##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 30, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 0-26483
 VaxGen, Inc.
  Delaware
    
    94-3236309(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)349 Oyster Point BoulevardSouth San Francisco, California
    
    94080(Address of Principal Executive Offices)
    
    (Zip Code)
 (650) 624-1000
  þ o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller Reporting Company þ(Do not check if a smaller reporting company)
  o þ




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##### 



VaxGen, Inc.
 Form 10-Q
 For the Quarter Ended June 30, 2008
 Table of Contents
 PagePart I Financial InformationItem 1 Financial Statements (unaudited):Condensed Consolidated Balance Sheets
    
    
    3Condensed Consolidated Statements of Operations
    
    
    4Condensed Consolidated Statements of Cash Flows
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2 Managements Discussion and Analysis of Financial Condition and Results of OperationsOverview
    
    
    14Critical Accounting Policies and Estimates
    
    
    16Results of Operations
    
    
    17Financial Condition, Liquidity and Capital Resources
    
    
    20Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4T Controls and Procedures
    
    
    22Part II Other InformationItem 1 Legal Proceedings
    
    
    23Item 1A Risk Factors
    
    
    23Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3 Defaults Upon Senior Securities
    
    
    28Item 4 Submission of Matters to a Vote of Security Holders
    
    
    28Item 5 Other Information
    
    
    29Item 6 Exhibits
    
    
    29Signatures
    
    
    30Exhibit 31.1Exhibit 32.1
   2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 VaxGen, Inc.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
 June 30,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    54,291
    
    
    $
    64,726Investment securities
    
    
    4,742
    
    
    
    6,889Accounts receivable
    
    
    232
    
    
    
    199Prepaid expenses and other current assets
    
    
    967
    
    
    
    1,167Loan to Raven biotechnologies, inc
    
    
    6,000
    
    
    
    Assets held for sale
    
    
    1,370
    
    
    
    Total current assets
    
    
    67,602
    
    
    
    72,981Property and equipment
    
    
    
    
    
    
    10,806Restricted cash
    
    
    1,556
    
    
    
    1,556Other assets
    
    
    1,049
    
    
    
    4,622Total assets
    
    $
    70,207
    
    
    $
    89,965LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    176
    
    
    $
    2,151Accrued and other current liabilities
    
    
    1,185
    
    
    
    2,326Derivative liability
    
    
    4,455
    
    
    
    3,500Total current liabilities
    
    
    5,816
    
    
    
    7,977Convertible senior subordinated notes
    
    
    29,390
    
    
    
    30,679Deferred rent and other liabilities
    
    
    4,743
    
    
    
    4,270Total liabilities
    
    
    39,949
    
    
    
    42,926Contingencies (Note 13)Stockholders equity:Common stock
    
    
    331
    
    
    
    331Additional paid-in capital
    
    
    302,500
    
    
    
    301,378Accumulated deficit
    
    
    (272,573
    )
    
    
    (254,678
    )Accumulated other comprehensive income
    
    
    
    
    
    
    8Total stockholders equity
    
    
    30,258
    
    
    
    47,039Total liabilities and stockholders equity
    
    $
    70,207
    
    
    $
    89,965
   3




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VaxGen, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues
    
    $
    15
    
    
    $
    198
    
    
    $
    293
    
    
    $
    4,382Operating expenses:Research and development
    
    
    
    
    
    
    4,836
    
    
    
    1,387
    
    
    
    11,925General and administrative
    
    
    3,545
    
    
    
    4,796
    
    
    
    8,945
    
    
    
    11,374Restructuring
    
    
    985
    
    
    
    566
    
    
    
    985
    
    
    
    4,283Impairment of assets held for sale
    
    
    8,498
    
    
    
    
    
    
    
    8,498
    
    
    
    Total operating expenses
    
    
    13,028
    
    
    
    10,198
    
    
    
    19,815
    
    
    
    27,582Loss from operations
    
    
    (13,013
    )
    
    
    (10,000
    )
    
    
    (19,522
    )
    
    
    (23,200
    )Other income (expense)Interest expense
    
    
    (601
    )
    
    
    (612
    )
    
    
    (1,369
    )
    
    
    (1,223
    )Interest income
    
    
    534
    
    
    
    1,279
    
    
    
    1,249
    
    
    
    2,519Valuation adjustments
    
    
    656
    
    
    
    1,212
    
    
    
    (955
    )
    
    
    4,044Gain on convertible debt redemption
    
    
    
    
    
    
    
    
    
    
    713
    
    
    
    Gain on sale of Anthrax Program
    
    
    2,000
    
    
    
    
    
    
    
    2,000
    
    
    
    Other, net
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    Total other income, net
    
    
    2,589
    
    
    
    1,879
    
    
    
    1,627
    
    
    
    5,340Net loss
    
    $
    (10,424
    )
    
    $
    (8,121
    )
    
    $
    (17,895
    )
    
    $
    (17,860
    )Basic and diluted net loss per share
    
    $
    (0.31
    )
    
    $
    (0.25
    )
    
    $
    (0.54
    )
    
    $
    (0.54
    )Weighted average shares used in computing
basic and diluted net loss per share
    
    
    33,107
    
    
    
    33,107
    
    
    
    33,107
    
    
    
    33,107
   4




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VaxGen, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
 Six Months EndedJune 30,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (17,895
    )
    
    $
    (17,860
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    587
    
    
    
    3,086Impairment of assets held for sale
    
    
    8,498
    
    
    
    Valuation adjustments
    
    
    955
    
    
    
    (4,044
    )Stock-based compensation
    
    
    1,122
    
    
    
    1,536Amortization of premiums and discounts on investment securities
    
    
    (161
    )
    
    
    (612
    )Gain on convertible debt repurchase
    
    
    (713
    )
    
    
    Non-cash interest expense
    
    
    381
    
    
    
    356Non-cash interest income
    
    
    (187
    )
    
    
    Raven merger costs previously capitalized
    
    
    1,932
    
    
    
    Changes in operating assets and liabilitiesReceivables
    
    
    (33
    )
    
    
    7,878Prepaid expenses and other current assets
    
    
    200
    
    
    
    1,497Accounts payable
    
    
    (1,975
    )
    
    
    (2,810
    )Accrued and other current liabilities
    
    
    (1,141
    )
    
    
    333Other
    
    
    762
    
    
    
    475Net cash used in operating activities
    
    
    (7,668
    )
    
    
    (10,165
    )Cash flows from investing activities:Purchase of property and equipment
    
    
    
    
    
    
    (19
    )Fees from sale of investment in affiliate
    
    
    
    
    
    
    (2,441
    )Proceeds from sale of assets held for sale
    
    
    351
    
    
    
    Proceeds from sale and maturity of investment securities
    
    
    18,242
    
    
    
    30,950Purchase of investment securities
    
    
    (15,942
    )
    
    
    (40,418
    )Loan to Raven biotechnologies, inc.
    
    
    (4,668
    )
    
    
    Other
    
    
    
    
    
    
    (40
    )Net cash used in investing activities
    
    
    (2,017
    )
    
    
    (11,968
    )Cash flows from financing activities:Redemption of senior subordinated convertible notes
    
    
    (750
    )
    
    
    Net cash used in financing activities
    
    
    (750
    )
    
    
    Net decrease in cash and cash equivalents
    
    
    (10,435
    )
    
    
    (22,133
    )Cash and cash equivalents, beginning of period
    
    
    64,726
    
    
    
    73,075Cash and cash equivalents, end of period
    
    $
    54,291
    
    
    $
    50,942
   5




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VaxGen, Inc.
 
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
 1. Organization
 Nature of Business Activities
         Delisting from the Nasdaq National Market
   6




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Basis of Presentation
    2. Summary of Significant Accounting Policies
  Additional Significant Accounting Policy
 Accounting for the Impairment or Disposal of Long-Lived Assets
 a)
    
    Management commits to a plan to sell the asset;b)
    
    The asset is available for immediate sale in its present condition;c)
    
    An active marketing plan to sell the asset has been initiated at a reasonable price;d)
    
    The sale of the asset is probable within one year; and,e)
    
    It is unlikely that significant changes to the plan to sell the asset will be made.
   Recent Accounting Pronouncements
 Determining Whether Instruments Granted in
Share-Based Payment Transactions are Participating Securities Earnings per Share
 Accounting for Convertible Debt Instruments That
May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)
  7




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The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles
 Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133
 Business Combinations
 Noncontrolling Interests in Consolidated Financial
Statements
 3. Net Loss per Share
 Share Based Payments
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (10,424
    )
    
    $
    (8,121
    )
    
    $
    (17,895
    )
    
    $
    (17,860
    )Basic and diluted net loss per share
    
    $
    (0.31
    )
    
    $
    (0.25
    )
    
    $
    (0.54
    )
    
    $
    (0.54
    )Weighted average shares used in computing
basic and diluted net loss per share
    
    
    33,107
    
    
    
    33,107
    
    
    
    33,107
    
    
    
    33,107
  8




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Options to purchase common stock
    
    
    5,336
    
    
    
    5,686
    
    
    
    5,336
    
    
    
    5,686Warrants to purchase common stock
    
    
    2,317
    
    
    
    2,359
    
    
    
    2,317
    
    
    
    2,359Convertible senior subordinated notes
    
    
    2,033
    
    
    
    2,134
    
    
    
    2,033
    
    
    
    2,134Total
    
    
    9,686
    
    
    
    10,179
    
    
    
    9,686
    
    
    
    10,179
 4. Comprehensive Loss
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (10,424
    )
    
    $
    (8,121
    )
    
    $
    (17,895
    )
    
    $
    (17,860
    )Change in unrealized gains on investment securities
    
    
    (12
    )
    
    
    
    
    
    
    (8
    )
    
    
    1Comprehensive loss
    
    $
    (10,436
    )
    
    $
    (8,121
    )
    
    $
    (17,903
    )
    
    $
    (17,859
    )
 5. Sale of Anthrax Program
  6. Assets Held For Sale
     9




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7. Loan to Raven biotechnologies, inc.
    8. Accrued and Other Current Liabilities
  June 30,
    
    
    December 31,2008
    
    
    2007Employee benefits and severance
    
    $
    217
    
    
    $
    1,398Income taxes
    
    
    
    
    
    
    60Interest on convertible notes
    
    
    413
    
    
    
    433Other
    
    
    555
    
    
    
    435Total accrued and other current liabilities
    
    $
    1,185
    
    
    $
    2,326
 9. Restructuring
 Accounting for Costs Associated with Exit or Disposal Activities
   Consolidationof ExcessWorkforce
    
    
    Facilities andReduction
    
    
    Other
    
    
    TotalRestructuring CostsCosts incurred
    
    $
    4,368
    
    
    $
    1,006
    
    
    $
    5,374Amounts paid
    
    
    (4,068
    )
    
    
    (1,006
    )
    
    
    (5,074
    )Balance accrued as of December 31, 2007
    
    
    300
    
    
    
    
    
    
    
    300Costs incurred
    
    
    985
    
    
    
    
    
    
    
    985Amounts paid
    
    
    (1,285
    )
    
    
    
    
    
    
    (1,285
    )Balance accrued as of June 30, 2008
    
    $
    
    
    
    $
    
    
    
    $
    
  10




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10. Income Taxes
  Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement No. 109
    11. Stock-Based Compensation
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Research and development
    
    $
    
    
    
    $
    173
    
    
    $
    42
    
    
    $
    721General and administrative
    
    
    951
    
    
    
    198
    
    
    
    1,080
    
    
    
    815$
    951
    
    
    $
    371
    
    
    $
    1,122
    
    
    $
    1,536
 12. Celltrion
    11




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13. Contingencies
  14. Fair Value Measurements
 Fair Value
Measurement The Fair Value Option for Financial Assets
and Financial Liabilities Including an Amendment of FASB Statement No. 115
  
    
    Level 1  Quoted prices in active markets for identical assets or liabilities.
    
    Level 2  Inputs other than quoted prices included in Level 1, such as quoted
prices for similar assets and liabilities in active markets; quoted prices for identical
or similar assets and liabilities in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data.
    
    Level 3  Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or liabilities. This includes
certain pricing models, discounted cash flow methodologies and similar techniques that
use significant unobservable inputs.
      12




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Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalAssets:Cash equivalents:Money market funds
    
    $
    9,882
    
    
    $
    
    
    
    $
    
    
    
    $
    9,882Commercial paper
    
    
    
    
    
    
    37,619
    
    
    
    
    
    
    
    37,619Corporate debt securities
    
    
    
    
    
    
    6,578
    
    
    
    
    
    
    
    6,578Investment securities:Commercial paper
    
    
    
    
    
    
    4,742
    
    
    
    
    
    
    
    4,742Restricted cash:Money market funds
    
    
    1,556
    
    
    
    
    
    
    
    
    
    
    
    1,556Total Financial Assets
    
    $
    11,438
    
    
    $
    48,939
    
    
    $
    
    
    
    $
    60,377Liabilities:Derivative liability
    
    $
    
    
    
    $
    
    
    
    $
    4,455
    
    
    $
    4,455
   Three Months Ended
    
    
    Six Months EndedDerivative Liability
    
    June 30, 2008
    
    
    June 30, 2008Beginning balance
    
    $
    5,111
    
    
    $
    3,500Valuation adjustment
    
    
    (656
    )
    
    
    955Ending balance
    
    $
    4,455
    
    
    $
    4,455
 15. Subsequent Events
 Note Redemptions
  Bridge Loan to Raven
  Anthrax Vaccine Program Milestone Payment
   13




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Special Note Regarding Forward - Looking Statements
   
 OVERVIEW
        14




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Consolidationof ExcessWorkforce
    
    
    Facilities andReduction
    
    
    Other
    
    
    TotalRestructuring CostsCosts incurred
    
    $
    4,368
    
    
    $
    1,006
    
    
    $
    5,374Amounts paid
    
    
    (4,068
    )
    
    
    (1,006
    )
    
    
    (5,074
    )Balance accrued as of December 31, 2007
    
    
    300
    
    
    
    
    
    
    
    300Costs incurred
    
    
    985
    
    
    
    
    
    
    
    985Amounts paid
    
    
    (1,285
    )
    
    
    
    
    
    
    (1,285
    )Balance accrued as of June 30, 2008
    
    $
    
    
    
    $
    
    
    
    $
    
        15




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##### Table of Contents



Celltrion
  
 CRITICAL ACCOUNTING POLICIES AND ESTIMATES
  Assets Held for Sale
 Accounting for the Impairment or Disposal of Long-Lived Assets,
 a)
    
    Management commits to a plan to sell the asset;b)
    
    The asset is available for immediate sale in its present condition;c)
    
    An active marketing plan to sell the asset has been initiated at a reasonable price;d)
    
    The sale of the asset is probable within one year; and,e)
    
    It is unlikely that significant changes to the plan to sell the asset will be made.
   Adoption of SFAS 157
 Fair Value
Measurement The Fair Value Option for Financial Assets
and Financial Liabilities  Including an Amendment of FASB Statement No. 115
  
    
    Level 1  Quoted prices in active markets for identical assets or liabilities.
    
    Level 2  Inputs other than quoted prices included in Level 1, such as quoted
prices for similar assets and liabilities in active markets; quoted prices for identical
or similar assets and liabilities in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data.
    
    Level 3  Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or liabilities. This includes
certain pricing models, discounted cash flow methodologies and similar techniques that
use significant unobservable inputs.
  16




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RESULTS OF OPERATIONS
 Comparison of Fiscal Quarters and Six Months Ended June 30, 2008 and 2007
 Revenues
 Three Months Ended
    
    
    Percent
    
    
    Six Months Ended
    
    
    PercentJune 30,
    
    
    Change
    
    
    June 30,
    
    
    Change2008
    
    
    2007
    
    
    2008/2007
    
    
    2008
    
    
    2007
    
    
    2008/2007(in thousands)Revenues
    
    $
    15
    
    
    $
    198
    
    
    
    -92
    %
    
    $
    293
    
    
    $
    4,382
    
    
    
    -93
    %
   Research and development expenses
 Three Months Ended
    
    
    Percent
    
    
    Six Months Ended
    
    
    PercentJune 30,
    
    
    Change
    
    
    June 30,
    
    
    Change2008
    
    
    2007

    
    
    2008/2007
    
    
    2008
    
    
    2007
    
    
    2008/2007(in thousands)
    
    
    
    
    
    (in thousands)Research and development expenses
    
    $
    
    
    
    $
    4,836
    
    
    
    -100
    %
    
    $
    1,387
    
    
    $
    11,925
    
    
    
    -88
    %
  17




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##### Table of Contents




    
    Labor and related expenses, which decreased by $3.3 million primarily due to no
research and development expenses during the second quarter of 2008 and decreased
headcount following multiple reductions in force during 2007; and
    
    Facilities and overhead costs, which decreased by $7.4 million due to reduced
operations and consolidation of facilities during the first quarter of 2008 and no
research and development expenses during the second quarter of 2008.
  General and administrative expenses
 Three Months Ended
    
    
    Percent
    
    
    Six Months Ended
    
    
    PercentJune 30,
    
    
    Change
    
    
    June 30,
    
    
    Change2008
    
    
    2007

    
    
    2008/2007
    
    
    2008
    
    
    2007
    
    
    2008/2007(in thousands)General and administrative expenses
    
    $
    3,545
    
    
    $
    4,796
    
    
    
    -26
    %
    
    $
    8,945
    
    
    $
    11,374
    
    
    
    -21
    %
    
    
    Labor and benefits, which decreased by $0.9 million primarily associated with the
2007 and 2008 reductions in force; and
    
    Consultant and outside labor costs, which decreased by $1.9 million due to
non-recurring costs incurred during the first six months of 2007 to file multiple SEC
filings.
  Restructuring expenses
 Three Months Ended
    
    
    Percent
    
    
    Six Months Ended
    
    
    PercentJune 30,
    
    
    Change
    
    
    June 30,
    
    
    Change2008
    
    
    2007
    
    
    2008/2007
    
    
    2008
    
    
    2007
    
    
    2008/2007(in thousands)Restructuring expenses
    
    $
    985
    
    
    $
    566
    
    
    
    74
    %
    
    $
    985
    
    
    $
    4,283
    
    
    
    -77
    %
   18




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Impairment of assets held for sale
 Three Months Ended
    
    
    Percent
    
    
    Six Months Ended
    
    
    PercentJune 30,
    
    
    Change
    
    
    June 30,
    
    
    Change2008
    
    
    2007
    
    
    2008/2007
    
    
    2008
    
    
    2007
    
    
    2008/2007(in thousands)Impairment of
assets held for
sale
    
    $
    8,498
    
    
    $
    
    
    
    
    100
    %
    
    $
    8,498
    
    
    $
    
    
    
    
    100
    %
  Other income (expense)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(in thousands)
    
    
    (in thousands)Interest expense
    
    $
    (601
    )
    
    $
    (612
    )
    
    $
    (1,369
    )
    
    $
    (1,223
    )Interest income
    
    
    534
    
    
    
    1,279
    
    
    
    1,249
    
    
    
    2,519Valuation adjustments
    
    
    656
    
    
    
    1,212
    
    
    
    (955
    )
    
    
    4,044Gain on convertible debt repurchase
    
    
    
    
    
    
    
    
    
    
    713
    
    
    
    Gain on sale of Anthrax Program
    
    
    2,000
    
    
    
    
    
    
    
    2,000
    
    
    
    Other, net
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    Other income, net
    
    $
    2,589
    
    
    $
    1,879
    
    
    $
    1,627
    
    
    $
    5,340
  
    
    Gain on the sale of our Anthrax Program of $2.0 million; and
    
    Partially offset by a) decreased interest income due to lower overall cash, cash
equivalent and investment balances primarily due to our operating losses, and b)
decreased mark-to-market adjustments related to the valuation of our outstanding
derivatives on our 5 1/2% Convertible Senior Subordinated Notes, due April 1, 2010, or
Notes, primarily due to changes in the likelihood of a change in control potentially
triggering the redemption option related to the Notes.
  
    
    Decreased interest income due to lower overall cash, cash equivalent and
investment balances primarily due to our operating losses;
    
    Expenses for the mark-to-market adjustments related to the valuation of our
outstanding derivatives on our 5 1/2% Convertible Senior Subordinated Notes, due April
1, 2010, or Notes, changed primarily due to changes in the likelihood of a change in
control potentially triggering the redemption option related to the Notes; and
    
    Partially offset by a gain on the sale of our Anthrax program of $2.0 million and
a gain of $0.7 million on the repurchase of $1.5 million principal amount of our Notes
at a purchase price of $0.8 million plus accrued interest.
   19




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##### Table of Contents



FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
 2008
    
    
    2007(in thousands)As of June 30:Cash, cash equivalents and investment securities
    
    $
    59,033
    
    
    $
    85,691Working capital
    
    
    61,786
    
    
    
    77,296Six Months ended June 30:Cash used inOperating activities
    
    $
    (7,668
    )
    
    $
    (10,165
    )Investing activities
    
    
    (2,017
    )
    
    
    (11,968
    )Financing activities
    
    
    (750
    )
    
    
    
    
    
    Depreciation expense of $0.6 million in 2008 and $3.1 million in 2007, reflecting
the $10.7 impairment of property and equipment in the fourth quarter of 2007;
    
    Impairment of assets held for sale of $8.5 million in 2008;
    
    Valuation loss of $1.0 million in 2008 and valuation gain of $4.0 million in
2007, reflecting changes in the fair value of outstanding derivatives from the Notes;
and
    
    Gain on redemption of the Notes of $0.7 million in 2008.
    
    $1.9 million of Raven merger costs capitalized at December 31, 2007 that were
expensed as general and administrative expense during the six months ended June 30,
2008.
  
    
    Receivables, which increased by $33,000 in 2008 and deceased by $7.9 million in
2007 primarily due to reduced revenues and the timing of payments received;
    
    
    Cash and cash equivalents and Investments which decreased by $26.7 million
primarily due to operating losses;
    
    Partially offset by the classification of Loan to Raven biotechnologies, inc of
$6.0 million as a current asset.
  20




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##### Table of Contents



Off-Balance Sheet Arrangements
 S-K.
 Recent Accounting Pronouncements
 Determining Whether Instruments Granted in
Share-Based Payment Transactions are Participating Securities Earnings per Share
 Accounting for Convertible Debt Instruments That
May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement)
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles
 Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133
 Business Combinations
 Noncontrolling Interests in Consolidated Financial
Statements
  21




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
  Indebtedness
  Derivative Valuation Risk
 .
 
 ITEM 4T. CONTROLS AND PROCEDURES
 Evaluation of disclosure controls and procedures.
  Changes in internal control over financial reporting.
  Inherent Limitations on Effectiveness of Controls.
   22




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##### Table of Contents



PART II
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  We do not currently have capabilities to develop products or offer any services; the continuation
of our business as a going concern is wholly dependent on our ability to identify and successfully
complete a strategic transaction, and/or the sale of the companys assets which we may be unable to
accomplish. *
   We may use some or all of our remaining resources, including available cash, while we seek to
identify a strategic transaction; we may fail to identify an appropriate transaction; our
stockholders may vote against a proposed transaction; and even if a strategic transaction is
completed, it may be unsuccessful in creating value for stockholders.
    23




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##### Table of Contents



If we fail to manage successfully any company or product acquisitions, joint ventures or
in-licensed product candidates, we may be limited in our ability to develop our product
candidates and to rebuild our product candidate pipeline.
   
    
    exposure to unknown liabilities of acquired companies;
    
    higher than anticipated acquisition costs and expenses;
    
    the difficulty and expense of integrating operations and personnel of acquired companies;
    
    disruption of our ongoing business;
    
    diversion of managements time and attention; and
    
    possible dilution to stockholders.
  We may need to raise additional capital to support our operations and in order to continue
as a going concern if we successfully complete a strategic transaction.
   As a result of the reductions in our workforce that we announced throughout 2007 and 2008, we may
not be successful in retaining key employees and in attracting qualified new employees as required
in the future. If we are unable to retain our management or to attract additional qualified
personnel, our ability to rebuild our business will be seriously jeopardized. *
   24




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##### Table of Contents



If we fail to meet our obligations under the 5 1/2% Convertible Senior Subordinated Notes due 2010,
or Notes, our payment obligations may be accelerated.
  
    
    require semi-annual payment of interest in cash at a rate of 5 1/2%;
    
    convert, at the option of the holder, into shares of our common stock at an
initial conversion price of approximately $14.76 per share, subject to adjustment;
    
    will be provisionally redeemable at our option in cash upon the occurrence of
certain circumstances, including among others, that the closing price of VaxGen common
stock exceeds $22.14 per share, subject to adjustment, for at least 20 trading days
within a period of 30 consecutive trading days;
    
    if a change in control, as defined in the indenture, occurs on or prior to the
stated maturity of the Notes, the holders of the Notes may require us to repurchase the
Notes and pay a make-whole premium to the holders of the Notes. If the holders request
such a repurchase, we or the successor entity may choose to pay in cash, common stock or
a combination of cash and common stock; and
    
    constitute senior subordinated obligations.
  Our indebtedness could adversely affect our financial health, limit our cash flow available to
invest in the ongoing requirements of our business and adversely affect the price of our common
stock.
  
    
    making it more difficult for us to satisfy our financial and payment obligations,
or to refinance maturing indebtedness;
    
    making us more vulnerable to a downturn in the economy or our business;
    
    limiting our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions and other general corporate purposes;
    
    requiring application of a significant portion of our cash flow from operations
to the payment of debt service costs, which would reduce the funds available to us for
our operations;
    
    limiting our flexibility in planning for, or reacting to, changes in our
industry, business and markets; and
    
    placing us at a competitive disadvantage to the extent we are more highly
leveraged than some of our competitors.
  We have only a limited operating history and we expect to continue to generate operating losses.
  Biopharmaceutical product development is a long, expensive and uncertain process and the approval
requirements for many products, including vaccines used to fight bioterrorism, are still evolving.
If we are unable to successfully develop and test product candidates in accordance with such
requirements, our business will suffer.
   25




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##### Table of Contents



Our future product development efforts may not yield marketable products due to results of studies
or trials, failure to achieve regulatory approvals or market acceptance, proprietary rights of
others or manufacturing issues.
  
    
    the lack of adequate quality or sufficient prevention benefit, or unacceptable safety
during preclinical studies or clinical trials;
    
    their failure to receive necessary regulatory approvals;
    
    the existence of proprietary rights of third parties; or
    
    the inability to develop manufacturing methods that are efficient, cost-effective and
capable of meeting stringent regulatory standards.
 We may fail to protect our intellectual property or may infringe on the intellectual property
rights of others, either of which could harm our business.
    
    
    others will not independently develop similar or alternative technologies or duplicate
any of our technologies;
    
    we or any of our current or future licensors will adequately protect trade secrets; or
    
    we will develop additional proprietary technologies that are patentable; or the patents
of others will not have a material adverse effect on our business.
   Natural disasters, including earthquakes, may damage our facilities.
  Our use of hazardous materials and chemicals require us to comply with regulatory requirements and
exposes us to potential liabilities.
   26




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##### Table of Contents



We may become subject to product liability claims, which could result in damages that exceed our
insurance coverage.
  We may be subject to claims that our employees or we have wrongfully used or disclosed alleged
trade secrets of their former employers.
  We are not currently listed on a national exchange and cannot assure you we will ever be
listed.
  Our stockholders could experience substantial dilution as a result of the issuance of additional
shares of common or preferred stock.
  Shares of our common stock eligible for future sale may adversely affect the market for our
common stock.
  Our stock price is likely to be volatile.
   27




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##### Table of Contents




    
    timing and consistency of filing financial statements;
    
    announcements or speculation about any strategic transactions we may enter into;
    
    failure to win future government contracts and government activities relating to prior
contracts;
    
    adverse results or delays in clinical trials;
    
    delays in our product development efforts;
    
    real or perceived safety issues with any of our product candidates;
    
    failure to obtain or maintain required regulatory approvals;
    
    changes in financial estimates by securities analysts and our failure to meet or exceed
such estimates;
    
    rumors about our business prospects, product development efforts or the progress,
timing and completion of our clinical trials;
    
    new products or services offered by us or our competitors or announcements relating to
product developments by our competitors;
    
    issuances of debt or equity securities;
    
    issuances of securities or the expectation of the issuance of securities as part of a
merger or other strategic transaction;
    
    actual or expected sales by our stockholders of substantial amounts of our common
stock, including shares issued upon exercise of outstanding options and warrants; and
    
    other events or factors, many of which are beyond our control.
  We have no history of paying dividends on our common stock.
  Our charter documents and Delaware law may discourage an acquisition of VaxGen.
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   28




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##### Table of Contents



ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
 (a) Exhibits required by Item 601 of Regulation S-K:
  Incorporated by ReferenceExhibit
    
    
    
    
    
    
    
    
    
    Exhibit
    
    FiledNo.
    
    Exhibit
    
    Form
    
    File No.
    
    Filing Date
    
    No.
    
    Herewith2.1
    
    
    Agreement and Plan of Merger, dated November 12,
2007, by and among VaxGen, Inc., TLW Merger Sub,
Inc., TLW, LLC, and Raven biotechnologies, inc.
    
    8-K
    
    000-26483
    
    11-13-07
    
    
    2.12.2
    
    
    Amendment No. 1 to Agreement and Plan of Merger,
dated December 20, 2007, by and among VaxGen,
Inc., TLW Merger Sub, Inc., TLW, LLC, and Raven
biotechnologies, inc.
    
    S-4
    
    333-148312
    
    12-24-07
    
    
    2.22.3
    
    
    Amendment No. 2 to Agreement and Plan of Merger,
dated February 6, 2008, by and among VaxGen, Inc.,
TLW Merger Sub, Inc., TLW, LLC, and Raven
biotechnologies, inc.
    
    S-4/A
    
    333-148312
    
    02-06-08
    
    
    2.33.1
    
    
    Amended and Restated Certificate of Incorporation.
    
    S-8
    
    333-84922
    
    3-26-02
    
    
    4.13.2
    
    
    Amendment to the Amended and Restated Certificate
of Incorporation.
    
    S-8
    
    333-84922
    
    3-26-02
    
    
    4.33.4
    
    
    Amended and Restated Bylaws, dated as of May 18,
2007.
    
    8-K
    
    000-26483
    
    05-23-07
    
    
    3.13.5
    
    
    Amendment to the Amended and Restated Certificate
of Incorporation, dated as of August 10, 2005.
    
    10-Q
    
    0-26483
    
    05-31-07
    
    
    3.44.1
    
    
    Reference is made to Exhibits 3.1, 3.2, 3.4 and 3.54.2
    
    
    Certificate of Designations, Rights and
Preferences of Series A 6% Cumulative Convertible
Preferred Stock.
    
    S-8
    
    333-84922
    
    3-26-02
    
    
    4.24.3
    
    
    Securities Purchase Agreement by and among
Registrant and Certain Stockholders.
    
    8-K
    
    000-26483
    
    5-24-01
    
    
    10.14.4
    
    
    Registrant Rights Agreement by and among
Registrant and Certain Stockholders.
    
    8-K
    
    000-26483
    
    5-24-01
    
    
    10.24.5
    
    
    Form of Common Stock Purchase Warrant.
    
    8-K
    
    000-26483
    
    5-24-01
    
    
    4.14.6
    
    
    Specimen Stock Certificate for Common Stock of
Registrant.
    
    S-1
    
    333-78065
    
    6-11-99
    
    
    4.110.103
    
    
    Separation Agreement between VaxGen, Inc. and Matthew J. Pfeffer, dated April 7, 2008
    
    10-Q
    
    000-26483
    
    5-14-08
    
    
    10.131.1
    
    
    Rule 13a-14(a)/15d-14(a) Certification
    
    10-Q
    
    
    
    
    
    
    
    
    
    X32.1
    
    
    Section 1350 Certification
    
    10-Q
    
    
    
    
    
    
    
    
    
    X
  29




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##### Table of Contents



Signatures
  VaxGen, Inc.Dated: August14, 2008
    By:
    /s/ James P. PanekJames P. PanekChief Executive Officer
(Principal Executive Officer and PrincipalFinancial
Officer)  30




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##### Table of Contents



EXHIBIT INDEX
 Incorporated by ReferenceExhibit
    
    
    
    
    
    
    
    
    
    Exhibit
    
    FiledNo.
    
    Exhibit
    
    Form
    
    File No.
    
    Filing Date
    
    No.
    
    Herewith2.1
    
    
    Agreement and Plan of Merger, dated November 12,
2007, by and among VaxGen, Inc., TLW Merger Sub,
Inc., TLW, LLC, and Raven biotechnologies, inc.
    
    8-K
    
    000-26483
    
    11-13-07
    
    
    2.12.2
    
    
    Amendment No. 1 to Agreement and Plan of Merger,
dated December 20, 2007, by and among VaxGen,
Inc., TLW Merger Sub, Inc., TLW, LLC, and Raven
biotechnologies, inc.
    
    S-4
    
    333-148312
    
    12-24-07
    
    
    2.22.3
    
    
    Amendment No. 2 to Agreement and Plan of Merger,
dated February 6, 2008, by and among VaxGen, Inc.,
TLW Merger Sub, Inc., TLW, LLC, and Raven
biotechnologies, inc.
    
    S-4/A
    
    333-148312
    
    02-06-08
    
    
    2.33.1
    
    
    Amended and Restated Certificate of Incorporation.
    
    S-8
    
    333-84922
    
    3-26-02
    
    
    4.13.2
    
    
    Amendment to the Amended and Restated Certificate
of Incorporation.
    
    S-8
    
    333-84922
    
    3-26-02
    
    
    4.33.4
    
    
    Amended and Restated Bylaws, dated as of May 18,
2007.
    
    8-K
    
    000-26483
    
    05-23-07
    
    
    3.13.5
    
    
    Amendment to the Amended and Restated Certificate
of Incorporation, dated as of August 10, 2005.
    
    10-Q
    
    0-26483
    
    05-31-07
    
    
    3.44.1
    
    
    Reference is made to Exhibits 3.1, 3.2, 3.4 and 3.54.2
    
    
    Certificate of Designations, Rights and
Preferences of Series A 6% Cumulative Convertible
Preferred Stock.
    
    S-8
    
    333-84922
    
    3-26-02
    
    
    4.24.3
    
    
    Securities Purchase Agreement by and among
Registrant and Certain Stockholders.
    
    8-K
    
    000-26483
    
    5-24-01
    
    
    10.14.4
    
    
    Registrant Rights Agreement by and among
Registrant and Certain Stockholders.
    
    8-K
    
    000-26483
    
    5-24-01
    
    
    10.24.5
    
    
    Form of Common Stock Purchase Warrant.
    
    8-K
    
    000-26483
    
    5-24-01
    
    
    4.14.6
    
    
    Specimen Stock Certificate for Common Stock of
Registrant.
    
    S-1
    
    333-78065
    
    6-11-99
    
    
    4.110.103
    
    
    Separation Agreement between VaxGen, Inc. and Matthew J. Pfeffer, dated April 7, 2008
    
    10-Q
    
    000-26483
    
    5-14-08
    
    
    10.131.1
    
    
    Rule 13a-14(a)/15d-14(a) Certification
    
    10-Q
    
    
    
    
    
    
    
    
    
    X32.1
    
    
    Section 1350 Certification
    
    10-Q
    
    
    
    
    
    
    
    
    
    X
  31