our
clinical trial would be delayed for up to twelve to eighteen months because it
may take that amount of time to certify a new facility under current Good
Manufacturing Practices and qualify the product, plus we would incur significant
costs to transfer our technology to another vendor.  In addition, the
number of facilities that can perform these radiolabeling services is very
limited.  Prior to commercial distribution of any of our products, if
approved, we will be required to identify and contract with a company for
commercial antibody manufacturing and radioactive isotope combination
services.  An antibody that has been combined with a radioactive
isotope, such as Iodine-131, cannot be stored for long periods of time, as it
must be used within one week of being radiolabeled to be
effective.  Accordingly, any change in our existing or future
contractual relationships with, or an interruption in supply from, any such
third-party service provider or antibody supplier could negatively impact our
ability to complete ongoing clinical trials conducted by us or a potential
licensing partner.





Our
Manufacturing Facilities May Not Continue To Meet Regulatory Requirements And
Have Limited Capacity.





Before
approving a new drug or biologic product, the FDA requires that the facilities
at which the product will be manufactured be in compliance with current Good
Manufacturing Practices, or cGMP requirements.  To be successful, our
therapeutic products must be manufactured for development and, following
approval, in commercial quantities, in compliance with regulatory requirements
and at acceptable costs.  Currently, we manufacture all pre-clinical
and clinical material through Avid Bioservices, our wholly owned
subsidiary.  While we believe our current facilities are adequate for
the manufacturing of product candidates for clinical trials, our facilities may
not be adequate to produce sufficient quantities of any products for commercial
sale.




40




If we are
unable to establish and maintain a manufacturing facility or secure third-party
manufacturing capacity within our planned time frame and cost parameters, the
development and sales of our products, if approved, may be materially
harmed.





We may
also encounter problems with the following:





·
            production
      yields;


·
            quality
      control and quality assurance;


·
            shortages
      of qualified personnel;


·
            compliance
      with FDA or other regulatory authorities regulations, including the
      demonstration of purity and
potency;


·
            changes
      in FDA or other regulatory authorities
  requirements;


·
            production
      costs; and/or


·
            development
      of advanced manufacturing techniques and process
  controls.





In
addition, we or any third-party manufacturer will be required to register the
manufacturing facilities with the FDA and other regulatory authorities, provided
it had not already registered.  The facilities will be subject to
inspections confirming compliance with cGMP or other regulations.  If
any of our third-party manufacturers or we fail to maintain regulatory
compliance, the FDA can impose regulatory sanctions including, among other
things, refusal to approve a pending application for a new drug product or
biologic product, or revocation of a pre-existing approval.  As a
result, our business, financial condition and results of operations may be
materially harmed.





We
Currently Depend On A Government Contract To Partially Fund Our Research And
Development Efforts.  If Our Current Government Funding Is Reduced Or
Delayed, Our Drug Development Efforts May Be Negatively Affected.





On June
30, 2008, we were awarded up to a five-year contract potentially worth up to
$44.4 million to test and develop bavituximab and an equivalent fully human
antibody as potential broad-spectrum treatments for viral hemorrhagic fever
infections.  The initial contract was awarded through the
Transformational Medical Technologies Initiative (“TMTI”) of the U.S. Department
of Defense's Defense Threat Reduction Agency (“DTRA”).  This federal
contract is expected to provide us with up to $22.3 million in funding over
a 24-month base period, with $19.4 million having been appropriated as of
October 31, 2009.  The remainder of
the $22.3 million in funding is expected to be appropriated over the remainder
of the two-year base period ending June 29, 2010.  Subject to the
progress of the program and budgetary considerations in future years, the
contract can be extended beyond the base period to cover up to $44.4 million in
total funding over the five-year contract period through three one-year option
terms.  Work under this contract commenced on June 30,
2008.  If we do not receive the expected funding under this contract,
we may not be able to develop therapeutics to treat hemorrhagic fever virus
infection nor otherwise receive the other indirect benefits that may be derived
from receipt of the full funding under this contract.





Federal
Government Contracts Contain Provisions Giving Government Customers A Variety Of
Rights That Are Unfavorable To Us, Including The Ability To Terminate A Contract
At Any Time For Convenience.





Federal
government contracts, such as our contract with the TMTI, contain provisions,
and are subject to laws and regulations, that give the government rights and
remedies not typically found in commercial contracts. These provisions may allow
the government to:





41




·
            Reduce,
      cancel,  or otherwise modify our contracts or related
      subcontract agreements;


·
            Decline
      to exercise an option to renew a multi-year
  contract;


·
            Claim
      rights in products and systems produced by
us;


·
            Prohibit
      future procurement awards with a particular agency as a result of a
      finding of an organizational conflict of interest based upon prior related
      work performed for the agency that would give a contractor an unfair
      advantage over competing
contractors;


·
            Subject
      the award of contracts to protest by competitors, which may require the
      contracting federal agency or department to suspend our performance
      pending the outcome of the protest;


·
            Suspend
      or debar us from doing business with the federal government or with a
      governmental agency; and


·
            Control
      or prohibit the export of our products and
  services.





If the
government terminates our contract for convenience, we may recover only our
incurred or committed costs, settlement expenses and profit on work completed
prior to the termination. If the government terminates our contract for default,
we may not recover even those amounts, and instead may be liable for excess
costs incurred by the government in procuring undelivered items and services
from another source. If the TMTI were to unexpectedly terminate or cancel, or
decline to exercise the option to extend our contract beyond the base period,
our revenues, product development efforts and operating results would be
materially harmed.





We
May Have Significant Product Liability Exposure Because We Maintain Only Limited
Product Liability Insurance.





We face an inherent business risk of
exposure to product liability claims in the event that the administration of one
of our drugs during a clinical trial adversely affects or causes the death of a
patient.  Although we maintain product liability insurance for
clinical studies in the amount of $3,000,000 per occurrence or $3,000,000 in the
aggregate on a claims-made basis, this coverage may not be
adequate.  Product liability insurance is expensive, difficult to
obtain and may not be available in the future on acceptable terms, if at
all.  Our inability to obtain sufficient insurance coverage on
reasonable terms or to otherwise protect against potential product liability
claims in excess of our insurance coverage, if any, or a product recall, could
negatively impact our financial position and results of operations.





In addition, the contract manufacturing
services that we offer through Avid expose us to an inherent risk of liability
as the antibodies or other substances manufactured by Avid, at the request and
to the specifications of our customers, could possibly cause adverse effects or
have product defects.  We obtain agreements from our customers
indemnifying and defending us from any potential liability arising from such
risk.  There can be no assurance that such indemnification agreements
will adequately protect us against potential claims relating to such contract
manufacturing services or protect us from being named in a possible
lawsuit.  Although Avid has procured insurance coverage, there is no
guarantee that we will be able to maintain our existing coverage or obtain
additional coverage on commercially reasonable terms, or at all, or that such
insurance will provide adequate coverage against all potential claims to which
we might be exposed.  A partially successful or completely uninsured
claim against Avid would have a material adverse effect on our consolidated
operations.





If
We Are Unable To Obtain, Protect And Enforce Our Patent Rights, We May Be Unable
To Effectively Protect Or Exploit Our Proprietary Technology, Inventions And
Improvements.





Our
success depends in part on our ability to obtain, protect and enforce
commercially valuable patents.  We try to protect our proprietary
positions by filing United States and foreign patent applications related to our
proprietary technology, inventions and improvements that are important to
developing our business.  However, if we fail to obtain and maintain
patent protection for our proprietary technology, inventions and improvements,
our competitors could develop and commercialize products that would otherwise
infringe upon our patents.




42




Our
patent position is generally uncertain and involves complex legal and factual
questions.  Legal standards relating to the validity and scope of
claims in the biotechnology and biopharmaceutical fields are still
evolving.  Accordingly, the degree of future protection for our patent
rights is uncertain.  The risks and uncertainties that we face with
respect to our patents include the following:





·
            the
      pending patent applications we have filed or to which we have exclusive
      rights may not result in issued patents or may take longer than we expect
      to result in issued patents;


·
            the
      claims of any patents that issue may not provide meaningful
      protection;


·
            we
      may be unable to develop additional proprietary technologies that are
      patentable;


·
            the
      patents licensed or issued to us may not provide a competitive
      advantage;


·
            other
      parties may challenge patents licensed or issued to
  us;


·
            disputes
      may arise regarding the invention and corresponding ownership rights in
      inventions and know-how resulting from the joint creation or use of
      intellectual property by us, our licensors, corporate partners and other
      scientific collaborators; and


·
            other
      parties may design around our patented
  technologies.





We
May Become Involved In Lawsuits To Protect Or Enforce Our Patents That Would Be
Expensive And Time Consuming.





In order to protect or enforce our
patent rights, we may initiate patent litigation against third
parties.  In addition, we may become subject to interference or
opposition proceedings conducted in patent and trademark offices to determine
the priority and patentability of inventions.  The defense of
intellectual property rights, including patent rights through lawsuits,
interference or opposition proceedings, and other legal and administrative
proceedings, would be costly and divert our technical and management personnel
from their normal responsibilities.  An adverse determination of any
litigation or defense proceedings could put our pending patent applications at
risk of not being issued.





Furthermore, because of the substantial
amount of discovery required in connection with intellectual property
litigation, there is a risk that some of our confidential information could be
compromised by disclosure during this type of litigation.  For
example, during the course of this kind of litigation, confidential information
may be inadvertently disclosed in the form of documents or testimony in
connection with discovery requests, depositions or trial
testimony.  This disclosure could have a material adverse effect on
our business and our financial results.





We
May Not Be Able To Compete With Our Competitors In The Biotechnology Industry
Because Many Of Them Have Greater Resources Than We Do And They Are Further
Along In Their Development Efforts.




The pharmaceutical and biotechnology
industry is intensely competitive and subject to rapid and significant
technological change.  Many of the drugs that we are attempting to
discover or develop will be competing with existing therapies.  In
addition, we are aware of several pharmaceutical and biotechnology companies
actively engaged in research and development of antibody-based products that
have commenced clinical trials with, or have successfully commercialized,
antibody products.  Some or all of these companies may have greater
financial resources, larger technical staffs, and larger research budgets than
we have, as well as greater experience in developing products and running
clinical trials.  We expect to continue to experience significant and
increasing levels of competition in the future.  In addition, there
may be other companies which are currently developing competitive technologies
and products or which may in the future develop technologies and products that
are comparable or superior to our technologies and products.




We are currently enrolling patients in
a Cotara Phase II ® clinical trial for the treatment of recurrent glioblastoma
multiforme (“GBM”), the most aggressive form of brain
cancer.  Approved treatments for brain cancer include the Gliadel®
Wafer (polifeprosan 20 with carmustine implant) from Eisai, Inc., Temodar®
(temozolomide) from Schering-Plough Corporation and Avastin® (bevacizumab) from
Genentech, Inc.  Gliadel® is inserted in the tumor cavity following
surgery and releases a chemotherapeutic agent over time.  Temodar® is
administered orally to patients with brain cancer.  Avastin® is a
monoclonal antibody that targets vascular endothelial growth factor to prevent
the formation of new tumor blood vessels.




43




Because Cotara® targets brain tumors
from the inside out, it is a novel treatment dissimilar from other drugs in
development for this disease.  Some products in development may
compete with Cotara® should they become approved for marketing.  These
products include, but are not limited to:  131I-TM601, a radiolabeled
chlorotoxin peptide being developed by TransMolecular, Inc., CDX-110, a peptide
vaccine under development by Celldex, cilengitide, an integrin-targeting peptide
being evaluated by Merck KGaA, and cediranib, a VEGFR tyrosine kinase inibitor
being developed by AstraZeneca.  In addition, oncology products
marketed for other indications such as Gleevec® (Novartis), Tarceva®
(Genentech/OSI), and Nexavar® (Bayer), are being tested in clinical trials for
the treatment of brain cancer.




Bavituximab is currently in clinical
trials for the treatment of advanced solid tumors.  Although we are
not aware of any other products in development targeting phosphatidylserine as a
potential therapy for advanced solid tumors, there are a number of possible
competitors with approved or developmental targeted agents used in combination
with standard chemotherapy for the treatment of cancer, including but not
limited to, Avastin® by Genentech, Inc., Gleevec® by Novartis, Tarceva® by OSI
Pharmaceuticals, Inc. and Genentech, Inc., Erbitux® by ImClone Systems
Incorporated and Bristol-Myers Squibb Company, Rituxan® and Herceptin® by
Genentech, Inc., and VectibixTM by Amgen.  There are a significant
number of companies developing cancer therapeutics using a variety of targeted
and non-targeted approaches.  A direct comparison of these potential
competitors will not be possible until bavituximab advances to later-stage
clinical trials.





In
addition, we are evaluating bavituximab for the treatment of
HCV.  Bavituximab is a first-in-class approach for the treatment of
HCV.  We are aware of no other products in development targeting
phosphatidylserine as a potential therapy for HCV.  There are a number
of companies that have products approved and on the market for the treatment of
HCV, including but not limited to:  Peg-Intron® (pegylated
interferon-alpha-2b), Rebetol® (ribavirin), and Intron-A (interferon-alpha-2a),
which are marketed by Schering-Plough Corporation, and Pegasys® (pegylated
interferon-alpha-2a), Copegus® (ribavirin USP) and Roferon-A®
(interferon-alpha-2a), which are marketed by Roche Pharmaceuticals, and
Infergen® (interferon alfacon-1) now marketed by Three Rivers Pharmaceuticals,
LLC.  First line treatment for HCV has changed little since alpha
interferon was first introduced in 1991.  The current standard of care
for HCV includes a combination of an alpha interferon (pegylated or
non-pegylated) with ribavirin.  This combination therapy is generally
associated with considerable toxicity including flu-like symptoms, hematologic
changes and central nervous system side effects including
depression.  It is not uncommon for patients to discontinue alpha
interferon therapy because they are unable to tolerate the side effects of the
treatment.





Future
treatments for HCV are likely to include a combination of these existing
products used as adjuncts with products now in
development.  Later-stage developmental treatments include
improvements to existing therapies, such as ZALBINTM (albumin interferon
alpha-2b) from Human Genome Sciences, Inc.  Other developmental
approaches include, but are not limited to, protease inhibitors such as
telaprevir from Vertex Pharmaceuticals Incorporated and boceprevir from
Schering-Plough Corporation.





Avid
Bioservices, Our Subsidiary, Is Exposed To Risks Resulting From Its Small
Customer Base.





A
significant portion of Avid Bioservices’ revenues have historically been derived
from a small customer base.  These customers typically do not enter
into long-term contracts because their need for drug supply depends on a variety
of factors, including the drug’s stage of development, their financial
resources, and, with respect to commercial drugs, demand for the drug in the
market.  Our results of operations could be adversely affected if
revenue from any one of our primary customers is significantly reduced or
eliminated.




44




If
We Lose Qualified Management And Scientific Personnel Or Are Unable To Attract
And Retain Such Personnel, We May Be Unable To Successfully Develop Our Products
Or We May Be Significantly Delayed In Developing Our Products.





Our
success is dependent, in part, upon a limited number of key executive officers,
each of whom is an at-will employee, and also upon our scientific
researchers.  For example, because of his extensive understanding of
our technologies and product development programs, the loss of Mr. Steven W.
King, our President & Chief Executive Officer and Director, would adversely
affect our development efforts and clinical trial programs during the six to
twelve month period that we estimate it would take to find and train a qualified
replacement.





We also
believe that our future success will depend largely upon our ability to attract
and retain highly-skilled research and development and technical
personnel.  We face intense competition in our recruiting activities,
including competition from larger companies with greater
resources.  We do not know if we will be successful in attracting or
retaining skilled personnel.  The loss of certain key employees or our
inability to attract and retain other qualified employees could negatively
affect our operations and financial performance.





Our
Governance Documents And State Law Provide Certain Anti-Takeover Measures Which
Will Discourage A Third Party From Seeking To Acquire Us Unless Approved By the
Board of Directors.





We
adopted a shareholder rights plan, commonly referred to as a “poison pill,” on
March 16, 2006.  The purpose of the shareholder rights plan is to
protect stockholders against unsolicited attempts to acquire control of us that
do not offer a fair price to our stockholders as determined by our Board of
Directors.  Under the plan, the acquisition of 15% or more of our
outstanding common stock by any person or group, unless approved by our board of
directors, will trigger the right of our stockholders (other than the acquiror
of 15% or more of our common stock) to acquire additional shares of our common
stock, and, in certain cases, the stock of the potential acquiror, at a 50%
discount to market price, thus significantly increasing the acquisition cost to
a potential acquiror.  In addition, our certificate of incorporation
and by-laws contain certain additional anti-takeover protective
devices.  For example,





·
            no
      stockholder action may be taken without a meeting, without prior notice
      and without a vote; solicitations by consent are thus
      prohibited;


·
            special
      meetings of stockholders may be called only by our Board of Directors;
      and


·
            our
      Board of Directors has the authority, without further action by the
      stockholders, to fix the rights and preferences, and issue shares, of
      preferred stock. An issuance of preferred stock with dividend and
      liquidation rights senior to the common stock and convertible into a large
      number of shares of common stock could prevent a potential acquiror from
      gaining effective economic or voting
control.





Further,
we are subject to Section 203 of the Delaware General Corporation Law which,
subject to certain exceptions, restricts certain transactions and business
combinations between a corporation and a stockholder owning 15% or more of the
corporation’s outstanding voting stock for a period of three years from the date
the stockholder becomes a 15% stockholder.





Although we believe these provisions
and our rights plan collectively provide for an opportunity to receive higher
bids by requiring potential acquirers to negotiate with our Board of Directors,
they would apply even if the offer may be considered beneficial by some
stockholders.  In addition, these provisions may frustrate or prevent
any attempts by our stockholders to replace or remove our current management by
making it more difficult for stockholders to replace members of our Board of
Directors, which is responsible for appointing the members of our
management.





ITEM
2.UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.   None.





ITEM
3.DEFAULTS
UPON SENIOR SECURITIES.   None.




45




ITEM
4.SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS.





We held
our annual meeting of stockholders’ on October 22, 2009.  The
following represents the matters voted upon and the results of the
voting:





Routine
      Matters
            For
            
            Withheld1)
            Election
      of Directors:Carlton
      M. Johnson
            171,522,970
            
            25,006,710Steven
      W. King
            168,524,133
            
            28,005,547David
      H. Pohl
            160,753,939
            
            35,775,741Eric
      S. Swartz
            159,860,745
            
            36,668,935For
            
            Against
      or Abstain2)
            To
      ratify the appointment of Ernst & Young LLP as independent auditors of
      the Company for the fiscal year ending April 30, 2010.
            188,932,180
            
            7,597,5003)
            To
      approve the adoption of the Company’s 2009 Stock Incentive
      Plan.
            66,627,845
            
            21,829,846Stockholder
      Proposal4)
            To
      modify the Company’s Bylaws and Certificate of Incorporation to remove all
      obstacles to the immediate sale of the Company in its entirety and to set
      in place an annual process to seek bids and vote for or against the
      Company’s sale.
            11,858,864
            
            76,598,828




ITEM
5.OTHER
INFORMATION.





On December 22, 1999, the Company’s
Board of Directors granted stock options to its employees including two of its
current named executive officers, certain employees and consultants, and a
current member of the Board of Directors (“Option Holders”), which stock options
are set to expire on December 22, 2009, unless exercised prior to such
date.  On December 9, 2009, the Company’s Board of Directors deemed it
to be in the best interest of the Company to enter into an Option Exercise
Forbearance Agreements (the “Agreement”) with the Option Holders including the
two named executive officers of the Company.  Pursuant to the terms of
the Agreement, each Option Holder will receive the same amount in net proceeds
as if he or she had exercised his or her stock options in the open market based
on the market price paid per share equal to the volume weighted average price of
the Company’s common stock sold under its At-the-Market Issuance agreement with
Wm Smith & Co during the period from August 1, 2009 to December 4, 2009 in
exchange for allowing the options to expire unexercised.  Pursuant to
their respective Agreements, the two participating named executive officers, Mr.
Steven King, President and CEO, and Mr. Paul Lytle, Chief Financial Officer,
will receive payments of $99,939 and $51,582, respectively, which will be
treated as bonus compensation.




46




On
December 9, 2009, the Company’s Board of Directors also authorized a one-time
bonus to seven members of the Company’s management in recognition of their
contributions toward successfully completing discussions for the Company’s
bavituximab clinical program with the Food and Drug Administration in November
2009.  The individual bonus amounts approved for the named executive
officers are as follows:  Mr. Steven King, President and CEO
($97,502); Mr. Paul Lytle, Chief Financial Officer ($60,899); Dr. Shelley
Fussey, Vice President  ($55,000), and Mr. Joseph Shan ($50,873). With
respect to Mr. King and Mr. Lytle, one hundred percent (100%) of the bonus
amount is being deferred until the earlier of such time as the Board of
Directors, in its sole discretion, shall determine or the termination of such
individual’s employment.  For Dr. Fussey and Mr. Shan, twenty five
percent (25%) of the bonus amount is payable prior to December 31, 2009, with
the remaining seventy five percent (75%) of the bonus amount being deferred
until the earlier of such time as the Board of Directors, in its sole
discretion, shall determine or the termination of such individual’s
employment.




ITEM
6.     EXHIBITS.





(a)
            Exhibits:





31.1
            Certification
      of the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.





31.2
            Certification
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.





32
            Certification
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.





47


SIGNATURES





Pursuant to the requirements of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.







PEREGRINE
      PHARMACEUTICALS, INC.Date:
      December 10,
      2009
              By:
              /s/ STEVEN
      W. KINGSteven
      W. KingPresident,
      Chief Executive Officer, and Director
  Date:
      December 10,
      2009
              By:
              /s/ PAUL
      J. LYTLEPaul
      J. LytleChief
      Financial Officer
                (signed
      both as anofficer
      duly authorized to sign onbehalf
      of the Registrant and principalfinancial
      officer and chief accountingofficer)


48